A robust system in place

  • Business
  • Saturday, 08 Aug 2009

In the past five decades, Bank Negara has focused on institutional building, financial market development and putting in place the appropriate infrastructure.

In the past 50 years, Malaysia’s financial system has been transformed from a rudimentary system dominated by the banking sector into one that is highly diversified with greater market orientation as well as more consolidated and rationalised.

The financial system is also supported by an extensive legal regime and regulatory and supervisory framework, and one that is more liberalised with stronger international linkages.

The country’s financial system started to evolve in 1959 with the commencement of operations of the central bank, Bank Negara Tanah Melayu.

Institutional building

A key focus of the central bank during the past five decades has been on institutional building, financial market development and putting in place the appropriate infrastructure. Part of the institutional building was the establishment of regulatory institutions such as the Securities Commission, the Cooperative Commission and the Labuan Offshore Financial Services Authority.

Specialised development financial institutions were also set up to provide financial services to sectors that were not serviced by existing financial institutions.

The 1960s saw the rapid expansion of domestic financial institutions while the 1970s witnessed the emergence of merchant banking, the capital market and non-bank financial institutions.

In the last two decades, a comprehensive Islamic financial system has also evolved in Malaysia including institutions, markets and supporting legal, regulatory and supervisory framework.

Since 1988, the central bank also assumed responsibility for the insurance industry and the development of financial institutions in 2002.

Financial market development has also been central to building a robust financial system. Bank Negara’s efforts in this direction included establishing institutions and the infrastructure to improve the efficiency of money, capital and foreign exchange markets.

The 1990s saw the establishment of the Securities Commission responsible for the securities industry, financial futures and options markets, unit trust and property trust schemes, as well as takeovers and mergers.

In addition to the ratings agencies, the Credit Guarantee Corp was established to provide support for small businesses while the national mortgage corporation, Cagamas Bhd, was formed to ensure a steady flow of funds to the housing industry and to develop a secondary mortgage market.

In terms of financial infrastructure, the central bank set up the centrally coordinated credit information system at national level which allows for better-informed credit decisions by financial institutions.

Also part of the financial infrastructure is payments, which has evolved from mainly paper-based to one that includes a range of new electronic forms of payment.

To ensure stability in the financial system, the central bank’s prudential regulatory and supervisory framework during the past 50 years has also undergone significant evolution.

The prudential framework, which at the start comprised simple rules addressing capital, gearing, liquidity and portfolio restrictions, has evolved into a more differentiated and principle-based regulations reflecting the levels of risks taken by an institution.

Flexible framework

As a result, significantly greater flexibility is now accorded to institutions that demonstrate sound governance practices and robust risk management capabilities.

This flexibility has been accompanied by fundamental changes in supervision which has shifted from a predominantly compliance-based approach, to one that focuses on the assessment of risk-taking activities of an institution and the control functions to manage the risks.

The supervisory tools have also grown to include forward-looking assessments of the risks to financial stability, supported by more dynamic stress testing and enhanced surveillance systems.

The Financial Sector Masterplan, released in 2001, is a blueprint for comprehensive financial sector reforms and provides the framework and strategies for the modernisation of the financial system.

The financial safety net was also strengthened with the introduction of a comprehensive deposit insurance system and organisations to help consumers manage their debts and resolve disputes with financial institutions.

During the Asian financial crisis, when regional currencies plummeted to historical lows, Malaysia implemented selective capital controls and de-internationalised the ringgit. This was instrumental in restoring stability in the market and acted very much like a circuit breaker.

Offshore trading of the ringgit, the major source for financing the speculative attacks, was effectively eliminated. Within a year, all the controls imposed were removed.

An extensive set of measures was also implemented during the Asian financial crisis, including a comprehensive restructuring programme for the financial and corporate sectors.

While still at the early stage of the crisis, an asset management company was formed to acquire and manage the non-performing loans of banking institutions.

A special-purpose vehicle to recapitalise banking institutions and a Corporate Debt Restructuring Committee were also established to provide avenues for voluntary debt restructuring of businesses.

Within six months of the implementation of these measures, the problems in the financial sector were addressed and lending activities resumed.

Once stability was restored, the central bank embarked on a comprehensive restructuring and reform of the financial sector.

These included the consolidation of domestic financial institutions, strengthening corporate governance, risk management and the institutional capacity of domestic financial institutions, as well as the deepening of the bond market.

These efforts have put Malaysia’s financial system in a much stronger position to weather the current global financial crisis.

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