The Banking Regulation Review: Malaysia


In 2021, the global economy continued its recovery from the covid-19 pandemic. In most advanced economies, growth was broad-based across manufacturing and services as containment measures were eased further amid higher vaccination rates. Many emerging market economies also experienced a softer recovery in domestic demand due to localised lockdowns. Nevertheless, trade activity remained strong among commodity exporters. The Malaysia economy was likewise on the path of recovery in 2021 under the National Recovery Plan,2 with swift progress of the National Covid-19 Immunisation Programme, which enabled economic sectors to gradually reopen in the third quarter of the year.3 In 2021, the Malaysian economy demonstrated encouraging recovery momentum with moderate growth of 3.1 per cent in GDP, as compared to a decline of 5.6 per cent in 2020, overall economic performance being driven by recovery in the manufacturing, services and mining and quarrying sectors. Overall, GDP expenditure was impelled by the components of private final consumption expenditure and government final consumption expenditure. In 2021, GDP at current prices amounted to 1.5 trillion ringgit. However, Malaysia's performance in 2021 remained below its pre-pandemic level of 2019.4 For 2022, the recovery of the domestic economy is expected to gain momentum, supported by the continued expansion in external demand, full upliftment of containment measures, reopening of international borders and further improvement in labour market conditions. In addition, the implementation of investment projects and targeted policy measures is expected to provide further support to economic activity and aggregate demand.5 Despite the positive outlook, downside risks to growth remain, mainly due to the unpredictable course of the pandemic globally and domestically. This is discussed in greater detail in Section VII.

The total size of the Malaysian capital market amounted to 3.5 trillion ringgit in 2021 compared with 3.4 trillion ringgit in 2020 and 3.2 trillion ringgit in 2019; equity market capitalisation moderated to 1.79 trillion ringgit compared with 1.82 trillion ringgit in 2020. Overall, the bond market grew to 1.7 trillion ringgit, which is an increase from the 1.6 trillion ringgit recorded in 2020, reflecting higher levels of debt fundraising. Malaysia continued to maintain its leadership in the Islamic capital market in 2021, with a market size of 2,308.54 billion ringgit as at the end of 2021. The Malaysian corporate bonds and sukuk markets reported a combined total issuance of 114.28 billion ringgit in 2021, which is an increase of 9.28 per cent from the 104.58 billion ringgit in 2021.6

Malaysia's financial services industry has traditionally been a key driver of its economic development, and is the foundation of the Financial Sector Blueprint (FSB), the 10-year master plan implemented by the Malaysian central bank, the Bank Negara Malaysia (BNM), for managing Malaysia's transition towards becoming a high-value-added, high-income economy.7 The BNM has released the new blueprint in January 2022, namely the Malaysia's Financial Sector Blueprint 2022–2026 (FSB 2022-2026) for the financial sector. The FSB 2022–2026 outlines the vision and strategies for the development of the nation's financial sector, in line with key national economic aspirations. Underpinned by three broad outcomes of finance for all, finance for transformation and finance for sustainability, the FSB 2022–2026 identifies five strategic thrusts to achieve these outcomes:

  1. fund Malaysia's economic transformation;
  2. elevate the financial well-being of households and businesses;
  3. advance digitalisation of the financial sector;
  4. position the financial system to facilitate an orderly transition to greener economy; and
  5. advance value-based finance through Islamic finance leadership.8

There will also be efforts to help accelerate the growth of fintech (financial technology), especially Islamic fintech, such as for trade-related solutions, alternative finance, social finance and sustainable finance.9

In addition, the Securities Commission (SC) launched its third Capital Market Masterplan (CMP3) (2021 to 2025)10 in September 2021, which aims to serve as a strategic framework for the growth of Malaysia's capital market over the next five years. The CMP3 is one of Malaysia's key enablers, paving the way for greater participation in the nation's growth by its population, by enabling more inclusive and accessible investment products and distribution channels.11

The number of licensed banking institutions in Malaysia currently stands at 56, comprising 32 domestic banking institutions and 24 foreign-owned banking institutions.12 There are also 16 Islamic banks, 11 of which are domestically owned, and 11 investment banks, all of which are domestically owned.13

The five main local banking groups are:

  1. Malayan Banking (Maybank);
  2. Public Bank;
  3. CIMB Bank;
  4. RHB Bank; and
  5. Maybank Islamic.

All of these (other than Maybank Islamic) have widespread branch networks, affording them access to inexpensive funding sourced from retail deposits. All (other than Maybank Islamic) have affiliated Islamic and investment-bank subsidiaries.

Top 10 banks in Malaysia by asset size (ringgit) as at the end of 2021
InstitutionAsset size (million ringgit)
Malayan Banking890,642*
CIMB Bank533,851*
Public Bank461,227*
Maybank Islamic281,553*
RHB Bank280,933*
Hong Leong Bank237,129
United Overseas Bank (Malaysia)*129,619*
OCBC Bank (Malaysia)*94,796*
HSBC Bank Malaysia87,650*
Data sourced from 2021 annual reports or financial statements (unless otherwise stated)
*As at 30 September 2021

The regulatory regime applicable to banks

In line with the FSB, the regulatory and supervisory framework of Malaysia in respect of the banking and finance sector was consolidated under the Financial Services Act 2013 (FSA) and the Islamic Financial Services Act 2013 (IFSA) (collectively, the Acts), both of which came into force on 30 June 2013, simultaneously consolidating and repealing the Banking and Financial Institutions Act 1989 (BAFIA), the Islamic Banking Act 1983, the Insurance Act 1996, the Payment Systems Act 2003 and the Exchange Control Act 1953. The Acts aim to provide a regulatory framework for both the conventional financial and shariah-compliant sectors, and endow the BNM with greater powers to counter future risks to 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 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 (the Labuan FSA) pursuant to the Labuan Financial Services Authority Act 1996 (the Labuan FSA Act). In 2008, the jurisdiction was renamed the Labuan International Business and Financial Centre (the Labuan IBFC), and an entity called Labuan IBFC Incorporated was established as the jurisdiction's marketing arm in 2008. The Labuan FSA and the Labuan IBFC work together to promote Labuan IBFC's reputation as the premier mid-shore international business and financial centre in the Asia 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).


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

The 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 the BNM to achieve its mandates effectively, and legitimises the duality of both the conventional and the Islamic financial systems in Malaysia, and in doing so establishes the legal foundation for the development of an Islamic financial system within the Malaysian financial system.

The 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 aforementioned, the BNM is responsible for advising the government on macroeconomic policies and the management of public debt. It is also the sole authority for issuing currency and managing the international currency reserves of the country. Other functions of the 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, the BNM is empowered by the Acts to regulate banking institutions, and does so by way of a risk-based supervisory approach that monitors and reviews the manner in which all financial institutions identify, control and deal with their respective business risks.

ii Securities Commission

In addition to the foregoing, financial institutions and investment banks that provide capital markets services are regulated by the Securities Commission (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, 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 are further governed by various guidelines and practice notes issued by the SC under the CMSA.

iii Companies Commission of Malaysia

Banks in Malaysia fall under the general supervision of the Companies Commission of Malaysia (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 1990.14

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 foregoing includes the licensing and regulation of licensed entities operating within the Labuan IBFC, and supervision over those entities to ensure their compliance with the 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, including the LFSSA and the LIFSSA, subject to the general directions and control of the Minister.15

v Development Financial Institutions Act 2002

The Development Financial Institutions Act 2002 (DFIA) provides for the 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 the BNM to monitor the activities and financial performance of these institutions and their main objective, which is to provide specific financial products and services to cater to their respective focus areas; and to ensure that DFIs are resilient, efficient and able to fulfil their respective mandates in a financially sustainable manner, while contributing to the overall stability of the financial system.


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 the BNM. The Minister is the authority for the issuance or revocation of licences to carry on banking business, insurance business and investment banking business, or the imposition of conditions on those licences, 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 under the IFSA.

The CMSA provides that any person wishing to carry out capital market activities (except 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 licences are new capital markets services licences, which are granted to principals, and new capital markets services representatives' 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.16

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

  1. the business of receiving deposits on current accounts, deposit accounts, savings accounts or any other accounts as may be specified by the Labuan FSA;
  2. Labuan investment banking business;
  3. Labuan financial business;
  4. Labuan Islamic banking business; and
  5. such other business as the Labuan FSA, with the approval of the Minister, may specify, in any currency (including the 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 (i.e., the carrying on of Labuan banking business in compliance with shariah principles).

Digital banking

In December 2020, the BNM issued the Licensing Framework for Digital Banks, which incorporates the simplified regulatory framework for digital banks, defined as 'banks which carry on banking business wholly or almost wholly through digital or electronic means', during the initial stage of operations, commensurate with an asset threshold of not more than 3 billion ringgit for three to five years.17 The simplifications aim to enable the innovative application of technology to uplift the financial well-being of individuals and businesses and to safeguard the integrity and stability of the financial system as well as depositors' interests. Digital banks will be required to comply with all equivalent regulatory requirements applicable to incumbent banks after the foundational phase.18 BNM is expected to announce, in April 2022, the application results of five digital bank licences among the 29 applications it has received from banks, industry conglomerates, technology firms, e-commerce operators, fintech players, cooperatives and state governments, for digital bank licences under the Financial Services Act 2013 and the Islamic Financial Services Act 2013.19

III Prudential regulation

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 for transparency on the 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 where they hold office. Further, under the Acts, the approval of the BNM is required for the appointment, election, reappointment and re-election of the chairperson, directors and chief executive officer of a financial institution.

In addition, the Acts provide that the BNM has the 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. The BNM has complete discretion in determining whether the fit and proper requirements specified have been complied with.20

To further ensure the proper division and coordination of their respective legislative responsibilities in respect of investment banks in particular, the BNM and the SC jointly issued the Guidelines of Investment Banks pursuant to Section 126 of the BAFIA (now repealed) and Section 158 of the SCA. The Guidelines specifically provide that the BNM will be responsible for the prudential regulation of investment banks to ensure safety and soundness in the interests of depositors, and that 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.21

The BNM also has stringent fit and proper tests, which are set out in further guidelines contained in the Fit and Proper Criteria of June 201322 issued under the FSA, which should be read together with the Corporate Governance guidelines issued in August 2016 (the CG Guidelines).23 The BNM also issued Fit and Proper Criteria in June 2017 for DFIs, as prescribed under the DFIA.

ii Management of banks

The CG 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 those committees. These specialised committees help to discharge the functions of the board and comprise the following, as set out in the CG Guidelines:

  1. a nominations committee responsible for the following matters concerning the board of directors, senior management and company secretaries:
    • board appointments and removals;
    • the overall composition of each group;
    • measures for evaluation of the performance and development of directors, senior managers and company secretaries; and
    • fit and proper assessments and evaluations;
  2. a remuneration committee responsible for reviewing the remuneration of directors, and actively overseeing the design and operation of remuneration systems of financial institutions;
  3. 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;
  4. an audit committee to provide independent oversight of the internal and external audit functions and internal controls, and ensuring checks and balances within the financial institution; and
  5. in the case of Islamic financial institutions, a shariah committee to provide oversight on shariah compliance.

The CG Guidelines should be read together with the Acts, the CA and other relevant regulations, guidelines and circulars relating to corporate governance that the BNM may issue from time to time.24

iii Regulatory capital and liquidity

The Acts provide that the BNM has the power to prescribe standards on prudential matters (including 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 these powers, the BNM issued the liquidity coverage ratio (LCR) framework in August 2016 as per Basel III requirements (see below), which provides that banking institutions must maintain sufficient stock of high-quality liquid assets (HQLA) to withstand an acute liquidity stress scenario for a 30-day horizon at both the entity and consolidated levels. The LCR framework, which took effect on 25 August 2016, provides that banking institutions shall hold, at all times, an adequate stock of HQLA to maintain a minimum LCR of 100 per cent by January 2019 and thereafter.

In addition to the Acts, the CBA provides that for the purpose of conducting monetary operations, the BNM may require financial institutions to deposit a reserve with it, and prescribe the principles and method for the determination of that reserve. Pursuant thereto, in January 2016, the BNM issued the Statutory Reserve Requirement Guidelines,25 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 2 per cent).

The Acts also 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, the BNM issued the Guidelines on Capital Funds and the Guidelines on Capital Funds for Islamic Banks in 2013 (updated in 2017) to ensure that financial institutions maintain a minimum amount of capital to operate and perform their functions.

On 5 February 2020, the BNM issued a policy document on the Domestic Systemically Important Banks (D-SIBs) Framework for D-SIBs, which sets out the BNM's assessment methodology to identify D-SIBs in Malaysia, and the inaugural list of D-SIBs. D-SIBs refer to banks whose distress or failure have the potential to cause considerable disruption to the domestic financial system and the wider economy. Higher capital requirements introduced for these banks will complement the regulatory framework in place to mitigate the risks posed by D-SIBs to the stability of the Malaysian financial system and the wider economy. This will contribute to a safer and more resilient Malaysian financial system. At the time of writing, the banking groups identified as D-SIBs are Public Bank Berhad, CIMB Group Holdings Berhad and Malayan Banking Berhad.26

iv Recovery and resolution

The CA was introduced in early 2017, repealing and superseding the Companies Act 1965 for the most part. As with corporations, financial institutions are subject to general legislation for corporate insolvency, now contained within Part IV of the CA. The modes of winding-up proceedings under the CA include compulsory and voluntary winding up and the appointment of receivers and managers over a corporation. The Act also contains provisions relating to corporate voluntary arrangements and judicial management in Part VIII (corporate rescue mechanisms), which came into force on 1 March 2018, together with the Companies (Corporate Rescue Mechanism) Rules 2018. 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 the Perbadanan Insurans Deposit Malaysia (PIDM) (or the Malaysia Deposit Insurance Corporation (the Corporation)) pursuant to the provisions of the MDICA. As a measure that promotes financial stability within the financial system, the PIDM ensures that depositors are insured against the loss of their deposits (subject to a threshold of 250,000 ringgit per depositor per financial institution) in the event of loss caused by the failure of a financial institution holding their deposits.

The Acts themselves provide measures for addressing the insolvency of financial institutions that distinguish between conventional and Islamic banks whereby the 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 the BNM in the event that the BNM is of the opinion that certain circumstances exist in relation to the financial institution concerned, including the following:

  1. 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;
  2. 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
  3. 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.27

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 the BNM.28

On 28 July 2021, the BNM, in collaboration with the PIDM, released a policy framework to implement recovery and resolution planning for financial institutions in Malaysia, setting out the BNM's expectations and policy requirements on the development and maintenance of recovery plans for financial institutions. Under the framework, each financial institution will be required to identify and plan for the execution of a suite of recovery options to restore its long-term viability under a range of idiosyncratic and system-wide stress events.29

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 as a 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 1956.30

Conduct of business

Under the provisions of the Malaysia Deposit Insurance Corporation Act 2011, conduct of the following activities, among others, would require licensing:

  1. 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;
  2. 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
  3. such other activities that the 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:

  1. 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 the provision of finance;
  2. international Islamic banking business, which means Islamic banking business in currencies other than the ringgit or such other business in point (c); and
  3. such other activities that the BNM, with the approval of the Minister, may prescribe.

International Islamic banks carry on Islamic banking business in currencies other than the Malaysian ringgit. The Guidelines on International Islamic Banks issued by the 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 the BNM.31

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 licence as the Labuan FSA, with the approval of the Minister, may specify. Labuan banks holding any of the aforementioned licences would only be allowed to undertake business activities in currencies other than the 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 the BNM in 2016 pursuant to the provisions of the Acts, which prohibit financial services providers from engaging in conduct deemed inherently unfair to financial consumers.

These rules reinforce existing standards of business conduct and consumer protection issued by the BNM by way of the following:

  1. ensuring consumers are not provided with misleading or deceptive information in connection with a financial service or product;
  2. preventing unreasonable business practices that intimidate or exploit financial consumers;
  3. preventing business practices that restrict the freedom of financial consumers to choose between financial services or products available to them; and
  4. preventing collusive business practices that may result in unfavourable outcomes to financial consumers.32

In addition to the foregoing, 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 as contemplated under the FSB to ensure the effective and fair handling of complaints and the 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 service, and 25,000 ringgit for disputes on unauthorised transactions involving payment instruments, payment channels or cheques.

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. The 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 the 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 the further development of a vibrant and competitive financial market.33

Moreover, one of the priorities of the BNM is to ensure that remittance systems continue to operate at high levels of safety, efficiency, reliability and integrity. In 2011, the Money Services Business Act 2011 (the Money Services Act 2011) came into force. This Act supports the development of a more dynamic, competitive and professional money services business industry, comprising the money changing, remittance and wholesale currency businesses, while strengthening safeguards against money laundering, terrorist financing and illegal activities.34 Under this Act, licensees are required to comply with legal requirements such as transparency and operations and governance arrangements to ensure the proper conduct of money services business. The Finance Ministry is reported to be in the process of fine-tuning the Money Services Act 2011 to increase monitoring of and prevent illegal remittance activities.35

In 2008, the BNM issued the Guidelines on Electronic Money (the E-Money Guidelines),36 which are currently used as the applicable guidelines for e-money business in Malaysia. The FSA has also required a person who intends to issue a designated payment instrument such as e-money to obtain approval from the BNM before it commences its operations.37 The BNM has also issued an exposure draft on the policy document on Electronic Money (e-money) that seeks to replace the current E-Money Guidelines. With a growing number of e-money transactions in Malaysia in 2021,38 it is important for the BNM to update the guidelines that detail expectations that e-money issuers need to fulfil, such as enhanced IT requirements and additional conditions such as minimum capital funds.39

The FSA also requires a person who intends to provide merchant-acquiring services to be registered with the BNM. Merchant-acquiring services enable merchants to accept payment instruments for the sale of goods and services to their customers while the acquirers provide the link between the users of payment instruments to the merchants to enable the purchase of goods or services. When users pay for the goods or services using payment instruments, acquirers ensure that funds for such payment are settled in a timely manner to the merchants. Owing to the rapid changes in the electronic payment landscape, merchant-acquiring services are now extended to the use of new payment methods such as Quick Response (QR) code and online banking. The BNM issued the Guidelines on Merchant Acquiring Services in 202140 to govern this. The Guidelines set out the BNM's expectations of effective governance and oversight, operational risk management and information technology management of registered merchant acquirers.


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. The money and foreign exchange markets are also integral to the funding of the banking system. These are governed by the Code of Conduct for Malaysia Wholesale Financial Markets, which came into effect on 31 December 2021.41 The revised Repurchase Agreement Transactions policy document, issued by the BNM in 2019,42 sets out the principles and standards to be observed by market participants in wholesale financial markets. The Code of Conduct for Malaysia Wholesale Financial Markets sets out the eligibility requirements for dealers and brokers, market conduct and internal control requirements to safeguard the professionalism and integrity of the wholesale financial markets and the role of industry associations in preserving market integrity, while the Repurchase Agreement Transactions policy document sets out the scope of the repurchase agreement that can be conducted by licensed banks and licensed investment banks to promote sound risk management practices.43

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 CA. Consequently, the reporting obligations for substantial shareholders under the CA 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 CA regarding substantial shareholders provide 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 conflicts of interest.44

ii Share transactions

The Acts provide that all approvals are required on two levels: first, prior to the 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 Acquisitions

The Acts require the approval of the 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 if he or she holds shares jointly with another person. This does not apply in certain instances, such as when the interest is held by a person as security or as bare trustee.

iv Control

The Acts 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 with 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 a 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 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 the BNM if it is satisfied that an 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 the BNM, for any agreement or arrangement for the reconstruction or amalgamation of a financial institution. The Acts also require the prior written approval of the 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 the 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 was established by a statement made by the then Prime Minister on 27 April 2009 and as announced by the BNM in April 2009 with regard to the liberalisation of the 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: 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 up to 30 per cent in conventional commercial banks.

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

The year in review

The year 2021 continued to be challenging with regard to covid-19. The global economy was on recovery path, supported by expansion in manufacturing and services activity. Amid continued strength in global demand, supply chain disruptions, higher commodity prices and labour shortages, inflation has also risen. Overall, the balance of risks to the global growth outlook remains tilted to the downside. This is mainly due to the uncertainty surrounding the emergence of variants of concern, the risk of more prolonged global supply chain disruptions, and potential risk of heightened financial market volatility amid adjustments in monetary policy in major economies. For Malaysia, performance in 2021 was still below its pre-pandemic level of 2019 influenced by all sectors except for manufacturing sector.45 Going into 2022, while Malaysia is still not yet out of the woods, the country is better prepared now for economic recovery. The BNM expects less disruption to economic activity and spending in the event of resurgences and the overall growth in 2022 is expected to expand between 5.3 per cent and 6.3 per cent.46


While many had initially hoped that 2021 would be a year of recovery, any expected stabilisation in the global economy was abruptly interrupted by covid-19, which started in 2020 and escalated quickly into a global health crisis impacting nearly every country in the world.

To fight the pandemic that had claimed some 5.6 million lives worldwide at the time of writing,47 the government of Malaysia imposed domestic social distancing restrictions through a movement control order (MCO) in March 2020 (issued pursuant to the Malaysian Prevention of Infectious Diseases Act 1998 and the Malaysian Police Act 1967) and continued to implement lockdowns in 2021 to halt the spread of the virus and afford respite to beleaguered public healthcare providers and agencies.48 The government also introduced the NRP in June 2021 as a phased strategy to transition out from the MCO, determined on three main indicators: the daily number of new cases, bed utilisation rate in intensive care units and percentage of the population that have been vaccinated.49

To pave the way forward for policy responses in facing the covid-19 pandemic, the government has introduced the Twelfth Malaysia Plan 2021–2025 (the 12 MP), with the aim of restructuring the country's economy as the basis for the population's well-being to realise its objectives of 'Prosperous, Inclusive and Sustainable Malaysia', which is in line with the Share Prosperity 2030 agenda and to put the country's economy recovery in place. The 12 MP encompasses strategies and initiatives based on three themes: resetting the economy; strengthening security, well-being and inclusivity; and advancing sustainability.50

To reduce the impact of the pandemic, two pieces of legislation have been passed by the government. On 23 October 2020, the Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (Covid-19) Act 2020 (the Covid Act) came into force.51 The Covid Act will be in force until 23 October 2022 and it constitutes part of the measures introduced by the Malaysian government for individuals and companies economically affected by covid-19. Section 7 of the Act provides some additional rights and entitlements for contracting parties that were unable to fulfil contractual obligations from 18 March 2020 due to the measures taken to control the spread of covid-19. In this scenario, the non-defaulting party will not be entitled to exercise its rights under the contract.

In addition to the Covid Act, the government has also passed the Temporary Measures for Government Financing (Coronavirus Disease 2019 (Covid-19)) Act 2020, which came into force on 26 October 2020 and will remain in operation until 31 December 2022 (except for Section 3 of the Act).52 This Act allowed the government's statutory debt level to be temporarily increased to 60 per cent of GDP from 55 per cent,53 and established a covid-19 fund for economic stimulus package and economic recovery plans.54

Overall, Malaysia has adopted a comprehensive and complementary policy response to the crisis. This has played a significant role in cushioning the economic impact of the pandemic on the domestic economy and supporting a recovery.55 The government has implemented several additional economic stimulus packages in 2020 and 2021, entailing fiscal and non-fiscal measures. More than 330 billion ringgit or 62 per cent of the 530 billion ringgit allocated by the government under eight economic stimulus and aid packages have been utilised, benefiting 20 million Malaysians and 2.4 million businesses.56

Notwithstanding the present state of affairs, the country's economy remains resilient and may rely on advantages such as diversified sources of growth, a robust external trade structure, a current account surplus, adequate levels of international reserves, a stable and dynamic financial sector and a flexible exchange rate to manage the economic impact of domestic and external developments and set the stage for the journey to economic recovery.57

Outlook and conclusions

In mid-2017, Malaysia pioneered the issuance of green sukuk. On 27 July 2017, the SC announced the debut of the world's first green sukuk under the Sustainable and Responsible Investment (SRI) Sukuk Framework launched in 2014.58 This issuance was the result of high-level collaboration between the SC, the BNM and the World Bank Group 'to develop an ecosystem to facilitate the growth of green sukuk and to introduce innovative financial instruments to accommodate global infrastructure needs and green financing'.59 In 2021, the SC expanded its Green SRI Sukuk Grant Scheme and renamed it as the SRI Sukuk and Bond Grant Scheme,60 which is applicable to all sukuk issued under the SC's SRI Sukuk Framework or bonds issued under the Association of Southeast Asian Nations (ASEAN) Green Bond Standards (the ASEAN GBS), ASEAN Social Bond Standards (the ASEAN SBS) and ASEAN Sustainability Bond Standards (the ASEAN SUS). Eligible issuers can claim the grant to offset up to 90 per cent of external review costs incurred, subject to a maximum of 300,000 ringgit per issuance.61

In the ASEAN region, Malaysia is one of the ASEAN countries that observes the ASEAN GBS, introduced by the ASEAN Capital Markets Forum in 2017, and the ASEAN SBS and ASEAN SUS, both introduced by the ASEAN Capital Markets Forum in October 2018. The region now has a complete suite of standards to accelerate the development of sustainable finance in the region.62

The BNM has also recognised that efforts on the sustainability front have gained significant traction, and is focusing on stepping up its response to and driving collective action on climate risks within the financial sector in an effort to move towards a greener financial system and build a financial sector that is resilient to climate change and one that lends support towards greening the economy. For Malaysia, the government has pledged to achieve net zero GHG (greenhouse gases) emissions by 2050. The BNM has also set up the Sustainability Unit (S) to drive the BNM's efforts to integrate the green agenda across the central bank's functions and operation.63

In 2017, the Malaysian Sessions Court heard a case related to cryptocurrency.64 The Court held that although cryptocurrency is not a legal tender in Malaysia, trading of cryptocurrency is not illegal. Further, the Court classified cryptocurrency as a commodity as fiat currency was used to purchase it. This decision was upheld by the Malaysian High Court in October 2018.65

The Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019,66 which allows the SC to regulate digital assets as prescribed securities, came into force on 15 January 2019. The offering of prescribed securities, as well as their associated activities, will require authorisation from the SC and will need to comply with the relevant securities laws and regulations.67 On 15 January 2020, the SC published its Guidelines on Digital Assets, stating that all offerings of digital tokens should be carried out through an initial exchange offering (IEO) platform operator.68 The Guidelines on Digital Assets were revised in October 2020 to regulate IEOs and digital asset custodians (DACs).69 IEO platform operators will be required to assess and conduct the necessary due diligence on issuers, review issuers' proposals and disclosures in their respective and applicable white papers,70 and assess issuers' abilities to comply with the requirements of the Guidelines and the SC's Guidelines on Prevention of Money Laundering and Terrorism Financing. The Guidelines also include rules and regulations on DACs to facilitate interested parties that wish to provide custody services for digital assets.71 The BNM has also collaborated with the Bank for International Settlements (BIS) Innovation Hub, the Reserve Bank of Australia, the Monetary Authority of Singapore and the South African Reserve Bank and developed the prototypes for a common platform that will enable international settlements using multiple central bank digital currencies (mCBSCs) and has the potential to reduce reliance on intermediaries and, correspondingly, save the costs and time taken to process cross-border transactions.72

In conclusion, Malaysia has a strong financial system that is the result of many decades of good work and systematic development. The strength of the BNM's institutional arrangements has been tested, and has always been proven in times of change and uncertainty. Although the pandemic, together with fundamental shifts in political and social dynamics, has made the regulatory and policy-making 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. The author would like to express his gratitude to Ms Wong Zhi Xin for her contribution to this chapter.

2 BNM Quarterly Bulletin: Third Quarter 202:

5 BNM Economic & Monetary Review 2021:

6 Securities Commission Malaysia, Annual Report 2021:

8 Malaysia's Financial Sector Blueprint 2022–2026:

12 List of Licensed Financial Institutions:

13 ibid.

14 Financial Services Act 2013 (FSA); Islamic Financial Services Act 2013 (IFSA), Section 12.

15 Labuan International Business and Financial Centre (IBFC) website:

16 SC website: See also Section 58, Capital Markets and Services Act 2007.

17 Policy Document on Licensing Framework for Digital Banks:

18 ibid.

20 FSA, Section 55; IFSA, Section 69.

25 Statutory Reserve Requirement Guidelines dated 26 January 2016:

27 FSA, Sections 165 and 167; IFSA, Sections 177 and 179.

28 IFSA, Sections 204, 205 and 207.

30 FSA, Section 205; IFSA, Section 216.

36 Guidelines on Electronic Money:

37 Division 1 of Part 1 of Schedule 1 of the FSA and

38 Malaysia saw 233.6 million electronic money transactions worth RM5 billion in November 2021, according to data provided by BNM. This is the highest monthly figure since 2016:

39 The Exposure Draft of Electronic Money:

46 BNM Economic and Monetary Review 2021:

48 BNM Economic and Monetary Review 2019 (Governor's Foreword):

49 Executive Summary, Twelfth Malaysia Plan 2021–2026:

52 The Temporary Measures for Government Financing (Coronavirus Disease 2019 (Covid-19)) Act 2020:

53 id., at Section 3.

54 id., at Section 4.

55 BNM Economic Monetary Review 2020 (Executive Summary):

63 The BNM Annual Report 2021:

64 Luno Pte Ltd & Anor v. Robert Ong Thien Cheng (Sessions Court Civil Suit No. BA-B52NCVC-389-12/2017) (Unreported).

65 Robert Ong Thien Cheng v. Luno Pte Ltd & Anor (Shah Alam High Court Civil Appeal No. 12BNCVC-91-10/2018).

70 Pursuant to the Guidelines on Digital Assets, 'white paper' means the documents issued by the issuer accompanying an initial exchange offering (IEO) describing, among other things, the detailed information of the issuer, the IEO and the IEO project, and includes a supplementary white paper.

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