Lecture 9

The Malaysian
Financial
Institutions

Overview
The Malaysian financial system is
structured into two major categories,
financial institutions and financial market.
The financial institutions comprise Banking
system and non-bank financial
intermediaries.

Financial Institutions

Banking System
Non-Bank Financial Institutions

Banking System
Look at the following slides and identify
who are they..

Banking System
The largest and most significant providers of
funds in the banking system.
Deal in foreign exchange and provide current
account facilities.

Banking System

The business is based on Syariah principles.

It promotes a greater degree of fairness and

equity in the conduct of banking business.

Profits from the banking activities will be shared

between the bank and the depositor based on
an agreed profit sharing ratio and paid in the
form of dividends.

Banking System
This bank conducts Islamic banking
business in international currencies.
As part of the efforts to strengthen
Malaysias position as an international
Islamic financial hub.

Banking System
This type of institutions
Underwrite the initial sale of stocks and bonds
Deal maker in mergers, acquisitions, and
spin-offs
Middleman in the purchase and sale
of companies
Specialises in short term money market
operations.

Banking System
It is merely a liaison office and does not
offer banking products directly to the
Malaysian market.

No. of FIs in Malaysia

Name of FI

1986

2014 (Current)

Commercial Bank

22 (L) 16 (F)

8 (L) 19 (F)

Finance co.

42 (L)

5 (F)

Islamic Banks

1 (L)

0 (F)

10 (L) 6 (F)

International Islamic
Banks

Investment banks
(Merchant banks- 1986)

12 (L)

0 (F)

12 (L) 0 (F)

Insurance Co.

53 (L) 10 (F)

19 (L) 16 (F)

Takaful Operators

0 (L)

1 (L)

0 (F)

4 (F)

9 (L) 2 (F)

Non-Bank Financial Institutions

Other nonbank Financial

Intermediaries

Development
FIs

NBFIs

Development Financial Institutions

have been established and funded by the
Government.
were set up with specific objectives, e.g. to
develop and promote certain strategic sectors;
to achieve social goals.
complement the banking institutions by
providing products and services to suit the
needs of the targeted strategic sectors.

Development Financial Institutions

Fill in gaps in the supply of financial
services (not normally provided by banking
inst., e.g. equity capital, guarantees for
loans).
Emphasize on value-added advisory,
consultancy & technical assistance
supported by strong research capabilities.

Development Financial Institutions

Extension of credit in:
Priority and new growth areas specified and
identified by Government, e.g. IT, high technology
ventures.
Sectors which banking inst. are not equipped with
the expertise to appraise, e.g. complex industrial
and agricultural technology.
More risky projects
Projects requiring longer term.

Development Financial Institutions

DFIs get benefits
Funding at lower rates
Implicit Government guarantee to the inst.s
debt.
Special status for their debt instruments.
Favorable tax treatment.

DFIs
Bank Pembangunan Malaysia Berhad
Bank Perusahaan Kecil & Sederhana Mala
ysia Berhad (SME Bank)
Export-Import Bank of Malaysia Berhad
Bank Kerjasama Rakyat Malaysia Berhad
Bank Simpanan Nasional
Bank Pertanian Malaysia Berhad (Agroban
k)

Bank Pembangunan Malaysia

Berhad (BPMB)
Owned by the Malaysian Government
Provide medium to long term financing to
capital-intensive industry, which include
infrastructure projects, maritime, high
technology sectors, and oil and gas.

SME Bank
Started on 3 Oct. 2005.
The principal activities of the Bank are to
provide financing as well as financial and
business advisory services to Malaysian
SMEs

EXIM Bank
Export-Import Bank of Malaysia Berhad
was incorporated on 29 August, 1995.
Provide credit facilities and insurance
services to support exports and imports of
goods, services and overseas investments,
the provision of export credit insurance
services, export financing insurance,
overseas investment insurance and
guarantee facilities.

Bank Rakyat
Bank Rakyat was established in September 1954 under
the Cooperative Ordinance 1948.
On 6 January 1973, the name was changed to Bank
Kerjasama Rakyat Malaysia Berhad or better known as
Bank Rakyat.
On 15 April 2009, after the cabinet restructuring, Bank
Rakyat was absorbed under the Ministry of Finance and
was later placed under the
Ministry of Domestic Trade, Co-operatives and Consumer
ism
. To date, Bank Rakyat has a total of 124 branches
offering Islamic banking facilities to its customers.

BSN
Established on 1 Dec 1974.
Promote and mobilise savings, especially
among the middle and lower-income
groups in the rural areas not adequately
served by the commercial banks.
At present, it works as a saving bank,
mainly receive deposit and provide loans to
customers including the operation of
Islamic Banking.

AgroBank
Previously known as Bank Pertanian
Malaysia.
A Government-linked-Company (GLC)
under the Minister of Finance Incorporated
(MFI).
Provides savings activities, banking
services, loan facilities, insurance coverage
and advisory services.

Other DFIs
Malaysian Industrial Development Finance
Berhad
Credit Guarantee Corporation Malaysia Be
rhad (CGC)
Lembaga Tabung Haji
Sabah Development Bank Berhad
Sabah Credit Corporation Berhad

MIDF
Malaysian Industrial Development Finance
Berhad
was incorporated on 30 March 1960.
Financing for manufacturing-based SMEs
as part of Malaysias strategy to expedite
the industrial sector development.
Core business areas, namely investment
banking, asset management and
development finance.

CGC
CGC was established on July 5, 1972 with the
objective to assist Small and Medium Scale
Enterprises (SMEs) without or with inadequate
collateral to access credit facilities from financial
institutions.
iGuarantee is the e-business venture of the
Credit Guarantee Corporation (CGC) to provide a
one-stop web services portal at which business
loan application can be made.

Lembaga Tabung Haji

Providing funding for the Muslims.
Investment funds are collected and
monitoring the investment function.
Hajj Service land and water in the Holy
Land.

Sabah Development Bank Bhd

wholly-owned by the State Government of
Sabah.
Provides a wide range of financial and nonfinancial services in order to foster a strong
and healthy corporate participation in the
growth of the economy, both in Sabah and
Malaysia as a whole.

Sabah Credit Corporation Bhd

Fully owned by the Sabah State Government in
Malaysia and operates under the purview of the
Sabah State Ministry of Finance.
Primary objective is to help contribute towards the
socio-economy development of the State of Sabah.
Provides financial credits to promote and encourage
private investment involving agriculture, light industry,
development of rural and urban housing, shophouses
and public utilities and amenities.

Other Non-Bank Financial

Intermediaries
Mutual Fund
Insurance Companies
Cagamas Berhad
Employees Provident Fund (KWSP)
Permodalan Nasional Berhad (PNB)

Mutual Fund

An investment which enables individuals,

corporations and institutions who have common
investment objectives to pool their money.

Professional fund managers then use this

pooled money to buy investments they consider
will help meet those objectives.

Advantages : diversification, professional

selection and management of investments.

Insurance Companies
Life insurance and non-life insurance
provide its customers with financial
planning, financial protection and savings.

Cagamas Bhd
Cagamas Berhad (Cagamas), the National
Mortgage Corporation and leading securitisation
house, was established in 1986 to promote the
secondary mortgage market in Malaysia.
Cagamas mainly issues debt securities to finance the
purchase of housing loans
It is only offered to financial institutions, selected
corporations and the Government. Cagamas does
not purchase loans and debts from non-banking
institutions unless otherwise approved by its Board.

EPF
provides retirement benefits for members
through management of their savings in an
efficient and reliable manner.

Permodalan Nasional Bhd

Incorporated on March 17, 1978.
promote share ownership in the corporate sector
among the Bumiputera.
Business : unit trusts, institution property trust,
property management and asset management.

Some Useful Websites

www.bpmb.com.my
www.smebank.com.my
www.exim.com.my
www.agrobank.com.my
www.midf.com.my
www.iguarantee.com.my
www.tabunghaji.gov.my

Some Useful Websites

www.sabahdevbank.com
www.sabahcredit.com.my
www.fimm.com.my
www.cagamas.com.my
www.kwsp.gov.my
www.pnb.com.my

Credit Rating Agencies (CRAs)

Credit ratings are opinions about credit risk. These ratings express the
agencys opinion about the ability and willingness of an issuer, such as a
corporation or state or city government, to meet its financial obligations in
full and on time.

Credit ratings assesses the credit quality of an individual debt issue, such as
a corporate or municipal bond, and the relative likelihood that the issue may
default.

Ratings are provided by credit rating agencies which specialize in evaluating

credit risk. In addition to international credit rating agencies, such as
Standard & Poors Ratings Services, Moodys and Fitch, there are regional
and niche rating agencies that tend to specialize in a geographical region or
industry.

Each agency applies its own methodology in measuring creditworthiness

and uses a specific rating scale to publish its ratings opinions. Typically,
ratings are expressed as letter grades that range, for example, from AAA to
D to communicate the agencys opinion of relative level of credit risk.

Characteristics of CRAs

Credit ratings are forward looking assesses potential impact of

foreseeable events.

Credit rating do not indicate investment merit Investors may use credit
ratings in making investment decisions, the ratings from CRAs are not
indications of investment merit. In other words, the ratings are not buy, sell,
or hold recommendations, or a measurement of asset value.

Credit ratings are not absolute measures of default probability Since

there are future events and developments that cannot be foreseen, the
assignment of credit ratings is not an exact science. For this reason, the
ratings from credit agencies are opinions that are not intended as
guarantees of credit quality or as exact measures of the probability that a
particular issuer or particular debt issue will default.

Instead, ratings express relative opinions about the creditworthiness of an

issuer or credit quality of an individual debt issue, from strongest to weakest,
within a universe of credit risk.

Usefulness of Credit Ratings

Raising Capital Through Rated Securities

Users of Credit Ratings

Investors use credit ratings to help assess credit risk and to compare
different issuers and debt issues when making investment decisions and
managing their portfolios. (e.g.: individual investors and institutional
investors)

Intermediaries Investment bankers help to facilitate the flow of capital

from investors to issuers. They may use credit ratings to benchmark the
relative credit risk of different debt issues, as well as to set the initial pricing
for individual debt issues they structure and to help determine the interest
rate these issues will pay.

Issuers, including corporations, financial institutions, national governments,

states, cities and municipalities, use credit ratings to provide independent
views of their creditworthiness and the credit quality of their debt issues.

Businesses and financial institutions, especially those involved in creditsensitive transactions, may use credit ratings to assess counterparty risk,
which is the potential risk that a party to an agreement may not fulfill its
financial obligations.

Fees for CRAs

Issuer-pay model Under the issuer-pay model, rating
agencies charge issuers a fee for providing a ratings opinion. In
conducting their analysis, agencies may obtain information from
issuers that might not otherwise be available to the public and
factor this information into their ratings opinion. Since the rating
agency does not rely solely on subscribers for fees, it can
publish current ratings broadly to the public free of charge.
Subscription model Credit rating agencies that use a
subscription model charge investors and other market
participants a fee for access to the agencys ratings. Critics
point out that, like the issuer-pay model, this model has the
potential for conflicts of interest since the entities paying for the
rating, in this case investors, may attempt to influence the
ratings opinion.

Rating An Issuer
CRAs evaluates the issuers ability and willingness to repay its
obligations in accordance with the terms of those obligations.
To form its ratings opinions, CRAs reviews a broad range
of financial and business attributes that may influence the
issuers prompt repayment.
The specific risk factors that are analyzed depend in part
on the type of issuer. For example, the credit analysis of a
corporate issuer typically considers many financial and
non-financial
factors,
including
key
performance
indicators, economic, regulatory, and geopolitical
influences, management and corporate governance
attributes, and competitive position.

Rating An Issuer
In rating a sovereign or national government, the analysis
may concentrate on fiscal and economic performance,
monetary stability and the effectiveness of the
governments institutions.
For high-grade credit ratings, CRAs considers the
anticipated ups and downs of the business cycle, including
industry-specific and broad economic factors. The length
and effects of business cycles can vary greatly, however,
making their impact on credit quality difficult to predict with
precision.
In the case of higher risk, more volatile speculative-grade
ratings, CRAs factors in greater vulnerability to down
business cycles.

Rating An Issue
In rating an individual debt issue, such as a corporate or municipal bond, CRAs
typically uses, information from the issuer and other sources to evaluate the
credit quality of the issue and the likelihood of default. In the case of bonds
issued by corporations or municipalities, rating agencies typically begin with an
evaluation of the creditworthiness of the issuer before assessing the credit
quality of a specific debt issue.
In analyzing debt issues, CRAs analysts evaluate the following:
The terms and conditions of the debt security and, if relevant, its legal
structure.
The relative seniority of the issue with regard to the issuers other debt
issues and priority of repayment in the event of default.
The existence of external support or credit enhancements, such as letters
of credit, guarantees, insurance, and collateral. These protections can
provide a cushion that limits the potential credit risks associated with a
particular issue.

Why Credit Ratings Change

The reasons for ratings adjustments are related to overall shifts in the
economy or business environment or on circumstances affecting a specific
industry, entity, or individual debt issue.
In some cases, changes in the business climate can affect the credit risk of a
wide array of issuers and securities. For instance, new competition or
technology, beyond what might have been expected and factored into the
ratings, may hurt a companys expected earnings performance, which could
lead to one or more rating downgrades over time.
While some risk factors tend to affect all issuersan example would be
growing inflation that affects interest rate levels and the cost of capitalother
risk factors may pertain only to a narrow group of issuers and debt issues. For
instance, the creditworthiness of a state or municipality may be impacted by
population shifts or lower incomes of taxpayers, which reduce tax receipts and
ability to repay debt.