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Banking, Finance & Exchange Administration

1 Financial System

The Malaysian financial system comprises of a diversified range of institutions to serve the increasingly more varied and complex needs of the domestic economy. The financial system consists of the conventional financial system and the Islamic financial system which co-exists and operates in parallel. 

The Central Bank

The principal objective of Bank Negara Malaysia (the Bank), the Central Bank of Malaysia, is to promote monetary stability and financial stability conducive to the sustainable growth of the Malaysian economy. Its primary functions as set out in the Central Bank of Malaysia Act 2009 are to:

  • formulate and conduct monetary policy in Malaysia;
  • issue currency in Malaysia;
  • regulate and supervise financial institutions which are subject to the laws enforced by the Bank;
  • provide oversight over money and foreign exchange markets;
  • exercise oversight over payment systems;
  • promote a sound, progressive and inclusive financial system;
  • hold and manage the foreign reserves of Malaysia;
  • promote an exchange rate regime consistent with the fundamentals of the economy; and
  • act as financial adviser, banker and financial agent of the Government.

To achieve its mandates, the Bank is vested with powers under various laws to regulate and supervise the banking institutions and other non-bank financial intermediaries. The Bank also administers the country’s foreign exchange regulations.

Financial Institutions

The banking system, comprising commercial banks, investment banks, and Islamic banks, is the primary mobiliser of funds and the main source of financing which supports economic activities in Malaysia. Banking institutions operate through a network of more than 2,400 branches and 7,000 agent banks across the country. There are also  17 representative offices of foreign banks in Malaysia which do not conduct banking business but undertake research, liaison services and exchange of information. Six Malaysian banking groups have presence in 23 countries through branches, representative offices, subsidiaries, equity participation and joint ventures worldwide, including in all ASEAN countries.

The non-bank financial institutions, namely development financial institutions, insurance companies and takaful operators, complement the banking institutions in mobilising savings and meeting the financial needs of the economy. The insurance companies and takaful operators which operate through a network of more than 600 offices and 170,000 registered agents nationwide provide avenues for risk management and financial planning solutions for businesses and individuals.


Islamic Financial Industry


Islamic Financial Industry

Islamic finance in Malaysia continues to demonstrate robust growth, supported by comprehensive regulatory, legal and Shariah governance frameworks, diverse industry players and professional ancillary service providers as well as high quality talent. 

Islamic banking industry accounts for 30% (RM829.8 billion) of the total banking asset as at end-2017, further expanding its role as a major component of the overall financial system in Malaysia since the implementation of the Financial Sector Blueprint 2011-2020. A wide range of competitive and innovative products offered by over 40 financial institutions (these include Islamic banks, Islamic window of conventional and investment banks, international Islamic banks and Development Financial Institutions) with aim to deliver a positive and sustainable impact on the community, economy and environment.

As for the takaful sector, the total takaful assets constitute 10.1% (RM29.3 billion) of market share of total insurance and takaful sector with an annual growth of 9.3% in 2017. The penetration rate for the takaful market is recorded at 14.7%, signifying a growing public acceptance of the benefits provided by takaful scheme.

To support further development of Islamic finance in Malaysia, investment accounts were introduced pursuant to the Islamic Financial Services Act 2013 (IFSA) to provide customers the opportunity to invest and share profit from Shariah-compliant investment activities. Investment accounts also provides additional avenue for businesses to access financing. Presently, 9 Islamic banks are offering investment accounts.

At the global front, Malaysia remains as a leading global hub for Islamic finance marketplace. It is home to the world’s largest sukuk market with a 51.0% share of global sukuk outstanding, amounting to USD202.2 billion as at end-2017. Additionally, Malaysia further achieved a major milestone in sukuk innovation with the inaugural issuance of world’s first green SRI sukuk in 2017.

In terms of Islamic wealth management, Malaysia is the top domicile for Islamic funds, accounting for 36.5% of global market share with assets under management (AuM) of USD28.3 billion as at end-2017. Malaysia also ranked first globally in terms of number of funds, accounted for 27.9% of global share with a total of 394 funds registered. Presently, there are 47 fund managers offering Shariah-compliant fund offerings in Malaysia.  


Development Financial Institutions

The Development Financial Institutions (DFIs) in Malaysia are specialised financial institutions established by the Government with a specific mandate to develop and promote key sectors that are considered of strategic importance to the overall socio-economic development objectives of the country. These strategic sectors include the agricultural, SMEs, infrastructure, maritime and export-oriented sectors, as well as capital-intensive and high-technology industries.

As specialised institutions, DFIs provide a range of specialised financial products and services to suit the specific needs of the targeted strategic sectors. Ancillary services in the form of consultation and advisory services are also provided by DFIs to nurture and develop the identified sectors. DFIs therefore complement the banking institutions and act as a strategic conduit to bridge the gaps in the supply of financial products and services to the identified strategic areas for the purpose of long-term economic development.

In 2002 the Development Financial Institutions Act 2002 (the DFIA) was enacted to promote the financial and operational soundness of the DFIs through sustainable practices and the requisite regulatory and supervisory framework, and that the institutions perform their mandated roles prudently, efficiently and effectively. With the enactment of the DFIA, the Bank was appointed as the central regulatory and supervisory body for DFIs. As part of the regulatory and supervisory framework, the Bank monitors the activities and financial performance of the DFIs to ensure that they perform their mandated roles in a prudent manner and are supported by strong corporate governance and best practices. In continuing efforts to further strengthen the DFIs, the DFIA was amended to further enhance the institutions’ intermediary role in supporting the strategic economic sectors amid challenging operating environment. The amendments focused on further strengthening the corporate governance practices and to increase the operational efficiency as well as the capacity and capability of DFIs to perform mandated roles more effectively. Amendments to the DFIA were passed in Parliament in July 2015 and took effect on 31 January 2016.

Six DFIs are prescribed under the DFIA: Small Medium Enterprise Development Bank Malaysia Berhad or SME Bank, which provides financing and advisory services to small and medium sized enterprises involved in manufacturing, services and construction sectors; Bank Pembangunan Malaysia Berhad, which provides medium- and long-term financing for infrastructure projects, maritime, capital-intensive and high-technology industries in the manufacturing sector and other selected sectors in line with the national development policy; Bank Kerjasama Rakyat Malaysia Berhad, a cooperative bank that encourages savings and provides financial services to members and non-members; the Export-Import Bank of Malaysia Berhad or EXIM Bank, which provides credit facilities to finance and support the exports and imports of goods and overseas projects as well as to provide export credit insurance services and guarantee facilities; Bank Simpanan Nasional focuses on retail banking and personal finance especially for small savers, and supports the financial inclusion agenda by providing microfinance and agent banking services; and Bank Pertanian Malaysia Berhad or Agrobank, which accepts savings deposits and provides financing and advisory services to support the development of the agricultural sector and communities. 

2 Export Credit Refinancing

Export Credit Refinancing (ECR) scheme provides short-term pre- and post-shipment financing to direct or indirect exporters. It is available to manufacturer or trading company with ECR credit line duly established with any participating commercial bank.

A pre-shipment ECR facility facilitates purchases of materials and overhead expenses while post-shipment ECR provides financing to direct exporter upon shipment.

Method of Financing

Two methods of financing are available for exporters under the pre-shipment ECR i.e. the order-based method and certificate of performance method (CP).

Under the order-based method, the pre-shipment ECR financing is against the export or purchase orders received from overseas buyers or direct exporters. Whilst under CP method, the pre-shipment financing is against the CP issued by EXIM Bank.

The post-shipment ECR facility uses the bills discounting method whereby the financing is against the export documents presented to the commercial banks.

Period and Amount of Financing

The maximum period of financing under the pre-shipment ECR and post-Shipment ECR is four months and six months respectively.

Under the order-based method, exporters can obtain financing up to 95% of the value of their export order or ECR Domestic Letter of Credit/ECR Domestic Purchase Order/Local Purchase Order. Whilst under the CP method, the amount of financing is subject to the CP issued by EXIM Bank.

In post-shipment ECR, exporters can obtain financing up to a maximum 100% of the export bill value subject to availability of ECR credit limit with the commercial banks as well as EXIM Bank’s administrative limit.

Repayment

Payment should be made upon receipt of export proceeds or in the case of post-shipment ECR, upon maturity of the post-shipment bill, whichever is earlier.

For more information on export credit financing, please visit http://www.exim.com.my

3 Securities Market
Securities Commission Malaysia

The Securities Commission Malaysia (SC), is responsible for the regulation and development of capital markets in Malaysia. Established on 1 March 1993 under the Securities Commission Act 1993, it is a self-funding statutory body with investigative and enforcement powers. It reports to the Minister of Finance and its accounts are tabled in Parliament annually. The SC's many regulatory functions include:

a. Supervising exchanges, clearing houses and central depositories;
b. Registering authority for prospectuses of corporation other than unlisted recreational dubs;
c. Approving authority for corporate bond issues;
d. Regulating all matters relating to securities and futures contracts;
e. Regulating the take-overs and mergers of companies;
f. Regulating all matters relating to unit trust schemes;
g. Licensing and supervising all licensed persons;
h. Encouraging self-regulation; and
i. Ensuring proper conduct of market institutions and licensed persons.


Underpinning all these functions is the SC's ultimate responsibility of protecting the investor. Apart from discharging its regulatory functions, the SC is also obliged by statute to encourage and promote the development of the securities and futures markets in Malaysia.

For more information on the SC, please visit http://www.sc.com.my.

Bursa Malaysia

Bursa Malaysia is an approved exchange holding company under Section 15 of the Capital Markets and Services Act 2007. A public company limited by shares under the Companies Act 1965, Bursa Malaysia operates a fully-integrated exchange, offering equities, derivatives, offshore, bonds as well as Islamic products, and provides a diverse range of investment choices globally.

Bursa Malaysia Securities regulates and operates the securities trading activities in Malaysia, a stock market with about 1,000 companies across 50 economic activities. Companies from any economic sectors are listed either on the Main Market for large-cap established companies, or on the ACE Market for emerging companies of all sizes. The Exchange adopts the FTSE Bursa Malaysia KLCI values as its main index.

Bursa Malaysia Derivatives (BMD) is a subsidiary of Bursa Malaysia Berhad which provides, operates and maintains a futures and options exchange. BMD’s star product, the crude palm oil futures (FCPO) contract has been the global benchmark for the pricing of palm oil and palm oil-based products. In 2009, Chicago Mercantile Exchange (CME) Group acquired a 25% equity interest in Bursa Malaysia Derivatives Berhad. BMD’s products were migrated onto the CME Globex® electronic trading platform to provide greater product visibility and accessibility to international traders.

To leverage on its strengths in Islamic capital markets, Bursa Malaysia’s long term objective is to elevate its Islamic offerings to mainstream status. Bursa Malaysia is the first exchange to establish Bursa Suq Al-Sila’, the first end-to-end Shari’ah compliant commodities trading platform.

Bursa Malaysia is committed to making the Malaysian capital market attractive to investors worldwide. The exchange places great emphasis in ensuring a fair and orderly market at all times, with high priority on investor protection. Its strength lies in its progressive regulatory approach to ensure that high standards of conduct are practiced by market players.


(i) Market Participants

a. Stockbroking Companies
Currently, there are more than 35 stock broking companies which 14 are categorised as Investment Banks. These banks offer services in the dealing of securities listed on Bursa Malaysia Securities. Investment banks hold merchant banking license issued by Bank Negara Malaysia under the Banking and Financial Institutions Act 1989 (BAFIA) as well as Capital Markets Services license issued by the Securities Commission under the Capital Markets & Services Act 2007. As such, investment banks are able to offer a full scope of integrated capital market and financial services which include corporate finance, debt securities trading and dealing in securities. One stock broking company still holds the universal broker status. A universal broker is able to offer integrated capital market services.
b. Trading Participants
A Trading Participant is a company which owns at least one Preference Share of Bursa Malaysia Derivatives to conduct business as a futures broker licensed by the Securities Commission under the Capital Markets & Services Act 2007 and carries on trading in Contracts traded on the Bursa Malaysia Derivatives.


(ii) Investor Protection

In the interest of protecting investors, Bursa Malaysia currently maintains three compensation funds, namely Compensation Fund of Bursa Malaysia Securities, the Fidelity Fund of Bursa Malaysia Derivatives and the Compensation Fund of Bursa Malaysia Depository to compensate investors who have suffered losses falling within the circumstances specified under the relevant securities laws and rules. The funds are administered by the Compensation Committee.


(iii) Risk Management

Bursa Malaysia's enterprise risk management framework, through the supervision of the Risk Management Committee (RMC), is aimed at managing and controlling risks appropriately for the Group. Key risks are identified and ranked for likelihood of occurrence and magnitude of impact while the appropriate action plans are developed to manage significant residual risks.

4 Labuan Financial Services
Labuan Financial Services Authority (Labuan FSA)

Labuan Financial Services Authority (Labuan FSA) is the statutory body responsible for the development and administration of the Labuan International Business and Financial Centre (Labuan IBFC). The key role of Labuan FSA is to license and regulate the licensed entities operating within Labuan IBFC and to ensure all such entities remain in compliance with internal and international best standards adopted by the jurisdiction. This is to safeguard investors’ interests as well as to maintain the soundness of the regulatory environment in Labuan IBFC.

As the regulatory authority for the Labuan IBFC, Labuan FSA is committed to maintain the position of Labuan IBFC as a well regulated and reputable international financial centre in Asia Pacific while the promotion of the IBFC is undertaken by the marketing arm of Labuan FSA, the Labuan IBFC Incorporated Sdn. Bhd. (Labuan IBFC Inc). Labuan IBFC Inc. has a team of resources and specialists to assist investors regarding the jurisdiction and its vast range of financial services solutions, both conventional and Islamic. 

Labuan IBFC is strategically located in the centre of Asia Pacific and positioned as the gateway for investments into and out of the region, presents investors an ideal balance of fiscal neutrality and certainly in a mid-shore jurisdiction. Well supported by a robust and comprehensive legal framework, Labuan IBFC provides clear legal provisions and complemented by a wide range of business and investment structures for cross border transactions, business dealings and wealth management needs.

The various Labuan company structures as well as comprehensive conventional and Islamic products and services catering to the diverse needs of investors contributed in making Labuan an attractive international business centre and a platform for residents and non-residents to invest abroad. The efficient delivery system as well as its customer oriented client charter further facilitates business needs of the investors.

Entities incorporated / registered in Labuan IBFC enjoy many advantages, from low operational costs to facilitative tax incentives and access to extensive double tax treaty agreements through the Malaysian double tax treaty network. Under the Labuan taxation system, a Labuan entity carrying on Labuan trading activity may:

  • elect to pay tax each year at the rate of 3% of its audited net profits or pay a fixed tax of RM20,000. There is currently no tax imposed on a Labuan entity conducting non-trading activities;
  • Labuan entity carrying on a Labuan business activity could also make an irrevocable election to pay tax under the Income Tax Act 1967. This would give Labuan entity more flexibility to structure their business transactions effectively, and create a more favourable tax conditions for the investors operating in or through the Labuan IBFC; and
  • Labuan entity could also pay Business Zakat in lieu of tax. The Government has also granted various tax exemptions to further entice investors and professional services to establish their presence in Labuan IBFC. 

Labuan IBFC offers a comprehensive financial solution in both conventional and Shariah-based principles -covering banking, insurance and insurance-related products, trust company business and capital market activities.

In addition, the IBFC has continued to offer other niche products including wealth management (foundations), reinsurance / retakaful, leasing and commodity trading. A wide range of cost-effective business structures such as the Labuan Holding Company, Labuan Protected Cell Companies, Labuan Limited Liability Partnership and Special Trust are also available.

The Labuan International Commodity Trading Company (LITC) introduced in 2011 under the Global Incentive for Trading Programme provides incentives to international trading companies to set up LITC in Labuan IBFC and to trade on petroleum / petroleum related products, including liquefied natural gas (LNG).

The Labuan International Financial Exchange (LFX) complements the traditional banking facilities through its offer of full-fledge capital raising services with unlimited access to international markets through the activities of listing, trading and settlement of financial instruments or facilities.

For more information on Labuan IBFC, please visit www.labuanibfc.com.

5 Foreign Exchange Rules

Malaysia continues to maintain a liberal foreign exchange administration (FEA) policy which are mainly prudential measures to support the overall macroeconomic objective of maintaining monetary and financial stability while safeguarding the balance of payments position. The FEA policies have been progressively liberalised to enhance competitiveness of the economy and to achieve greater efficiency in the conduct of trade and investments.

Rules applicable to Non-Residents

Investments in Malaysia

The Malaysian markets are easily accessible by global investors,with free mobility of inflow and outflow of capital for investments in Malaysia.

Non-residents are free to invest in any form of ringgit assets either as direct or portfolio investments; and

Non-residents are free to remit out divestment proceeds, profits, dividends or any income arising from these investments in Malaysia as long as the funds are repatriated in foreign currency.

There are no restrictions for the non-residents to convert foreign currency into ringgit or vice versa, with licensed onshore banks, other than licensed International Islamic banks, for the purchase of ringgit assets or for repatriation in foreign currency of funds arising from these ringgit investments. Non-residents are also allowed to undertake the settlement of ringgit investments through appointed overseas offices of the licensed onshore banks.

Accessibility to domestic financing

i. Borrowing in foreign currency

  • There have never been restrictions on the accessibility to foreign currency financing by non-residents (banks or non-banks) from licensed onshore banks. Proceeds of the borrowing can be utilised offshore or onshore; and
  • Non-residents are also allowed to issue foreign-currency denominated sukuk/bonds in Malaysia for use onshore or abroad.

ii. Borrowing in ringgit

Settlement for trade in goods and services

Non-residents may undertake the settlement for trade in goods and services in foreign currency or ringgit with residents.


Hedging

Non-residents are free to hedge with licensed onshore banks and licensed International Islamic Banks for their capital account and current account transactions based on firm underlying commitment. Hedging involving ringgit, however, must be undertaken only with the licensed onshore banks


Ringgit and foreign currency accounts

There are no restrictions for non-residents to open :

  • foreign currency accounts with any licensed onshore banks and licensed International Islamic Banks to facilitate investments as well as business operations in Malaysia. Funds in these accounts are free to be remitted abroad; and
  • ringgit accounts with the licensed onshore banks. The accounts can be funded with ringgit from the sale of foreign currency or any ringgit income earned from their investments in Malaysia including interest, rental, profits, dividend or proceeds from divestments of their ringgit assets. Funds in these accounts are also free to be remitted abroad once converted into foreign currency with the licensed onshore banks.
Rules applicable to Residents

Investment in foreign currency assets

Residents are free to invest in foreign currency assets using their own foreign currency funds, proceeds from permitted foreign currency borrowing and proceeds from issuance of Initial Public Offerings on the Main Board of Bursa Malaysia. Prudential limits are applicable only for investments by residents with domestic ringgit borrowing who are converting ringgit into foreign currency for the investment as follows-
  • Up to RM50 million equivalent in aggregate per calendar year for resident companies on a corporate group basis; and
  • Up to RM1 million equivalent per calendar year in aggregate for resident individuals.


Borrowing onshore and offshore

i. Borrowing in foreign currency

  • Resident companies are free to obtain any amount of foreign currency borrowing from:
    • Licensed onshore banks;
    • Non-resident non-bank related companies; and
    • Resident related companies
  • Foreign currency borrowing by resident companies from non-resident banks and other non-resident companies (non-related) is subject to a prudential limit of RM100 million equivalent in aggregate on a corporate group basis. Foreign currency borrowing by resident individuals from licensed onshore banks and any non-residents is subject to an aggregate limit of RM10 million equivalent.

ii. Borrowing in ringgit

  • Resident entities are free to obtain ringgit borrowing of:
    Any amount from non-resident companies within its corporate group of companies and non-resident direct shareholder to finance activities in the real sector in Malaysia; or
  • Up to RM1 million in aggregate from any non-resident other than non-resident financial institutions for use in Malaysia.

Resident individuals are free to obtain ringgit borrowing of any amount from non-resident immediate family members and up to RM1 million in aggregate from any non-resident other than non-resident financial institutions for use in Malaysia.

Import and export of goods and services

All proceeds from the export of goods must be repatriated to Malaysia in full as per the sales contract which must not exceed six months from the date of export. Settlement with the non-residents can be undertaken in ringgit or foreign currency.


Hedging

Residents are free to hedge foreign currency exposures for financialand current account transactions  with firm underlying commitment or on anticipatory basis, with the licensed onshore banks. 


Foreign currency accounts

Residents are free to open foreign currency accounts with licensed onshore banks and offshore banks.

For details on the foreign exchange administration rules of Malaysia, please visit http://www.bnm.gov.my/fxadmin.

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Last Updated : Monday 15th October 2018