Bank Negara Malaysia Research Articles

ANALYSIS ON THE DEVELOPMENT OF LEGISLATIONS GOVERNING SHARIAH ADVISORY COUNCIL OF BANK NEGARA MALAYSIA

The establishment of Shariah Advisory Council under the aegis of Bank Negara Malaysia in 1997 was the best solution taken by the Government to harmonize the issue of divergence of Shariah opinions among the Shariah committees established by the Islamic banks and takaful operators. Since then, the Shariah Advisory Council has been regulated by several statutes which provide the legal framework of such a Council. Using a historical approach, this article highlights the development of the legal framework of Shariah Advisory Council since its establishment. Comparative analysis method is used to compare the existing legislation to the previous one. Finally, the article found that the Central Bank of Malaysia Act 2009 (Act 701) provides a comprehensive legal framework to regulate Shariah Advisory Council compared to the previous statutes.

Analysis on the development of legislations governing Shariah advisory council of Bank Negara Malaysia

The establishment of Shariah Advisory Council under the aegis of Bank Negara Malaysia in 1997 was the best solution taken by the Government to harmonize the issue of divergence of Shariah opinions among the Shariah committees established by the Islamic banks and takaful operators. Since then, the Shariah Advisory Council has been regulated by several statutes which provide the legal framework of such a Council. Using a historical approach, this article highlights the development of the legal framework of Shariah Advisory Council since its establishment. Comparative analysis method is used to compare the existing legislation to the previous one. Finally, the article found that the Central Bank of Malaysia Act 2009 (Act 701) provides a comprehensive legal framework to regulate Shariah Advisory Council compared to the previous statutes.

Shariah Governance Practices in Malaysian Islamic Financial Institutions

The Central Bank of Malaysia (Bank Negara Malaysia or BNM) introduced the Shariah Governance Framework (SGF) in 2010 and required all Islamic Financial Institutions (IFIs) to fully implement in 2011. The objective is to provide a proper regulatory framework for IFIs to function within the required Sharia framework that will help further strengthen the international investor confidence in the fast growing Islamic Finance Industry in the country. However, to realize this objective, the IFIs must ‘buy-in’ and provide the necessary infrastructure to effectively implement the requirements of the framework. This paper deliberates on the level of commitment and implementation of the requirements of the framework by IFIs in the country, and highlights the success factors, challenges and suggestions for effective implementation of this framework. Sixteen Shariah committee members from 16 different IFIs were interviewed on the issues of interest and the findings suggest that IFIs perceive that SGF is not only relevant but necessary to ensure that Shariah committees to keep the gates on the IFIs business operations. It has provided an avenue for Shariah experts to actively participate in the Shariah Risk Management Control Function, Shariah Review Function, Shariah Research Function and Shariah Audit Function.

English

This paper estimates a nonlinear model of monetary policy reaction function by augmenting the standard Taylor rule equation for the case of Malaysia. M\netary policy reaction function is identified by which the BNM sets the current level ofpolicy rates after observing the current level ofoutput, inflation and exchange rate, and lags ofthesevariables (bachuard looking). (Jsing quarterly time series data set spanningfrom 1991 to 2014, thefindings support the relevance of Taylor rule in which the Bank Negara Malaysia (nNu) sets their policy rates based on both inflation and output growth. In addition, the BNM has also considered the exchange rate in their reactionfunction.

A Few Methods in Charging Fees for Kafālah Bank Guarantee - I among Islamic Banks in Malaysia

Kafalah (guarantee) is generally considered as a tabarru' (gratuitous gift) act, and the majority of past Muslim jurists held the opinion that imposing ujrah (fee) on Kafalah is not allowed; however some contemporary jurists have allowed it. Islamic banks in Malaysia offer Bank Guarantee-i (BG-i) which uses the contract of Kafalah as the main contract, and they charge a fee for it. The objective of this paper is to determine the practice of Islamic banks in charging a fee for Kafalah BG-i and to get clarification from Islamic banks on the basis for their practices. The qualitative method is adopted as the main research methodology; the information on the practice of 12 Islamic banks in Malaysia is gained from semi-structured interviews conducted with bankers directly involved with Kafalah BG-i. This paper discovered that Islamic banks in Malaysia use three methods to determine the fee for Kafalah BG-i: using the percentage issued by the Association of Bankers Malaysia; calculating the actual cost incurred by the bank in issuing the BG-i; and using the bank’s own calculation or formula based on a percentage in determining the fee. There are two reasons for this variation. First, the Shariah Committees of Islamic banks have different interpretations of the nature of Kafalah: whether it is a tabarru' contract or aqd mu'awadah (contract of commercial exchange). Second, Bank Negara Malaysia (BNM) has not yet imposed any standard method upon Islamic banks for determining fees in Kafalah BG-i. BNM’s role is very important in recommending the best practice of charging fees among Islamic banks in order to avoid confusion among the bankers and the customers of Islamic banks regarding the most appropriate practice according to Shariah requirements.

Shariah Boards and the Corporate Governance of Islamic Banks in the United Kingdom

In the last decade Islamic banks (or banks with Islamic windows) that can compete with conventional (i.e. non-Islamic banks) have begun to emerge in Britain. A governmental policy of neither prejudice nor favour, coupled with legislative reforms evince the UK government’s increasing interest in encouraging and even actively promoting Islamic banking and finance, and London as its European capital. At the same time, codes and guidance concerning corporate governance have gained stringency in the UK, following on the financial crisis that began in 2007. Structurally similar to conventional banks in most legal respects, the Shariah Board of Islamic banks and financial institutions poses a variety of unique challenges to UK corporate governance. This article explores those challenges and outlines how they might begin to be met; it does so with reference to corporate governance measures implemented in Malaysia and by its central bank, the Bank Negara Malaysia.

Financial Liberalization, Reforms and Bank Performance: Evidence from Malaysian Islamic Banks

The regulatory reforms implementing by Malaysian government since 2010 have been enhancing the performance of Islamic banks. The purpose of this research is to provide empirical evidence concerning the impacts of liberalization and reforms on Islamic bank's performance in Malaysia. The posited hypothesis is there is significant relationship among? between financial liberalization, regulatory reforms and Islamic banks performance in Malaysia. Datum were collected from 16 Islamic banks. Online statistical datum used in this study were extracted from Bank Negara Malaysia (BNM), World Bank, IMF and financial report of the selected banks, we considered annual datum from 2002 until 2012. To test our hypotheses, we used panel regressions model to investigate the relationship between the Islamic banks performance and financial liberalization and reforms, although its relation with return on assets and equity on return was measured by Z-score. The findings indicate that financial liberalization and openness, assets, profitability, return on assets and inflation have statistically positive impacts on Islamic banks performances.

The Determinants of Economic Growth in South Eastern Asia

This paper studies the ability that exposure and sensitivity of the determinants to the South Eastern Asia economic growth. It analyzes the relationships between trade openness, foreign aid, domestic investment, long-term external debt, government spending and economic growth in South Eastern Asia. The South Eastern Asia’s country concludes all the 11 countries, which were Brunei, Cambodia, East Timor, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and lastly Vietnam. It examined the South East Asia’s dramatic economic growth during the past forty years and explores the prospects for continued growth during the next forty years. This paper uses annual time series data for 11 Southern East Asia countries for the period 1970-2012. Data are retrieved from UNCTAD Statistics, Thompson Data Stream, Bank Negara Malaysia. The effects and impacts of trade openness, foreign aid, domestic investment, long-term external debt, and government spending on economic growth for the 11 South East Asian countries is assess using multiple model and regressions.

An Analysis of the Impact of Foreign Investment on Regional Disparities: A Case of Malaysia

Foreign Direct Investment (FDI) is said to boost the economic growth of the host country and FDI also is one of the factors that contribute to regional disparities because FDI typically tend to focus on the areas that offer economic advantages compared to those areas of backward regions. This study aimed to investigate the effect of FDI on economic development and regional disparities in a globalizing economy of Malaysia. It explores the proposition that regional disparities are linked to the FDI that come into the country. This study involved six areas of the Northern, Central, Eastern, Southern, Sabah and Sarawak Regions. The variables used involved data acquired from Bank Negara Malaysia Report, Ninth Malaysia Plan, Tenth Malaysia Plan, Labor Investigation Report, Department Of Statistics Malaysia, Malaysian Investment Development Authority (MIDA) and Economic Planning Unit (EPU) and the period covered was 28 years ranging from the year of 1980 to 2008. The analysis was conducted using classical production function which explained output as function to capital and labor and involved time series and cross section data which will be regressed with Least Square Dummy Variables (LSDV) Regression Model and Random Effects Model. It was found that FDI is positive and significantly related to GDP implying that FDI is enhancing economic growth and regions with higher level of FDI tend to have higher GDP. Since FDI focuses on the developed areas especially the central, northern and southern regions, thus this concentration will widen the regional disparities in Malaysia. These disparities has brought about the imbalances between the society with regards to poverty, manufacturing activities and many more.

The Effectiveness and Efficiency of REITs Performance in Malaysia

Abstract: This research paper reports on the effectiveness and efficiency of REITs performance in Malaysia. This research paper studies the factors that influence the effectiveness and efficiency of REITs in Malaysia. Purpose: This paper aims to identify the factors that could affect the performance of REITs in Malaysia, to determine the effectiveness of interest rate toward the performance of REITs in Malaysia, to determine the relationship between property market climates that could lead to the effectiveness of REITs and to identify the effectiveness of dividend that could effects the performance of REITs in Malaysia. Design/methodology/approach: Data are retrieved from the utilizing journals, books, Thompson Data Stream, balance sheet, income statements and report by Bank Negara Malaysia for the period 2008-2012. Multiple regressions are applied to assess the impact of interest rate, property market climates and dividend rates on REITs performance. Findings: The results of the multiple regressions showed that the market capitalization, dividend yield and interest rate are significance since they rejected null hypothesis. For the correlation, there is strongly relationship between variable because positive and the T test between the each variable also shown the strong relationship. Originality/value: The study provides the understanding on factors that brings the effectiveness and efficiency of REIT’s performance in Malaysia and the results should be helpful on helping how to manage the independent variables to maintain the good performance of REITs. Also should be meaningful to the real property investors to investigate on performance of REIT’s market.

Liquidity Risk and Performance of Banking System in Malaysia

Recent financial crisis raised the issue of understanding the liquidity risk of financial assets and institutions. This paper studies the ability that exposure and sensitivity to liquidity risk has in banking system in Malaysia. Purpose - This paper aims to analyze the liquidity risks and disclosure as well as to draw the relationship between liquidity risks and financial performance measures using deposits, cash, liquidity gap and also non-performing loans as the indicator to the banking system in Malaysia and evaluate the effect on banks’ capital and reserve. Design/methodology/approach - Data are retrieved from the utilizing journals, books, Thompson Data Stream, balance sheet, income statements and report by Bank Negara Malaysia for the period 1997-2012. Multiple regressions are applied to assess the impact of liquidity risk on banks’ capital and reserve. Findings - The results of the multiple regressions showed that liquidity risk affects banks capital and reserve significantly, with non-performing loan (NPLs), as the exacerbating the liquidity risk. They have a negative relationship with deposit, cash and liquidity gap. Research limitations/implications - The period studied in this paper is one year, due to availability of data. However, the sample period does not impair the findings since the sample includes 56 banks, which constitute the main part of the Malaysian banking system. Moreover, only NPLs do not used to measure of performance. Economic factors contributing to liquidity risk are not covered in this paper. Originality/value - This is paper are refer to journal who is research about the Pakistani banking system but the result from that journal are not influence the result in this paper. This paper helps in understanding the factors of liquidity risk and performance of banking system. Consequently, understanding their impact on the bank’s capital and reserve of the banking system. Paper type - Research paper

Malaysia: Publication of Financial Sector Assessment Program Documentation�Detailed Assessment of Observance of Insurance Core Principles

This report is an analysis of the insurance core principles of Malaysia. This assessment gives a clear understanding of the regulatory and supervisory framework of the insurance sector of Malaysia. Bank Negara Malaysia (BNM) is the best insurance regulator in this region. Six percent of the financial sector accounts for the insurance sector. The assessment did not reveal any current potential sources of significant risk to the Malaysian financial stability from its insurance industry. The Executive Board expects further enhancement for an effective insurance sector.

An Issue on Uniform Customs and Practice for Documentary Credits (UCP) No 600 for Islamic Letter of Credit

Islamic banks in Malaysia offer Letter of Credit (LC) Wakalah (agency) and LC Murabahah (cost-plus) as two of their main trade finance facilities. LC is the product of International Chamber of Commerce, the world business organization based in Paris and it is governed by the Uniform Customs and Practice for Documentary Credits (UCP) No. 600 (UCP 600). The objective of this paper is to clarify an issue on a few articles of the UCP 600 as the governing rules of LC Wakalah and LC Murabahah. At the same time, this paper discusses the practice of some Islamic banks in Malaysia in facing this issue. This study adopts the qualitative method as the main research methodology where both the primary and the secondary data are used. For the primary data, semi-structured interviews were conducted with bankers who are directly involved with the operation of Islamic LCs. As the result, this paper discovers an issue on the UCP 600 for Islamic LCs that is the issue of insufficiency in dealing solely with documents for LC Wakalah and LC Murabahah without checking the conditions of goods. This paper analyzes this issue by determining whether it is in line with the Shariah principles. Lastly, a solution to resolve the issue on the UCP 600 for Islamic LCs is recommended to Bank Negara Malaysia.

Information asymmetry and regulatory shortcomings in profit sharing investment accounts

PurposeThe purpose of this paper is to explore the shortcomings in the compliance of the full‐fledged Islamic banks with the Bank Negara Malaysia (BNM) disclosure guidelines related to the profit sharing investment accounts (PSIAs).Design/methodology/approachThis study uses interviews and a survey.FindingsIt was found that only two out five full‐fledged Islamic banks followed BNM guidelines which are based on the idea of self‐regulation. The authors developed a checklist of disclosure items, and probed whether the sample banks would adopt these new disclosure items. As it transpired, some banks have been disclosing these items selectively, and/or recording them for internal control and management purposes. The findings show these banks do not disclose: policies, procedures, product design and structure; profit allocation basis, methodology of calculating profit attributable to investment account holders (IAHs). Nevertheless, disclosure related to Shari'ah compliance was given to a reasonable extent. It is intriguing that full‐fledged Islamic banks do not provide comprehensive disclosure related to PSIAs because such disclosure is not mandatory; while foreign full‐fledged Islamic banks provided such disclosure voluntarily.Research limitations/implicationsThe banking sector regulator is not sure of whether individual Islamic banks have actually complied with all of its guidelines. The shortcomings in the disclosure are due to lack of expertise, outdated information system structure, and shortage of support and highly trained staff. The authors propose that the Islamic jurists should use Istiqra – which is a comprehensive examination of contracting environment before a new definite ruling is made on the issue of accountability to the IAHs. This would involve exploratory study of how the securities regulator (not banking regulator) perceives the information risks faced by the IAHs and enforce new disclosure guidelines.Originality/valueThis paper proposes new disclosure guidelines which incorporate transparency, appropriateness, and timeliness to reduce information asymmetry and enhance governance disclosure.

Review of Credit Guarantee Corporation Malaysia (CGCM) Initiatives to Enhance Small and Medium Enterprises Performance

The prime focus of this study is to review the initiatives by CGC to enhance Small and Medium Size Enterprise(SMEs) which will benefit both the government and the SMEs traders. A review of the literature shows thatsmall firms experience difficulties in accessing the credit market due to informational asymmetries. In this paper,we establish that even small firms may improve their access to finance with the help of government agenciessuch as the Credit Guarantee Corporation (CGC). CGC works closely with Bank Negara Malaysia (BNM) interms of its operations and progress. Hence, the government can develop more packages of service whichenables SMEs to have more options to access financing, financial restructuring ,advisory services, information,training and marketing coordination Moreover with the availability of such services, the SMEs have theadvantage as the Credit Guarantee Corporation (CGC) will facilitate their business growth. This article exploresthe variables affecting the performance of the entrepreneurs and to ascertain how SME businesses can achievehigh growth. It further provides evidence on how Credit Guarantee Corporation (CGC) has helped SMEs inMalaysia.

Investigation and prosecution of money laundering cases in Malaysia

PurposeThe purpose of this paper is to examine money laundering cases investigated by the Central Bank of Malaysia under the Anti‐Money Laundering and Anti‐Terrorism Financing Act 2001.Design/methodology/approachThis study analyzes the contents of public releases by the enforcement division of the Central Bank for period 2007 to 2011. Analysis of data is carried out based on three categories: the predicate offence, the perpetrators and current status of the cases.FindingsFindings reveal that most cases investigated by the Central Bank relate to sec 4(1) of AMLATFA 2001 and the main predicate offence related to the money laundering charges are on illegal deposit taking. Further it is found that directors of companies are the leading group of people charged under the Act for money laundering. In addition, findings also show that only half of the cases investigated have been charged in court.Research limitations/implicationsData from this research only come from enforcement releases from the Central Bank of Malaysia. Since AMLATFA2001 is administered by multiple agencies, the research may not provide a comprehensive view of all the cases investigated. Future research should look at other agencies and in particular the Royal Police of Malaysia.Practical implicationsFindings from the study suggest that prosecuting money laundering cases by Bank Negara Malaysia are limited to cases with predicate offence of illegal deposit taking. The agency should explore other predicate offences and the concept of “irresistible inference” to increase its effort in prosecuting money laundering activities in the country.Originality/valueThe paper documents and analyzes the actual cases being investigated for money laundering offences. It provides basis for the standard setters to evaluate their effort to curb money laundering activities in Malaysia.

Disclosure of Shariah compliance by Malaysian takaful companies

PurposeThis paper seeks to explore the disclosure of Shariah compliance as reported by the Shariah Committee (SC) in the annual reports of takaful companies in Malaysia. Disclosure of Shariah compliance is important in enhancing and protecting the Islamic identity of takaful operators, thereby providing Muslims with an alternative insurance system. The paper also aims to discuss whether the advisory role constrains the SC members to improve disclosure which can boost consumers' confidence and companies' accountability. Both confidence and accountability on Shariah compliance would also help promote Malaysia as an Islamic financial centre.Design/methodology/approachContent analysis of the SCs' reports in the 2008/2009 annual reports of seven takaful operators in Malaysia were conducted and the findings discussed with three officers from Bank Negara Malaysia (Central Bank of Malaysia). Subsequent to the discussion, the findings were further clarified and confirmed with a former member of the SC through e‐mail correspondence.FindingsDisclosure of Shariah compliance by the SC reflects high conformance to the Bank Negara Malaysia guidelines. Although the high level of conformance promotes comparability, it does not necessarily fully address disclosure issues such as providing adequate and relevant information. Shariah compliance by takaful companies seems to develop in much the same manner as other disclosure practices, that is, a tendency to comply with rules rather than with principles. Related to the disclosure issue, SC members are constrained by the advisory role and part‐time basis of appointment from fully participating in every stage of product process from its conception to its implementation.Research limitations/implicationsThe paper relies heavily on Shariah compliance reported by the SC in the annual reports of takaful companies. Nonetheless, findings were confirmed with three officers from Bank Negara Malaysia and with a former member of the SC to enhance the findings' credibility. In future, interviews can be conducted with other stakeholders such as takaful managers, Islamic academics and members of the SC to better understand the nature of disclosure practices by takaful companies.Practical implicationsInsights drawn from this study suggest the need to enhance disclosure on Shariah compliance in the SC reports and to further strengthen the role of the SC members. As Shariah governance mechanisms, both the SC reports and SC members can be utilised to enhance the identity of Islamic businesses and fulfils the religious obligations.Originality/valueThis paper highlights the need for increased transparency through adequate and relevant disclosure of Shariah compliance information in the SC report of takaful companies. It also raises the concern that the advisory role entrusted to SC members might not be adequate for them to effectively ensure that compliance with Shariah principles are adhered to at all times as expected by Bank Negara Malaysia.

An Assessment of Malaysian Monetary Policy During the Global Financial Crisis of 2008-09

Malaysia was hit hard by the global financial crisis of 2008-09. Anticipating the downturn that would follow the episode of extreme financial turbulence, Bank Negara Malaysia (BNM) let the exchange rate depreciate as capital flowed out, and preemptively cut the policy rate by 150 basis points. Against this backdrop, this paper tries to quantify how much deeper the recession would have been without the BNM's monetary policy response. Taking the most intense year of the crisis as our baseline (2008:Q4-2009:Q3), counterfactual simulations indicate that rather the actual outcome of a -2.9 percent contraction, growth would have been -3.4 percent if the BNM had not implemented countercyclical and discretionary interest rate cuts. Furthermore, had a fixed exchange rate regime been in place, simulations indicate that output would have contracted by -5.5 percent over the same four-quarter period. In other words, exchange rate flexibility and the interest rate cuts implemented by the BNM helped substantially soften the impact of the global financial crisis on the Malaysian economy. These counterfactual experiments are based on a structural model estimated using Malaysian data.

An Assessment of Malaysian Monetary Policy During the Global Financial Crisis of 2008-09

Malaysia was hit hard by the global financial crisis of 2008-09. Anticipating the downturn that would follow the episode of extreme financial turbulence, Bank Negara Malaysia (BNM) let the exchange rate depreciate as capital flowed out, and preemptively cut the policy rate by 150 basis points. Against this backdrop, this paper tries to quantify how much deeper the recession would have been without the BNM's monetary policy response. Taking the most intense year of the crisis as our baseline (2008:Q4-2009:Q3), counterfactual simulations indicate that rather the actual outcome of a -2.9 percent contraction, growth would have been -3.4 percent if the BNM had not implemented countercyclical and discretionary interest rate cuts. Furthermore, had a fixed exchange rate regime been in place, simulations indicate that output would have contracted by -5.5 percent over the same four-quarter period. In other words, exchange rate flexibility and the interest rate cuts implemented by the BNM helped substantially soften the impact of the global financial crisis on the Malaysian economy. These counterfactual experiments are based on a structural model estimated using Malaysian data.

Empowering and Protecting Financial Consumers: Bank Negara Malaysia’s Consumer and Market Conduct Framework

This case study looks back on Bank Negara Malaysia’s decade-long program to enhance consumer empowerment and market conduct and extracts key lessons. Following the Asian financial crisis of 1997, the government of Malaysia committed to a decade-long program of financial reform that aimed to improve financial stability through consumer protection and market conduct initiatives. The Financial Sector Master Plan (FSMP) was launched in 2001, and since then Bank Negara Malaysia has been working to align its business strategy and institutional capacity with the goals of the Plan. With financial stability as its primary objective, the Bank introduced initiatives that would help to strengthen the capacity of financial institutions, promote financial education among consumers, and ensure that financial institutions adhere to fair market practices. Today, consumer empowerment and protection are pursued through a comprehensive framework that includes market conduct regulation and supervision, avenues for redress, consumer literacy and public awareness initiatives. This framework has been built progressively over time and has benefited from collaborations with other departments in Bank Negara Malaysia, consumer associations, and the industry. Since 2006, the Bank’s Consumer and Market Conduct Department (CMC) has played a key role in developing the framework.