Introduction Bank Negara Malaysia

Introduction
Bank Negara Malaysia (the Central Bank of Malaysia), is a statutory body which started
operations on 26 January 1959. Bank Negara Malaysia is governed by the Central Bank of
Malaysia Act 2009. The role of Bank Negara Malaysia is to promote monetary and financial
stability. This is aimed at providing a conducive environment for the sustainable growth of the
Malaysian economy.
Bank Negara Malaysia’s monetary policy stance is to maintain price stability while remaining
supportive of growth. Bank Negara Malaysia is also responsible for financial system stability.
This is achieved by developing a sound, resilient, progressive and diversified financial sector
which serves to support the sectors of the real economy. It also plays an important function in
implementing initiatives to deepen and strengthen the financial markets, including the foreign
exchange market.
Bank Negara Malaysia plays a significant developmental role in developing the financial system
infrastructure in advancing the financial inclusion agenda. This is to ensure all economic sectors
and segments of the society have access to financial services. In addition, Bank Negara Malaysia
also oversees the nation’s payment systems infrastructure which emphasizes on the efficiency
and security of the financial systems.
As the banker and adviser to the Government, Bank Negara Malaysia provides advice on
macroeconomic policies and the management of public debt. Bank Negara Malaysia is also the
sole authority in issuing the national currency and in managing the country's international
reserves.
The Bank has also established the Agensi Kaunseling Dan Pengurusan Kredit (AKPK), with
branches located across Malaysia to help consumers manage their debts and become more self-
reliant in their financial affairs and thereby preserve the resiliency of the household sector in the
economic growth process. Apart from that, the Bank was also instrumental in the setting up of
the Ombudsman for Financial Services (OFS), an independent body providing consumers with
objective and timely solutions to disputes, claims and complaints arising from services provided
by financial institutions.
As the financial system becomes more developed, the Bank has taken measures to raise the level
of financial literacy among consumers. Given today's sophisticated financial markets, products

and services, the Bank has initiated its Consumer Education Programme nationwide to reach out
to the masses. This comprises, namely,bankinginfo and insuranceinfo initiatives; inclusion of
targeted school children in the Bank's outreach programme to enhance their financial education;
and financial education roadshows to reach out to members of the public, including those in the
rural areas.
Bank Negara Malaysia assessed that domestic financial stability continues to be well-supported
by sound financial institutions and orderly domestic financial markets. Since last meeting in
November 2017, global financial market volatility has increased amid renewed uncertainties
regarding the pace of interest rate normalisation in the advanced economies.
Bank Negara Malaysia 14 March 2018, the financial stability committee (FSC) is high-level
internal committee of the bank. It is responsible for monitoring and taking actions to reduce or
avert risks to financial stability stemming from both system-wide and institutional developments.
Section 29 of the Central Bank of Malaysia Act 2009 defines “risk to financial stability” as “a
risk which in the opinion of the Bank disrupts, or is likely to disrupt, the financial intermediation
process including the orderly functioning of the money market and foreign exchange market, or
affects, or is likely to affect, public confidence in the financial system or the stability of the
financial system”.

Importance of Central Bank in economic growth
Central Bank utilises five major forms of economic policy which consist monetary policy, fiscal
policy, exchange rate policy, prices and income policy and national debt management policy that
conducted by governments to boost economic growth. Monetary policy concerns with the
actions taken by central banks to influence the availability and cost money and credit. In
addition, monetary policy also helps to control some measure of the money supply and the level
and structure of the interest rates. Fiscal policy refers to changes in the level and structure of
government expenditure and taxation designed to influence the economy. An expansionary fiscal
policy means a higher government spending relative to taxation. The effect of this policies would
encourage more spending and boost the economic growth. On the other hand, a contractionary
fiscal policy means raising taxes and cutting expenditure. Exchange rate policy involves the
targeting of a particular value of a country’s currency exchange rate, so it influences the flows
within the balance of payments. However, exchange rate policy may be used in conjunction with
other measures such as exchange controls, import tariffs and quotas in some countries. Prices
and incomes policy are intended to influence the inflation rate by means of either statutory or
voluntary restrictions upon increases in wages, dividends and prices. National debt
management policy is concerned with the manipulation of the outstanding stock of government
debt instruments held by the domestic private sector. National debt management policy is to
influence the level and structure of interest rates and the availability of reserve assets to the
banking system.

Functions of Bank Negara Malaysia
Bank Negara Malaysia acts as an adviser to government and lender of last resort. It manages
the government’s liabilities and advises the government on its loan programmes which include
the terms and timings of the loans and the issuance of new types of securities. They have
responsibility for trading, registering, settling and redeeming Government securities through its
trading and settlement system. Lender of last resort (LOLR) is one of the main functions of the
central bank, which they offer loans to banks that are experiencing financial difficulty such as
bank run. Moreover, the Central bank is in charge of currency issuance and management of
international reserves. They need to maintain a cover of above 100% of their currency
liabilities so they need to maintain full gold and foreign currency to back their currency. In the
light of the currency exchange rate are market driven, Central Bank only can intervene to smooth
excessively volatile fluctuations. With a strong reserves position, the government can fortify our
country against unpredicted destabilizing development, sustain market confidence and improve
creditworthiness and government has more flexibility in the conduct of domestic policies.
Central bank helps the government to issue currency (Ringgit Malaysia) in Malaysia. In addition,
the central bank needs to ensure stability through formulating and conducting monetary
policy. Central Bank needs to guarantee that there is adequate money to allow the economy to
expand along its long-term potential growth under situations of relatively little or no inflation.
Central Bank can help to minimize the fluctuations of recessionary which can deteriorate
economy as a short-term measure. Besides, central bank provides a sound, progressive and
inclusive financial system to ensure the existence of strong and effective prudential framework.
It ensures the level of risks assumed by the banking system is kept to a manageable level so the
need to seek help from the central bank will be minimised. It conducts supervisory activities
through regulations and off-site monitoring and on-site examination. Off-site monitoring is
central bank reviews the financial condition of all the banking institutions. An on-site
examination is the central bank conduct customized examination to match the size, activities and
risk profiles of the concerned banking institution.

Organizational Structure
The Bank Negara Malaysia is controlled by the government, so it does not have any privatized
shareholders. The Bank's Board of Directors consists of eleven members and are responsible for
the oversight of the management and operations of the Bank and reviews the performance of the
Bank in delivering its mandates. The ex-official members of the Board are the Governor, the
Deputy Governors and the Secretary-General of the Treasury. The other directors are prominent
leaders who have vast experience in the public and private sectors. All members, except the
Deputy Governors, are appointed by His Majesty the Yang di-Pertuan Agong. The Deputy
Governors are appointed by the Minister of Finance. The Board is statutorily required to meet at
least once in a month.
The responsibility to ensure safety, soundness and robustness of the financial institutions lies
with the supervision functions in Bank Negara Malaysia. In continuing to achieve a higher level
of efficiency and effectiveness in performing the supervision role, Bank Negara Malaysia had
conducted a holistic review of the financial supervisory and regulatory functions to ensure that
the departments continue to support the achievements of the strategic results and the desired
outcomes of Bank Negara Malaysia. The realignment exercise particularly has resulted in
supervision departments playing the supervisory role along the functional lines and types of
institutions; a transition from the previous sector specific demarcation of responsibilities. This is
intended to achieve a more integrated and holistic supervisory approach with the ability to
identify emerging trends and vulnerabilities and to be able to understand the dynamics of inter-
relation of various departments and functions.
The function of the Supervision Sector is to develop, enhance and implement a sustainable,
progressive and robust risk-based supervision framework on respective financial institutions
under their purview, to ensure the safety and soundness of these institutions in the adoption of
best practices, sound governance and proper risk management. The responsibilities of the
respective Supervision Departments are as follows:

? Financial Conglomerates Supervision: Supervision of domestic financial
conglomerates
? Banking Supervision: Supervision of foreign banks, stand-alone investment banks and
all Islamic banks including Islamic banking subsidiaries of domestic banks
? Insurance and Takaful Supervision: Supervision of insurance companies, reinsurance
companies, takaful operators, retakaful operators as well as international takaful operators
While the sector specific supervisory approach is retained, a matrix reporting framework is
adopted for the supervision of the financial institutions that are part of financial conglomerates.
This is to enable an integrated approach to supervision and assessment of the risk profile to be
undertaken on a group basis across the banking and insurance sectors.
The Governor is the Chief Executive Officer of the Bank and is assisted by two Deputy
Governors and eight Assistant Governors.Most of the 36 departments/units in the Bank are
organised into eight divisions, where each Assistant Governor including a General Manager,
being responsible for one.

For a better understanding of the structure, please refer to the Bank's organisation chart below:

Strategy of Central Bank
The strategy of central bank is using the targets to boost economic growth. They utilize the tools
which include open market operations(OMO), discount policy and reserve requirements as the
stepping stone. OMO are the purchases and sales of securities in the open market by the Central
Bank. Discount policy is policy taken by the Central Bank to increase and decrease the money
circulation by raising or lowering bank rates. Reserve Requirements are the proportion of
customers' deposits a bank is required by the Central Bank to hold in reserve without loaning out.
Besides, there are operating targets and intermediate targets. Operating targets concern about
reserve aggregates which include reserves, non-borrowed reserve, monetary base, non-borrowed
base and interest rates (short-term such as federal funds rate). In addition, they prioritize
intermediate targets to reach goals. Intermediate targets consist monetary aggregates (M1, M2
and M3) and interest rates (for short-term and long-term).
Last but not least, we use three strategies above to achieve our goals. The central bank tries the
best to have high employment, price stability, financial market stability, stable economic growth,

interest rate stability, stability in foreign exchange markets and so on. For instant, price stability
considered an essential objective of economic policy, given the general wish to avoid the costs
associated with inflation and it also viewed as desirable because a rising price level creates
uncertainty in the economy and this can adversely affect economic growth. Moreover, interest
rate stability viewed as desirable economic objective because volatility in interest rates creates
uncertainty about the future and this can adversely impact on business and consumer investment
decisions.

Different types of instruments of Central Bank
The instrument of monetary policy are tools or devise which are used by the monetary authority
in order to attain some predetermined objectives. There are two types of instruments of the
monetary policy which are quantitative and qualitative instruments. The Quantitative Instruments
are also known as the General Tools of monetary policy. These tools are related to the Quantity
or Volume of the money. The Quantitative Tools of credit control are also called as General
Tools for credit control. They are designed to regulate or control the total volume of bank credit
in the economy. These tools are indirect in nature and are employed for influencing the quantity
of credit in the country. The general tool of credit control comprises of following instruments
which are Bank Rate Policy (BRP), Open Market Operations (OMO) and Variation in the
Reserve Ratios (VRR).
Bank Rate Policy (BRP) is a very important technique used in the monetary policy for
influencing the volume or the quantity of the credit in a country. The bank rate is a traditional
weapon of credit control used by a central bank. In order to perform its function as lender of last

resort to commercial banks, it will discount first-class bills or advance loans against approved
securities.
Open Market Operations (OMO) involve the purchase or sale of securities, such as Treasury
Bills or Government bonds, by the Central Bank in order to influence the money supply. When
the Bank sells or purchases these securities to or from a bank or an individual, money is
withdrawn from or added to the flow of money in the economy. The Central Bank is the current
Official Registrar and Transfer Agent of securities for the Government, the Bahamas Mortgage
Corporation, the Bridge Authority and the Clifton Heritage Authority. The Bank maintains both
a primary and secondary market for the Government's local currency securities, which at present
includes Treasury Bills and Registered Stock.
The variable reserve ratio (VRR) is comparatively new method of credit control used by central
banks in recent times. The variable reserve ratio device springs from the fact that the central
bank, in its capacity as Bankers Bank, must hold a part of the cash reserves of commercial banks.
The minimum balances to be maintained by the member banks with the central bank are fixed by
law and statutory powers have been conferred on the central bank to alter the quantum of these
minimum reserves. The customary minimum cash reserve ratio is an important limitation on the
lending capacity of banks.

Products and services provided
In this technological era, we may find that the number of people using smart devices to surf
internet is astounding. Therefore, Bank Negara Malaysia has utilised internet technology to
deliver its innovative products and discretionary service. To fulfil diverse needs of whole society
and not forget the countryside’s community, Bank Negara Malaysia provides a variety of
financial services that have high accessibility. Its network of financial access points covers most
part of Malaysia, so people can access to the minimum financial services of accepting deposit
and withdrawal of funds. Moreover, Bank Negara Malaysia also provides basic banking service,
microfinance, micro savings, microinsurance and microtakaful and remittance. Basic Savings
Accounts (BSA) and Basic Current Accounts (BCA) are offered at all the banking institutions to
Malaysians and permanent residents. These accounts can be opened under individual or joint
names. Small and Medium Enterprises (SMEs) mostly the micro enterprises are also qualified
to apply for BCAs. BSA and BCA operate in the same way as the common savings or current

accounts except that these accounts allow you to perform only basic transactions and at a
minimal cost or for free.
Microfinance is a type of finance which financing amount of up to RM50,000 and without
collateral,Pembiayaan Mikro are offered to micro-enterprises and self-employed individuals in a
fast, easy and convenient manner by 10 joining financial institutions. Microsavings is a branch of
microfinance, consists of a small deposit account offered to lower income individual and families
as an incentive to store funds for future use. A long-term contractual microsavings with low
devoted periodical savings and favourable terms is currently being piloted by financial
institutions to instruct the low-income households a healthy savings habit.
Microinsurance and Microtakaful are the small valued insurance and takaful products which are
cost-effective, accessible and easy to understand are currently being piloted by some insurers and
takaful operators to protect all segments of the society, especially the low-income households
against shocks to a consumer’s consumption path. Microtakaful is shariah compliant alternative
to conventional insurance because Islamic scholars believe that conventional insurance consists
of riba and gharar which are strictly prohibited in Islamic finance.
Remittances are provided by banking institutions and non-bank remittance service providers
(RSPs) through branches and/or authorised remittance agents. Licensed non-bank RSPs operate
in strategic locations nationwide, including rural areas and offer services beyond normal business
hours. Electronic payments (e-payments) play a crucial role in facilitating a more convenient,
secure and cost-effective means of conducting payments over paper-based payment instruments.
The benefits of moving to e-payments are not only limited to financial efficiency gains but also
the promotion of an inclusive financial system.

Current Data of the performance of Central Bank
A central bank’s performance needs to be assessed on how well it meets its statutory policy
mandate. But policy outcomes are only one measure of performance and institutional credibility.
Central banks incur substantial financial risk and are an important part of overall public sector
finances. Maintaining the privilege of operational independence requires a record of successful
policy outcomes and sound and prudent financial management. Therefore, financial
arrangements and performance expectations are important components of overall central bank
institutional design. These issues are even more important today. In the Global Financial Crisis
(GFC) many governments became guarantors of last resort, and undertook investments that were
well beyond their traditional risk habitat. Central banks were asked to do much more either
through pursuing multiple targets, directing credit flows, or by adopting unconventional
monetary policies. Some central banks’ balance sheets have expanded enormously. Central bank

capital has been more at risk from some of these activities, and we have seen reinvestment by
governments to build capital levels in some central banks.
Central bank financial statements do not lend themselves easily to an econometric investigation.
Given the lack of international standardization, a specific accounting value for central bank
capital might well signal sufficient strength in one country, but financial distress in another.
Moreover, central bank losses have often been accounted for with lags. The consequences of a
weak balance sheet might thus be observed in periods where measured financial strength is still
apparently high. Finally, trends in central bank accounting standards, such as the recent tendency
to increasingly use mark-to-market valuation, may lead to systematic changes in the whole
sample of countries. This might be particularly troublesome since more sensitive accounting
practices have been introduced in parallel with a worldwide decline in inflation, thus leading to a
potential downward bias for parameter estimates. Perhaps more fundamentally, theories of
central bank financial strength do not provide clear guidance as to which of the potential
measures should be used when assessing the relation between a central bank’s financial
condition and macroeconomic outcomes. (Figure1)

Figure 1.
Besides, treasury bills (T-bills) are short-term which usually less than one year, typically three
months maturity promissory note issued by a national government as a primary instrument for
regulating money supply and raising funds via open market operations. Issued through the
country's central bank, T-bills commonly pay no explicit interest but are sold at a discount, their
yield being the difference between the purchase price and the par-value (redemption value). This
yield is closely watched by financial markets and affects the yield on municipal and corporate
bonds and bank interest rates. Although their yield is lower than on other securities with similar
maturities, T-bills are very popular with institutional investors because, being backed by the
government's full faith and credit, they come closest to a risk free investment.
On the other hand, treasury bonds (T-bonds) are long-term which maturity over 10 years fixed
interest rate debt security issued by a national government backed by its 'full faith and credit.' T-
bonds are the safest form of marketable investment compare to treasury bills and treasury notes.
They have an active secondary market, and usually pay semi-annual interest.
(Figure2)

Figure 2.

Current Issues faced by Bank Negara Malaysia
The current issues faced by Bank Negara Malaysia lately includes the weakening of Malaysian
Ringgit (RM) caused by the trading of Malaysian Ringgit (RM) in the offshore non-deliverable
forwards market. Other issues faced by Bank Negara Malaysia is accumulating questions by
Malaysians that the recent purchase of government land costing RM2Billion which is equivalent
to S$678million.
Bank Negara is faced with the weakening of Malaysian Ringgit (RM) due to foreign banks
trading the Malaysian Ringgit (RM) in the offshore non-deliverable forwards market. To prevent
and protect Malaysian Ringgit (RM) from weakening more than it already has, Bank Negara
Malaysia has sent forms of letters to foreign banks to stop them from making any trading
activities which involves the trade of any offshore Malaysian Ringgit (RM) non-deliverable
forwards or offshore derivatives. The foreign banks have to provide a detailed plan to Bank
Negara Malaysia of its needs to make Malaysian Ringgit (RM) onshore and to seek help from
Malaysian Financial Institutions for any foreign exchange transaction needs. To execute any
foreign exchange transactions, foreign funds and asset managers were asked to contact
Malaysian Licensed Banks to enable the authorities to tighten controls on Malaysian Ringgit
(RM) to prevent further weakening of it.
It’s not surprising and it is undeniable that tons of Malaysian Ringgit (RM) is lost, causing issues
to be faced by Bank Negara Malaysia. Bank Negara Malaysia’s comparatively small foreign
reserves compared to other Asian countries has left Bank Negara Malaysia with fewer options
which needs such measures more than other Asian Central Banks. Malaysia’s foreign holdings
are one of the largest in Asia at 40% of the total outstanding bond market, investors typically use
the liquid NDF markets in Singapore and Hong Kong to hedge their exposure because of the
many restrictions in the domestic (Malaysia) market.
On the other hand, another issue which is faced by Bank Negara Malaysia which is questions
growing around Bank Negara Malaysia’s recent purchase of government land for RM2billion,
which observers say it’s fairly unusual for Bank Negara Malaysia to pay market price for state
land. This sparked a claim toward a highly sensitive issue which is to bail out troubled state fund
1Malaysia Development Berhad (1MDB), which on December 2018 forked out US$602.7million
to settle a debt with Abu Dhabi’s International Petroleum Investment Company (Ipic).

Bank Negara Malaysia’s responded that the purchase was an “arm’s length transaction” which
further fuelled arguments whether the financial regulator should be making such deals at
commercial prices. It was said that Bank Negara Malaysia itself wanted to purchase the land and
wanted to do so for a period of time but wasn’t approved by the government up until this point of
time and at their own will. The land was announced purchased on Jan4 while (Ipic) confirmed a
receipt of the US$600million payment from 1MBD on Dec27 on the previous year, this just add
more issues to be faced by Bank Negara Malaysia and put them in a troublesome position which
is not easy to cope with while getting questioned by the media and Malaysian citizens.
But as the saying goes, Bank Negara Malaysia has acquired many tracts of land over many
decades at market price, this statement was declined by some stating that Bank Negara Malaysia
has never spent so much on land, which put Bank Negara Malaysia in difficult position.
According to the 2014 annual report of Bank Negara Malaysia, it states that they spent a total of
RM112million on land holding as of 2013. Whereby in 2014, they spent another RM1.25billion
on an undisclosed amount of land and made no acquisitions since, until this recent deal.
In 2015, the Monetary Policy Committee (MPC) maintained the Overnight Policy Rate (OPR) at
3.25%, this is due to Bank Negara Malaysia was focusing on ensuring that monetary conditions
supported the growth of the Malaysian economy while maintaining price stability. While against
a challenging external environment that affected the Malaysian economy, it (the monetary
policy) remained accommodative and supportive of the economy activities. Bank Negara
Malaysia projected that the Malaysian economy would grow at a steady pace between 4.5% and
5.5% during that year. As in the inflation, Bank Negara Malaysia forecasted to range between
2.0% to 3.0% as lower commodity prices and the lower global inflation were expected to offset
the increase in domestic cost factors and the effects from a weaker Malaysian Ringgit (RM)
exchange rate, which was not a good position for Bank Negara Malaysia to be in for this
particular year.
As for the year 2016, Bank Negara Malaysia’s business plan was based on the strategies
identified 7 focus areas including i) Monetary Stability ii) Financial System Stability iii) Greater
Financial Intermediation and Inclusion iv) Progressive, Safe and Competitive Payments
Ecosystem v) Talent Development for the Financial Industry vi) Strengthened Regional and
International Linkage vii) High Performing and Sustainable Organisation. New initiatives were
also introduced by Bank Negara Malaysia to address emerging priorities. This business plan was

also used to measure the bank’s performance. In assessing the bank’s performance, the bank
focus on the impact of their policies for monetary and financial stability. There is a top-down
guidance from the bank’s management team, especially the strategic areas that will meet the
mandates and the required investment resources to meet Bank Negara Malaysia’s objectives
which is creating an efficient economy system to improve the financial status of our country
(Malaysia), which include increasing the Malaysian Ringgit (RM) exchange rate and positioning
Bank Negara Malaysia into a better foreseeing future that helps develop a financially successful
country.
Recently Bank Negara Malaysia’s luck has taken its turn and this is due to Bank Negara
Malaysia and The Securities Commission Malaysia (SC) established a joint working group to
accelerate digitisation of stockbroking industry. This announcement was made at the launch of
the SC Annual Report 2017 in favour of Bank Negara Malaysia. BRIDGE aims to accelerate the
digitisation of the brokerage industry to enhance operational efficiency and services standards.
The group will encompass the SC, Bank Negara Malaysia and the industry participants including
the brokers and banking institutions.
The SC and Bank Negara Malaysia share a common aim to drive digitisation within Malaysian
Financial Industry. Opportunities to innovate across intermediation value chain and reduced cost
in both brokerage and banking sectors exists, so it is undeniably important for the regulators to
collaborate with industry to create greater value for the customers, as well as for the long-term
development of the market. This is also a great opportunity for Bank Negara Malaysia to regain
its reputation and create an efficient economy situations where funds are channelled sufficiently
from surplus units to deficit units.
Besides that, the Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to
maintain the Overnight Policy Rate (OPR) at 3.25%. Global economy continues to strengthen,
the global also showing strong growth momentum. For our nation (Malaysia), the strong growth
performance in the last quarter of 2017 continued to be anchored by private sector spending.
Bank Negara Malaysia projected that the inflation is lower in 2018 as Bank Negara Malaysia has
expectations of a smaller effect from global cost factors. A stronger ringgit exchange rate
compared to 2017 will mitigate import costs. Bank Negara Malaysia is expecting it’s
performance for this coming year to be improved compared to the previous year and states that
Malaysia’s economy would improve as Bank Negara Malaysia aims to control the foreign

exchange rate to increase Malaysian Ringgit (RM) for the upcoming financial future for Bank
Negara Malaysia and Malaysia as a country as a whole itself.