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CHAPTER SIX

CHAPTER SIX. FINANCIAL MARKET AND MALAYSIAN FINANCIAL SYSTEM. Financial Markets. Financial markets exist to manage the flow of funds from investors to borrowers Financial markets can be distinguished along two dimensions: Primary versus secondary markets Money versus capital markets.

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CHAPTER SIX

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  1. CHAPTER SIX FINANCIAL MARKET AND MALAYSIAN FINANCIAL SYSTEM

  2. Financial Markets • Financial markets exist to manage the flow of funds from investors to borrowers • Financial markets can be distinguished along two dimensions: • Primary versus secondary markets • Money versus capital markets

  3. Primary Markets • Provide a forum in which corporations and governments raise funds by issuing new financial instruments (stocks and bonds) • Because many companies and government entities can’t generate enough cash flow from internal sources to fund their needs, they must raise capital from external sources (households)

  4. Financial institutions called investment banks arrange most primary market transactions for businesses • Morgan Stanley • Goldman Sachs • Lehman Brothers • Investment banks provide a number of important services to businesses that need to raise capital • Advice • Pricing • Attracting investors

  5. One of the best-known types of primary market transactions is an initial public offering (IPO) • Company’s shares are publicly traded for the first time • When a firm that is already public issues new securities it is called a seasoned offering • Example: Procter & Gamble issues $500 million worth of stock

  6. Once a company’s bonds or shares of stock are issued in the primary market they trade among investors in the secondary market • Main Market (Main n Second Board) • ACE Market (revamp from MESDAQ market) • Secondary markets provide a centralized marketplace where economic agents know they can buy or sell securities quickly and efficiently

  7. Securities brokers such as Charles Schwab or other brokerage firms act as intermediaries in the secondary market • Note: the firm that originally issued the bond or stock is not involved in secondary transactions • If you buy shares of IBM through your broker, you are buying them from another investor. IBM has nothing to do with the transaction

  8. Secondary markets offer benefits to both investors and issuers • Investors gain liquidity and diversification benefits • Issuers gain information about the value of their securities • Publicly-traded firms can observe what investors think of their firm value and corporate decisions by tracking their stock price

  9. Money Markets versus Capital Markets • Money markets feature debt securities with maturities of one year or less • Because of the shorter maturity, fluctuations in secondary market prices are usually small • Money market securities are less risky than long-term instruments • Most money market securities trade over-the-counter

  10. Corporations and governmental entities issue a variety of money market securities to obtain short-term funds • Treasury bills • Federal funds • Repurchase agreements • Commercial paper • Negotiable CDs • Banker’s acceptances

  11. Stocks and long-term debt (with a maturity of greater than one year) trade in capital markets Capital market instruments are subject to wider price fluctuations than money market instruments

  12. Capital market securities include: • Malaysian Treasury notes and bonds • State and local government • M’siagovernment agency bonds • Mortgages and mortgage-backed securities • Corporate bonds • Corporate stocks

  13. Malaysian Financial System • Structure of Malaysian Financial System • Financial Institutions • Non- Bank Financial Intermediaries • Financial Market

  14. The Financial System Structure in Malaysia Financial System Financial Institutions Financial Market • Banking System • Bank Negara Malaysia • Bank Institutions • Commercial Banks • Finance Companies • Merchant Banks • Islamic Banks • Others • Discount Houses • Representative offices of foreign Banks • Non-Bank Financial Intermediaries • Provider & Pension Funds • Insurance Companies (including Takaful) • Development finance Institutions • Saving Institutions. • National Saving Banks • Co-operative societies • 5. Others • Unit Trusts • Pilgrims Fund Board • Housing Credit Institutions • CagamasBerhad • Credit Guarantee Corporation • Leasing Companies • Factoring Companies • Venture Capital Companies • Money & Foreign Exchange Market • Money market • Foreign exchange Market • Capital Market • Equity Market • Bond Market • Public Debt Securities • Private debt Securities Derivatives Market 1. Commodity Futures 2, KLSE CI Futures 3. KLIBOR Futures Offshore Market 1. Labuan International Offshore Financial Center (IOFC)

  15. Banking System • Consists of Bank Negara Malaysia (Central Bank of Malaysia – BNM) , banking institutions ( commercial banks, finance companies, merchant bank and Islamic banks) and a miscellaneous group ( discount house and representative office of foreign banks). • Largest of financial system ,accounting for >70% of the total assets of the financial system. • Rapid expansion of largest group of institutions in banking system – grew an average rate 19.7% (1988-97) but decline by 5.6% (during Asian Financial crisis). – recover after 2000.

  16. Bank Negara Malaysia • Established on 26 January1959 under the Central Bank of Malaya Ordinance 1958. Objectives of BNM are as follows: • To issue currency and keep reserves to safeguard the value of the currency; • To act as a banker and financial adviser to the Government; • To promote monetary stability and a sound financial structure; and • To influences the credit situation to the advantage of Malaysia. • The objectives of BNM, in essence, encapsulate the importance of promoting economic growth with price stability and maintaining and financial stability. • The introduction of the Banking and Financial Institutions Act 1989 (BAFIA) on 1 October 1989 extended BNM’s powers for the supervision and regulation of financial institutions and depositing taking institutions who also engaged in the provisions of finance and credit.

  17. Commercial Banks • The commercial banks are largest and most significant providers of funds in the banking system. • Since they are involved in deposit-taking activities, they are required to operate within the ambit of the provisions of the Banking and Financial Institutions Act 1989 (BAFIA) – under direct supervision of Bank Negara Malaysia. • Current 22 commercial banks (exclude Islamic banks) of which 13 are locally incorporated foreign banks.

  18. Commercial Banks • The main functions of commercial banks are to provide: • The mobilization of saving , deposits, surplus and idle funds through savings accounts, currents accounts, fixed deposit accounts, negotiable instruments of deposits and through other banking, financial and investment instruments. • The provision of services and facilities for their customers and others members of the public to collect/receive and transfer/pay money in Malaysian ringgits or in other foreign currencies, both locally and internationally. Commercial banks are also authorized to deal in foreign exchange and are the only financial institutions allowed to provide current account facilities. • The lending of money under various from of overdrafts, loan and advances, and the financing instruments to private individuals and different forms of business enterprises and other organizations for personal consumption, investments, working capital requirements and for other productive and economically viable purpose and activities. • The provision of banking services and facilities to stimulate, assist and encourage productive and profitable utilization of available funds for investments and promotion of exports. • The financing of government project and activities through subscriptions to Treasury Bills, Cagamas Bonds, Government securities, and so on.

  19. Commercial Bank

  20. Finance companies • Finance companies form the second largest group of deposit taking institutions in Malaysia. • Financial company initially governed by BNM through the Finance company Act 1969. • This was repealed by the Banking and Financial Institutions Act 1989 (BAFIA). • Finance company business is defined as: • The business of receiving deposits on deposit account, saving account or other similar account; • The lending of money; • Leasing business or the business of hire purchase; and • Any other such business as BNM with the approval of the Minister may prescribe.

  21. Finance Companies

  22. Merchant Banks • Merchant banks emerged in the Malaysian banking scene in the 1970s, marking an important milestone in the development of the financial system alongside the corporate development of the country. • They play a role in the short-term money market and capital raising activities including financing specializing in syndication, corporate finance and management advisory services, arranging for the issue and listing of shares, as well as investment portfolio management. • There are currently 9 merchant banks in Malaysia.

  23. Merchant Banks

  24. Islamic Banks • In Malaysia, separate banking legislation and banking regulation exists side by side with those for the conventional banking system. The legal basis for the establishment of Islamic banks was the Islamic Banking Act (IBA), which came into effect on 07 April 1983. The IBA provides BNM with powers to supervise and regulate Islamic banks, similar to the case of other licensed banks. • The banking activities of Islamic banks are based on Syariah principles (the Islamic principles). The first Islamic bank was Bank Islam Malaysia Bank (paid-up capital RM80million) which commenced operations on 1 july 1983. On 1 October 1999, a second Islamic bank, namely Bank Mualamat Malaysia Berhad was established. Apart from Islamic banks, other financial institutions also offer Islamic banking services through the “Islamic Banking Scheme” • In term of products, all Islamics banking entities are offers banking products based on the Islamic principles.

  25. Islamic Banks

  26. Islamic Banks

  27. Islamic Banks

  28. Discount House • Discount House began operations in Malaysia since 1963. • Generally, the discount house specialize in short-term money market operations and mobile deposits from the financial institutions and corporations in the form of money at call, overnight money and short term deposits. • The funds mobilized are invested in Malaysian Treasury Bills, Malaysian Government Securities (MGS), banker acceptance (Bas), negotiable certificates of deposits (NCDs), Cagamas bonds and Floating Rate Negotiable Certificate of Deposits (FRNCDs), as well as to provide an active secondary market for these activities.

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