Module Foundation of Banking

CHAPTER 3

3.0 COMMERCIAL BANKS

3.1 Identify the roles and responsibilities of commercial banks
3.2 Describe the banking services provided by commercial banks

3.2.1 Describe types of deposits
3.2.2 Describe types of money remittances

a. Demand draft
b. Telegraphic transfer
c. Mail transfer
d. Standing instructions
3.2.3 Describe types of advance and loans
a. Overdraft
b. Fixed and term loans
3.2.4 Describe status of the following
a. Credit card
b. Banker’s guarantee
c. Trust receipts
d. Travellers cheques
3.2.5 Describe other services
a. Share trading
b. Insurance
c. Unit trust
3.3 Explain e-marketing for banking
3.3.1 Define e-marketing
3.3.2 Classification of e-marketing for banking services

45

INTRODUCTION OF COMMERCIAL BANK

The commercial banks have always played a crucial role in the banking system. They are the
largest and most significant providers of funds in the system. Under the terms of the license
recommended by Bank Negara Malaysia, and granted by the minister, they enjoy the widest
scope of banking activities and businesses.

DEFINITION OF COMMERCIAL BANK

Commercial bank is a banking institution that provides retail banking services, trade financing
facilities, treasury services, payment services and custodial services. The Financial Services Act
(FSA 2013) defines commercial banks’ business to include receiving deposits on current
accounts, deposit accounts, savings accounts or other similar accounts and pays or collects
cheques drawn by or paid in by customers, as well as dealing in the provision of finance and such
other business as BNM with the approval of the Minister may prescribe.

The provision of finance under FSA includes:

a) The lending of money
b) Leasing business
c) Factoring business
d) The purchase of bills of exchange, promissory notes, certificates of deposits, debentures

or other negotiable instruments
e) The acceptance or guarantee of any liability, obligation or duty of any person

Below are the lists of commercial banks that available in Malaysia:

No Name of Bank n ship
L : Locally-owned
1 A i B k Ber F : Foreign-owned
2 Alli ce B k M l y i Ber
3 AmB k M Ber L
4 BNP P ri M l y i Ber L
5 B gk k B k Ber
6 B k Americ M l y i Ber L
7 B k i M l y i Ber
8 IMB B k Ber F
9 i tr cti B k M l y i Ber
10 iti k Ber F
11 e t c e B k M l y i Ber
F

F

L

F

F
F

12 B B k M l y i Ber 46

13 g e g B k Ber F
L
14 I i I ter ti l B k M l y i Ber F
F
15 I tri l mmerci l B k i M l y i Ber F
F
16 J P M rg e B k Ber L
F
17 MU G B k M l y i Ber F
F
18 M l y B ki g Ber L
L
19 Mi B k M l y i Ber F
F
20 N ti l B k A i M l y i Ber F
F
21 B B k M l y i Ber

22 P lic B k Ber

23 R B B k Ber

24 t r rtere B k M l y i Ber

25 mit m Mit i B ki g r r ti M l y i Ber

26 e B k N v c ti Ber

27 U ite ver e B k M l y i B

47

ROLES AND RESPONSIBILITIES OF COMMERCIAL BANK

The general role of commercial banks is to provide financial services to general public, business
and companies, ensuring economic and social stability and sustainable growth of the economy.

The roles and responsibilities of commercial bank are:

 To actively promote and inculcate the saving habits, especially among younger
generation to growth of the economy.

 Should make their interest rate reasonable enough for customer.
 Banks should educate customer on services and facilities by giving talks and publishing

pamplets and brochure, that clarifying on the procedure and advantages of the various
types of services and facilities available.
 As the financial intermediaries between depositors and borrowers, banks have to ensure
that such funds lent out for productive and economically activities.

Commercial banks play important functions as financial intermediaries. The functions and
business of commercial banks in Malaysia are:

1) Providing facilities for savings through current, savings and fixed deposit accounts and
other financial instruments

2) Providing facilities to effect payments on behalf of its customers
3) Providing loans and credit facilities, both to individual borrowers and corporations
4) Financing the government through the purchase of government securities and treasury

bills
5) Providing a wide variety of other banking services such as remittances, facilitating foreign

exchange transactions and the financing of both domestic and international trade

48

BANKING SERVICES OFFERED BY COMMERCIAL BANK

DEPOSITS ACCOUNT

Deposits are the main source of funds for commercial banks. It is bank’s responsibilities to
attract public to deposit their money into the banks. There are several types of deposits
accounts. The main types of deposits are current account, savings account and fixed deposit
account.

 Current account
Current account is an account into which a customer can deposit money and effect
payments by the drawing of cheques. Customer can make arrangement with his bank to
allow him to overdraw his current account. This facility is called as overdraft facility.

Types of current account that available in Malaysia are:
1) Individual account
2) Joint account
3) Sole proprietors account
4) Partnership account
5) Companies account
6) Trustee account

 Savings account
A savings account is the most basic type of account at a bank. It allows you to deposit
money, keep the funds safe, and withdraw funds as needed. Savings accounts typically
pay interest on your deposits, which helps you grow your money. However, the rates
offered by the banks are relatively low.

An account holder will be given a
passbook and an ATM card. However,
nowadays the bank will not provide
passbook. Customers can view their
banking transaction via online banking
or ask for a statement from the bank.

49

Types of current account that available in Malaysia are:
1) Individual accounts
2) Joint accounts
3) Associations, societies and clubs accounts

 Fixed account deposit
Fixed deposit, or commonly referred to as “FD” in Malaysia, is a type of bank savings or
investment account that promises the investor a fixed rate of interest. In return, the
investor agrees not to withdraw or access his / her funds for a fixed period of time.

Fixed deposit is the form of investment or deposit account where certain sum money is

placed with a bank for a fixed period of time to earn interest. The rates for fixed deposits

for periods exceeding 12 months are negotiable. Banks are not required to display,

publish or announce the interest rates on deposits for more than 12

months.

As compared to a savings
account, generally the
interest rate payable
on a fixed deposit
account is higher.
Some of the
examples of fixed
deposits are Affin

Bank Fixed Deposit,
Public Bank PB Golden
50 PLUS FD Account,
AmBank Conventional Fixed
Deposit, BSN Term Deposit,
Maybank Fixed Deposit, RHB
Ordinary Fixed Deposit and many more fixed deposit that available in the market.

50

MONEY REMITTANCES

A remittance is the funds an expatriate sends to his or her country of origin via wire, mail, or
online transfer. These peer-to-peer transfers of funds across borders are economically significant
for many of the countries that receive them.

 Demand draft

A Demand Draft or bank draft is a cheque drawn by a bank on its Head Office, on a

branch or on another bank for payment outside the local area, either domestically or

abroad. A

demand draft

is a method

used by an

individual for

making a

transfer

payment from

one bank

account to

another.

 Telegraphic transfer
If a person needs to transfer funds to a beneficiary who is located in another town in the
country or overseas urgently, he can instruct the bank to remit the funds by telegraphic
transfer. Telegraphic Transfer is the fastest mode of money transfer and is used for
payments, in or out of Malaysia. It transfers the funds by telegraph, telex, cable, or
SWIFT from a bank to its branch
or another
bank
authorizing
the payment
of funds to a
specified
account.

51

 Mail transfer
A mail transfer is similar to Telegraphic Transfer. However, instead of transmitting the
message electronically through telex, fax or SWIFT, the message is sent through the mail.
Nowadays, this mode of transfers is
seldom used.

Mail is a method of sending money
from one place to another place by using

the letter (mail). The mail transfer (MT)
is possible only when the sender
(remitter) and the receiver
(remittee) both are having bank
accounts in the same bank, but at

different branches. Generally, no
charges are charged by bank for mail

transfer. In this the remitter has to
inform his bank to transfer a certain
amount from his account to another person's account in other branch of the same bank.
The details of the remittee (receiver) such as his name, account number, the branch
where he has account, etc. must be provided to the
bank.

 Standing instructions
A standing instruction is an instruction by account
holder ("the payer") gives to his or her bank to pay a set
amount at regular intervals to another's ("the payee's")
account. The instruction is sometimes known as a
banker's order.
Standing instructions is a way of making an automatic
payment of a fixed amount to a loan, bill, or credit card at
the same time every week or month. It can be made

52

from your savings or checking account and is most commonly used to make payments to a
mortgage, car loan, insurance premium, or to pay bills. But, this service is not suitable for a

variable payment such as utility bills because the amount to be paid is not fixed.

ADVANCES AND LOANS
Money is an essential element for any business, because it fulfills the short term and long term
requirement of funds. It is not possible for the owner to bring all the money himself, so he/she
take recourse to loans and advances. Loans refer to a debt provided by a financial institution for
a particular period while Advances are the funds provided by the banks to the business to fulfill
working capital requirement which are to be payable within one year.

 Overdraft
Overdraft is one of the examples of advance provided by the bank. A bank overdraft is a
line of credit that covers your
transactions if your bank account
balance drops below zero. This is
an advance or facility granted
under a current account whereby
the customer is authorized to
draw on the account up to an
approved limit. Interest is
charged only on the utilized
portion of overdraft limit.

 Fixed and term loans
A term loan is a loan from a bank for a specific amount that has a specified repayment
schedule and a fixed or floating interest rate. For example, many banks have term-loan
programs that can offer small
businesses the cash they need to
operate from month to month.
Often, a small business uses the
cash from a term loan to purchase
fixed assets such as equipment for
its production process.
With a term loan, you must repay the loan either by instalments over the loan period, or
in full at the end of the loan period, depending on the terms agreed with your lender.

53

OTHER BANKING FACILITIES

 Credit card
A credit card is a card
issued by a financial
company to a user that
enables the cardholder to
borrow funds to pay for
goods and services on the
condition that the
cardholder will pay back
the original amount plus
agreed-upon additional
charges.

The credit company or bank also grants a line of credit to the cardholder from which the
cardholder can borrow money in the form as a cash advance. A credit card’s borrowing
limits are usually pre-set according to the individual's credit rating.

A credit card holder can make minimum amount of payment each month on what he
owes if he chooses not to make full payment. A late payment charges is also a cost to a
card holder if he pays after the due date stated in the bill.

 Banker’s guarantee
A bank guarantee is a guarantee from a lending institution ensuring the liabilities of a
debtor will be met. In other words, if
the debtor fails to settle a debt, the
bank covers it. A bank guarantee
enables the customer, or debtor, to
acquire goods, buy equipment or draw
down loans, and thereby expand
business activity.

54

 Trust receipts
A trust receipt (TR) is a notice of the release of merchandise to a buyer from a bank, with
the bank retaining the ownership title of the released assets. In an arrangement involving
a trust receipt, the bank remains the owner of the merchandise, but the buyer is allowed
to hold the merchandise in trust for the bank, for manufacturing or sales purposes.

TR is a short term trade financing facility offered to customers to finance the
purchase/import of
goods. TR is signed by
the customer
(borrower) on the
strength of which the
Bank releases shipping
documents to the customer, who will hold and sell the goods as a trustee for the Bank. It
is to be repaid with interest by the customer on the maturity date, or when the goods
have been sold, (whichever is earlier).

 Travellers cheques
Travellers cheque are issues for the convenience of travellers. They are issued in various
denominations and currencies. They are drawn on the bank’s head office and counter
signed by the customer to whom they are issued at the time of issue. This is an
alternative way to carry money abroad for leisure or business. It is issued in various
currencies. It is also easy, convenient and safe to carry around the world.

55

OTHER BANKING SERVICES

 Share trading
Shares trading are the buying and selling of company stock – or derivative products based
on company stock – in the hope of making
a profit. Shares represent a portion of the
ownership of a public company, and make
up its worth. The trading of shares is one of
the most popular and best-known markets
in investing, alongside forex and
commodities.
Share trading is an online trading service which allows you to trade and manage your share
portfolio in real-time from anywhere around the world. It provides instant access to Bursa
Malaysia Securities Berhad and Bursa Malaysia Derivatives Berhad live prices. It also
provides access to major foreign stock exchanges across the globe.

 Insurance

Insurance is a means of protection from
financial loss. It is a form of risk management,
primarily used to hedge against the risk of a
contingent or uncertain loss. Insurance
companies accept premiums that have been
determined under the contract.

 Unit trust
A Unit Trust Fund consists of a pool of funds collected
from a group of investors with similar objectives. This
collective investment fund is managed full time by
professional fund managers. An investment portfolio
typically includes equities, bonds and assets.

A unit trust is a three-way relationship among the manager, the trustee and the unit
holder. The manager manages and operates the unit trust fund, the trustee holds all the
assets and the unit holder is the investor.

56

EXPLAIN E-MARKETING FOR BANKING
a) Define e-marketing
E-marketing is referred to those strategies and techniques which utilized online ways to reach target
customers. There are millions of internet users that daily access different websites using a variety of tools
like computers, laptops, tablet and smart or android phone devices, and the number of internet users are
increasing very rapidly. E-marketing also known as online or internet advertising which uses the internet
technology to promote online message to customer. E-marketing examples are email or social media
advertising, web banners and mobile advertising.

b) Classification of e-marketing for banking services
Marketing of bank products refers the various ways in which a bank can help a customer, such as
operating accounts, making transfers, paying standing orders and selling foreign currency. Banking is the
business activity of banks and similar institutions. Promotion and marketing in general is a big part of any
bank or financial institution. They rely on their promotional material in order to sustain their reputation.
Electronic banking can be defined as the use of electronic delivery channels for banking products and
services. The most important electronic delivery channels are the Internet, wireless communication
networks, automatic teller machines (ATMs), and telephone banking. Internet banking is a subset of e-
banking that is primarily carried out by means of the Internet. E-banking includes the systems that enable
financial institution customers, individuals or businesses, to access accounts, transact business, or obtain
information on financial products and services through a public or private network, including the Internet.

E-banking provides many advantages for banks and customer's. It provides banking throughout the year
24/7 days from any place have internet access. The usage of e banking by the enterprises came into
existence in mid 90’s. E-banking came into existence in greater numbers because of low operating costs.
First it is in the form of ATM’s and phone transactions. Recently it transformed to internet a new channel
between customers and banks which benefits both.

The main aim of e- banking services is to provide the customers a much faster services with low cost.
From the last twenty years, banking sector has chosen a new method of banking based on the progress
of information technology. In addition to these customers, transaction and communication abilities are
fastened based on information technology. The progress of electronic banking started with use of
automatic teller machines (ATM) and afterwards it developed to online banking. Anyway online banking
continues to be the best for financial transactions.

57
Importance of E-Banking:
E banking provides many advantages for banks and customers. E-banking has made life much easier and
banking much faster for both customers and banks.

Main advantages are as follows.
 It saves time spent in banks
 It provides ways for international banking.
 It provides banking throughout the year 24/7 days from any place have internet access.
 It provides well-organized cash management for internet optimization
 It provides convenience in terms of capital, labour, time all the resources needed to make a
transaction.
 Taking advantage of integrated banking services, banks may compete in new markets, can get
new customers and grow their market share.
 It provides some security and privacy to customers, by using state-of-the-art encryption and
security technologies.

Electronic Funds Transfer (EFT) means computer systems are used to perform financial transactions
electronically. The EFT is used for electronic payments and customer initiated transactions where the
cardholder pays using credit or debit card. The transaction types are withdrawal, deposit, inter account
transfer, inquiry, administrative transactions that covers non-financial transactions including PIN change.
Electronic Fund Transfer transactions needs authorisation and a means to match the card and card
holder. EFT transactions require the cardholder’s PIN to send online in encrypted form for validation by
the issuer of the card. Other information may include the card holders’ address or the CVV (Card
Verification Value) security value printed on the card.

Electronic funds transfer transactions are activated during e-banking procedures. The different methods
of e-banking are:

 “Online banking
 Short message service banking
 Telephone banking
 Mobile banking

58

Online banking
Online banking also called as internet banking, allows the customers to use all the banking services from
a computer which has internet access. The customer can perform financial transactions on a secure
website operated by the bank. Online banking offers features such as bank statements, loan applications,
funds transfer, e-bill payments and account aggregation allows customers to monitor all their accounts
in one place.

Telephone Banking
Telephone banking is a service provided by the banks which provides customers to perform transactions
on phone. All the telephone banking systems uses automated answering system with keypad response
or voice recognition capability. To prove their identity customers must provide a numeric or verbal
password or answering the questions asked by the call centre representative. In telephone banking
customer can’t withdraws and deposits cash but can do all the other transactions. Mostly there will be a
customer care representative to which the customers speak, although this feature is not guaranteed. The
customer care representatives are trained to do what are available at the branch like cheque book orders,
address change, debit card replacements.

SMS Banking
SMS banking is a service permitting banks to do selected banking services from the users mobile by the
sms messaging. SMS banking services have push and pull messages. Push messages are sent by the banks
for alerting customer about new offers, marketing messages, alerts to events happening in costumers
account such as large amount of withdrawals from ATM or credit card etc. Pull messages are those that
are sent by the customer to bank for having some information or to perform a transaction in their
account. Examples include account balance enquiry, requesting for current exchange rates and for new
offers that are launched. The customer has a choice to select the list of services he need to be informed.
This can be done by integrating to internet banking or speaking to the customer care representative of
the bank call centre.

Mobile Banking
Mobile banking can be described as the facility provided by the banks to its clients, in which they can
access their bank accounts and undertake monetary transactions remotely using mobile
telecommunication devices like smartphones, tablet or cellular device. It can take place through short
message service (SMS), mobile web or application. The customer can avail this service anytime and
anywhere.

CHAPTER 4

4.0 INVESTMENT BANKS

4.1 Identify the roles of investment banks
4.2 Classify the services provided by investment banks

a. Corporate financial and advisory services
b. Portfolio and investment services
c. Corporate banking
d. Fund-based activities

59

INTRODUCTION OF INVESTMENT BANK

The creation of investment banks is in line with the overall efforts of BNM and the Securities
Commission (SC) to enhance the capacity and capabilities of domestic capital market players to
be able to compete meaningfully in an increasingly dynamic and globalized environment. The
emergence of investment banks also represents a significant milestone towards enhancing the
dynamism and vibrancy of the capital market to contribute towards economic transformation.

Below are the lists of investment banks that available in Malaysia:

No Name of Bank Ownership
L : Locally-owned
1 Affin Hwang Investment Bank Berhad L
2 Alliance Investment Bank Berhad L
3 AmInvestment Bank Berhad L
4 CIMB Investment Bank Berhad L
5 Hong Leong Investment Bank Berhad L
6 KAF Investment Bank Berhad L
7 Kenanga Investment Bank Berhad L
8 MIDF Amanah Investment Bank Berhad L
9 Maybank Investment Bank Berhad L
10 Public Investment Bank Berhad L
11 RHB Investment Bank Berhad L

Source Bank Negara Malaysia:
http://www.bnm.gov.my/index.php?ch=li&cat=banking&type=MB&fund=0&cu=0

60

COMMERCIAL BANKING VS. INVESTMENT BANKING

While regulation has changed the businesses in which commercial and investment banks
may now participate, the core aspects of these different businesses remain intact. In other
words, the difference between how a typical investment bank and a typical commercial bank
operates is simple: A commercial bank takes deposits for checking and savings accounts from
consumers while an investment bank does not. We'll begin examining what this means by
taking a look at what commercial banks do.

Commercial Banks

The typical commercial banking process is fairly straightforward. You deposit money into
your bank, and the bank lends that money to consumers and companies in need of capital
(cash). You borrow to buy a house, finance a car, or finance an addition to your home.
Companies borrow to finance the growth of their company or meet immediate cash needs.
Companies that borrow from commercial banks can range in size from the dry cleaner on
the corner to a multinational conglomerate.

Investment Banks

An investment bank in Malaysia operates with a slight difference. The Investment bank is
allowed to accept deposits of more than RM500, 000-00 and hence, also has an inventory of
cash deposits. It, however, does not lend as a business activity unless if lending is linked to a
capital market transaction (i.e. intermediate in nature, serving as a bridging loan). In essence,
an investment bank acts as an intermediary, and matches sellers of stocks and bonds with
buyers of stocks and bonds.

Note, however, that companies use investment banks toward the same end as they use
commercial banks. If a company needs capital, it may get a loan from a bank, or it may ask
an investment bank to finance equity or debt (stocks or bonds).

Investment banks typically sell public securities (as opposed private loan agreements).
Technically, securities such as Maybank stock or Genting AAA bonds, represent
government-approved stocks or bonds that are traded either on a public exchange or
“traded-over-the-counter” through an approved dealer. The dealer is the investment bank.

61

ESTABLISHMENT OF INVESTMENT BANKS IN MALAYSIA

The framework on the creation for investment banks was introduced in 2005 following the
successful rationalization of commercial banks and finance companies. The framework
provided for the development of full-fledged investment banks through consolidation,
integration and rationalization between merchant banks, stock broking companies and
discount houses.

The establishment of investment banks would require the merchant banks, stock
broking companies and discount houses within the same banking groups to be
merged before the new entities are transformed into investment banks.

Discount houses which did not have merchant banks in their groups would also merge
with another discount house to become merchant banks, and subsequently be
transformed into investment banks when they merge with stock broking companies.

The integration exercise is aimed at:

Strengthening the capacity and capabilities of domestic banking groups to
contribute towards economic transformation and developing a more resilient,
competitive and dynamic financial system to face the challenges of liberalization
and globalization;
Enhancing their efficiency and effectiveness by minimizing duplication of resources
and overlapping of activities, leveraging on common infrastructure and reaping
benefits of synergies and economies of scale.
Strengthening their potential to capitalize on business opportunities, increase their
competitive advantage and leverage on a larger capital base to support their
expanded range of activities. Customers will also benefit from wider access to financial
services at more cost-effective prices.

62

ROLES OF INVESTMENT BANK

Investment Banking activities mainly include capital raising activities such as underwriting, loans
syndication and corporate financing, management advisory services, arranging for the issue and
listing of shares, as well as investment portfolio management. The development of Investment
Bank will enhance the capacity of financial institutions in Malaysia to better serve its corporate
customers through a wider range of financial and advisory activities.

Investment Bank is to provide an avenue for the government and
accomplished by
corporations to raise capital required. This is agent to the

undertaking the role of issuer as well as

securities issued

(capital market

instrument such as

bond and shares).

In Malaysia, all

the investment

banks are heavily

involved in

providing additional financial services for clients, such
exchange, and
as the trading of fixed income, foreign refer to both the
divisions such as "Fixed
equity securities. It is therefore acceptable to

"Investment Banking Division" and other 'front office'

Income" as part of "investment banking," and any employee involved in either side as an
"investment banker."

63

SERVICES OF INVESTMENT BANK

 Corporate financial and advisory services

The bread and butter of a traditional investment bank, corporate finance generally performs two

different functions:

• On the M&A advising side of corporate finance,

bankers assist in negotiating and structuring a merger

MERGERS AND between two companies. If, for example, a company

ACQUISITIONS wants to buy another firm, then an investment bank

will help finalize the purchase price, structure the

deal, and generally ensure a smooth transaction.

UNDERWRITING • In this role, investment banks are financial

intermediaries in securities offerings. They verify
financial data and business claims, facilitate pricing,
and perform due diligence. Most underwritings are
“firm commitment” underwritings in which
investment banks purchase the securities from the
issuer and distribute them to the public.

It involves the advisory services on mergers and acquisition, initial public offering (IPO), share
placement exercises, funds raised through equity capital market and other general corporate
advisory functions namely bonus issue, corporate and debt restructuring exercises, employee
share option scheme, listing transfer, share buy-back and valuation of companies, businesses,
securities and assets.
For example, mergers and acquisitions service provided by Kenanga Investment Bank Berhad
which advice companies in planning and implementing optimum strategy that include take-
overs, mergers, joint ventures, acquisitions, reverse take-over and management buy-outs.

Services offered include:

64

 Portfolio and investment services

It provides daily reports, company outlook, sector outlook, economic outlook and monthly
review which advice the investors on economic development, stock investments and technical
outlook. If the market condition is expected to boom, the bank will advise investors to invest in
order to get profit due to the increasing in share price.

a. Debt Capital Markets.

The debt capital markets department provides the investment banks corporate
clients with the expertise in structuring debt financing programs via debt securities
instruments, conventional or Islamic.

Services offered Advising and arranging for the issuance of debt
include: securities.

Underwriting the issuance of debt securities

Subscribing the issuance of debt securities.

Agency role throughout the tenure of the debt
securities.

Placement of debt securities.

b. Equity Markets

The Equity Capital Markets department manages the investment banks activities in
the primary and secondary equity and equity-linked markets. Equity Capital Markets
assists companies in accessing the equity capital market for their financing
requirements.

Services offered include:

65

c. Derivatives and Structured Products.

Derivatives and Structured Products has been a relatively recent division as
derivatives have come into play, with highly technical and numerate employees
working on creating complex structured products which typically offer much greater
margins and returns than underlying cash securities.

Services offered include:

Advising, originating Designing

and issuing of products/structures
products/structures with modified risk-

. return profiles.

d. Research.

Research analysts follow stocks and bonds and make
recommendations on whether to buy, sell, or hold those securities.
Stock analysts (known as equity analysts) typically focus on one
industry and will cover up to 20 companies' stocks at any given time.
Some research analysts work on the fixed income side and will cover
a particular segment, such as high yield bonds or Malaysian
Government Securities. Salespeople within the investment bank
utilize research published by analysts to convince their clients to buy
or sell securities through their firm. Corporate finance bankers rely
on research analysts to be experts in the industry in which they are
working. Reputable research analysts can generate substantial
corporate finance business as well as substantial trading activity, and
thus are an integral part of any investment bank.

66

 Corporate banking

This service involves structuring the financing facilities through
other loan products, revolving credit and banker guarantee. For
example, capitalized on their institutional and investment
banking capabilities, Alliance Investment Berhad provides a wide
spectrum of product to corporate customers including credit
facilities, banker acceptance, bank

guaratee, term loans and cash
management.

 Fund-Based activities (Treasury)

Fund Based Services are financing method that is driven by the assets of companies. Assets
include current assets such as account receivables, inventory and fixed assets such as plant and
machinery. Authorized to accept call deposits and fixed term deposits. The Treasury division
engages in proprietary trading in money market and fixed income instruments.
Services offered include:

CHAPTER 5

5.0 NON BANK FINANCIAL INTERMEDIARIES

5.1 Explain the roles of non-bank financial intermediaries in Malaysia
a. Development finance institutions
b. Savings institutions
c. Employees provident and pension funds
d. Insurance companies
e. Others financial intermediaries

67

OVERVIEW OF NON-BANK FINANCIAL INTERMEDIARIES

Non-bank financial intermediaries DEVELOPMENT PROVIDENT AND PENSIONS
(NBFIs) are mainly supervised by FINANCE FUND
other government agencies. Non-
Bank Financial Intermediaries INSTITUTIONS
mainly comprised of Insurance
Companies, Provident and Pension NON-BANK
Funds and Development Finance FINANCIAL
Institutions. INTERMEDIARIES

OTHERS FINANCIAL
INTERMEDIARIES

SAVING INSURANCE / TAKAFUL
INSTITUTIONS COMPANIES

NBFIs supplement banks by providing the infrastructure
to allocate surplus resources to individuals and
companies with deficits.

Additionally, NBFIs also introduces competition in
the provision of financial services. While banks may
offer a set of financial services as a packaged deal,
NBFIs unbundle and tailor these services to meet
the needs of specific clients. Additionally, individual
NBFIs may specialize in one particular sector and
develop an informational advantage. Through the
process of unbundling, targeting, and specializing,
NBFIs enhances competition within the financial
services industry.

68

NON-BANK FINANCIAL INTERMEDIARIES

A. DEVELOPMENT FINANCE INSTITUTIONS (DFIs)
Development Financial Institutions (DFIs) are established by the
Government to promote the development of certain identified
priority sectors and sub-sectors of the economy, such as
agriculture, infrastructure development and international trade.
DFIs generally specialize in the provision of medium and long
term financing of projects that may carry higher credit or market
risk. It is envisaged that in the next decade, DFIs will continue to
progress and assume a more significant role in pursuing the
Government policy goals for strategic, social and economic
development. The following are the main DFIs in Malaysia:-

 Bank Pertanian Malaysia
 Bank Industri & Technologi Malaysia
 Bank Pembangunan & Infrastruktur Malaysia Berhad
 EXIM Bank
 Malaysian Industrial Development Finance (MIDF)

These are specialized financial institutions, established by the Government to promote
investments in the manufacturing and agriculture sectors. Their emergence, as in most
developing countries, are to fill the gap in the supply of financial services, which are not usually
covered by the established financial institutions.

Commercial banks traditionally focus on short-term lending to finance working capital and are
not equipped to appraise projects involving complex industrial and agricultural technology. As a
result, many new ventures without previous track records would find it difficult to obtain
financing. The prime objective of development finance institutions in Malaysia is to provide long-
term funds tailored to the need of borrowers. Both Federal and State Governments provide
funding in the form of equity participation and low interest loans. As the name suggests,
development finance institutions are to develop specific sectors in the economy.

The Development Finance Institutions Act 2002, (DFIA) was enacted and made effective on 15th
February 2002 to provide a comprehensive regulatory and supervisory framework to ensure safe
and sound financial management of the DFIs. Six institutions now come under the purview of
Bank Negara Malaysia. They are Bank Pembangunan dan Infrastruktur Malaysia Berhad, Bank
Industri & Teknologi Malaysia Berhad, Malaysia Export Credit Insurance Berhad, Export-Import
Bank of Malaysia Berhad, Bank Kerjasama Rakyat Malaysia Berhad and Bank Simpanan Nasional
which have been gazette as “prescribed institutions” under subsection 2(1) of the DFIA.

69

One of the main aspects of the DFIA is to ensure that DFIs roles, objectives and activities are
consistent with the Government’s national objectives and these mandated roles are effectively
and efficiently implemented. For this purpose, the DFIA requires DFIs to submit their proposed
business and development activities and projected sources of funding to Bank Negara Malaysia
on an annual basis. Furthermore, the DFIA also provides a mechanism to monitor the
management of Government allocated funds to ensure that the funds are utilized as specified.

Now, let’s take a look at the roles and function of development finance institutions.

 Roles and Functions of DFIs

Their functions include extension of financial assistance in the form of medium and long term
loans, participation in equity capital, underwriting and wherever relevant, acting as issuing house
for public share issues and the provision of guarantees for loans. In addition, they helps in the
identification of new projects, participate in their promotion, and where appropriate, provide
ancillary financial, technical and managerial advice. The role played by development finance
institutions tends to complement those of other financial institutions.

DFIs specialize in medium and long term financing as well as supply of financial services not
normally provided by the commercial banks and finance companies. Commercial banks
traditionally focus their business on only short term lending to finance working capital. Their
medium to long term loans, wherever given, are generally extended to larger and more
established enterprises with high credit standing. Further, commercial banks are not equipped
with the expertise to appraise projects involving complex, industrial and agricultural technology.
To overcome the gap in supply of financial service, and as a part of development strategy, the
government has established specialized DFIs.

As specialized institutions, DFIs provide a range of specialized 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. The DFIs have, to a large extent,
contributed to the development and growth of the targeted sectors.

70

B. SAVINGS INSTITUTIONS

Saving institutions exists to complement the commercial banks and finance companies as the
major deposit taking institutions. Saving institutions in Malaysia is Bank Simpanan Nasional (BSN).
BSN was officially established on 1st December 1974, the Bank Simpanan Nasional Act, 1974,
enabled the transfer of the management power from the Postal Services Department to the
bank’s Board of Directors. With that, BSN was officially launched on 5th December by YAB Tun
Haji Abdul Razak Bin Hussein, the Second Prime Minister of Malaysia

The objective of its establishment is to promote and mobilize private savings especially from
middle and lower income groups in the rural areas not adequately served by commercial banks.
The institutions encourage savings from depositors and mobilize the savings effectively and
efficiently in the financial system. BSN’s mission is to encourage savings, investments and smart
financial management among Malaysians to increase their quality of life. BSN is continuously
enhancing its services as well as expanding its range of products for the benefit of its customers.
BSN’s main products include Personal Financing, mortgage loans, Premium Saving Certificate
(SSP), Islamic Banking Scheme, Giro Savings Account, BSN Matrix and Matrix-i Debit Card as well
as VISA and MasterCard credit card.

 Bank Simpanan Nasional

The National Savings Bank (NSB) was established through the
National Savings Bank Act 1974, through a reorganization of
the former Post Office Savings Bank system.
The National Savings Bank’s principal activity is to carry out the
functions of a national savings bank, namely to accept deposits and to provide retail loans to
small borrowers.

The Government guarantees all deposits. Funds raised through the premiums savings certificates
are unique to this bank. Attractive prizes for lucky draw winners and payment of dividends
contributed to the growth of these deposits. Other deposit products are savings deposits, fixed
deposits and Giro deposits and save-as-you-earn deposits. The Giro savings scheme is attractive
due to its features, which enables depositors to remit funds and make payments while earning
an interest. Lending is channeled to housing, credit cards, hire- purchase and corporate loans.

71

 Co- operatives Societies

The co-operative movement was first introduced in the country in 1922. In the same year, the
Department of Co-operative Development was also established. Co-operatives are
organizations of consumers or producers who voluntarily pool their resources together to meet
common objectives. The Co- operative Societies Ordinance 1948 defines a co-operative society
as “society which has its objective of promotion of economic interest of its members in
accordance with co-operative principles”.

Therefore, the aim is to provide opportunities for its members to save, invest and participate
in economic interests. Collectively, members can be a force to be reckoned with as they have a
better bargaining power. Co-operatives can be classified as single purpose or multi-purpose.
Comprehensive guidelines under the National Co-operative Policy are a framework and guide to
eradicate poverty, create jobs and business and to improve quality of life. To date, there are
4,330 co – operatives with a membership of 5 million members.

Bank Kerjasama Rakyat Malaysia Berhad was
established in 1954, under the Co-operative
Ordinance 1948. On 6 January 1973, its name
was changed to Bank Kerjasama Rakyat
Malaysia Berhad following a broadening of its
scope of activity.

As a co-operative, the main objectives of Bank Kerjasama Rakyat Malaysia Berhad are to improve
the standard of living through the provision of financing and financial and advisory services in the
commercial, industrial, agricultural and other sectors, and to encourage savings among its
members. The principal activities of Bank Kerjasama Rakyat Malaysia Berhad are providing
personal, property, education and other financing, including pawn broking to members of the
public and co-operatives. Since 1997, all banking facilities offered by Bank Kerjasama Rakyat
Malaysia Berhad are based on the Syariah principles.

72

C. PROVIDENT AND PENSION FUNDS (PPFs)
Provident and pension funds (PPFs) are a group of
financial schemes designed to provide members and
their dependents with a measure of social security in the
form of retirement medical, death or disability benefits.
Several forms of provident and pension funds operate in
Malaysia, such as health and medical schemes,
compulsory workmen compensation insurance, public
provident and pension funds as well as private provident
and pension schemes.

PPFs in Malaysia comprise the Employee Provident Fund (EPF) and Social Security Organisation
(SOCSO). The EPF is a social security institution formedaccording to the Laws of Malaysia,
Employees Provident Fund Act 1991 (Act 452) which provides retirement benefits for members
through management of their savings in an efficient and reliable manner. The EPF also provides
a convenient framework for employers to meet their statutory and moral obligations to their
employees. The retirement scheme is fully funded and provides defined contribution type
benefits to members.

SOCSO (Social Security Organization), also known as
PERKESO (Pertubuhan Keselamatan Sosial), was established
to provide social security protections to all
employees/workers in Malaysia. Every company is required
to contribute SOCSO for its employees, whether they are
full/part time, permanent or temporary, employment or
contract. A company must remit the contribution sum to
Perkeso Office before the end of the following month. Failing
to submit the forms & remit the payment within the period
will result in late interest (penalty) charged by Perkeso.

The functions of SOCSO (PERKESO) are as follows:
 Registration of employers and employees
 Collection of contribution from employers and employees
 Payment of benefits to workers and/or their dependents when tragedy strikes
 Provision of physical and vocational rehabilitation benefits
 Promotion of awareness of occupational safety and health

73

D. INSURANCE COMPANIES
Insurance is a means of protection from financial loss. It is a form of risk management, primarily
used to hedge against the risk of a contingent
or uncertain loss. Insurance companies have
to spread their risks over the insured
community and take calculated risks to be able
to cover for possible claims. Insurance
companies mobilize substantial funds through
the acceptance of premium particularly long
term funds for life insurance.

In Malaysia, the insurance industry can be
divided into two groups, which are:

i) Conventional insurance companies
ii) Takaful operators (Islamic insurance companies)
There two forms of business in conventional insurance: general insurance business and life
insurance business. In the takaful industry, also there two types of business: family takaful
business and general takaful business. Participants of takaful mutually guarantee each other
against loss or damage. Each participants needs to fulfill his obligation by contributing a certain
amount of money (tabarru) into a fund.

Life insurance is an insurance coverage that pays out a certain amount of money to the insured
or their specified beneficiaries upon a certain event such as death of the individual who is insured.
The coverage period for life insurance is usually more than a year. So this requires periodic
premium payments, either monthly, quarterly or annually. The risks that are covered by life
insurance are premature death, income during retirement, disability or illness.

General insurance is basically an insurance policy that protects you against losses and damages
other than those covered by life insurance. For more comprehensive coverage, it is vital for you
to know about the risks covered to ensure that you and your family are protected from
unforeseen losses. The coverage period for most general insurance policies and plans is usually
one year, whereby premiums are normally paid on a one-time basis. The risks that are covered
by general insurance are property loss, for example, stolen car or burnt house, liability arising
from damage caused by yourself to a third party, accidental death or injury.

74

E. OTHERS FINANCIAL INTERMEDIARIES regulated by
register with BNM to carrying out
Leasing Companies and Factoring Companies

Leasing and factoring companies are non-deposit
taking institutions. Prior to the enhancement of the
Banking and Financial Institutions Act (BAFIA) in 1989,
both leasing and factoring companies were not
any supervisory authority, but they are required to
leasing and factoring business.

Financial leasing companies engage in financing the purchase of tangible assets. The leasing
company is the legal owner of the goods, but ownership is effectively conveyed to the lessee,
who incurs all benefits, costs, and risks associated with ownership of the assets. Sources of funds
for leasing companies are mainly from shareholders, borrowing from financial institutions and
inter-company borrowing.

Factoring is a financial transaction and a type of debtor finance in which a business sells its
accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. A business will
sometimes factor its receivable assets to meet its present and immediate cash needs. Most of
the factoring debt finance was channeled to finance general commerce, constructions and
manufacturing sectors. In contrast to leasing companies, which services mainly the industrial
sector, the bulk of the factoring debt finance was used for general trade and commerce.

Housing Credit Institutions

There are two housing credit institutions, Malaysian
Building Society Berhad (MBSB) and Borneo Housing
Mortgage Finance Berhad were the pioneer institutions
to provide housing loans. MBSB is funded mainly from
Employee Provident Fund, shareholders fund and
deposit by the public including institutions. The
objective of the government’s housing policy is to
ensure sufficient home ownership for the country’s
population to satisfy their basic needs in term of
shelter.

75

Unit Trust

First unit trust was established by a company in Malaysia called Malaysian Unit Trust Ltd. A unit
trust is simple and convenient form of investment that enables not only individuals but also
corporations and institutions which have common investment objectives to pool their money.
The pool of money is managed by a team of professional fund managers.

This collective investment fund is managed full time by professional fund managers. An
investment portfolio

typically includes

equities, bonds and

assets. A unit trust is a

three-way relationship

among the manager, the

trustee and the unit

holder. The manager

manages and operates

the unit trust fund, the

trustee holds all the

assets and the unit

holder is the investor.

Unit holders do not own the securities in
the portfolio directly. Ownership of the
fund is divided into units of entitlement. As
the fund increases or decreases in value,
the value of each unit increases or
decreases accordingly. The number of units
held depends on the unit purchase price at
the time of investment and the amount of
money invested. The return on investment
of unit holders is usually in the form of
income distribution and capital
appreciation, derived from the pool of
assets supporting the unit trust fund. Each
unit earns an equal return, determined by
the level of distribution and/or capital
appreciation in any one period.

76

Cagamas Berhad

The national mortgage corporation, Cagamas Berhad, was established in December 1986, to
ensure a steady flow of funds to the housing industry as well
as to develop a secondary mortgage market. Cagamas issues
notes and bonds to raise funds. Notes are short term, with
maturity dates being less than one year. Bonds are long term,
having maturity dates of more than one year. Financial institutions invest in these notes and

bonds. Having raised these funds, they are mainly used
in two areas.

 Firstly, Cagamas, together with other institutions,
provides funding to the Housing Loans Division of the
Treasury, which in turn provides housing loans to civil
servants in the public sector.
 Secondly, to provide a secondary market, Cagamas
purchases housing loans from the primary lenders of
housing loan, thus acting as an intermediary for long-
term investors.

It can be observed, since the inception of Cagamas,
financial institutions are able to provide longer

repayment tenors for housing loans. Prior to 1986,
housing loans were not extended for more than ten
years. Now, tenors are extended to 25 years. This is

largely made possible by Cagamas, as financial
institutions liquidity positions can be adjusted by sale
of housing loans to Cagamas. Also, it must be made clear that banks sell their housing loans and
not the houses to Cagamas. The legal owners of the houses are the chargors. The banks merely
sell their interests in the property by way of a sub-charge. The provision of liquidity at a
reasonable cost to the primary lenders of housing loans encourages further financing of houses
at an affordable cost. Cagamas is the second largest issuer of debt instruments after the
Government of Malaysia and its debt securities have been rated AAA by RAM Rating Services
Berhad and Malaysian Rating Corporation Berhad.

77

Credit Guarantee Cooperation (CGC)
Credit Guarantee Corporation Malaysia Berhad (CGC) is a
limited company incorporated under the Companies Act
1965 on July 5, 1972. Its main objective is to play a
developmental role in supporting the country’s economic
development agenda by assisting marginal but potentially
viable small and medium scale enterprises (SMEs),
particularly enterprises without collateral or with
inadequate collateral and track record, to obtain financing
from the financial institutions. CGC facilitates SMEs access
to financing through its guarantee schemes.

In its formative years, CGC’s main aim
was to assist the small enterprises
particularly in agricultural, commercial
and industrial sectors. As the Malaysian
economy expanded and diversified over
the years, the demand for CGC’s
guarantee services also grew in
tandem. This has lead CGC to expand its range of products and services to
cater for larger credit facilities required by the medium-sized SMEs.

Pilgrims Fund Board
Pilgrims fund board formerly known as Lembaga
Urusan dan Tabung Haji (LUTH). LUTH is an institution with an important
and relevant role especially for Malaysian Muslims. We strive to manage
various facilities for the welfare of the country’s Hajj pilgrims in a
comprehensive and systematic manner, ranging from the best and halal
savings management, as well as investment activities to provide
additional value to Hajj management and hibah payments to our
depositors. LUTH focuses on providing excellent and satisfactorily Hajj
services to Malaysian pilgrims and its consistent track record has gained
world recognition as a role model for innovative Hajj Management and
Islamic financial services among the Islamic countries.

CHAPTER 6

6.0 FINANCIAL MARKETS ENVIRONMENT

6.1 Describe financial markets environment
6.1.1 Define financial markets
6.1.2 Explain features and roles of major financial markets
a. Capital market
b. Money and Foreign exchange market
c. Commodity market
d. Derivative market
6.1.3 Explain products or instruments of major financial markets
a. Capital market
b. Money and Foreign exchange market
c. Commodity market
d. Derivative market
6.1.4 Explain main participants in global financial market

6.2 Describe the role regulators
a. Securities Commission (SC)
b. Bursa Malaysia

78

FINANCIAL MARKETS OVERVIEW

Financial markets are places where financial instruments are issued and exchanged. In economics
a financial market is a mechanism that allows people to easily buy and sell (trade) commodities
(such as precious metals or agricultural goods), and other fungible items of value at low
transaction costs and at prices that reflect efficient markets. The financial market also allows
people to make investments in stocks and sukuk.

The Financial Market mainly comprises:-

Money Market
Foreign Exchange Market
Capital Market
Derivatives Market

The money and foreign exchange markets are integral to the functioning of the banking system,
firstly, in providing funding to the banking system, and secondly, serving as a channel for the
transmission of monetary policy. These are governed by the Malaysian Code of Conduct for
Principals and Brokers in the Wholesale Money and Foreign Exchange Markets in January 1994
which set out the market practices, principles and standards to be observed.

The capital markets in Malaysia comprise the conventional and
Islamic markets for medium to long term

financial assets. The conventional
markets consist of two main markets,
namely the equity market dealing in
corporate stocks and shares, and the
public and private debt securities.

Apart from BNM, following are the statutory bodies established by Malaysian Government in
regulating and supporting the above mentioned markets:-
 Securities Commission
 Bursa Saham Malaysia
 Malaysia Derivatives Exchange Market
 Malaysian Exchange of Securities Dealing and
Automated Quotation (MESDAQ)

 Rating Agency Malaysia (RAM)

79

FEATURES AND ROLES OF MAJOR FINANCIAL MARKETS

CAPITAL MARKETS
The capital market mainly comprises:-

i. Equity market
ii. Debt/Bond market
The Equity Market
While the money market is for short-term funds, equity markets are for raising long-term funds.
The development of the equity market benefits society because it provides a greater variety of
channels for borrowing, particularly for medium and long-term financing. The equity market
provides an avenue for corporations to raise funds by issuing stocks and shares to be listed on
the Main market and ACE market.
The primary market is used to raise new capital for enterprises while the secondary market
provides the requisite liquidity for investors to meet their individual needs. Secondary market
trading in stocks and shares is conducted through stockbrokers.
The Bond Market
The bond market is the market through which both the private and public sectors can raise funds
by issuing private debt securities and Government securities (such as Treasury bills and
Government bonds) respectively. Issuance of Malaysian Government Securities is becoming
significant as the government sourced the bulk of its financing requirements from the domestic
market. The bond market has become increasingly popular, as many companies issue private
debt securities as an alternative means for fund raising

80

FEATURES OF CAPITAL MARKET

Capital market is a market for medium and long term funds. It includes all the organizations,
institutions and instruments that provide long term and medium term funds. It does not include
the instruments or institutions which provide finance for short period (up to one year). The
common instruments used in capital market are shares, debentures, bonds, mutual funds, public
deposits etc.

Features

 Link between Savers and Investment Opportunities:

 Capital market is a crucial link between seanvtirnegpraenndeiunrviaelstbmorernotwperrosc.ess. The capital
market transfers money from savers to

 Deals in Long Term Investment:

 Cchaapnitnael lmizianrgkestavpirnogvifdoerslefsusntdhsafnorolnoenygeaanrd.medium term. It does not dealwith

 Utilizes Intermediaries:

 Capital market makes use of different intermediaries such as brokers,
underwriters, depositories iemtcp.oTrhtaensteeilnetmeremntesdoiafrcieaspitaacltmaasrkweot.rking organs of
capital market and are very

 Determinant of Capital Formation:

 The activities of capital market determine the rate of capital formation in an
economy. Capital market offers attractive opportunities to those who have

surplus funds so that they ipnrvoefsittabmleoroeppaonrdtumniotirees.in capital market and are
encouraged to save more for

 Government Rules and Regulations:

 The capital market operates freely but under the guidance of government policies.
Trehgeusleatimonasr.kets function within the framework of government rules and

 Cinasptrituaml menatrskesutcishmasarbkoentdwshaenrdebshyapraerst.icipants invest and trade in a variety of long-term

 Instruments in capital market are less liquid compared to money market.

81

 Equity market provides means of raising funds by corporations by issuing stocks and shares.

 The bgoovnedrnmmareknettdisebatpsleaccuerwitiheesre private and public sectors can raise funds by issuing private
and

An ideal capital market is one which has these:

 Where finance is available at reasonable cost.

 Which facilitates economic growth.

 Where market operations are free, fair, competitive and transparent.

 Must provide sufficient information to investors.

 Must allocate capital productively.

MONEY MARKET

The money market is an avenue for channeling short-term funds with maturities typically varying
from overnight to those not exceeding 12 months. It provides a ready source of funds for market
participants facing temporary shortfalls in funds. At the same time, it also provides short-term
investment opportunities and outlets for those with temporary surplus funds. Money market
operations comprise two broad categories: placement of short-term funds, and

purchase and sale of short-term money market instruments (such as Bankers Acceptances,
Negotiable Instruments of Deposit, Treasury Bills, Cagamas notes, etc.). The main players are the
commercial banks and investment banks.
FEATURES OF MONEY MARKET

 The MM does not exist in isolation; but it is part of a complex web of financial markets (which
ignloclbuadlefitnhaenccaiaplimtala,rfkoerte.ign exchange, commodity & derivative markets) that make up the

 It is essentially a short term market whereby maturities are normally one year or less
a(aclttihvoeusgehcothnedraeryarmeasrokmete.for more than one year) and trading is usually back by a very

 It plays a distinctive role (unlike tohfeshoothret rtefirnmanfucinadl ms baerktwetese) ninstuhraptluitsfaunndctdioenfsicaitsuannits.
intermediary for the ‘matching’

82

 The ‘price’ at which money market deals are transacted is tinhteeirnetsetrreastter).ate (i.e. the
lender earns the interest rate while the borrower pays the

 Major issuers of MM instruments are Government, banks and large companies.

MAJOR PLAYER OF MONEY MARKET

Money market operations basically comprise of placing deposits, trading deposits
(borrowing and lending) and sale and purchase of money market instruments. The major
players in the money market are commercial banks, merchant banks, finance companies,
discounts houses, insurance companies, large corporations, pension funds and money
brokers.

STRUCTURE OF THE MALAYSIAN MONEY MARKET

The structure of the Malaysian money market consists of primary market, secondary
market, inter-bank market and securities market.

a) Primary Market

In this market, the participants are the initial supplier and final users of the funds. The
short term funds are supplied by the public, provident or pension funds and also by the
government and statutory bodies. These funds are mobilized through the authorized
institutions which be channeled to the final user (business enterprises, individual or
government). Funds may also be mobilized between the surplus and deficit units in the
economy through the issuance of financial instruments.

b) Secondary Market

Activities in this market refer to the activities among the financial intermediaries. Funds
are mobilised by these institutions among themselves. The secondary market for the
securities is where the existing negotiable money market instruments are traded among
the authorised financial institutions.

c) Inter-bank Market

The interbank market is the centre for the secondary market activities of the loans and
deposits market. Deposits are lent and borrowed for a fixed period of time which ranges
from overnight to three years. It has developed to become an important source of short
terms funds which enables players to adjust with their liquidity positions and risk
preference.

83

d) Securities Market
The securities market basically involves the sale and purchase of negotiable money market
instruments. Trading of these papers is an indirect method of borrowing and lending of funds.
The primary security market is where the securities were initially issued and the trading of
the money market papers takes place in the secondary market.

MONEY MARKET INSTRUMENTS
The instruments used are those financial claims that can be traded or titles that can
change hands. The instruments are:
a) Deposit or “Straight Placements” (DEPO’s)
b) Negotiable Instruments of Deposits (NID’s)
c) Bankers’ Acceptance (BA’s)
d) Malaysian Government Securities and Treasury Bills (MGS and MGTB’s)
e) Repurchase Agreements (REPO’s)
f) Government Bond and Cagamas Bonds

FOREIGN EXCHANGE MARKET
The foreign exchange market is the market for trading in foreign currencies against the Ringgit
or against any other foreign currencies. Dealings in the foreign exchange market can be
undertaken in the spot market as well as the forward market. The Spot market transacted on
the spot while the forward market transaction will be delivered in future. The forward market
enables traders and investors to hedge against foreign exchange risk, i.e., a way to reduce the
risk of exchange rate fluctuations. Under the current exchange control regime, all forward
transactions undertaken by non - bank residents have to be supported by bona fide underlying
trade transactions. Under the Exchange Control Act 1953, all transactions in foreign currencies
have to be undertaken through authorised dealers which comprise all commercial banks
(including Islamic banks) and some designated investment banks.

*bona fide – carried out in good faith, sincere.

84

WHY FOREIGN EXCHANGE?

The need for foreign exchange is because of international trade and services and
international investment. Foreign exchange is a trade of one currency for another at a
set rate called the exchange rate.
TYPES OF ROREIGN EXCHANGE

FEATURES OF THE FOREIGN EXCHANGE

a. It is essentially an OTC market whereby there is no central place between buyer and
seller.

b. The foreign exchange is made up of dealers and brokers located over numerous
locations who transact via a network of sophisticated international dealing systems.

c. The heart of the foreign exchange market is the dealing rooms of commercial banks,
financial institutions, governments, large corporations, brokers and central banks.

d. An informal market whereby buyers and sellers transact without having to know or
meet each other.

e. An electronic market whereby large amounts of funds are transferred between buyers
and sellers through a computer network called “SWIFT” (Society for World-Wide Inter-
Bank Fund Transfer).

f. It is a 24-hours market that opens daily in the New Zealand and closes in the West
Coast of North America.

MAJOR PARTICIPANTS IN THE FOREIGN EXCHANGE MARKET
a. Commercial banks
b. Corporations
c. Non-bank financial and related institutions
d. Individuals
e. Central banks
f. Money brokers

85

COMMODITY MARKET

In financial markets, a commodity is a raw product, rather than a finished good. The earliest
materials traded on what developed into the commodities market were agricultural products like
wheat and corn. Today the list includes livestock, base and precious metals, minerals and energy
sources like crude oil and natural gas. In addition, futures contracts on some securities like
currency are also traded on the commodity market.

Commodities include:

 Soft commodities (rice, coffee, salt, cocoa and sugar)

 Hard commodities (gold, rubber, crude oil and palm oil)
Commodities product always stand together with derivatives market, it complete each other.

DERIVATIVES MARKET

Literal meaning of derivative is that something which is derived. Now question arises as to what
is derived? From what it is derived? Simple one line answer is that value/price is derived from
any underlying asset. The term ‘derivative’ indicates that it has no independent value, i.e., its
value is entirely derived from the value of the underlying asset. The underlying asset can be
securities, commodities, bullion, currency, livestock or anything else.
There are two types of derivatives. Commodity derivatives and financial derivatives. Firstly
derivatives originated as a tool for
managing risk in commodities markets. In
commodity derivatives, the underlying
asset is a commodity. It can be agricultural
commodity like wheat, soybeans,
rapeseed, cotton etc. or precious metals
like gold, silver etc. The term financial
derivative denotes a variety of financial
instruments including stocks, bonds, treasury
bills, interest rate, foreign currencies and other hybrid securities. Financial derivatives include
futures, forwards, options, swaps, etc. Futures contracts are the most important form of
derivatives, which are in existence long before the term ‘derivative’ was coined.

86

The derivatives market is for trading instruments that provide contingent claims on

underlying assets, and whose values depend on the price of the underlying assets or securities.
Bursa Malaysia Derivatives (BMD), formerly known as Malaysia Derivatives Exchange (MDEX),
came into inception on 11 June 2001 with the merger of the Kuala Lumpur Options and Financial
Futures Exchange of Malaysia (KLOFFE) and the Commodity and Monetary Exchange of Malaysia
(COMMEX Malaysia).

The name MDEX was changed to Bursa Malaysia Derivatives Berhad in April 2004. BMD offers
products that cover three different market segments namely equity, financial and commodities.
Currently, the products are:-

 Kuala Lumpur Composite Index (KLCI)
 Kuala Lumpur Composite Index Futures (FKLI)
 Kuala Lumpur Composite Index Options (OKLI)
 Crude Palm Oil Futures (FCPO)
 USD Crude Palm Oil Futures (FUPO)
 Crude Palm Kernel Oil Futures (FPKO)
 3-month Kuala Lumpur Interbank Offered Rate Futures (FKB3)
 Three years Malaysian Government Securities (FMG3)
 Five years Malaysian Government Securities (FMG5)
The main use of derivatives is to trade or hedge against volatility in the price of the underlying
assets, although it is possible to use derivatives to speculate for capital gains. Both the capital
and derivatives markets come under the Securities Commission’s supervision.

•Kuala Lumpur MERGER OF
KLOFFE &
Options and COMMEX - BURSA
Financial Futures MALAYSIA
MALAYSIA
Exchange of DERIVATIVES
EXCHANGE DERIVATIVES
B Malaysia (KLOFFE) 2001 2004 (BMD)
•Commodity and (MDEX) ONWARDS
E Monetary

F Exchange of
Malaysia
O (COMMEX

R Malaysia).

E

Y

2

K

87

FEATURES OF DERIVATIVES MARKET

 It is a contract: Derivative is defined as the future contract between two parties. It means
ftuhteurreem.ust be a contract-binding on the underlying parties and the same to be fulfilled in

 Derives value from underlying asset: Normally, the derivative instruments have the value
cwohmicmh oidsitdieesr,ivmeedtaflrso, mfinatnhceiavl aalsuseests,oifntoanthgeibrleuansdseertlsy,inegtc.assets, such as agricultural

 Specified obligation: In general, the counter parties have specified obligation under the
tdyepreivoatfitvheecionnsttrraucmt.eOnbt voifoausdlye,ritvhaetinveat.ure of the obligation would be different as per the

 Direct or exchange traded: The derivatives contracts can be undertaken directly between

the two parties or through the particular exchange like financial futures contracts. The

ecoxcmhpaanrgiseo-tnratdoetdailodre-mrivaadteivecosntarraectsq.uite liquid and have low transaction costs in

 May be used as deferred delivery: Derivatives are also known as deferred delivery or
ddeefreivraretidvepsaiynmcoenmtpianrsitsrounmteonot.thItemr aesasneststhoar tseitcuisrietaiessie.r to take short or long position in

 Secondary market instruments: Derivatives are mostly secondary market instruments
and have little usefulness in mobilizing finretshhiscraepsiptaelcbt.ythe corporate world, however,
warrants and convertibles are exception

 Exposure to risk: Although in the market, the standardized, general and exchange-traded

derivatives are being increasingly evolved, however, still there are so many privately
negotiated customized, over-the-counter (OTC) traded derivatives are in existence. They

expose the trading parties to operational risk, counter-party risk and legal risk.

MAJOR PLAYER IN DERIVATIVES MARKET
Hedgers

88

Speculators
Market Makers
Arbitrageur

89

PRODUCTS / INSTRUMENTS OF MAJOR FINANCIAL MARKETS

 Capital Market and Money Market

i. Bankers’ Acceptance(BAs)

 BA is a bill of exchange drawn on a bank, payable to the order of drawer for a
specified amount with a specific maturity date.

 It is created to finance a customer for a trade transaction.
 The maturity of BAs ranges from 21 days to 200 days.

ii. Negotiable Instruments of Deposits (NIDs)

 NID is a deposit document issued by a bank to a customer certifying that a certain
amount of money has been deposited with the bank at a specific rate and for a
specified maturity date.

 NIDs can be sold before its maturity date.
 It is a negotiable form of instrument.
 Malaysian Government Securities (MGS)
 These are interest-bearing instruments issued by BNM to obtain funds from the

public to finance national development projects.
 It is an instrument whereby the government agreed to pay periodic interest to

the holder of the instrument and upon maturity the return of the par value.
 Long-term interest-bearing bonds issued by the Government of Malaysia to raise

funds from the domestic capital market for development expenditure.
iii. Treasury Bills (TBs)

 TBs are issued by BNM on behalf of the government of Malaysia with the
purpose of raising short-term funds to finance government’s expenditure.

 The instruments are issued on a discounted basis with maturities not exceeding
one year.

90

iv. Bank Negara Bills
 Introduced to encourage savings and absorb excess liquidity from the banking
system.
 These are short term instruments issued by BNM on a discounted basis with
maturities not exceeding one year.
 The instruments are often used for the Open Market operations, one of the
monetary tools of BNM.

v. Repurchase Agreement (REPO)
 A REPO is a sale of financial instrument by a bank with an undertaking to
repurchase it at an agreed price on a specified future.
 It is suitable for anyone who needs to manage its short-term funds because the
period dealt is normally on a number of day’s basis.

vi. Cagamas Bonds and Notes.
 Cagamas Mudharabah Bond was introduced on 1 March 1994 by Cagamas Bhd to
finance the purchase of Islamic housing debts from financial institutions that
provides Islamic house financing to the public.
 This bond is structured using the concept of Mudharabah where the bondholders
and Cagamas Bhd. will share the profits according to the agreed profit-sharing
ratios.

vii. Government Investment Certificate (GIC)
 GIC are non-bearing instruments issued by the government to enable Bank Islam
Malaysia and other institutions to invest their liquid funds on Islamic basis.
 The return are declared by the government on the anniversary date of issue of
the Certificates. GICs are issued with maturities of one, two and five years.