In 2016, Malaysia was once again faced with a challenging global economic landscape due to subdued global demand and low commodity prices. The reversal of capital flows from emerging economies, fuelled by surprising and dramatic political developments in the United Kingdom and the United States together with shifts in macroeconomic policy in those countries, caused considerable volatility in the international financial markets. On the home front, Malaysia’s economy was impacted by rising living costs, greater household debt and soft employment conditions.2 Simultaneously, uncertainty in global financial markets, together with the underperformance of the ringgit as compared to other Southeast Asian currencies, contributed to overall slower growth in domestic business and consumer prospects.

Nevertheless, the Malaysian economy grew 4.2 per cent in 2016 with a value of 1,107.9 billion ringgit at constant and 1,229.4 billion ringgit at current prices, and is projected to register a sustained growth of 4.3 to 4.8 per cent in 2017 with the gradual improvement in global growth,3 supported collectively by a gradual recovery in global commodity prices and continued domestic demand.

In the first quarter of 2017, the dip in the ringgit’s performance against other currencies was stabilised after Bank Negara Malaysia (BNM), the Central Bank of Malaysia, took measures to clamp down on the derivative and hedging market at the end of 2016. BNM has stated that such financial intermediation is intended to be supportive of growth, supported by strong bank balance sheets and a well-developed financial market.4

2016 also saw the continued expansion of the Malaysian capital market in 2016 to reach 2.84 trillion ringgit in size compared with 2.82 trillion ringgit in 2015 and a slight decline in the Malaysian equity market, which depreciated by 25 billion ringgit from 1,695 billion ringgit in 2015 to 1,670 billion ringgit by the end of 2016. Overall, the Malaysian bond market totaled 1.17 trillion ringgit as of 31 December 2016, approximating the 1.12 trillion ringgit recorded at the end of 2015. Malaysia continued to maintain its position as the third-largest local currency bond market as a percentage of GDP in Asia, after Japan and South Korea, and continued to lead the world sukuk market in 2016, accounting for US$29.9 billion or 41.1 per cent of total global sukuk issuances.5 While Malaysian corporate bonds and sukuk market reported total issuances of 85.65 billion ringgit in 2016, albeit slightly lower than the 86.35 billion ringgit issued in 2015, it is heartening to note that despite this and amid prevailing uncertainties and cautious investor sentiment, the bond market grew 4.5 per cent to close at 1.17 trillion ringgit at the end 2016.6

Malaysia’s financial services industry has always been championed as a key driver of its economic development. It is one of the 12 national key economic areas under Malaysia’s Economic Transformation Programme, the national strategic initiative formulated by the government to elevate the country to developed-nation status by 2020, and is the foundation of the Financial Sector Blueprint (FSB), the 10-year masterplan implemented by BNM, for the management of Malaysia’s transition towards becoming a high-value-added, high-income economy.7

As at the end of 2016, the number of licensed banking institutions in Malaysia stood at 57, comprising 29 domestic banking institutions and 28 foreign-owned banking institutions.8 There are also 16 Islamic banks, 10 of which are domestically owned, and 11 investment banks, all domestically owned.9

The five main local banking groups are Malayan Banking (Maybank), Public Bank, CIMB Bank, RHB Capital and Hong Leong Bank. All have widespread branch networks, affording them access to inexpensive funding sourced from retail deposits. All have affiliated Islamic and investment-bank subsidiaries.

Top 10 banks in Malaysia by asset size (ringgit) as at the end of 2016


Asset size (ringgit)

Malayan Banking




Public Bank

380, 053

RHB Bank


Hong Leong Bank


Maybank Islamic


United Overseas Bank (Malaysia)


OCBC Bank (Malaysia)


HSBC Bank Malaysia




Save for asterisked entries, all information in the table above is sourced from the 2016 annual reports or financial statements of the listed banking institutions

* Bank’s interim financial results


In line with the FSB, the regulatory and supervisory framework of Malaysia in respect of the banking and finance sector was recently consolidated and updated under the Financial Services Act 2013 (FSA) and the Islamic Financial Services Act 2013 (IFSA) (collectively, Acts), both of which came into force on 30 June 2013, simultaneously consolidating and repealing the Banking and Financial Institutions Act 1989 (BAFIA), Insurance Act 1996, Payment Systems Act 2003 and Exchange Control Act 1953. The Acts aim to provide a regulatory framework for both the conventional financial and shariah-compliant sectors, and endow BNM with greater powers to counter future risks to financial stability in the financial sector, increase consumer protection and promote competition in the financial services sector. The Acts also contain provisions that preserve every guideline, direction, circular or notice previously issued under any repealed legislation in relation to any provision of the Acts prior to their coming into force.

Malaysia has also established its own mid-shore jurisdiction on the island of Labuan off the coast of Borneo, which was declared as an as an international offshore financial centre in October 1990 to complement the activities of the domestic financial market in Kuala Lumpur. Labuan is regulated and administered by the Labuan Financial Services Authority pursuant to the Labuan Financial Services Authority Act 1996 (Labuan FSA Act). In 2008, the jurisdiction was renamed the Labuan International Business and Financial Centre (Labuan IBFC), and an entity called Labuan IBFC Incorporated was established as the jurisdiction’s marketing arm in 2008. The Labuan FSA and Labuan IBFC work together to promote Labuan IBFC’s reputation as the premier mid-shore international business and financial centre in the Asian region. Entities operating in the Labuan IBFC are subject to federal laws that are specific to the Labuan IBFC. Labuan banks are subject to the Labuan Financial Services and Securities Act 2010 (LFSSA), and Labuan Islamic banks are regulated under the Labuan Islamic Financial Services and Securities Act 2010 (LIFSSA) respectively.


BNM, a statutory body wholly owned by the government that was established under the Central Bank of Malaysia Act 1958, continues to operate under the Central Bank of Malaysia Act 2009 (CBA), which became effective on 25 November 2009. BNM reports to the Minister of Finance (Minister), and keeps the Minister informed of policies governing the monetary and financial sector.

BNM is empowered to act as the regulator of banking institutions under the Acts and the CBA. The CBA confers the necessary powers and instruments on BNM to achieve its mandates effectively and legitimises the duality of both the conventional and Islamic financial systems in Malaysia, and in doing so establishes the legal foundation for development of an Islamic financial system within the overall Malaysian financial system.

BNM’s primary objectives include the prudent conduct of monetary policy, financial system stability, and the development of a sound and progressive financial sector. In carrying out the above, BNM is responsible for advising the government on macroeconomic policies and the management of public debt. BNM is also the sole authority in issuing currency as well as managing the international currency reserves of the country. Other functions of BNM include the regulation and supervision of financial institutions as described below, and the monitoring and supervision of payment systems, money markets and foreign exchange markets.

From a supervisory perspective, BNM is empowered by the Acts to regulate banking institutions, and does so by way of a risk-based supervisory (RBS) approach that monitors and reviews the manner in which all financial institutions identify, control and deal with their respective business risks.

ii SC

In addition to the above, financial institutions and investment banks that provide capital markets services are regulated by the SC, a statutory body with investigative and enforcement powers established under the Securities Commission Act 1993 (SCA).

The SC is the regulatory body mandated to regulate the Malaysian capital market, and is directly responsible for the regulation, supervision and monitoring of all persons licensed under the Capital Markets and Services Act 2007 (CMSA) with the core objective of investor protection. The SC is also primarily responsible under the CMSA for encouraging and promoting the development of the securities and derivatives markets in Malaysia, and for the monitoring and supervision of public-listed companies to ensure compliance with securities laws.

The CMSA constitutes a single framework regulating the offering and licensing of capital market services, market conduct, issuances of securities and the conduct of takeovers and mergers. Debt issuances (bond and sukuk) in Malaysia require the approval of the SC, and such issues are further governed by various guidelines and practice notes issued by the SC under the CMSA.

iii Companies Commission of Malaysia (CCM)

Banks in Malaysia fall under the general supervision of the CCM, as the FSA and the IFSA require incorporation under the Companies Act 2016 (CA) for the undertaking of banking business. However, the IFSA provides for international Islamic banks to do business through either a locally incorporated company or a branch registered with the CCM, whereas banks in Labuan are required to be incorporated or registered under the Labuan Companies Act 1990.10

iv Labuan FSA

The Labuan FSA is the sole statutory body responsible for the regulation, supervision and development of the Labuan IBFC under the Labuan FSA Act. According to the Labuan FSA website, the objectives of the Labuan FSA include promoting and developing Labuan as an international centre for business and financial services; implementing national objectives, policies and priorities for the development and administration of international business and financial services in Labuan; and acting as the central regulatory, supervisory and enforcement authority of the international business and financial services industry in Labuan.

The above includes the licensing and regulation of licensed entities operating within Labuan IBFC, and supervision over such entities to ensure their compliance with applicable domestic and international standards and best practices.

The Labuan FSA is also responsible for the development of policies for the conduct of business and financial services in the Labuan IBFC, and administration of several crucial pieces of legislation, which includes the LFSSA and the LIFSSA, subject to the general directions and control of the Minister.11

v Development Financial Institutions Act 2002 (DFIA)

The DFIA provides for BNM to be responsible for the regulation and supervision of specialised financial institutions known as ‘development financial institutions’ (DFIs) established by the government to specifically develop and promote national strategically important socioeconomic sectors such as agriculture, small and medium-sized enterprises, infrastructure, maritime, export-oriented sectors, capital-intensive and high-technology industries.

The provisions of the DFIA empower BNM to monitor the activities and financial performance of these institutions and their objective, which is to provide specific financial products and services to cater to their respective focus areas; and ensure that DFIs are resilient, efficient and able to fulfill their respective mandates in a financially sustainable manner, while contributing to the overall stability of the financial system.

In January 2016, further amendments were made to strengthen the regulatory framework of the DFIA in line with the evolving role of DFIs in supporting Malaysia’s socioeconomic development. The new amendments enhance existing provisions in the DFIA on corporate governance, business activities and the scope of BNM’s regulatory oversight to ensure sound financial management, and improvement of the operational efficiency and resilience of DFIs. In addition, amendments incorporate new provisions for the regulation of shariah governance and consumer protection, with enforcement tools to ensure compliance.

To date, there are six DFIs prescribed under the DFIA: Bank Pembangunan Malaysia Berhad, Bank Perusahaan Kecil & Sederhana Malaysia Berhad, Export-Import Bank of Malaysia Berhad, Bank Kerjasama Rakyat Malaysia Berhad, Bank Simpanan Nasional and Bank Pertanian Malaysia Berhad (Agrobank).12

vi Licensing

Under the Acts, all persons undertaking banking business, investment banking or insurance business are required to hold a valid licence granted by the Minister. These businesses continue to fall within the oversight of the Ministry of Finance and BNM. The Minister is the authority for the issuance, revocation or imposition of conditions of licences to carry on banking business, insurance business and investment banking business, and has the power to carry out investigations in certain circumstances. Specifically, licences for commercial and investment banks are issued under the FSA, whereas licences for Islamic banks and international Islamic banks are issued the IFSA.

The CMSA provides that any person wishing to carry out capital market activities (save for registered persons) is required to be licensed by the SC, the sole authority that issues and approves licences for capital market intermediaries engaging in the regulated activities prescribed under the CMSA.Under the CMSA single licensing regime, capital market intermediaries that are fit and proper are issued with a licence that will enable them to carry on one or more regulated activities.

The two main types of licence are new capital markets services licences, which are granted to principals, and new capital markets services representative’s licences, which are granted to representatives of a principal, enabling licensed representatives to carry out one or more regulated activities on that principal’s behalf.13

In Labuan, the LFSSA empowers the Labuan FSA to grant licences for the conduct of ‘Labuan banking business’, which means the following:

  • a the business of receiving deposits on current account, deposit account, savings account or any other account as may be specified by the Labuan FSA;
  • b Labuan investment banking business;
  • c Labuan financial business;
  • d Labuan Islamic banking business; and
  • e such other business as the Labuan FSA, with the approval of the Minister, may specify, in any currency (including ringgit where permitted by the Acts or such other relevant law in force).

The LIFSSA also empowers the Labuan FSA to grant licences for the conduct of ‘Labuan Islamic banking business’, meaning the carrying on of ‘Labuan banking business’ in compliance with shariah principles.


i Relationship with the prudential regulator

From a corporate governance perspective, the Acts codify the duties of the directors of financial institutions and place stringent requirements on transparency on the part of directors of financial institutions and their holding companies. Directors are required to disclose to the board of directors the nature and extent of any direct or indirect interest in a material transaction or material arrangement with the financial institution in which they hold office. Further, under the Acts, the approval of BNM is required for the appointment, election, re-appointment and re-election of the chairperson, directors and chief executive officer of a financial institution.

In addition, the Acts provide that BNM has power to specify fit and proper requirements to be complied with by the chairperson, directors, chief executive officer and senior officers of a financial institution and, in the case of Islamic financial institutions, members of the shariah committee. The requirements may include minimum criteria relating to probity, personal integrity and reputation; competency and capability; and financial integrity. BNM has complete discretion in determining whether the fit and proper requirements specified have been complied with.14

The earlier-mentioned RBS approach15 is primarily implemented by BNM through the adoption of risk profiles, best practices, sound governance and proper risk management systems within the internal oversight process of each institution with the objective of anticipating and managing future risks; and identifying and resolving weaknesses within the processes of each institution. BNM further facilitates the RBS approach by ensuring the quality of the membership of directors and senior management of financial institutions, inculcating a culture of workforce risk management and ethics, and reliance on the opinion of independent audit and actuarial professionals appointed by financial institutions.

To further ensure the proper division and coordination of their respective legislative responsibilities in respect of investment banks in particular, BNM and the SC jointly issued the Guidelines of Investment Banks pursuant to Section 126 of BAFIA and Section 158 of the SCA. The Guidelines specifically provide that BNM will be responsible for the prudential regulation of investment banks to ensure safety and soundness in the interest of depositors, while the SC will be responsible for the business and market conduct of investment banks to promote market integrity and investor protection in the capital market.16

BNM also has stringent ‘fit and proper’ tests, which are set out in further guidelines contained in the Fit and Proper Criteria issued June 2013 issued under the FSA and Guidelines on Corporate Governance for Licensed Institutions (Guidelines) issued in June 2013 under BAFIA.

The Guidelines were formulated based on the fundamental concepts of responsibility, accountability and transparency, set out broad principles and minimum standards as well as specific requirements for sound corporate governance expected of licensed institutions and holding companies, and are aligned with existing guidelines on corporate governance such as the Malaysian Code on Corporate Governance, the Bank for International Settlements guidelines on enhancing corporate governance for banking organisations and other international best practices.

ii Management of banks

From a management perspective, the Guidelines stipulate that the organisational structure of licensed institutions should include the following four primary forms of oversight, namely:

  • a oversight by the board of directors;
  • b oversight by individuals not involved in the day-to-day management of the different business areas;
  • c direct line supervision of various business areas; and
  • d independent risk management, compliance and audit functions.

Further to the above, the Guidelines require boards of directors of banking institutions to establish specialised board committees to oversee critical or major functional areas, to address matters requiring detailed review or in-depth consideration, and to be responsible for the decisions of such committees. These specialised committees help discharge the functions of the board and comprise the following:

  • a a nominating committee responsible for:

• prescribing the minimum qualification requirements for members of the board and the chief executive officer;

• the overall composition of the board;

• measures for evaluation of the performance of the board and each member thereof, its committees and that of the chief executive officer and senior management; and

• ongoing training for directors on the fulfilment of their responsibilities and updates on new developments in the industry;

  • b a remuneration committee responsible for prescribing policies for the remuneration of directors, chief executive officer and key senior management officers for the approval of the full board of directors;
  • c a risk management committee responsible for formulating risk management strategies that include identification of the nature of and exposure to risks involved in banking, and methods used to identify, monitor, manage and control each risk and the nature and frequency of evaluation procedures of risk management systems; and
  • d an audit committee to provide independent oversight of the internal and external audit function, and internal controls, and ensuring checks and balances within the licensed institution.

In addition, the Guidelines are aimed at ensuring that risk-taking activities and business prudence are appropriately balanced so as to maximise shareholders’ returns and protect the interests of all stakeholders, and contain principles dealing with board matters, management oversight, accountability and audit and transparency.

The Guidelines should be read together with the Acts, the CA and other relevant regulations, guidelines and circulars relating to corporate governance that BNM may issue from time to time and are applicable to the following institutions: licensed financial institutions; holding companies of licensed financial institutions (companies holding 51 per cent or more of the shares of a licensed financial institution or otherwise as prescribed by BNM); and any other institution specified by BNM.17

iii Regulatory capital and liquidity

The Acts provide that BNM has the power to prescribe standards on prudential matters (inclusive of liquidity and capital adequacy) to be complied with by financial institutions to promote the sound financial position of an institution, and the integrity, professionalism and expertise in the conduct of the business, affairs and activities of an institution. Pursuant to such powers, BNM issued the liquidity coverage ratio (LCR) framework in March 2015 as per Basel III requirements (see below), which provides that banking institutions must maintain sufficient stock of high-quality liquid assets (HQLA) to buffer an acute liquidity stress scenario over a 30-day period. The framework, which took effect on 1 June 2015, supersedes the guidelines on liquidity framework and liquidity framework-i issued in July 1998, and provides that banking institutions shall hold, at all times, an adequate stock of HQLA such that it maintains a minimum LCR of 70 per cent, achieved by January 2016, rising to 100 per cent to be complied with by January 2019. In addition, banking institutions are required to comply with the framework at (1) their respective entity and global operational level on a stand-alone basis; and (2) a consolidated level, which includes both (1) and the consolidation of all subsidiaries, save for insurance and takaful subsidiaries.18

In addition to the Acts, the CBA provides that for the purpose of conducting monetary operations, BNM may require financial institutions to deposit a reserve with it, and prescribe the principles and method for the determination of the said reserve. Pursuant thereto, in January 2016, BNM issued the Statutory Reserve Requirement Guidelines, which came into effect in February 2016 for the purpose of liquidity management, whereby financial institutions (conventional and Islamic) are required to maintain a statutory reserve requirement (SRR) balance in their statutory reserve accounts equivalent to a certain proportion of their eligible liabilities, this proportion being the SRR rate (currently 3.5 per cent).19 In this case, ‘eligible liabilities’ comprise ringgit-denominated deposits and non-deposit liabilities, net of interbank assets and placements with BNM, subject to the adjustments, exclusions and deductions prescribed under the SRR rules.

Under BNM’s Guidelines on Capital Funds and Guidelines on Capital Funds For Islamic Banks 2013 (Capital Funds Guidelines),20 Malaysian financial institutions were previously required to set aside a percentage of profit as part of a reserve fund to ensure they were able to continue providing financial services without disruption. This was meant to be a prudential tool for banks to use during stress periods, distinct from the SRR as stated above. Effective May 2017, BNM announced that the reserve fund requirement was no longer required owing to the phasing-in of the Basel capital conservation buffer in Malaysia, which began in 2016, because the two reserve funds are intended for the same purpose. Instead, a set minimum amount of capital funds must be maintained at all times.21 In addition, banking institutions must also comply with the minimum regulatory capital requirement as set out in the 2015 Framework (below) and Capital Adequacy Framework (Basel II – Risk Weighted Assets).22

The Acts provide that a financial institution may only be licensed if its capital funds are equal to or exceed the minimum amount prescribed by the Minister. Pursuant thereto, BNM recently issued a revision to the Capital Funds Guidelines in May 2017, superseding the old Capital Funds Guidelines to ensure that financial institutions maintain a minimum amount of capital to operate and perform their functions.

The Capital Funds Guidelines provide that the minimum capital funds that have to be maintained by commercial banks and investment banks are as follows: for a domestic bank (by itself or in aggregation with its related corporation that is a licensed investment bank), 2 billion ringgit; for a locally incorporated foreign bank, 300 million ringgit; and for a stand-alone investment bank, 500 million ringgit.23

In December 2010, the Basel Committee on Banking Supervision (Basel Committee) finalised a package of measures to strengthen global capital and liquidity rules with the goal of strengthening the resilience of the global banking system. The rules are detailed in the documents Basel III: A global regulatory framework for more resilient banks and banking systems and Basel III: International framework for liquidity risk measurement, standards and monitoring (collectively, Basel III).

BNM issued a circular implementing Basel III in 2010 that set out BNM’s approach to incorporating elements of each reform into Malaysia’s domestic regulatory and supervisory framework, together with the regulator’s expectations of banking institutions in managing the transition towards the new regime. The circular provides that BNM supports the implementation of these reforms, and will strengthen the existing capital and liquidity standards for banking institutions in Malaysia to be in line with Basel III, and also provides that BNM aims to implement Basel III reforms in Malaysia in accordance with globally agreed levels, and is working towards an implementation timeline for the gradual phase-in of the reforms during a time frame from 2013 until 2019.24

In addition to the above, and to facilitate the monitoring of Basel III reform implementation, identification of transitioning issues and assessment of potential impact on the financial system, the following requirements were imposed by BNM on financial institutions:

  • a minimum regulatory capital requirements imposed under the Capital Adequacy Framework (Capital Components) and Capital Adequacy Framework for Islamic Banks (Capital Components) issued by BNM, which basically fulfil Basel III capital adequacy requirements. The guidelines require banking institutions to maintain a minimum risk-weighted total capital ratio of 8 per cent at all times at entity, global and consolidated levels; and
  • b reporting requirements on financial institutions with regard to their Basel III leverage and liquidity prior to formal implementation of the new standards.25

In November 2012, BNM issued its regulatory capital adequacy framework entitled ‘Capital Adequacy Framework (Capital Components)’ (2012 Framework), implementing Basel III reforms. The capital requirements promulgated by BNM provided that banking institutions were required to maintain the following minimum capital ratios for the relevant calendar years below: a common equity Tier 1 (CET1) capital ratio of 3.5 per cent in 2013, 4 per cent in 2014 and 4.5 per cent in 2015; a Tier 1 capital ratio of 4.5 per cent in 2013, 5.5 per cent in 2014 and 6 per cent in 2015; and a total capital ratio of 8 per cent from 1 January 2013 onwards. The 2012 Framework provided that the above capital requirements would be supplemented by a leverage ratio, a liquidity coverage ratio and a net stable funding ratio. Further, banking institutions were required to maintain additional capital buffers above the minimum CET1, Tier 1 and total capital ratios set out above in the form of a capital conservation buffer and a countercyclical capital buffer based on a percentage of total risk-weighted assets.

BNM recently issued its guidelines on the Capital Adequacy Framework (Capital Components) in October 2015 (2015 Framework) for banking and financial institutions. The provisions of the 2015 Framework do not differ greatly from the 2012 Framework, but seek to enhance the framework so that Malaysian regulations can better conform with Basel III. The 2015 Framework provides detailed formulae on how the capital conservation buffers and countercyclical buffers will be calculated and determined from an operational perspective, and also provides that banking institutions and their respective holding companies are required to comply with the provisions of the 2015 Framework both at the entity and consolidated levels.26

The implementation of Basel III standards remained a key focus of the Bank’s regulatory and supervisory activities in 2016. The Basel Committee expects to finalise the remaining components of its post-crisis reforms in the first half of 2017. This will address improvements to the risk-based capital framework to make the requirements of the global standard simpler, more risk-sensitive and comparable across jurisdictions. In respect of these reforms, a key priority for the Bank in the medium-term will be to improve the risk capture of banking institutions’ activities. 27

iv Recovery and resolution

The Companies Act 2016 was introduced in early 2017, and this statute repeals and supersedes the Companies Act 1965 for the most part. Like corporations, financial institutions are subject to general legislation for corporate insolvency, now contained within Part IV of the Companies Act 2016. While the modes of winding-up proceedings under the Companies Act 2016 include compulsory and voluntary winding-up and the appointment of receivers and managers over a corporation, the Act contains major exception provisions relating to corporate voluntary arrangements and judicial management in Part VIII (corporate rescue mechanisms) that have yet to come into force. However, specialised frameworks for addressing the failure of financial institutions to pay their debts as they fall due exist separately under the Acts and the Malaysia Deposit Insurance Corporation Act 2011 (MDICA).

Consumers who make deposits into financial institutions in Malaysia are protected by an insurance scheme known as PIDM (Perbadanan Insurans Deposit Malaysia or the Malaysia Deposit Insurance Corporation (Corporation)) pursuant to the provisions of MDICA. As a measure that promotes financial stability within the financial system, PIDM ensures depositors are insured against the loss of their deposits (subject to a threshold of up to 250,000 ringgit per depositor per financial institution) in the event of loss caused by failure of a financial institution holding their deposits.

The provisions of MDICA empower the Corporation to assume control of a non-viable financial institution, and to acquire and take control of non-performing loans that are outstanding between financial institutions, borrowers and security providers through the appointment of a conservator.

The MDICA further provides that upon the appointment of a conservator, a moratorium shall take effect during which, inter alia, no action, suit or proceeding may be commenced or continued against the Corporation, the conservator or the financial institution, any petition for the winding up of the financial institution shall be dismissed, no receiver, receiver manager or liquidator may be appointed over the financial institution, and no steps may be taken to enforce any security over the assets of the financial institution.28

The MDICA also provides that BNM may provide written notice to the corporation where BNM is of the opinion that a financial institution has ceased to be viable or is likely to cease to be viable, whereupon the Corporation is empowered to, inter alia:

  • a require the financial institution to take any step or action or refrain from any act or thing, in relation to itself, its businesses or its officers, to cease soliciting, taking or repaying deposits, or carry on its business or such part of its business as the Corporation may direct, or to restructure the whole or part of its business as may be specified by the Corporation;
  • b acquire or subscribe to the shares of the financial institution;
  • c assume control over the member institution, carry on the whole or part of its businesses, and manage the whole or part of its assets, liabilities and affairs, including disposal of its assets or businesses or any part thereof, or appoint any person to do so on behalf of the Corporation;
  • d apply for the appointment of a receiver, a manager or a receiver manager, to manage the whole or part of the assets, liabilities, businesses and affairs of the financial institution;
  • e subject to the approval of the Minister, present a petition for the winding up of the financial institution;
  • f with the approval of the Minister, designate one of its subsidiaries as a ‘bridge institution’; or
  • g transfer such assets and liabilities of the non-viable financial institution to the bridge institution on terms as the corporation shall determine.29

The Acts themselves provide measures for addressing the insolvency of financial institutions that distinguish between conventional and Islamic banks whereby BNM itself acts as a resolution authority, and with the prior approval of the Minister by an order in writing, is empowered to assume control of the whole or part of the business, affairs or property of a financial institution, manage the same, or appoint any person to do so on behalf of BNM in the event that BNM is of the opinion that certain circumstances exist in relation to the financial institution concerned, including the following:

  • a the assets of the institution are not sufficient to give adequate protection to its depositors, policy owners, participants, users or creditors, as the case may be;
  • b the capital of the institution has reached a detrimental level or is eroding in a manner that may detrimentally affect its depositors, policy owners, participants, users, creditors or the public generally; and
  • c the financial institution has become or is likely to become insolvent, or is likely to become unable to meet all or any of its obligations.30

In addition, the Acts also provide BNM with further powers in the event of insolvency whereby BNM may:

  • a make an application to appoint a receiver and manager over the whole or part of the business, affairs or property of the financial institution;31
  • b with the prior approval of the Minister, by an order in writing, vest in a bridge institution or any other person the whole or part of the business, assets or liabilities of the financial institution;32
  • c with the prior approval of the Minister, provide financial assistance to another institution or any other person to purchase any shares, or the whole or any part of the business, assets or liabilities, of the financial institution;33 and
  • d recommend to the Minister, and the Minister may, upon such recommendation, authorise BNM to file an application for the winding up of a financial institution.34

The Acts generally provide that the provisions of the CA shall apply to the winding up of an institution, unless specifically provided otherwise. However, no application for the winding up of a financial institution may be presented by any person without the prior written approval of BNM.35

In conclusion, the Acts provide that in the winding up of investment banks and Islamic banks, the assets of a banking institution shall be available to meet all liabilities of that licensed investment bank in respect of all deposits in Malaysia in priority over all other unsecured liabilities of those banking institutions in Malaysia, other than preferential debts set out in the CA and debts due and claims owing to the government under the Government Proceedings Act 1956.36


Under the FSA, conduct of, inter alia, the following activities would require licensing under the provisions thereof:

  • a ‘banking business’, which means the business of accepting deposits on current accounts, deposit accounts, savings accounts or other similar accounts; paying or collecting cheques drawn by or paid in by customers; and provision of finance;
  • b ‘investment banking business’, which means the business of accepting deposits on deposit accounts, and the provision of finance; and any regulated activity carried on pursuant to a capital markets services licence under the CMSA; and
  • c such other activities as BNM, with the approval of the Minister, may prescribe.

Under the IFSA, conduct of, inter alia, the following activities would require licensing under the provisions thereof:

  • a ‘Islamic banking business’, which means the business of accepting Islamic deposits on current accounts, deposit accounts, savings accounts or other similar accounts, with or without the business of paying or collecting cheques drawn by or paid in by customers; accepting money under an investment account; or provision of finance;
  • b ‘international Islamic banking business’, which means Islamic banking business in currencies other than ringgit or such other business in (c) below; and
  • c such other activities as BNM, with the approval of the Minister, may prescribe.

International Islamic banks basically carry on Islamic banking business in currencies other than Malaysian ringgit. The Guidelines on International Islamic Banks issued by BNM in 2008 provide that Islamic banking business in international currencies includes the following: commercial banking business; investment banking business; and other banking businesses in Malaysia, as may be specified by BNM.37

The LFSSA and the LIFSSA provide that the Labuan FSA may grant a Labuan banking licence, a Labuan investment banking licence, a Labuan Islamic banking licence, a Labuan Islamic investment banking licence or such business as the Labuan FSA, with the approval of the Minister, may specify. Labuan banks holding any of the aforesaid licences would only be allowed to undertake business activities in currencies other than Malaysian ringgit in, from or through the Labuan IBFC, subject always to the relevant exchange control restrictions imposed under the Acts.

The Rules on Prohibited Business Conduct were issued by BNM in 2014 pursuant to the provisions of the Acts, which prohibit banking institutions from practising conduct and business practices deemed inherently unfair to financial consumers. These rules reinforce existing standards of business conduct and consumer protection issued by BNM by way of the following:

  • a ensuring consumers are not provided with misleading or deceptive information in connection with a financial service or product;
  • b preventing unreasonable business practices that intimidate or exploit financial consumers;
  • c preventing business practices that restrict the freedom of financial consumers to choose between financial services or products available to them; and
  • d preventing collusive business practices that may result in unfavourable outcomes to financial consumers.

In addition to the above, the Financial Services (Financial Ombudsman Scheme) Regulations 2015 and Islamic Financial Services (Financial Ombudsman Scheme) Regulations 2015 (Regulations) were issued in September 2015. The Regulations established the Financial Ombudsman Scheme (FOS) as contemplated under the FSB to ensure the effective and fair handling of complaints and resolution of disputes against member banking institutions for direct financial loss, within prescribed monetary limits, which include 250,000 ringgit in respect of disputes relating to financial services; and 25,000 ringgit for disputes on unauthorised transactions involving payment instruments, payment channels or cheques.

The FOS, which commenced operations in 2016,38 is operated from funds provided by its banking institutions’ members and will be governed by a board of directors made up of independent individuals who are not in active employment, nor have a significant interest in any banking institution.

To avoid duplicity and inconsistency, the Acts further provide that a dispute referred to the FOS may not be further referred to the Tribunal for Consumer Claims under the Consumer Protection Act 1999. However, the service does not constitute a replacement for the Malaysian courts.39

As the responsible authority under the Malaysian Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001, BNM is tasked with disseminating financial intelligence received from reporting entities to the law enforcement agencies tasked to investigate money laundering and terrorism financing activities.

BNM has continuously sought to strengthen money laundering and terrorism financing controls and practices among banking institutions. This is reflected in the increased resources allocated to, and investments in, screening and transaction monitoring systems and improved practices in the conduct of customer due diligence. Further enhancements in governance and control measures were put in place to improve processes for identifying transactions designed to evade tax and for assessing risks associated with politically exposed persons.

The SC has also been active in undertaking regulatory reform, and introduced the Lodge and Launch (LOLA) Framework for wholesale offerings of unlisted capital market products in June 2015, which constituted a major revision of its capital markets product authorisation rules.

LOLA provides an avenue for unlisted capital market products offered to sophisticated investors (comprising accredited investors, high net worth entities and high net worth individuals) to be made available to such investors once specific information has been lodged with the SC via an online submission system, which significantly reduces time to market.

The Netting of Financial Agreements Act 2015 (NFAA), which came into force in March 2015, contains provisions for the enforceability of close-out netting for financial transactions in Malaysia. Close-out netting is an important risk-management mechanism used by financial institutions and other financial market participants in financial derivative transactions and repurchase transactions. The enforceability of close-out netting provides credit risk reduction and mitigation benefits by allowing counterparties to net off credit risk exposures instead of having gross exposures, thus improving operational efficiency and reducing systemic risk of the financial system.

It is also anticipated that the NFAA will enhance the efficiency of the financial markets in Malaysia, as banking institutions would be able to deal more competitively with foreign counterparties globally, develop new hedging instruments and innovative financial products, and facilitate further development of a vibrant and competitive financial market.40

In 2016, BNM introduced the Financial Technology Regulatory Sandbox Framework (Framework) to enable the deployment and testing of innovations and advances in financial technology (FinTech) in live environments within specified parameters and time frames. The Framework sets out a conducive regulatory environment that harnesses the potential of FinTech to modernise, deepen and inject competition to the domestic financial and funding markets. Through the Framework, BNM aims to facilitate the growth and development of Malaysia’s financial sector by way of encouraging innovation in financial services and the introduction of new business models, solutions and enhancements in customer value and experience; and improvements in the efficiency and risk management of financial institutions.41

In 2017, BNM spearheaded a tri-partite effort between the Malaysian Anti-Corruption Commission and the Inland Revenue Board of Malaysia for strategic cooperation in combating financial crimes, tax evasion and corruption. This joint strategic cooperation aims to combine the powers and resources of each agency to restrain financial crimes, especially those involving corruption and tax evasion. It is hoped that this joint effort will strengthen the country’s financial system, increase national revenue, and build a nation free from corruption and abuse of power.


The primary sources of funding for banks in Malaysia are deposits (fixed, demand, savings, investment deposits, etc.), which include negotiable instruments of deposits and repurchase agreements. In addition, the money and foreign exchange markets are also integral to the funding of the banking system. These are governed by the Malaysian Code of Conduct for Principals and Brokers in the Wholesale Money and Foreign Exchange Markets issued by BNM in January 1994, which, together with guidelines on Repurchase Agreement Transactions issued by BNM in 2014, set out applicable market practices, principles and standards.

Throughout 2015, the Islamic banking sector completed an industry-wide exercise to migrate customers’ Islamic deposit accounts into Islamic deposits or investment accounts according to the requirements of the Islamic Financial Services Act 2013. Under the exercise, which was carried out over two years, customers, depending on their risk appetite, could choose to convert their deposits into investment accounts that offered different rates of return but were not principal-guaranteed. As at the end of 2016, investment intermediation activities grew significantly whereby total investment accounts managed by Islamic banks amounted to 73.7 billion ringgit, accounting for 12.2 per cent of total Islamic deposits as compared to 2015, during which such investment accounts amounted to 47.1 billion ringgit, accounting for 8.6 per cent of total Islamic deposits.42

vi control of banks and transfers of banking business

i Reporting requirements

The Acts provide that financial institutions carrying on banking business under the FSA and Islamic banking business under the IFSA must be public companies incorporated under the Companies Act 2016. Consequently, the reporting obligations for substantial shareholders under the Companies Act and the Securities Industry (Reporting of Substantial Shareholding) Regulations 1998 apply to substantial shareholders of Malaysian financial institutions. A substantial shareholder is a person who has an interest of at least 5 per cent of the interests in the voting shares of a company. Notice in writing of the acquisition of a substantial shareholding must be given to the company and the SC within three days for a company whose shares are quoted on a stock exchange, and five days for any other case, from the date a person becomes a substantial shareholder. A substantial shareholder is also required to file a notice of change in their interests or notice of cessation of a substantial shareholding within three days for a company whose shares are quoted on a stock exchange, and five days for any other case, from the date of a change or date of cessation, as the case may be. The changes made in the Companies Act 2016 regarding substantial shareholders provides for good governance practices by enhancing and refining the relevant provisions pertaining to transactions involving directors and substantial shareholders by way of rules relating to substantial property transactions and persons connected with directors or substantial shareholders; and disclosure principles to avoid conflict of interests.43

ii Share transactions

The Acts provide that all approvals are required on two levels: first, prior to commencement of negotiations, and subsequently, prior to the execution of the relevant transaction agreements. Approval is required for direct and indirect acquisitions of shares in a financial institution.

iii Acquisition

The Acts require the approval of BNM or the Minister for the acquisition of interest in shares that exceed prescribed percentages, or result in a change in control, of a financial institution. An ‘interest in shares’ is defined under Schedule 3 of the Acts, and includes both legal and beneficial interest in shares. Such an interest arises when a person enters into a contract to acquire shares or has a right to have a share transferred to them. A person is deemed to have an interest in shares where they hold shares jointly with another person. This does not apply in certain instances, such as where the interest is held by a person as security or as bare trustee.

Consequently, the Acts respectively require a person to obtain the prior approval of BNM for the following: entering into an agreement to acquire an interest in shares that would result in him or her holding an aggregate interest of 5 per cent or more of shares in a licensed person; entering into an agreement to acquire an interest in shares that would result in the acquirer holding an aggregate interest in shares of a financial institution of, or exceeding, any multiple of 5 per cent or the percentage holding triggering a mandatory offer under the Malaysian Code on Take-Overs and Mergers; and entering into any agreement that will result in him or her holding an aggregate of more than 50 per cent of the interest in shares of a financial institution.

A person’s interests are aggregated with shares held by his or her spouse, children, family corporation and persons acting in concert with him or her for the purposes of determining interests held, or to be held, by a person in a financial institution.

iv Control

The Acts respectively require a person to obtain the prior approval of the Minister if he or she takes control of a financial institution. In this case, ‘control’ means the acquirer has an interest of more than 50 per cent of the shares in a financial institution; or, unless proven otherwise, has the power to, inter alia, appoint the majority of the directors of a financial institution, or to make and implement business and administration decisions of a financial institution, or is a person in accordance with whose directions, instructions or wishes the directors or senior officers of a financial institution are accustomed or under an obligation to so act.

v Disposal

The Acts also require a person who has an aggregate interest in shares of a financial institution of more than 50 per cent, or 50 per cent or less but has control over the financial institution, to obtain the approval of the Minister before entering into an agreement that would result in that person holding less than 50 per cent interest in shares in, or ceasing to have control over, the licensed person.

vi Sharing threshold for individuals

The Acts stipulate that an individual may only own a maximum interest of 10 per cent of the shares in a financial institution. However, solely in the case of the IFSA, this threshold may be waived by BNM if it is satisfied that the aforesaid individual will not exercise control over the financial institution and has given a written undertaking not to exercise control over the financial institution. No such provision for waiver is provided for under the FSA.

vii Reconstruction, amalgamation and transfers

The Acts require the prior approval of the Minister, upon recommendation by BNM, for any agreement or arrangement for the reconstruction or amalgamation of a financial institution. The Acts also require the prior written approval of BNM for any agreement or arrangement to transfer the whole or part of the business of a financial institution. Consequently, the prior approval of the Minister or BNM (as the case may be) would have to be applied for and obtained if the acquisition of a financial institution is to take place through the acquisition of business and assets.

viii Foreign ownership of financial institutions

The current position in Malaysia remains as per a statement by the Prime Minister on 27 April 2009 and as announced by BNM in April 2009 with regard to the liberalisation of Malaysia’s financial sector as contemplated under the FSB, whereby flexibility is allowed for the following thresholds for foreign equity ownership in banking and financial institutions in Malaysia:

  • a up to 70 per cent in investment banks, insurance companies and Islamic banks, subject to domestic Islamic banks maintaining a paid-up capital of at least US$1 billion; and
  • b up to 30 per cent in conventional commercial banks.

Priority will be accorded to investors who have the capacity to contribute in areas of Malaysia’s financial sector where growth is required and in new areas of growth, as well as in areas that will reinforce Malaysia’s position as an international Islamic financial hub.


As mentioned above, 2016 was a year of unexpected developments ranging from geopolitical uncertainties and challenges arising from Brexit to the changes following the recently concluded US presidential elections. In this context, Malaysia signed the Trans-Pacific Partnership Agreement (TPPA) in February 2016 with 11 other countries: the United States, Singapore, Japan, Australia, New Zealand, Brunei, Canada, Chile, Mexico, Peru and Vietnam. The TPPA is aimed at promoting economic integration to liberalise trade and investment as well as spur economic growth and social benefits. However, the issuance of a Presidential Memorandum in January 2017 announcing the withdrawal of the United States from the TPPA effectively meant the end of the TPPA as previously negotiated. As such, Malaysia is looking forward to establishing trade partnerships with ASEAN countries with the aim of strengthening economic integration from a regional perspective.44

In line with its commitment towards further strengthening corporate governance, in August 2016, BNM issued enhanced standards to raise the corporate governance bar to strengthen the conditions for strong and effective boards, with greater emphasis on a sound risk culture and remuneration system in promoting prudent risk-taking. The key changes introduced in the standards include addressing issues arising from more complex organisational structures and business models of financial institutions that have expanded in size and across borders, which are:

  • a strengthened requirements on board composition, including a requirement for boards to have a majority of independent directors;
  • b enhanced expectations for boards and their committees, including a requirement to approve and maintain credible recovery and resolution plans under conditions of stress;
  • c an expectation for boards to set a tenure limit for independent directors that should not generally exceed nine years;
  • d requirements for financial institutions to adopt a code of ethics that promotes ethical, prudent and professional behaviour supported by a transparent whistleblowing policy;
  • e expanded requirements on remuneration arrangements that promote a sound risk culture and are aligned with prudent risk-taking; and
  • f strengthened expectations for effective group-wide governance arrangements.45

In December 2016, BNM introduced a Supplementary Notice to its existing Foreign Exchange Administration Rules (issued on 30 June 2013) to enhance the foreign exchange market through the following measures:

  • a allowing residents to freely and actively hedge their foreign currency exposure with a licensed onshore bank up to a limit of 6 million ringgit per client per bank subject to a declaration of non-participation in speculative activities;
  • b allowing residents with domestic ringgit borrowing to invest in foreign currency assets both onshore and abroad up to a limit of 50 million ringgit;
  • c allowing resident and non-resident fund managers to manage their foreign exchange exposure up to 25 per cent of their invested assets, subject to registration with BNM;
  • d allowing offshore non-resident financial institutions to participate in the Appointed Overseas Office Framework (AOO Framework);46
  • e expanding the AOO Framework to include non-resident financial institutions; and
  • f requiring exporters to convert 75 per cent of their proceeds into ringgit.

Further to the above, BNM established the Financial Markets Committee in May 2016,47 which was entrusted with formulating strategies to further develop the domestic financial market and provide an effective engagement platform to discuss potential issues and risks related to the development of the financial market. Since its inception, proactive measures have been introduced to develop the onshore foreign exchange market, mitigate speculative activities and correct imbalances that existed within the onshore foreign exchange market.

In conclusion, Malaysia has a strong financial system that is the result of many decades of good work and systematic development. The strength of BNM institutional arrangements has been tested and has always been proven in times of change and uncertainty. Although fundamental shifts in political and social dynamics have made the regulatory and policymaking environment increasingly challenging, we firmly believe that Malaysia will maintain its role at the forefront of banking and financial regulation, and continue its outstanding work towards a better future for all Malaysians.

1 Rodney Gerard D’Cruz is a partner at Adnan Sundra & Low.

2 BNM press release 23 March 2017: www.bnm.gov.my/index.php?ch=en_press&pg=en_press&ac=

3 BNM Annual Report 2016 (Executive Summary), Department of Statistics, Malaysia.

4 Ibid. (Executive Summary).

5 www.theedgemarkets.com/my/article/ram--malaysia--tops--20l6--global--sukuk--market--us299b--issuance.

6 Securities Commission Malaysia (SC) Annual Report 2016.

7 Pemandu website: etp.pemandu.gov.my. BNM website: www.bnm.gov.my/?ch=en_fsd&pg=en_fsd_intro&ac=737.

8 BNM Financial Stability and Payment Systems Report 2016

9 BNM website: www.bnm.gov.my/index.php?ch=li&cat=banking&rype=CB&fund=0&cu=0.

10 FSA, IFSA Section 12.

11 Labuan IBFC website: www.labuanibfc.com.

12 BNM Financial Stability And Payment Systems Report 2016.

13 SC website: www.sc.com.my/the-licensing--process. See also Section 58 CMSA.

14 Sections 55 FSA and 69 IFSA.

15 See Section II.i, supra.

16 SC website: www.sc.com.my.

17 Guidelines On Corporate Governance 2013.

18 BNM Liquidity Coverage Ratio framework 31 March 2015.

19 CBA Section 26 and BNM Statutory Reserve Guidelines 2016.

20 www.bnm.gov.my/index.php?ch=57&pg=137&ac=70&bb=file.

21 www.bnm.gov.my/index.php?ch=en_announcement&pg=en_announcement&ac=534&lang=en.

22 Capital Adequacy Framework (Basel II – Risk Weighted Assets).

23 BNM’s Capital Funds Guidelines and Capital Funds Guidelines 2013.

24 Implementation of Basel III (2010).

25 Basel III Observation Period Reporting (Net Stable Funding Ratio and Leverage Ratio) 2015.

26 Capital Adequacy Framework (Capital Components) 2012 and 2015.

27 BNM Financial Stability and Payment Systems Report 2016.

28 Sections 161, 179 MDICA.

29 Sections 98, 98 MDICA.

30 Sections 165, 167 FSA and Sections 177, 179.

31 Section 172 FSA.

32 Section 176 FSA.

33 Section 188 FSA.

34 Section 193 FSA.

35 Sections 204, 205, 207 IFSA.

36 Section 205, FSA. Section 216, IFSA.

37 Guidelines On International Islamic Banks 2008.

38 BNM Financial Stability and Payment Systems Report 2016.

39 Financial Services (Financial Ombudsman Scheme) Regulations 2015 & Islamic Financial Services (Financial Ombudsman Scheme) Regulations 2015.

40 Malaysia Ministry of Finance press release dated 30 March 2015:

41 www.bnm.gov.my/index.php?ch=en_press&pg=en_press&ac=4273&lang=en.

42 BNM Financial Stability And Payment System Report 2016.

43 www.ssm.com.my/sites/default/files/companies_act_2016/companies_act_2016_-_policies.pdf.

44 www.thestar.com.my/news/nation/2017/01/22/malaysias-move-if-tppa-falls-through-mustapa-we-will-

45 www.bnm.gov.my/index.php?ch=57&pg=137&ac=511&bb=file%27.

46 BNM Press Release dated 6 December 2016 www.bnm.gov.my/index.php?ch=en_press&pg=en_press&ac=4318.

47 www.bnm.gov.my/index.php?ch=en_press&pg=en_press&ac=4178&lang=en.