chapter 2 : central bank

CENTRAL BANK OF MALAYSIA
(BANK NEGARA MALAYSIA)
CHAPTER 2

SITI NURAZANI MUSTAFFA/PB303/JUN
2012

1

SPECIFIC OBJECTIVE OF TOPIC
At the end of the unit you will be able to :
1. Explain the formation of Bank Negara Malaysia (BNM)
2. Explain the system’s objectives and the functions of BNM.
3. Explain the organizational structure of BNM, two-tier regulatory system, the
BNM and International Institutions relationship and the direction of creditcredit guidelines.
4. Explain the objective and the monetary policy instruments
5. Explain the techniques that are used by BNM in influencing the fund supply,
credit and interest through monetary control-statutory reserve requirements
(SRR), liquidity requirements (LR), interest rate management, money market
operations, discount operations and moral suasion.

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Formation of Bank Negara Malaysia
• Bank Negara Malaysia (BNM) of Malaya
Ordinance 1959 (CBO) which established the
BNM was enforced on January 26, 1959.
• The establishment of BNM in 1959 can be
fundamentally attributed to the recognition
then for the need for deliberate management
of the money and credit situation in the
country.
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BANK NEGARA MALAYSIA
• Bank Negara Malaysia is entrusted with the task of
overseeing the nation's economic and financial
system.
• Committed to promoting monetary stability and to
foster a sound and progressive financial sector to
achieve sustained economic growth for the nation.
• Being a Central Bank in an emerging economy,
– Bank Negara Malaysia also places high importance
in its developmental role with respect to
economic management, institutional building and
the development of the financial system
infrastructure.

• Bank Negara Malaysia is managed by a team led
by Tan Sri Dr. Zeti Akhtar Aziz, a highly regarded
Governor by the financial community.
• Completing the management team are 3 Deputy
Governors and 7 Assistant Governors, who
together provide a clear strategic blueprint for
the long term development of the Bank.

GAVENORS
• Since May 2000
Tan Sri Dato' Sri Dr. Zeti Akhtar
Aziz
• Section 9 (1) of the Central Bank of
Malaysia Act 1958 provides that the
Governor shall be appointed by the Yang
Di Pertuan Agong, and the Deputy
Governors by the Minister of Finance.
Since the Bank's inception in 1959, there
has been seven Governors.

• The policy of the Bank is entrusted to its Board of Directors
 Consists of ten members.
 The ex-officer members of the Board are the Governor,
the Deputy Governors and the Secretary-General to 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 Governor, or in his or her absence, one of the Deputy
Governors, is the chairman of the Board, which is
statutorily required to meet at least once a month.

The Objectives of BNM
to issue currency and keep reserves while safeguarding
the value of the currency.
to act as a banker and financial adviser or agent to the
Government.

to promote monetary stability and a sound financial
structure.
to influence the credit situation to the advantage of
the country.

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The Functions of BNM
Bank for Currency Issue
 arrange for the printing of currency notes and the
minting of coins.
 issue, re-issue and exchange notes and coins at its
office and at such agencies as it may, from time to time
and establish or appoint
 arrange for the safe custody of unissued stocks of
currency and for the preparation, safe custody and
destruction of plates paper for the printing of notes
and of dies for the minting of coins.
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Keeper of International Reserves
The country’s official external reserves are held and
maintained by BNM.
 Gold
 Foreign exchange assets and reserve in International
Monetary Fund (IMF)
 Holdings of Special Drawing Rights
 investments denominated in the major international
currencies, such as bank balances, Treasury Bills,
Bonds and other appropriate term securities to
secure the best result and returns/benefits for the
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2012
country.

Government Banker and Financial Advisor
(i) Management of Government Accounts
It provides cheque facilities, accepts funds and makes payments on
behalf of the government and undertakes the foreign exchange
business of the government
(ii) Source of Funds to Government
It provides temporary advances to the Government to cover any deficit
in the budget revenue.
(iii) Management of National Debt
It advises the government on its loan programmes, including terms and
timing of loans and the issue of new types of securities.
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To Promote Monetary Stability and Influence the
Credit Situation to the Advantage of the Country.
•BNM is obliged to ensure that the supply of money and the
volume of credit are sufficiently elastic to the demands in the
domestic economy without creating undue pressure on
resources.
•Influence the level of inflation
•Promote saving deposit
•Preserving price stability
•Sustaining economicNURAZANI MUSTAFFA/PB303/JUN
growth
SITI
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Banker to the Banks
• Promote a sound financial structure
• Licensing of banks and non-banks
• Banking relationship
• Currency distribution
• Inspection and investigation of banks and non
banks
• Lender of the last resort
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SELECTIVE
INSTRUMENTS

GENERAL
INSTRUMENTS

Selective instruments of
monetary control are
used to influence credit
to a particular subsector or type of
lending

General instruments
of monetary control
are those that
operate to influence
the level of bank
reserves

1.Interest Rate
(Loan &
Deposits)
2.Credit Control
& Lending
Guideline
3.Moral Suasion

MONETARY
POLICY
INSTRUMENTS

1. Statutory
Reserve
Requirement
2. Minimum
Leiquidity
Requirement
3. Money Market
Operation
4. Discount
Operation
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• Under Section 37(1)(c) of the Central Bank Ordinance, the
banking institutions are required to maintain a certain
percentage of their reserves with BNM.
• SRR is known as a bank’s eligible liabilities (EL). The EL
foundation comprises of deposits (including negotiable
certificates of deposits and repurchase agreements).
• INCREASING the SRR ratio will:
√ reduce the level of reserves available to the banking institutions.
√ decrease the lending ability of the banking institutions

• DECREASING the SRR ratio will:
√ increase the level of reserves available to the banking institutions.
√ increase the lending ability of the banking institutions.

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Reserve Requirements
-regulations on the minimum amount of reserves that
banks must hold against deposits
• an increase in reserve requirements means that
- banks must hold more reserves and
- can loan out less of each RM that is deposited
• as a result, it raises the reserve ratio, lowers the money multiplier, and
decrease the money supply
• a decrease in reserve requirements means that
• lowers the reserve ratio  banks hold less reserves
• have excess reserves  to be lent out
• as a result, it raises the money multiplier and increases the money supply

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• Source: http://www.bnm.gov.my

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• Under s 38(1) of the BAFIA 1989, the banking
institutions are required to observe a minimum
liquidity ratio that expressed as a percentage of
the EL based on the banking liquid asset
• Liquid assest are:










Cash
Money at call
Treasury bills
Government securities
Government investment certificates
Cagamas Bond
Bank Negara Bills
Bank Negara Certificates
State Government Securities
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• INCREASING the MLR ratio will:
√ reduce the level of reserves available to the
banking institutions.
√ decrease the lending ability of the banking
institutions
• DECREASING the MLR ratio will:
√ increase the level of reserves available to the
banking institutions.
√ increase the lending ability of the banking
institutions.
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• WHY the minimum liquidity requirement is
essential ????
Because commercial banks need to provide
enough vault cash and other liquid assets to fulfill
the demand for deposits withdrawal and loans.
Since February 16, 1987 the minimum liquidity
ratio has been fixed at 17 per cent of the total
eligible liabilities.

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Money market operations (MMO) are operations
conducted by BNM to influence the liquidity
situation in the system. MMO can be conducted by
the following:
(i) Open Market Operations are mainly
transacted via the sales and purchase of
Government papers or
(ii) the borrowing or lending by Bank Negara
Malaysia in the interbank market.

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Open-Market Operation (OMO)
Definition of Open Market Operations:
The purchase and sale of government securities in
financial market so as to influence the size of bank
deposits. Government has authorized the BNM to buy
and sell government securities.

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•When BNM sells securities in the open market, it
receives payment in cash (paid in the form of
commercial bank cheques).
• The cash balances of the banks will decrease
• Reduce their lending activities.
• This results in the reduction of credit available.

When BNM buys securities, it pays cash to the banks
and this will increase the bank’s cash balances and
enable them to increase credit for their customers.

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The discount operations is defined as deliberate measures by
BNM to influence the interest rate and liquidity situations via
various terms and conditions under which the commercial
banks and money market may have temporary access to
BNM’s credit facilities.
The INCREMENT of the discount rate by BNM will:
√ decrease the reserves of banks
√ reduced the credit available to the customers
√ decrease the supply of money in the market
The DECREMENT of the discount rate by BNM will:
√ increase the reserves of banks
√ increase the credit available to the customers
√ increase the supply of money in the market
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Banks may borrow from BNM
The interest rate on the loans that BNM makes to banks is
called the discount rate
A bank borrows from BNM when it has too few reserves
to meet reserve requirements
This might occur because the bank made too many loans
or
it has experienced recent withdrawals
Therefore, the banking system has more reserves and this
allow to create more money
BNM can alter the money supply by changing the discount
rate

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• BNM can control including the bank’s liquidity and cost of
bank credit through the interest rates charged on bank
loans as well as the rates of interest offered for deposits.
• INCREASING of the interest rate will:
√ increase the level of cost of funds for bank loans
√ decrease the demand for bank loans
• DECREASING of the interest rate will:
√ decrease the level of cost of funds for bank loans
√ increase the demand for bank loans

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BNM impose control on credit and strengthen the credit
guidelines to the selected sector, Example such as:
– priority sector lending guidelines (ex.
Telecommunication and Tourism)
– hire-purchase guidelines on motor vehicle
– guidelines on credit card operations
– credit limit for purchase of stocks and shares and units
of units trust funds
– credit limit for financing of specific types of property

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Refer to a traditional BNM which informally induces a
voluntary response from the financial system to its policy
initiatives such as:
 discouraging financial institutions to lend excessively for
speculation activity
 encouraging them to extend longer-term financing loans,
to be granted on the basis of viability of projects rather
than purely dependent on meeting collateral
requirements.
 commercial banks were encouraged to step up their
lending to priority areas such as the bumiputera
community and small borrowers
 the banking institutions were also urged to limit lending
secured by shares to protect the banking system from over
exposure to the volatility of the stock market.
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Relationship BNM with International
Institutions
• BNM has maintained an active role in
international, financial and economic
matters.
• BNM maintains close working relationship
with International Monetary Fund (IMF), the
World Bank, Asian Development Bank (ADB),
Islamic Development Bank (IDB) and World
Trade Organization.

Relationship BNM with International
Institutions
• BNM is an active organization in involving
any event includes:
– Convention
– Meeting
– SEACEN
– APEC
– ASA (Swap ASEAN)

CONTINUE

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GROUP WORK
•
•
•
•
•
•

Economics Department – Group 1
Investment and Treasury Department – Group 2
Bank Examination Department – Group 3
Control of Banking Department – Group 4
Banking Supervision Department – Group 5
Payment System Department – Group 6

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ORGANISATION STUCTURE
• The Governor is the Chief Executive Officer of
the Bank and is assisted by three Deputy
Governors and seven Assistant Governors.
Most of the 35 departments/units in the Bank
are organized into seven divisions, with each
Assistant Governor being responsible for one.
• Organizational Chart

DEPARTMENTS
• Roles of the functional areas include the following:
–
–
–
–
–
–
–

Economics Sector
Investment and Operations
Regulation Sector
Supervision Sector
Organizational Development
Payment Systems
Communications
Link

ECONOMIC SECTOR

•

Primarily provides good technical and research support on growth-related issues to
enhance formulation of monetary and credit policies in promoting monetary stability
and ensuring the availability of adequate credit to finance economic growth.

•

Strategies and formulate economic and monetary policies
– conducting surveillance, identifying emerging risk, forecasting trends and
undertake policy research to provide the bank with pre-emptive actions that
would promote sound and sustainable economic growth, monetary and financial
stability and better understanding of the financial sector in terms of impact with
the real economy.

•

Formulate and manage the Bank's international relations
– by recommending policies, conducting negotiations, intelligence gathering and
operations on trade financing agreement to promote and protect Malaysia's
interest in economic and financial matters.

•

Analyze and forecast on key
– economic indicators, economic outlook and balance of payment movement for the
world and domestic economy to formulate economic policy recommendations to
Monetary Policy Committee (MPC).

ORGANIZATIONAL DEVELOPMENT
• Spearhead the Bank's strategic management, organizational performance
management and program management functions
– to drive the Bank's performance improvement processes and transition towards a Strategy
Focused Organisation, thereby strengthening the capacity building of the Bank.

• Strategically lead and drive resources, human resource (HR) initiatives and
other strategic activities
–

to ensure the overall Human Capital Management framework is implemented in an
integrated manner. Also design and develop innovative and cutting edge HR solutions in
order to address bank-wide issues relating to human resources.

• Spearhead and promote state-of-the-art learning practices to enable
performance excellence culture and strengthen the Bank's capability
development.
– This is carried out through effective and efficient management of enterprise-wide learning
and implementation by setting the Bank's learning direction, policies and learning
pedagogy (learning architecture, adult learning, self-directed learning, life-long learning,
and blended learning).

INVESTMENT AND OPERATIONS
• Manage domestic liquidity and exchange rates
to ensure that monetary policy targets are
achieved as well as managing external reserves to
safeguard its value and optimize its returns.
• It also has the responsibility of providing advice
and assistance to the Government in the area of
debt and fund management and contributing to
domestic financial market development.

REGULATION SECTOR
• Promote financial sector stability through the progressive
development of sustainable, robust and sound financial institutions
policy and infrastructure, thereby enabling a competitive local financial
industry that is resilient against the changing future environment as
well as leading initiatives to enhance access to financing, including
SMEs (Small and Medium Enterprises).
• Formulate and implement strategies towards building and positioning
Malaysia as a premier integrated Islamic Financial Centre and the
development of relevant policies to ensure the soundness of the
Islamic finance industry.
• Enhance financial capability of consumers via formulation,
implementation and enforcement of market conduct and consumer
protection policies to safeguard the interest of depositors, consumers
and policyholders.

SUPERVISION SECTOR
• Develop, enhance and implement an
effective surveillance framework
– to ensure safety and soundness of financial
institutions and to enforce sound practices in
them.

• Develop policies and strategies
– to promote a reliable, secure, efficient clearing,
settlement and payment systems and instruments
in the country.

PAYMENT SYSTEMS
• Develop policies and strategies
– to promote reliable, secure and efficient clearing,
settlement and payment systems in the country.

COMMUNICATIONS
• The communications function has assumed
increasing importance in response to the
heightened demands of the various
stakeholders, seeking greater transparency
and disclosure.

Exercise/ Discussion
Explain how the following instrument used by BNM
to control fund and supply of credit in the
economy:

1.
2.
3.
4.
5.
6.
7.

Statutory Reserve Requirement (SRR)
Minimum Liquidity Requirement (MLR)
Money Market Operation
Discount Operation
Interest Rate Management
Credit Control & Guidelines
Moral Suasion
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THE END
CENTRAL BANKS

2012

46

chapter 2 : central bank

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chapter 2 : central bank