Chapter 1 - BANK Negara Malaysia PDF

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MPU 3312 – Banking and Finance Chapter 1 – BANK NEGARA MALAYSIA

INTRODUCTION TO FINANCIAL SYSTEM Money o o

Payment for goods and services. Surplus Units & Deficit Units.

Financial Instruments o o

Transfer of resources from savers to borrowers. Eg: Stocks, Mortgages (Housing Loan), Insurance policies.

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Financial Markets o o o

To allow purchase and sale of financial instruments. Generate prices whenever securities are bought or sold. New York Stock Exchange ( NYSE), Kuala Lumpur Stock Exchange ( Bursa Saham Malaysia).

Financial Institutions o o o

Value financial assets whenever making loans to businesses or consumers. Pricing and valuation of financial assets are at the heart of the financial marketplace. Banks, Securities Firm and Insurance Companies.

Central Bank -

Banker’s Bank

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Provide loans during times of financial stress.

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Manage Payment Systems.

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Oversee commercial banks and the financial system.

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To monitor and stabilize the economy.

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eg: Federal Reserve System in USA. Bank Negara Malaysia (BNM)

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Real Time Electronics Transfer of Funds and Securities (RENTAS)

Interbank Giro The Interbank Giro (IBG) refers tq a payment system that provides funds transfer services amongst its participating financial institutions.

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National Electronic Cheque Information Clearing System (e SPICK)

Cheque Truncation and Conversion System (CTCS)

Direct Debit Direct debit which is operated by MyClear Sdn Bhd , is an interbank collection service for regular and recurring payments enabling automated collection directly from a customer’s bank account at multiple banks in a single authorization.

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Financial Process Exchange Financial Process Exchange (FPX) is an internet based multi-bank payment platform that leverges on the internet banking services of banking institutions to offer online payment for electronic commerce (e-commerce) transactions.

Cheques A cheque is a paper based payment instrument. It is a form of written order directing a bank to pay money to the beneficiary. Based on the market practices in Malaysia, a cheque is generally valid for 6 months after the date of issue. The use of cheques has traditionally dominated Malaysian non-cash payments. Despite the development of other payment instruments, cheques remain an important form of non-cash payments.

Charge Cards The functionality of a charge card is similar to a credit card. However, charge card holders must settle their outstanding amount in full by the due date every month. Since charge cards are often associated with prestige, the fees are generally higher than credit cards. This is compensated by the differences in terms of benefits, with charge cards generally offering more privileges. Its popularity has dropped in Malaysia.

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Debit cards A debit card is a payment card where the transaction amount is deducted directly from the cardholder’s bank account upon authorisation. Cardholders can manage their finances more effectively and need not worry about late payment penalties,finance charges and snowballing card debts. There is also no income requirement to qualify for one. In Malaysia, anyone having an account with a domestic bank and has an ATM card can make payments using the card at any merchants displaying the Bankcard logo, as it doubles as a debit card.There are also international brand debit cards under the VISA and MasterCard brands as well as cards with both international debit and domestic PIN-based ATM applications.

Bank Negara Malaysia Objectives and Functions 1. To maintain adequate external reserves to safeguard the value and stability of the currency. 2. To be sole issuing and distributing authority of the currency in Malaysia , which is ringgit and sen (RM). 3. To be the banker and financial adviser to the Government of Malaysia. As banker to the Government, it advises the Government on the issues of new types of securities, loan programmes and provides temporary advances to the Government to cover any deficit in the budget revenue. 4. It provides facilities such as cheques, acceptance of deposits, and effect payment on behalf of the Government, which includes Federal and State Governments. 5. To influence the credit situation to Malaysia’s advantage. 6. To lay down policies intended to promote sound monetary stability and a strong financial structure to enhance growth in Malaysia. These policies are intended to maintain a high standard of banking and governance necessary to instill confidence in the banking system. 7. To act as banker to commercial banks and other financial institutions in the country. It has always been recognised as the lender of last resort for these financial institutions. 8. To recommend to the Minister, for issuance of licences to commercial banks, merchant banks, finance companies and discount houses in Malaysia.Powers are also vested to the Minister to revoke licences, if it deems necessary.

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9. Bank Negara Malaysia has been given powers, under BAFIA 1989 to issue guidelines, regulations and directives which are directly related to credit and lending. 10. Bank Negara Malaysia may specify limitations, terms and conditions in respect of giving any class, category or description of credit facilities to be given by any licensed institution. This is with respect to financing the purchase of securities of shares, immovable properties and/or any derivative instruments. 11. Issue guidelines, circulars or notes as the Bank or the Finance Minister may consider desirable. 12. Government’s Bank: - Manage the finances of the Government. - Control the availability of money and credit via interest rates. 13. Banker’s Bank : - Guarantees that banks can do business by lending to them, even during crises. - Operates payment system for inter-bank payments (Giro, SWIFT) - Oversee financial institutions to ensure confidence.

Reporting Requirements Two types of reports required by AMLATFA which directly affects financial institutions in Malaysia are:a. Cash Transaction Report (CTR) b. Suspicious Transaction Report (STR)

Cash Transaction Report (CTR) -

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It is designed to expose money laundering at its most vulnerable point, that is, when the cash enters the financial system and is then transferred between banks. It is designed to provide information for on-going investigations and act as a deterrent for both money launderer and any financial intermediaries who would make themselves vulnerable to money laundering activities. Financial institutions are required to report cash transactions above the threshold amount of RM25,000-00 and above in a business day. Also apply to multiple transactions on the same business day.

Suspicious Transaction Report (STR) •

Information which would alert law enforcement agencies that a certain activity is in some way suspicious and might indicate money laundering or terrorism financing.

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Financial Institutions are required to make a STR where the identity of the persons involved in the transaction, or transaction itself, or any other circumstances concerning that transaction gives reason to suspect that the transaction involves proceeds of unlawful activity.

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Financial Institutions are also required to report transactions suspected of being linked to terrorism financing.

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Suspicion is usually detected by the sheer size of the transaction in relation to the known financial circumstances of the customer. A suspicious transaction refers to the 7

conduct , which due to its circumstances, have reached a level of suspicion sufficient to identify a criminal offence. In this respect, financial institutions would decide based on its normal commercial criteria and its internal policy. -

STR’s are submitted to the Financial Intelligence Unit ( FIU) in Bank Negara Malaysia.

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Section 24 (1) of AMLATFA protects employees of bank who report suspicions of money laundering from being exposed to civil, criminal or even disciplinary proceedings, unless the information was disclosed or supplied in bad faith. In complying with the reporting obligations, banks and their employees cannot be sued by their customers for damages for breach of contract or defamation

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SWIFT (SOCIETY FOR WORLDWIDE INTERBANK FINANCIAL TELECOMMUNICATIONS) -

Headquartered in Belgium. Provides international governance and oversight Global office network ensures an active presence in all major financial centres. Does not hold funds or manage accounts on behalf of customers

MONETARY POLICY and MANAGEMENT of FINANCIAL SYSTEMS. OVERNIGHT POLICY RATE (OPR) Bank Negara Malaysia – Monetary Policy Committee issues: -

Monetary Policy Statement wef 3 Nov 2020. Overnight Policy Rate (OPR) – 1.75 % p.a. OPR is overnight interest rate set by Bank Negara which is the rate a borrowing bank has to pay a lending bank for the funds borrowed.

Increasing the OPR would immediately increase the cost of borrowing for banks which would lead to an increase in loan interest rate, meaning it will cost more to borrow. It would curtail the accumulation of personal and household debts. This is how Bank Negara regulates the financial institutions in its lending activities.

STATUTORY RESERVE REQUIREMENT (SRR) SRR is a monetary policy instrument available to BNM to manage liquidity and hence credit creation in the banking system. It is used to withdraw or inject liquidity when the excess or lack of liquidity in the banking system is perceived by BNM to be large and long – term in nature. Last reported SRR is 2.0% wef 5 May 2020. SRR is the amount of money set aside by banks to be placed in their Statutory Reserve Accounts with BNM with zero interest. By lowering SRR ,Banks will have reduced cost of funds, and can therefore preserve their profit margins by lending out the liquidated money and earn interest.

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A higher SRR would mean that banks in Malaysia will have to keep more money in reserve.

BASE RATE -

Replace Base Lending Rate (BLR) wef 2/1/15. Determined by financial institutions’ benchmark cost of funds and SRR. Other factors in loan pricing are borrower credit risk, liquidity risk premium, operation costs and profit margin will be reflected in a spread above Base Rate. Main reference rate for new retail floating rates. Base rates varies between banks in Malaysia. For example, wef 4 Dec 2018, Base rate for MBB 3.25% pa, PBB 3.77% pa, and RHB Bank Bhd 3.9% pa.

BASE LENDING RATE (BLR) -

Rate that banks refer to internally before deciding how much to charge for various products or loans. It takes into account banks cost of operations and is heavily influenced by Overnight Policy Rate ( OPR). Not determined by Bank Negara Malaysia. Based on internal cost of funds, how much it costs to borrow the money to be lent out. Changes to the rate is affected by changes to OPR. wef 4 Dec 2018, BLR of MBB 6.9% pa, BLR of PBB 6.97% pa, and BLR of RHB Bank Bhd 6.85% pa.

ANTI MONEY LAUNDERING and ANTI-TERRORISM FINANCING ACT 2001 (AMLATFA) AMLATFA -

July 2001 –gazetted as law. Bank Negara appointed as competent authority under AMLA.

FINANCIAL INTELLIGENCE UNIT (FIU) -

(FIU) established within BNM on 8 August 2001 to carry out the functions of the competent authority as provided in AMLA. To collaborate with the relevant domestic regulatory, supervisory and enforcement agencies in intelligence gathering , analysis and dissemination.

WHAT IS MONEY LAUNDERING? -

It is a process of converting cash or property which is derived from criminal activities to give it the appearance of having been obtained from a legitimate source

STAGES OF MONEY LAUNDERING -

PLACEMENT is defined as physical disposal of cash proceeds derived from illegal activity. LAYERING is separating illicit proceeds from their source through transactions that disguise audit trail and provide anonymity. 9

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INTEGRATION is the process of turning criminally derived wealth into legitimate funds.

KNOW YOUR CUSTOMER POLICY (KYC) -

BASEL sets up the following principles to prevent using the financial system for money laundering purposes:-

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Customer Identification/Customer Due Diligence. identify customer when opening account or in providing service. Compliance with legislation and law enforcement agencies. comply with laws, co-operate with enforcement authorities without breaching customer confidentiality. c. Record Keeping and system - maintain proper record keeping and test for compliance.

d) Staff training -

Provide on-going education in the financial institutions’ procedures to recognise and report money laundering.

Moral duty to report to appropriate authorities and NOT to facilitate money laundering

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