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CHAPTER ONE

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  1. CHAPTER ONE MALAYSIAN FINANCIAL SYSTEM

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

  3. 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)

  4. The Differences between Bursa Malaysia and Bursa Derivative

  5. Differences between Capital Market and Money Market

  6. 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.

  7. 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.

  8. 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.

  9. 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.

  10. Commercial Bank

  11. 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.

  12. Finance Companies

  13. 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.

  14. Merchant Banks

  15. 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.

  16. Islamic Banks

  17. Islamic Banks

  18. Islamic Banks

  19. 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.

  20. The Capital Allocation Process • In a well-functioning economy, capital flows efficiently from those who supply capital to those who demand it. • Suppliers of capital – individuals and institutions with “excess funds”. These groups are saving money and looking for a rate of return on their investment. • Demanders or users of capital – individuals and institutions who need to raise funds to finance their investment opportunities. These groups are willing to pay a rate of return on the capital they borrow.

  21. How is capital transferred between savers and borrowers? • Direct transfers • Investment banking house • Financial intermediaries

  22. What is a market? • A market is a venue where goods and services are exchanged. • A financial market is a place where individuals and organizations wanting to borrow funds are brought together with those having a surplus of funds.

  23. Types of financial markets • Physical assets vs. Financial assets • Money vs. Capital • Primary vs. Secondary • Spot vs. Futures • Public vs. Private

  24. The importance of financial markets • Well-functioning financial markets facilitate the flow of capital from investors to the users of capital. • Markets provide savers with returns on their money saved/invested, which provides them money in the future. • Markets provide users of capital with the necessary funds to finance their investment projects. • Well-functioning markets promote economic growth. • Economies with well-developed markets perform better than economies with poorly-functioning markets.

  25. What are derivatives? How can they be used to reduce or increase risk? • A derivative security’s value is “derived” from the price of another security (e.g., options and futures). • Can be used to “hedge” or reduce risk. For example, an importer, whose profit falls when the dollar loses value, could purchase currency futures that do well when the dollar weakens. • Also, speculators can use derivatives to bet on the direction of future stock prices, interest rates, exchange rates, and commodity prices. In many cases, these transactions produce high returns if you guess right, but large losses if you guess wrong. Here, derivatives can increase risk.

  26. Types of financial institutions • Commercial banks • Investment banks • Mutual savings banks • Credit unions • Pension funds • Life insurance companies • Mutual funds • Hedge funds

  27. Physical location stock exchanges vs. Electronic dealer-based markets • Auction market vs. Dealer market (Exchanges vs. OTC) • NYSE vs. Nasdaq • Differences are narrowing

  28. Stock Market Transactions • Apple Computer decides to issue additional stock with the assistance of its investment banker. An investor purchases some of the newly issued shares. Is this a primary market transaction or a secondary market transaction? • Since new shares of stock are being issued, this is a primary market transaction. • What if instead an investor buys existing shares of Apple stock in the open market – is this a primary or secondary market transaction? • Since no new shares are created, this is a secondary market transaction.

  29. What is an IPO? • An initial public offering (IPO) is where a company issues stock in the public market for the first time. • “Going public” enables a company’s owners to raise capital from a wide variety of outside investors. Once issued, the stock trades in the secondary market. • Public companies are subject to additional regulations and reporting requirements.

  30. Historical stock market performance, S&P 500 (1968-2004)

  31. Where can you find a stock quote, and what does one look like? • Stock quotes can be found in a variety of print sources (Wall Street Journal or the local newspaper) and online sources (Yahoo!Finance, CNNMoney, or MSN MoneyCentral).

  32. What is the Efficient Market Hypothesis (EMH)? • Securities are normally in equilibrium and are “fairly priced.” • Investors cannot “beat the market” except through good luck or better information. • Levels of market efficiency • Weak-form efficiency • Semistrong-form efficiency • Strong-form efficiency

  33. Weak-form efficiency • Can’t profit by looking at past trends. A recent decline is no reason to think stocks will go up (or down) in the future. • Evidence supports weak-form EMH, but “technical analysis” is still used.

  34. Semistrong-form efficiency • All publicly available information is reflected in stock prices, so it doesn’t pay to over analyze annual reports looking for undervalued stocks. • Largely true, but superior analysts can still profit by finding and using new information.

  35. Strong-form efficiency • All information, even inside information, is embedded in stock prices. • Not true--insiders can gain by trading on the basis of insider information, but that’s illegal.

  36. Conclusions about market efficiency • Empirical studies suggest the stock market is: • Highly efficient in the weak form. • Reasonably efficient in the semistrong form. • Not efficient in the strong form. Insiders have made abnormal (and sometimes illegal) profits. • Behavioral finance • Incorporates elements of cognitive psychology to better understand how individuals and markets respond to different situations.

  37. Implications of market efficiency • You hear in the news that a medical research company received FDA approval for one of its products. If the market is semi-strong efficient, can you expect to take advantage of this information by purchasing the stock? • No – if the market is semi-strong efficient, this information will already have been incorporated into the company’s stock price. So, it’s probably too late …

  38. Implications of market efficiency • A small investor has been reading about a “hot” IPO that is scheduled to go public later this week. She wants to buy as many shares as she can get her hands on, and is planning on buying a lot of shares the first day once the stock begins trading. Would you advise her to do this? • Probably not. The long-run track record of hot IPOs is not that great, unless you are able to get in on the ground floor and receive an allocation of shares before the stock begins trading. It is usually hard for small investors to receive shares of hot IPOs before the stock begins trading.