The Banking Regulation Review: Malaysia

Introduction

The year 2020 brought with it the deepest recession in the global economy since the Great Depression.2 It began with global nations gearing up to contain the spread of the coronavirus pandemic by principally imposing the enforcement of movement restrictions, the closing of borders and the shutdown of international travel. The unprecedented situation severely curtailed overall global economic activities and caused the world economy to experience a sharp contraction. The pandemic also triggered unprecedented global policy responses, including larger fiscal stimuli, accommodative monetary policies and quantitative easing measures.3 Being a highly open economy, Malaysia's GDP was adversely affected due to broad-based weaknesses in exports, production and domestic demand, arising from adverse external spillovers and the introduction of stringent domestic containment measures to combat covid-19. The weaker domestic economic activities also led to a deterioration in labour market conditions and income losses, thereby impacting consumer spending.4

Overall in 2020, the Malaysian economy recorded a decline in GDP of 5.6 per cent, as compared to a positive growth of 4.3 per cent in 2019, influenced by the poor performance of virtually all economic sectors.5 More optimistically, Malaysia's GDP growth in 2021 is projected to be between 6.5 per cent and 7.5 per cent, although the path of recovery will be gradual and uneven across economic sectors. Growth will be underpinned by stronger external demand and higher public and private expenditure. The rollout of the domestic covid-19 vaccination programme will also lift sentiments and support economic activities. Despite the positive outlook, downside risks to growth remain, mainly due to the unpredictable course of the pandemic globally and domestically.6 This is discussed in greater detail in Section VII.

The total size of the Malaysian capital market amounted to 3.4 trillion ringgit in 2020 compared with 3.2 trillion ringgit in 2019 and 3.1 trillion ringgit in 2018; equity market capitalisation expanded by 6.2 per cent to 1.82 trillion ringgit compared with 1.71 trillion ringgit in 2019. Overall, the bond market totalled 1.61 trillion ringgit as at 31 December 2020, which is an increase of 8 per cent from the 1.49 trillion ringgit recorded at the end of 2019. Malaysia continued to maintain its leadership in the Islamic capital market in 2020, with a market size of 2,256.36 billion ringgit as at December 2020. The Malaysian corporate bonds and sukuk markets reported a combined total issuance of 104.6 billion ringgit in 2020, which is a decrease of 21.26 per cent from the 132.8 billion ringgit in 2019.7

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.8 The BNM is currently working to develop the next blueprint for the financial sector, which it aims to publish in 2022 (Blueprint 3.0), in which it will set out the critical development and regulatory priorities for the next five years (2022–2026) and focus on enabling technology and data-driven innovation, enhancing the competitiveness of the financial sector, expanding access and responsible usage of financial solutions, and ensuring financial intermediation remains effective to support future economic needs.9

The number of licensed banking institutions in Malaysia currently stands at 56, comprising 32 domestic banking institutions and 24 foreign-owned banking institutions.10 There are also 16 Islamic banks, 11 of which are domestically owned, and 11 investment banks, all of which are domestically owned.11

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 2020
InstitutionAsset size (million ringgit)
Malayan Banking872,213*
CIMB Bank516,075*
Public Bank450,310*
RHB Bank263,038*
Maybank Islamic259,219*
Hong Leong Bank221,278
AmBank169,203
United Overseas Bank (Malaysia)*126,146*
OCBC Bank (Malaysia)*93,922*
HSBC Bank Malaysia87,082*
Data sourced from 2020 annual reports or financial statements (unless otherwise stated)

*    As at 30 September 2020

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).

i The BNM

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 (RBS) 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 1990.12

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.13

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.

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 provisions in the DFIA on corporate governance, business activities and the scope of the BNM's regulatory oversight to ensure sound financial management and an improvement in the operational efficiency and resilience of DFIs. Other amendments incorporate new provisions for the regulation of shariah governance and consumer protection, with enforcement tools to ensure compliance.

At present, there are six DFIs prescribed under the DFIA: Bank Pembangunan Malaysia Berhad, Bank Perusahaan Kecil & Sederhana Malaysia Berhad (Small Medium Enterprise Development Bank Malaysia Berhad (SME Bank)), Export-Import Bank of Malaysia Berhad, Bank Kerjasama Rakyat Malaysia Berhad, Bank Simpanan Nasional and Bank Pertanian Malaysia Berhad (Agrobank).14

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 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.15

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, 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.16 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. The key features of the framework include a capital adequacy requirement, in which the risk categories to calculate the credit and market risk components for risk-weighted assets under the Basel II capital framework have been rationalised into simpler categories. Moreover, there is also a liquidity requirement in which at least 25 per cent of the digital bank's on-balance sheet liabilities must be held in high-quality liquid assets (HQLA). Digital banks will be required to comply with all equivalent regulatory requirements applicable to incumbent banks after the foundational phase.17

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.18

The aforementioned RBS approach19 is primarily implemented by the 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. The 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, 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.20

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 201321 issued under the FSA, which should be read together with the Corporate Governance guidelines issued in August 2016 (the CG Guidelines).22 The BNM also issued Fit and Proper Criteria in June 2017 for the DFIs, as prescribed under the DFIA.

The CG Guidelines are applicable to, inter alia, banks, investment banks, Islamic banks and financial holding companies (i.e., companies approved by the BNM to hold more than 50 per cent of the shares of a licensed financial institution), and set out the minimum standards of corporate governance that the BNM expects local financial institutions to adopt, which are consistent with the long-term viability of the aforesaid institutions.

Based on the fundamental concepts of responsibility, accountability and transparency, the CG Guidelines contain provisions that set out management and audit oversight, accountability and transparency together with key responsibilities of the board of directors and senior management of financial institutions. Overall, the CG Guidelines seek to encourage a corporate culture that reinforces ethical, prudent and professional behaviour, beginning with the example to be set by the board and senior management of the core values of a financial institution. Similar guidelines have been issued that are applicable to DFIs.23

ii Management of banks

Further to the foregoing, 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.

In addition, the aim of the CG Guidelines is to ensure that risk-taking activities and business prudence are appropriately balanced so as to maximise shareholders' returns and protect the interests of all stakeholders, and they contain principles dealing with board matters, management oversight, accountability and audit and transparency.

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 such 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 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, supersedes the LCR guidelines issued on 31 March 2015 and the Liquidity Framework 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 by January 2019 and thereafter. 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, except for insurance and takaful subsidiaries.25 As at the first half of 2020, all banking institutions reported LCR levels of above the 100 per cent minimum ratio, with the banking system LCR remaining at approximately 140 per cent.26

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,27 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 2 per cent). In this case, eligible liabilities comprise ringgit-denominated deposits and non-deposit liabilities, net of interbank assets and placements with the BNM, subject to the adjustments, exclusions and deductions prescribed under the SRR rules. In the past, and in addition to the SRR, Malaysian financial institutions were required to set aside a percentage of their profits as buffers under the repealed Banking and Financial Institutions Act 1989. The BNM announced in May 2017 that these buffers were no longer needed with the phasing-in of the Basel capital conservation buffer. Instead, financial institutions must maintain a set minimum amount of capital funds at all times.28 It is now possible for the existing reserve funds to be distributed as dividends, which was not possible previously.29 On 19 March 2020, the BNM announced that the SRR ratio will be lowered by 100 basis points from 3 per cent to 2 per cent, effective from 20 March 2020.30 The BNM also updated the policy document on SRR on 15 May 2020. Since 16 May 2020, all banking institutions have been permitted to recognise holdings of Malaysian Government Securities (MGS) and Malaysian Government Investment Issuers (MGII) as part of their SRR compliance. The flexibility for banking institutions is available until 31 December 2022. Since March 2020, the reduction in the SRR ratio by 100 basis points and flexibility in recognising MGS and MGS II as part of the SRR compliance have released liquidity worth approximately 46 billion ringgit into the banking system.31

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.

The Guidelines on Capital Funds provide that the minimum capital funds that must 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.32 Under the Guidelines on Capital Funds for Islamic Banks, banking entities are required to maintain 300 million ringgit as a minimum capital fund.33

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 (revised)' and 'Basel III: International framework for liquidity risk measurement, standards and monitoring' (collectively, Basel III).

The BNM issued a circular implementing Basel III in 2010 that set out its approach to incorporating elements of each reform into Malaysia's domestic regulatory and supervisory framework, with the regulator's expectations of banking institutions in managing the transition to the new regime. The circular provides that the 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 that the BNM aims to implement Basel III reforms in Malaysia in accordance with globally agreed levels and is working on an implementation timeline for the gradual phasing-in of the reforms between 2013 and 2019.34

In addition to the foregoing, 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 on financial institutions by the BNM:

  1. minimum regulatory capital requirements imposed under the Capital Adequacy Framework (Capital Components) and the Capital Adequacy Framework for Islamic Banks (Capital Components) issued by the 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
  2. reporting requirements on financial institutions with regard to their Basel III leverage and liquidity prior to formal implementation of the new standards.35

In November 2012, the BNM issued its regulatory capital adequacy framework (Capital Adequacy Framework (Capital Components) (2012 Framework)), implementing the Basel III reforms. The capital requirements promulgated by the BNM provided that banking institutions were required to maintain the following minimum capital ratios for the calendar years stated: 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 these capital requirements would be supplemented by a leverage ratio, an LCR and a net stable funding ratio (NSFR). 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.

On 9 December 2020, the BNM issued the Capital Adequacy Framework (Capital Components), which superseded previous policy documents,36 and the Capital Adequacy Framework for Islamic Banks (Capital Components).

The implementation of Basel III standards remained a key focus of banks' regulatory and supervisory activities. The leverage ratio requirement took effect on 1 January 2018 with a minimum ratio of 3 per cent. The NSFR requires banks to maintain sufficient stable funding in relation to their asset profile and off-balance sheet obligations over a one-year horizon. While most banking institutions are expected to be well-positioned to meet the NSFR minimum requirement of 100 per cent, the BNM is conducting further work on the liquidity risk management practices of banking institutions as additional input to the finalisation of the NSFR requirements. Although progress in the implementation of NSFR remains uneven globally, the BNM remains committed to its implementation in Malaysia. In July 2019, the BNM issued the Net Stable Funding Ratio Guidelines, which came into effect on 1 July 2020.37 However, the minimum NSFR will initially be lowered to 80 per cent and banking institutions will be required to comply with the 100 per cent requirement from 30 September 2021.38

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 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 such 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. A D-SIB is required to maintain higher capital buffers to meet regulatory capital requirements that include a higher loss absorbency requirement. This serves to increase a D-SIB's capacity to absorb losses, thereby reducing its probability of distress or failure during periods of stress. In turn, 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.39

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 provisions of the 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.40

The MDICA also provides that the BNM may provide written notice to the Corporation if the 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:

  1. 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;
  2. acquire or subscribe to the shares of the financial institution;
  3. 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;
  4. 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;
  5. subject to the approval of the Minister, present a petition for the winding up of the financial institution;
  6. with the approval of the Minister, designate one of its subsidiaries as a bridge institution; or
  7. transfer such assets and liabilities of the non-viable financial institution to the bridge institution on terms as the Corporation shall determine.41

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.42

The Acts provide the BNM with further powers in the event of insolvency whereby it may:

  1. make an application to appoint a receiver and manager over the whole or part of the business, affairs or property of the financial institution;43
  2. 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;44
  3. 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;45 and
  4. recommend to the Minister, and the Minister may, upon such recommendation, authorise the BNM to file an application for the winding up of a financial institution.46

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.47

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 1956.48

Conduct of business

Under the Malaysia Deposit Insurance Corporation Act 2011, conduct of, inter alia, the following activities would require licensing under the provisions thereof:

  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 as 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 as 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.49

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.50

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 (FOS) 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 FOS commenced operations in 2016.51 Its operations are funded by its banking institutions' members and 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.52

As the responsible authority under the Malaysian Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001, the 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. In December 2019, the Anti-Money Laundering, Countering Financing of Terrorism (AML/CFT) and Targeted Financial Sanctions for Financial Institutions was revised to consolidate the four sector-specific policy documents (AML/CFT Sectors 1 to 4 policy documents) into a single policy.53 It also states the obligations of reporting institutions as well as common red flags with respect to, inter alia, the banking sector.54

The 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.

In 2018, the legal and regulatory framework continued to be strengthened to counter money laundering and terrorism financing risks, which constitutes one of the main objectives for the BNM in 2019. The Companies Act was revised to improve transparency in the ownership of legal persons registered in Malaysia. Owing to the recent proliferation of digital currencies, the BNM has also taken the steps to extend the AML/CFT obligations to digital currency exchangers by issuing the Anti-Money Laundering and Counter Financing of Terrorism Policy for Digital Currencies (Sector 6) to ensure that effective measures are in place against money laundering and terrorism financing risks associated with the use of digital currencies and to increase the transparency of digital currency activities in Malaysia.55

In 2018, Malaysia's effort to preserve the integrity of the financial system and combat money laundering and terrorism financing risks have resulted in the Financial Action Task Force (FATF) Plenary upgrading Malaysia's technical compliance ratings of its AML/CFT framework. This places Malaysia among jurisdictions that are highly rated for their technical compliance with FATF Recommendations.

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.56

In 2016, the BNM introduced the Financial Technology Regulatory Sandbox Framework (the Framework) to enable the deployment and testing of innovations and advances in 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 in the domestic financial and funding markets. Through the Framework, the BNM aims to facilitate the growth and development of Malaysia's financial sector by 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.57 The Financial Technology Enabler Group was established by the BNM in June 2016. It is responsible for formulating and enhancing regulatory policies to facilitate the adoption of technological innovations in the Malaysian financial services industry.

In 2017, the BNM spearheaded a tripartite 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.

In 2020, as a result of the outbreak of covid-19 and given the significant impediments to growth arising therefrom, the BNM imposed additional measures to assist borrowers or customers experiencing temporary financial constraints. These measures aim to ensure that the financial intermediation function of the financial sector remains intact, access to financing continues to be available, and banking institutions remain focused on supporting the economy during these exceptional circumstances. One of the measures implemented by the BNM is that banking institutions will grant an automatic moratorium on all loan or financing repayments on principal and interest (except for credit card balances) by individuals and small or medium-sized enterprises (SMEs) for a period of six months, which ended in September 2020. In November 2020, under Budget 2021, the government instructed banks to automatically approve applications to freeze loan repayments by applicants in the bottom 40 per cent income group (B40) as well as micro enterprises with debts of below 150,000 ringgit. Those in the middle 40 per cent income group (M40) seeking a reduction in monthly instalments would have to make a self-declaration with the banks.58 As announced in Budget 2021, the BNM will establish additional or enhance existing financing facilities to provide relief for, and to support the recovery of, SMEs. The funds that have been implemented include the Targeted Relief and Recovery Facility, which is a 2 billion ringgit facility available to eligible SMEs whose revenues have been affected by the movement control orders (MCOs) and those in targeted vulnerable sectors; the High Tech Facility – National Investment Aspirations programme, which is a 500 million ringgit facility available to support SMEs in high-tech sectors; and the Micro Enterprises Facility in which 410 million ringgit is available to SMEs for working capital and capital expenditure. In addition, the banking industry has agreed to provide an additional initiative called Targeted Repayment Assistance for individuals and SME borrowers. These enhancements constitute additional assistance for individuals who have lost their jobs, as well as for individuals and SMEs whose incomes have been affected by the pandemic. Borrowers can also continue to approach their banks for tailored repayment assistance based on their specific financial circumstances. Repayment assistance will be rolled out to borrowers in the B40 categories and to microenterprises for facilities with approved amounts of up to 150,000 ringgit.59

Funding

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 22 April 2020.60 The revised Repurchase Agreement Transactions policy document, issued by the BNM in 2019,61 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.62

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 IFSA. During the exercise, which was carried out over the subsequent 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. By the end of 2020, investment intermediation activities had continued to grow, whereby total investment accounts managed by Islamic banks amounted to 99 billion ringgit, compared to 2019, when investment accounts amounted to 87.1 billion ringgit.63

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.64

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 Acquisition

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.

Consequently, the Acts require a person to obtain the prior approval of the BNM for:

  1. 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;
  2. 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 2016; and
  3. 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 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

2020 was a challenging year, with covid-19 placing a substantial strain on the global economy. As the number of infections and fatalities rose, movement controls and physical distancing measures, including travel restrictions, were widely implemented, affecting consumption and investment activities. As a highly open economy, the Malaysian economy was affected by these global developments. In addition, weakness in investment activity and supply disruptions in the commodities sector also affected domestic economic activity. As a consequence, economic growth declined by 5.6 per cent in 2020. While the Malaysian economy is expected to recover as business activities progressively normalise and external demand improves, the pace and strength of the recovery remain susceptible to multiple downside risks. This includes the prospect of subsequent waves of covid-19 leading to the reimposition of containment measures. Persistent weakness in labour market conditions and a weaker-than-expected recovery in global growth are also factors that may affect the economy and financial stability.65 Even with signs of economic recovery and the global roll-out of vaccines, there remains significant uncertainty surrounding the evolution and trajectory of the pandemic.66 In 2020, the Monetary Policy Committee (MPC) of the BNM lowered the overnight policy rate (OPR) four times, by a cumulative 125 base points to 1.75 per cent, where it remained at the time of writing. The decision to lower and maintain the OPR at this rate was made to provide appropriate support to economic activities. Amid the decline in economic activity, the OPR reductions helped to ease debt servicing burdens and, thus, cash constraints for households, SMEs and corporates. The lower interest rates also reduced the cost of financing and lent support to new credit expansion and fundraising activity.67 The growth trajectory is projected to improve from the second quarter of 2021. The MPC will continue to assess the evolving conditions and their implications on the overall outlook for inflation and domestic growth.68

Covid-19

While many had initially hoped that 2020 would be a year that would continue the tentative gains of 2019, any expected stabilisation in the global economy was abruptly interrupted by the sudden outbreak of covid-19 in the first quarter of 2020, escalating quickly into a global health crisis impacting nearly every country in the world.

To fight the pandemic that had claimed some 2.7 million lives worldwide at the time of writing, global governments responded with public health policies that included social distancing, which broadly comprised travel restrictions, bans on large social gatherings, shutdowns of non-essential services, enforced business closures and, most restrictively, movement restriction and self-isolation orders. The government of Malaysia imposed domestic social distancing restrictions through the MCO dated 18 March 2020 (issued pursuant to the Malaysian Prevention of Infectious Diseases Act 1998 and the Malaysian Police Act 1967) to halt the spread of the virus and afford respite to beleaguered public healthcare providers and agencies.69

To reduce the impact of the pandemic, two pieces of legislation were 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.70 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 to 31 December 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, Section 20 of the Covid Act provides that the minimum threshold for presenting a bankruptcy petition has been increased to 100,000 ringgit from the previous threshold of 50,000 ringgit. The Covid Act also seeks to extend the limitation periods under several pieces of legislation, including the Limitation Act 1953.

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).71 This Act allowed the government's statutory debt level to be temporarily increased to 60 per cent of GDP from 55 per cent,72 and established a covid-19 fund for economic stimulus package and economic recovery plans.73 Pursuant to this Act, the government has approved an allocation ceiling of 45 billion ringgit for the covid-19 fund. The government has also proposed to increase the ceiling to 65 billion ringgit in the future.74

In January 2021, the Malaysian government issued a proclamation of emergency in accordance with Article 150(1) of the Federal Constitution to declare a state of emergency for the whole country effective from 11 January 2021 to 1 August 2021.75 In light of the increasing number of confirmed cases of covid-19, and with the country's healthcare system under significant stress, the government implemented MCO 2.0 to break the virus's chain of infection.76 The government is endeavouring to lead the country onto the economic recovery path with various stimulus packages, including those approved under Budget 2021, and these packages are expected to have spillover effects and provide an additional boost to the economy in 2021.77

Overall, Malaysia has adopted a comprehensive and complementary policy response to the crisis. This played a significant role in cushioning the economic impact of the pandemic on the domestic economy and supporting a recovery.78 The government has implemented several additional economic stimulus packages since 2020, entailing fiscal and non-fiscal measures, with a total value of 305 billion ringgit and accounting for 21 per cent of GDP in 2020. For its part, the BNM has supported the economy by implementing monetary and liquidity conditions such as the lowering of the OPR in 2020, by a total of 125 base points, and the lowering of the SRR ratio by 100 base points, with allowance provided for government securities to be recognised for SRR compliance. In addition, the BNM retains powers and oversight over monetary policy, macroprudential and microprudential policy and financial institutions, which can be deployed to preserve monetary and financial stability, and support recovery and growth.79

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.80

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 2014.81 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'.82 In 2021, the SC expanded its Green SRI Sukuk Grant Scheme and renamed it as the 'SRI Sukuk and Bond Grant Scheme',83 which is applicable to all sukuk issued under the SC's SRI Sukuk Framework or bonds issued under the ASEAN Green Bond Standards (the ASEAN GBS), ASEAN Social Bond Standards (the ASEAN SBS) and ASEAN Sustainability Bond Standards (the ASEAN SUS). The 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.84

In the Association of Southeast Asian Nations (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.85 In addition, going forward, in the Mid-Term Review of the Eleventh Malaysia Plan 2016–2020: New Priorities and Emphases, the government has emphasised its determination to support the development of green projects, green technologies and green industries through financing mechanisms such as green sukuk financing. The Green Technology Financing Scheme 3.086 will be continued with a fund size of 2 billion ringgit for two years up to 2022, which will be guaranteed by Danajamin Nasional Berhad to encourage the issuance of SRI sukuk.87 The Bond Pricing Agency Malaysia has launched the country's first environmental, social and governance bond index series, which will monitor bonds that were issued under or aligned with the SC's Sustainable and Responsible Investment (SRI) Sukuk Framework, the ASEAN GBS, SBS and SUS and the United Nation Sustainable Development Goals.88

In line with its commitment to further strengthen corporate governance, the BNM issued enhanced standards in August 2016 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, namely:

  1. strengthened requirements on board composition, including that the majority of the directors should be independent;
  2. enhanced expectations for boards and their committees, including a requirement to approve and maintain credible recovery and resolution plans under conditions of stress;
  3. an expectation for boards to set a tenure limit for independent directors that should not generally exceed nine years;
  4. requirements for financial institutions to adopt a code of ethics that promotes ethical, prudent and professional behaviour supported by a transparent whistle-blowing policy;
  5. expanded requirements on remuneration arrangements that promote a sound risk culture and are aligned with prudent risk-taking; and
  6. strengthened expectations for effective group-wide governance arrangements.89

The Securities Commission also issued the Malaysian Code on Corporate Governance (the Code) in 2017, which places more emphasis on internalisation of corporate governance culture, not just among listed companies, but also encourages non-listed entities – including state-owned enterprises, SMEs and licensed intermediaries – to embrace the Code.90

On 30 April 2020, the BNM released the new Foreign Exchange Notices, which superseded the seven existing notices on Foreign Exchange Administration Rules (issued on 30 June 2013) and revoked all supplementary notices issued between December 2016 and August 2019. The new Foreign Exchange Notices consist of seven new notices and a comprehensive interpretation notice, and set out the following:

  1. approvals of the BNM for transactions that are otherwise prohibited under Section 214(2) read together with Schedule 14 of the FSA 2013 and Section 225(2) read together with Schedule 13 of the IFSA 2013;
  2. requirements, restrictions and conditions of the approvals; and
  3. directions of the BNM.

A person shall obtain a written approval from the BNM to undertake or engage in any transaction listed in Schedule 14 of the FSA or IFSA that is not approved by the BNM under the Foreign Exchange Notices.91

The new Notices comprise an interpretation section and seven notices as follows:

  1. interpretation;
  2. Notice 1: Dealings in Currency, Gold and Other Precious Metals;
  3. Notice 2: Borrowing, Lending and Guarantee;
  4. Notice 3: Investment in Foreign Currency Asset;
  5. Notice 4: Payment and Receipt;
  6. Notice 5: Security and Financial Instrument;
  7. Notice 6: Import and Export of Currency; and
  8. Notice 7: Export of Goods.

One of the measures that the new Foreign Exchange Notices have also introduced is that no prior approval from or registration with BNM is required for a resident to obtain a financial guarantee in any amount from any non-resident guarantor, including a non-resident financial institution.92

On 18 February 2018, the BNM issued the Anti-Money Laundering and Counter Financing of Terrorism Policy for Digital Currencies (Sector 6) (Policy Document) to ensure that effective measures are in place against money laundering and terrorism financing risks associated with the use of digital currencies and to increase the transparency of digital currency activities in Malaysia.93 In 2017, the Malaysian Sessions Court heard a case related to cryptocurrency.94 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 and is currently pending appeal before the Malaysian Court of Appeal.95

The Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019,96 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.97 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.98 The Guidelines on Digital Assets were revised in October 2020 to regulate IEOs and digital asset custodians (DACs).99 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,100 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.101

In addition, in April 2019, the SC and the BNM entered into digital asset regulation coordination arrangements, which will facilitate industry innovation, fundraising activities for early stage companies and the trading of digital assets. The arrangement will also support the oversight of digital asset activities and ensure the systemic risk and financial integrity measures remain effective.102 In Labuan, the Labuan IBFC has used legacy licences such as money broking licences103 and credit token business licences104 to provide the regulatory umbrella for digital businesses such as crypto trading platforms, blockchain token and robo-advisory services and digital exchanges, as well as e-payment systems.105 In October 2020, the Currency Act 2020 came into operation; this complements the Central Bank of Malaysia Act 2009 in setting out a comprehensive regulatory and operational framework for the management of currency operations.106

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.

Footnotes

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 Economic and Monetary Review 2020 (Executive Summary): www.bnm.gov.my/o/ar2020/index.html.

3 ibid.

4 ibid.

5 Gross Domestic Product Fourth Quarter 2020, Department of Statistics Malaysia: www.dosm.gov.my/v1/index.php?r=column/pdfPrev&id=Y1MyV2tPOGNsVUtnRy9SZGdRQS84QT09.

7 Securities Commission Malaysia, Annual Report 2020: www.sc.com.my/resources/publications-and-research/sc-annual-report-2020.

9 BNM's Annual Report 2020: www.bnm.gov.my/o/ar2020/index.html.

10 List of Licensed Financial Institutions: www.bnm.gov.my/list-of-licensed-financial-institutions.

11 ibid.

12 FSA; IFSA, Section 12.

13 Labuan IBFC website: www.labuanibfc.com.

14 BNM Financial Stability and Payment Systems Report 2018: www.bnm.gov.my/-/financial-stability-and-payment-systems-report-2018.

15 SC website: www.sc.com.my/about/client-charter/business-processes/the-licensing-process. See also Section 58, Capital Markets and Services Act 2007.

16 Policy Document on Licensing Framework for Digital Banks: www.bnm.gov.my/-/policy-document-on-licensing-framework-for-digital-banks.

17 ibid.

18 Section 55, FSA; Section 69, IFSA.

19 See Section II.i.

23 Guidelines on Corporate Governance (for prescribed development financial institutions): www.bnm.gov.my/documents/20124/963937/Corproate+Governance+DFI.pdf/c35020a2-6d30-3ee1-e5cd-c0d836e68048?t=1593360462165.

26 BNM Financial Stability Review Second Half 2019: www.bnm.gov.my/o/annual-report/fsr-overview.html; BNM Financial Stability Review First Half 2020: www.bnm.gov.my/documents/20124/1395181/en_fs_01.pdf.

27 Statutory Reserve Requirement Guidelines dated 26 January 2016: https://islamicbankers.files.wordpress.com/2013/12/20160126-statutory-reserve-requirements.pdf.

28 Removal of reserve fund requirement in the policy document on Capital Funds: www.bnm.gov.my/-/removal-of-reserve-fund-requirement-in-the-policy-document-on-capital-funds.

29 'Removal of reserve fund rule mildly positive for banks': www.theedgemarkets.com/article/removal-reserve-fund-rule-mildly-positive-banks.

35 Basel III Observation Period Reporting (Capital Adequacy Ratios, Liquidity Coverage Ratio, and Leverage Ratio) 2017: www.bnm.gov.my/documents/20124/938039/Observation+Period+Reporting+%28CAR%2C+LCR%2C+LR%29+%5B08122017%5D.pdf/70e37235-3767-e88f-a9a4-14aa14779ca3?t=1592247972728.

36 Capital Adequacy Framework (Capital Components): www.bnm.gov.my/documents/20124/938039/pd_Capital+Adequacy+Framework+%28Capital+Components%29_Dec+2020_to+FSA.pdf; Capital Adequacy Framework for Islamic Banks (Capital Components): www.bnm.gov.my/documents/20124/938039/CAF+PD+IFSA+Dec_to+FSA.pdf.

40 Sections 161 and 179, MDICA.

41 Sections 98 and 99, MDICA.

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

43 Section 172, FSA.

44 Section 176, FSA.

45 Section 188, FSA.

46 Section 193, FSA.

47 Sections 204, 205 and 207, IFSA.

48 Section 205, FSA; Section 216, IFSA.

51 BNM Financial Stability and Payment Systems Report 2016: www.bnm.gov.my/documents/20124/856371/fs2016_book.pdf.

52 Financial Services (Financial Ombudsman Scheme) Regulations 2015: www.ofs.org.my/file/files/fi_reg.pdf; and Islamic Financial Services (Financial Ombudsman Scheme) Regulations 2015: www.ofs.org.my/file/files/ifi_reg.pdf.

63 BNM Financial Stability and Payment Systems Report 2018: www.bnm.gov.my/documents/20124/856365/fs2018_book.pdf.

65 BNM Financial Stability Review for First Half 2020 (Overview): www.bnm.gov.my/documents/20124/1395181/overview.pdf.

66 BNM Annual Report 2020 (Executive Summary): www.bnm.gov.my/o/ar2020/index.html.

67 ibid.

69 BNM Economic and Monetary Review 2019 (Governor's Foreword): www.bnm.gov.my/o/annual-report/html/ar-foreword.html.

71 The Temporary Measures for Government Financing (Coronavirus Disease 2019 (Covid-19)) Act 2020: www.federalgazette.agc.gov.my/outputaktap/20201026_830_BI_WJW000000%20Act%20830.pdf.

72 id., at Section 3.

73 id., at Section 4.

75 Transcript of Speech of the Special Announcement of Emergency from the Prime Minister's Office of Malaysia: www.pmo.gov.my/2021/01/teks-ucapan-pengumuman-khas-darurat/.

76 'PM: 14-day MCO in six states beginning Wednesday': www.pmo.gov.my/2021/01/pm-14-day-mco-in-six-states-beginning-wednesday/.

78 BNM Economic Monetary Review 2020 (Executive Summary): www.bnm.gov.my/o/ar2020/index.html.

79 BNM Economic and Monetary Review 2019 (Governor's Foreword): www.bnm.gov.my/o/annual-report/html/ar-foreword.html.

87 ibid.

93 BNM issues policy document for digital currencies: www.bnm.gov.my/documents/20124/65312/20180515+-+PD+Digital+currency.pdf.

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

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

99 Guidelines on Digital Assets (revised on 28 October 2020): www.sc.com.my/api/documentms/download.ashx?id=aeb10f62-944b-4d83-8aa0-4ed492dc1109.

100 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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