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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 newly enacted 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 following table provides an overview of the number of financial institutions under the purview of Bank Negara Malaysia as at end December 2013 :

Total Malaysian-Controlled Institution Foreign- Controlled Institution
Commercial Banks 27 8 19
Islamic Banks 16 10 6
International Islamic Banks 5 0 5
Investment Banks 12 12 0
Insurers 32 16 16
Takaful Operators (Islamic Insurers) 12 9 3
International Takaful Operators 0 0 1
Reinsurers 7 3 4
Retakaful Operators (Islamic Reinsurers) 4 1 3
Development Financial Institutions 6 6 0

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 2,500 branches across the country. There are also 16 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 22 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 and reinsurance companies conduct life and general insurance business and similarly takaful and retakaful operators engage in the general and family takaful business. The insurance companies and takaful operators which operate through a network of more than 900 offices and 120,000 registered agents nationwide provide avenues for risk management and financial planning solutions for businesses and individuals.


Islamic Financial Industry

Islamic finance in Malaysia continues to demonstrate dynamic growth with a comprehensive Islamic financial system that is supported by robust regulatory, legal and Shariah governance frameworks, the many players as well as the requisite talent and expertise.

The Islamic financial system comprises four main components, namely Islamic banking, takaful and retakaful, Islamic interbank money market and Islamic capital market. The expansion of Islamic finance is rigorously driven by the current 53 institutions offering Islamic financial services. As at December2013, Malaysia’s total Islamic banking assets has reached RM556.5 billion with a market share of 25.0% and recorded an average annual growth rate of 19.7% for the period of 2002 to 2013. For the takaful industry, total assets has reached RM24.6 billion in 2013 with a market share of 10.2% and an average annual growth rate of 10.7% for the period of 2008 to 2013. The Malaysian capital market has also recorded total outstanding sukuk amounting to RM512.1 billion as at end of 2013, surpassing the outstanding conventional bond with 49.7% of market share.

To date, there are more than 100 Islamic banking products and services available in the industry. Innovative products and financial instruments that are aligned with the global Shariah principles have been issued in the global market. An example is the multi-currency sukuk, with issuances denominated in the US Dollar, Singapore Dollar and Renminbi that have attracted international investors. Malaysia has evolved to become a multi-currency sukuk market, where there is an increasing demand for multicurrency sukuk issuance in Malaysia. In 2013, Malaysia maintained its leading position as the main sukuk issuer with a 69% share of total global issuances in 2013 amounting to USD82.6 billion.


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.

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. 

Malaysia International Islamic Financial Centre

In August 2006, the Malaysia International Islamic Financial Centre (MIFC) initiative was launched to position Malaysia as the international hub of Islamic Finance and to strengthen the country’s role as an intellectual epicentre for Islamic finance.

The MIFC initiative comprises a community network of financial and market regulatory bodies, Government ministries and agencies, financial institutions, human capital development institutions and professional services companies that participate in the field of Islamic finance.

The MIFC initiative is supported by international legal, regulatory and Shariah best practices that enable industry practitioners to conduct international business in Islamic finance throughout Malaysia, while enjoying attractive incentives in a business friendly environment.

In evolving Malaysia as an Islamic finance marketplace, Malaysia aims to be an open marketplace that is linked to a network of other financial hubs. As a destination for financial investment, Malaysia offers a platform and a gateway for global Shariah-compliant investment opportunities via the MIFC initiative. Malaysia offers a business connection to each segment of our Shariah-compliant financial industry with attractive value-propositions and opportunities for global institutions, talents, investors and issuers.

Malaysia is well positioned to act as a gateway to facilitate and enhance greater international linkages and market integration in Islamic finance between the Asian region and the rest of the world. Situated centrally in the Asian time zone, Malaysia presents itself as a meeting platform for those with surplus funds and those who seek to raise funds from any part of the world.

Malaysia invites global experts, leading players, investors and issuers alike to shape the future of Islamic finance together through the MIFC initiative, leveraging on and benefiting from Malaysia’s more than 30 years of experience in Islamic finance, in an environment of innovation and thought leadership.

For more information on the MIFC initiative, please visit www.mifc.com. 

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 Offshore Financial Service 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). Investors wishing to establish their businesses in the Labuan IBFC may deal with Labuan FSA, a one-stop agency which licenses and regulates entities operating in or out of the Labuan IBFC.

The functions of the Labuan FSA are guided by the following three main objectives:
(i) to promote and develop Labuan as an international centre for business and financial services;
(ii) to develop national objectives, policies and priorities for the orderly development and administration of the international business and financial services in Labuan; and
(iii) to act as the central regulatory, supervisory and enforcement authority of the IBFC in Labuan.
The Labuan IBFC Incorporated Sdn Bhd (Labuan IBFC Inc) serves as the marketing arm of Labuan FSA to promote the products and services of the jurisdiction. It has a team of specialists to provide technical advice in the areas of international tax, fund management, wealth management, insurance and Islamic finance.

Business Activities of Labuan IBFC

Labuan IBFC offers a comprehensive financial solution in both conventional and Shariah-based principles products and services include banking, insurance and insurance-related products, takaful / retakaful, leasing, trust administration and capital raising.

Since the enhancement of the legislative framework in 2010, the IBFC has further diversified its offer of niche products covering captive, foundation, wealth management and shipping operations under the Malaysia International Ship Registry initiative. 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. Having revised its fee structures in 2010, the IBFC has emerged as one of the most competitive jurisdiction in the Asia Pacific region.

The Labuan International Trading Company introduced in 2011 under the Global Incentive For Trading Program provides incentives to enable international trading companies involved in oil and gas to tap on the huge market potential and maximize their return of investment from Labuan and its surrounding region.
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.

Business Incentives in the Labuan IBFC

Business activities undertaken by Labuan companies are categorised as trading and non-trading activities. Trading activities include banking, insurance, fund management, leasing, money broking and other trade related business. Whereas non-trading refers to activities relating to holding of investments in securities, stocks, shares etc.

(i) Competitive Tax Structure

  • Under the Labuan Business Activity Tax Act 1990, 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.
  • A 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 not only give Labuan entity more flexibility to structure their business transactions effectively, but also create a more favourable tax conditions for the investors operating in or through the Labuan IBFC.
  • A Labuan entity could also pay Business Zakat in lieu of tax.


(ii) Tax Exemption for Labuan Entities Under the Income Tax Act

The government has granted tax exemptions to further entice investors and professional services to
establish their presence in Labuan, where the following exemptions are available for the Labuan entities under the Income Tax Act 1967.

  • Dividends paid to a resident or a non-resident person by a Labuan entity.
  • Dividends received from a Malaysian domestic company, which are paid out of dividends received from a Labuan entity.
  • 100% tax exemption on fees paid to a non-citizen Director.
  • Distribution by Labuan foundation and partnerships to beneficiaries and partners.
  • Labuan entities are exempted from withholding tax on the following:
    • Interest paid to a resident person or a non-resident who is not engaged in the business of banking, finance or insurance in Malaysia.
    • Interest paid to a non-resident person or another Labuan entity.
    • Lease rental paid to non-resident by a licensed Labuan leasing entity.
    • Technical or management fee paid to a non-resident or another Labuan entity.
    • Royalty to a non-resident person or another Labuan entity.
    • Payment of fees paid to a non-resident under Section 4(f) of Income Tax Act 1967.
    • Distributions made by a Labuan trust to non-resident beneficiaries.
    • Distributions made by a Labuan foundation or a Labuan Partnership to the beneficiaries and partners
  • Tax Exemptions for Qualifying Professional Services and Employment
    • Any person or his employee or a company rendering qualifying professional services to a Labuan entity in Labuan is exempted from income tax of up to 65% of the statutory income. Qualifying professional services includes legal, accounting, financial and secretarial services.
    • Non-citizens employed in a managerial capacity in a Labuan entity, working in Labuan and
      co-located / marketing office (as approved by Labuan FSA) enjoy an income tax exemption
      of up to 50% of gross employment income.
    • 50% tax exemption on Labuan and housing allowances paid to Malaysian employee working in a Labuan entity.
  • Stamp Duty Exemption
    All documentation executed by any Labuan entity in relation to Labuan business activities
    (including M&A and transfer of shares of a Labuan company and constituent documents of a
    Labuan trusts, partnerships and foundations) are exempted from payment of stamp duty.

    For more information on Labuan FSA, please visit http://www.labuanfsa.gov.my

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

There are no FEA restrictions and the Malaysian markets are easily accessible by global investors. There is 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
  • They are free to remit out divestment proceeds, profits, dividends or any income arising from these investments in Malaysia.

There are no restrictions for the non-residents to convert foreign currency to ringgit or vice versa, with licensed onshore banks, for the purchase of ringgit assets or for repatriation of funds arising from these ringgit investments. Non-residents are also allowed to undertake the settlement of ringgit investments through appointed overseas banks which are within the same banking group of banks with presence in Malaysia. 


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

  • Non-bank non-residents are free to borrow any amount in ringgit from licensed onshore banks to finance real sector activities in Malaysia; and
  • Non-residents may also raise ringgit financing through the issuance of sukuk/bonds in Malaysia. The proceeds can be used onshore or offshore.


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 companies are free to obtain ringgit borrowing from non-resident non-bank related companies to finance activities in the real sector in Malaysia or up to RM1 million in aggregate from other non-resident non-bank companies or individuals 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 non-resident non-bank companies or other non-resident individuals 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 any purpose.

In the case of a resident individual, the account is allowed to be maintained individually or jointly with any other resident individual and with a non-resident immediate family member; and

For foreign currency accounts maintained by resident  entities with licensed international Islamic banks and offshore banks, the account can be funded with any foreign currency receipt except proceeds from the export of goods. There are no restrictions on the source of foreign currency funds to be credited in foreign currency accounts maintained with the licensed onshore banks.

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

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Last Updated : Friday 26th May 2017