Malaysia - Banking and securities

In 1958, the Bank Negara Tanah Melayu (renamed the Bank Negara Malaysia in 1963) was created as the central banking institution. Bank Negara requires banks to maintain a minimum risk-weighted capital ration (RWCR) of 8%. At the end of 2002, Malaysia had 31 licensed commercial banks, 19 finance companies, 12 merchant banks, two Islamic banks, and 7 discount houses. A total of 36 foreign banks have offices in Malaysia, but their banking privileges are restricted. Specialized credit institutions include the Federal Land Development Authority (FELDA), the Agricultural Bank of Malaysia (Bank Pertanian Malaysia), and Bank Rakyat, serving rural credit cooperative societies. International trade is financed mainly by the commercial banks. Total banking system assets were $179.1 billion in 2000. There were 51 offshore banks operating on the island of Lauban in 1997, and a total of more than 1600 companies in operation.

Malaysia offers Islamic banking, which is based on the concept of profit sharing as opposed to the use of interest in the conventional banking system. One such Islamic bank is Bank Islam Malaysia Berhad. The central bank has embarked on a plan to develop Malaysia as a regional Islamic financial center. Toward this end, the central bank formed a consultative committee on Islamic banking in January 1996 to serve as a think-tank group to develop strategies and proposals to map out the future direction of Islamic banking. Although Islamic operations are still only a small proportion of total business, Malaysia has achieved more than most other Islamic countries in this respect, and its developments are regarded as models by them.

The International Monetary Fund reports that in 2001, currency and demand deposits—an aggregate commonly known as M1—were equal to $22.1 billion. In that same year, M2—an aggregate equal to M1 plus savings deposits, small time deposits, and money market mutual funds—was $93.9 billion. The money market rate, the rate at which financial institutions lend to one another in the short term, was 2.79%.

The principal market for securities is the Kuala Lumpur Stock Exchange (KLSE), which separated from the joint Stock Exchange of Malaysia and Singapore in 1973. A second, smaller exchange has operated since 1970 to serve indigenous Malay interests. In October 1991 the Kuala Lumpur Stock Exchange completely severed its links with the Singapore Stock Exchange. As of 2001, the KLSE was capitalized at approximately $120 billion. Foreign investors are permitted to buy and sell on the stock market, subject only to compliance with regulatory requirements. In June 1995, a wide range of measures liberalizing the Malaysian capital market were introduced. These included the lowering of commission rates on the KLSE, the easing of controls on loans secured against shares and less stringent conditions for overseas fund managers. Overseas funds can now set up 100% subsidiaries for conducting non-Malaysian business, and rules on work permits for expatriate staff have been relaxed. By the end of 1997, the Kuala Lumpur Stock Exchange Composite Index (KLCI) capitalization had declined 53% from its high that year of 1271.57. The KLCI hit a low of 262.70 in September 1998, but had climbed back up to 696.1 by the end of 2001, still barely over half its peak value.