The Banking Regulation Review: Malaysia


The year 2019 was a challenging one for Malaysia. Economic growth remained subdued around the world, with investor confidence held back by trade tensions and other geopolitical uncertainties. Malaysia was affected by these developments, through muted demand for exports as well as greater cross-border capital flows. Domestically, subdued sentiments, weakness in investment activity and supply disruptions also affected the economy.2

The Malaysian economy grew by 3.6 per cent in the fourth quarter of 2019 (down from 4.7 per cent in 2018). Overall in 2019, Malaysia's economy registered a growth of 4.3 per cent with a value of 1.42 trillion ringgit at constant prices and 1.51 trillion ringgit at current prices.3 However, Malaysia's GDP growth in 2020 is projected to be between -2 and 0.5 per cent against a highly challenging global economic outlook, due mainly to the significant economic repercussions arising from the unprecedented coronavirus pandemic,4 discussed in greater detail in Section VII.

The ringgit saw a mixed performance in 2019. In the first quarter, the ringgit appreciated against the US dollar. The strengthening of the ringgit reflected strong risk-appetite following the US Federal Reserve's more accommodative monetary policy stance on the interest rate hike, which led to higher investor appetite for riskier assets and drove the portfolio inflows to the region. However, in the second and third quarters of 2019, the ringgit depreciated against the US dollar, due mainly to higher global risk aversion amid the escalation of trade disputes between the US and China. Despite financial market volatility, the ringgit ended the year with an appreciation against the US dollar as investor sentiments improved and some progress was made in the trade talks between the US and China.5

The total size of the Malaysian capital market amounted to 3.2 trillion ringgit in 2019 compared with 3.1 trillion ringgit in 2018 and 3.2 trillion ringgit in 2017; equity market capitalisation expanded by 0.7 per cent to 1.71 trillion ringgit compared with 1.7 trillion ringgit in 2018. Overall, the bond market totalled 1.5 trillion ringgit as at 31 December 2019, which is an increase of 7.1 per cent from the 1.4 trillion ringgit recorded at the end of 2018. Malaysia continued to maintain its position as the third-largest local currency bond market as a percentage of GDP in Asia, after Japan and South Korea, and continued to maintain its leadership in the Islamic capital market in 2019, with a market size of 2,035.58 billion ringgit as at December 2019. The Malaysian corporate bonds and sukuk markets reported a combined total issuance of 132.8 billion ringgit in 2019, an increase of 25.96 per cent from the 105.45 billion ringgit in 2018.6

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 is currently working to develop the next blueprint for the financial sector, which it aims to publish in 2021, in which it will address the future path of regulation to support the objectives of a sound, progressive and inclusive financial system going forward.8

The number of licensed banking institutions in Malaysia on the BNM website currently stands at 56, comprising 32 domestic banking institutions and 24 foreign-owned banking institutions.9 There are also 16 Islamic banks, 11 of which are domestically owned, and 11 investment banks, all of which are domestically owned.10

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 (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 2019


Asset size (million ringgit)

Malayan Banking




Public Bank


RHB Bank


Maybank Islamic


Hong Leong Bank




United Overseas Bank (Malaysia)*


OCBC Bank (Malaysia)*


HSBC Bank Malaysia


Data sourced from 2019 annual reports or financial statements (unless otherwise stated)

* As at 30 September 2019

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 recently consolidated and updated 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 (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 1990.11

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.12

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).13


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.14

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.

In March 2020, BNM issued an updated Exposure Draft on the Licensing Framework for Digital Banks that incorporates the proposed simplified regulatory framework for digital banks applicable during the foundational phase.15 The simplifications aim to reduce the regulatory burden on new entrants that have strong value propositions for the development of the Malaysian economy, while safeguarding the integrity and stability of the financial system. 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 25 per cent of the digital bank's on-balance sheet liabilities must be held in high-quality liquid assets. The digital banks will be required to comply with all equivalent regulatory requirements applicable to incumbent banks after the foundational phase.16

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.17

The aforementioned RBS approach18 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.19

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 201320 issued under the FSA, which should be read together with the Corporate Governance guidelines issued in August 2016 (the CG Guidelines).21 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.22

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.23

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 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, supersedes the LCR guidelines issued on 31 March 2015 and the Liquidity Framework and 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.24 As at the end of 2019, all banking institutions reported LCR levels of above the 100 per cent minimum ratio.25

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,26 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.27 It is now possible for the existing reserve funds to be distributed as dividends, which was not possible previously.28 On 19 March 2020, the BNM announced that the SRR ratio will be lowered by 10 basis points from 3 per cent to 2 per cent, effective from 20 March 2020. In addition, each principal dealer is able to recognise Malaysian Government Securities and Malaysian Government Investment Issues of up to 1 billion ringgit as part of the SRR compliance. This flexibility to the principal dealers is available until 31 March 2021. These combined measures will release approximately 30 billion ringgits' worth of liquidity into the banking system.29 The BNM also updated the policy document on Statutory Reserve Requirement on 27 March 2020.30

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.31 Under the Guidelines on Capital Funds for Islamic Banks, banking entities are required to maintain 300 million ringgit as a minimum capital fund.32

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 2019.33

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.34

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.

The BNM then issued its guidelines on the Capital Adequacy Framework (Capital Components) in October 2015 (2015 Framework) for banking and financial institutions, which superseded the 2012 Framework. The provisions of the 2015 Framework do not differ greatly from the 2012 Framework, but seek to enhance it so that Malaysian regulations can better conform with Basel III. The 2015 Framework provides detailed formulae for calculating the capital conservation buffers and countercyclical buffers, determined from an operational perspective, and provides that banking institutions and their holding companies are required to comply with the provisions of the 2015 Framework both at the entity and consolidated levels.35

The BNM subsequently issued its guidelines on the Capital Adequacy Framework (Capital Components) in August 2017 (2017 Framework) for banking and financial institutions. The aim of the 2017 Framework is to incorporate loss absorption mechanisms via write-off for Additional Tier 1 and Tier 2 Islamic capital instruments that are structured using equity-based shariah contracts such as wakalah, musyarakah or mudarabah.36 The BNM issued fresh guidelines on the Capital Adequacy Framework (Capital Components) in February 2018 (2018 Framework) for banking institutions, to be read together with the Capital Adequacy Framework (Basel II – Risk-Weighted Assets) Guidelines. The 2018 Framework supersedes the 2017 Framework. On 5 February 2020, the BNM issued the Capital Adequacy Framework (Capital Components) and Capital Adequacy Framework for Islamic Banks (Capital Components), which supersede the 2018 Framework.37

The implementation of Basel III standards remained a key focus of banks' regulatory and supervisory activities in 2018. 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 globally remains uneven, the Bank remains committed to its implementation in Malaysia. In July 2019, the BNM issued the Net Stable Funding Ratio Guidelines, which will come into effect on 1 July 2020.38 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 2021.39

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. As at April 2020, the banking groups identified as D-SIBs are Public Bank Berhad, CIMB Group Holdings Berhad and Malayan Banking Berhad.40

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 (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.41

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.42

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.43

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;44
  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;45
  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;46 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.47

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.48

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 1956.49

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.50

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.51

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 2016.52 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.53

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.54 It also states the obligations of reporting institutions as well as common red flags with respect to, inter alia, the banking sector.55

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.56

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.57

In 2016, the BNM introduced the Financial Technology Regulatory Sandbox Framework (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.58 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 who are 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 for a period of six months from 1 April 2020 to ease their financial burdens in this difficult period. The automatic moratorium is applicable to loans or financing that had not been in arrears for more than 90 days as at 1 April 2020 and denominated in Malaysian ringgit.59 In addition, banking institutions will also facilitate requests by corporations to defer or restructure their loan or financing repayments in a way that will enable viable corporations to preserve jobs and swiftly resume economic activities when conditions improve.60 Furthermore, some banks have announced that they are not compounding interest or profit on their conventional and Islamic financing facilities.61 The 'bold' relief measures by the BNM are aimed at protecting banks' earnings, addressing the strain on liquidity and easing the pressure on funding costs for Malaysian banks.62


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 2 May 2017.63 This Code and the Guidelines on Repurchase Agreement Transactions, issued by the BNM in 2015,64 set 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 Guidelines on Repurchase Agreement Transactions set out the scope of the repurchase agreement that can be conducted by licensed banks and licensed investment banks to promote sound risk management practices.65

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 2019, investment intermediation activities had continued to grow, whereby total investment accounts managed by Islamic banks amounted to 97.1 billion ringgit, compared to 2018, when investment accounts amounted to 91.9 billion ringgit.66

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.67

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 who 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

2019 was a challenging year, with unresolved trade tension, a slowdown in investments and trade activity, heightened financial market volatility, country-specific risks and geopolitical uncertainties. 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. Economic growth expanded by 4.3 per cent, driven by private sector spending. The services and manufacturing sectors remained as key contributors to growth. However, these sectors expanded at a more moderate pace, mainly on account of weaker external demand and a normalisation in the growth of household spending. In 2019, the Monetary Policy Committee of the BNM decided to lower the overnight policy rate (OPR) by 25 basis points. This brought the OPR to 3 per cent, where it remained for the rest of 2019. The decision to lower the OPR was made in view of providing a conducive monetary environment for a steady growth path amid price stability.68

Covid-19 outbreak

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 40,000 lives worldwide as at 31 March 2020,69 global governments responded with public health policies of 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 Movement Control Order 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.70

While critical in saving lives, controlling the spread of infection and relieving the pressure on public health and medical services, these measures have adversely impacted the supply and demand of goods and services. As a consequence, projections for Malaysia's economic growth for 2020 are hovering between -2 and 0.5 per cent, on expectations of declines in both external and domestic demand, and the country's growth outlook remains uncertain, as developments unfold in the continuing struggle against the pandemic.71

In response, on 27 March 2020, the government of Malaysia announced the PRIHATIN Rakyat Economic Stimulus Package, amounting to 250 billion ringgit, aimed at easing the economic adversities experienced by households and businesses. This package is equivalent to 17 per cent of GDP (compared with the 8 per cent of GDP (or 67 billion ringgit) package introduced during the 2008 global financial crisis).72 This stimulus package aims to support household income and safeguard job security, through cash transfers and wage subsidy schemes. For the wider business community, measures such as dedicated loan guarantee facilities, lower utility costs and income tax deferments are to help reduce expenses and compensate for diminishing cashflows and shrinking demand. For its part, the BNM has supported the economy by implementing monetary and liquidity conditions such as the lowering of the OPR in January and March 2020, by a total of 50 basis points, and the lowering of the SRR ratio by 100 basis 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.73

Nothwithstanding 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.74

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 2014.75 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'.76 In 2018, the SC continued to lead initiatives to establish Malaysia as a regional leader for sustainable and responsible investment (SRI) in 2018 by establishing a 6 million ringgit green SRI sukuk grant scheme in 2018 to incentivise issuances of green SRI sukuk by defraying up to 90 per cent of external review costs in relation to obtaining green certification.77

In the Association of Southeast Asian Nations (ASEAN) region, Malaysia is also one of the ASEAN countries that observes the ASEAN Green Bond Standards (ASEAN GBS), introduced by the ASEAN Capital Markets Forum in 2017 and the ASEAN Social Bond Standards (ASEAN SBS) and Sustainability Bond Standards (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.78 In addition, going forward, the government has emphasised in the Mid-Term Review of the Eleventh Malaysia Plan 2016–2020: New Priorities and Emphases its determination to support development of green projects, green technologies and green industries through financing mechanisms such as green sukuk financing to fund development of green projects. The Green Technology Financing Scheme 2.079 will be continued to provide financing for development of green technologies and green industries.80 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.81

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.82

The Securities Commission also issued the Malaysian Code on Corporate Governance (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, small and medium-sized enterprises and licensed intermediaries – to embrace the Code.83

In December 2016, the BNM introduced a Supplementary Notice84 to its existing Foreign Exchange Administration Rules (issued on 30 June 2013) to enhance the foreign exchange market through the following measures:

  1. allowing residents to freely and actively hedge their foreign currency exposure with a licensed onshore bank up to a limit of 6 million ringgit per client per bank, subject to a declaration of non-participation in speculative activities;
  2. allowing residents with domestic ringgit borrowing to invest in foreign currency assets both onshore and abroad up to a limit of 50 million ringgit;
  3. allowing resident and non-resident fund managers to manage their foreign exchange exposure up to 25 per cent of their invested assets, subject to registration with the BNM;
  4. allowing offshore non-resident financial institutions to participate in the Appointed Overseas Office Framework (the AOO Framework);85
  5. expanding the AOO Framework to include non-resident financial institutions; and
  6. requiring exporters to convert 75 per cent of their proceeds into ringgit.

In 2017, the BNM issued Supplementary Notice No. 2, which sets out additional hedging flexibilities to further facilitate foreign exchange risk management. For example, the hedging framework is expanded to include other major currency pairs. Again in 2017, it issued Supplementary Notice No. 3, which lays down additional hedging flexibility.86 In 2018, the BNM issued Supplementary Notice No. 4, which introduces greater flexibility in the management of export proceeds, flexible hedging of foreign currency obligations and wider access for non-residents to the onshore market financial market.87 In 2019, the BNM issued Supplementary Notice No. 6, which sets outs additional hedging flexibilities to better manage foreign exchange risk and amends the definitions of the notices on foreign exchange administration rules.88

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.89 In 2017, the Malaysian Sessions Court heard a case related to cryptocurrency.90 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 since 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.91

The Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019,92 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.93 On 15 January 2020, the SC published Guidelines on Digital Assets, stating that all offerings of digital tokens should be carried out through an initial exchange offering platform operator.94 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.95 In Labuan, the Labuan IBFC has used legacy licences such as money broking licences96 and credit token business licences97 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.98 In 2020, the BNM plans to implement the requirements of the Currency Act 2020, which will complement the Central Bank of Malaysia Act 2009 in setting out a comprehensive regulatory and operational framework for the management of currency operations.99

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 covid-19 pandemic together with fundamental shifts in political and social dynamics have made the regulatory and policymaking environment increasingly challenging, we firmly believe that Malaysia will maintain its role at the forefront of banking and financial regulation, and continue its outstanding work towards a better future for all Malaysians.


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

2 BNM's Annual Report 2018 (Executive Summary):

3 Gross Domestic Product Fourth Quarter 2019, Department of Statistics Malaysia:

4 BNM's Economic and Monetary Review 2019 (Executive Summary), p. 15:

5 ibid.

8 BNM's Annual Report 2019 (Governor's Foreword):

10 ibid.

11 FSA; IFSA, Section 12.

12 Labuan IBFC website:

13 BNM Financial Stability and Payment Systems Report 2018:

14 SC website: See also Section 58, CMSA.

15 Exposure Draft of the Licensing Framework for Digital Banks:

17 Section 55, FSA; Section 69, IFSA.

18 See Section II.i.

20 Guidelines on Fit and Proper Criteria dated 28 June 2013:

21 Guidelines on Corporate Governance:

22 Guidelines on Corporate Governance (for prescribed development financial institutions):

23 Guidelines on Corporate Governance:

24 BNM Liquidity Coverage Ratio Framework, 25 August 2016:

25 BNM Financial Stability Review Second Half 2019:

26 Statutory Reserve Requirement Guidelines dated 26 January 2016:

27 Removal of reserve fund requirement in the policy document on Capital Funds:

30 Policy document on Statutory Reserve Requirement:

31 BNM's Capital Funds Guidelines 2017:

32 BNM's Capital Funds for Islamic Banks Guidelines 2017:

33 Implementation of Basel III (2010):

34 Basel III Observation Period Reporting (Capital Adequacy Ratios, Liquidity Coverage Ratio, and Leverage Ratio) 2017:

36 Reissuance of the Capital Adequacy Framework (Capital Components) 2017:

37 Capital Adequacy Framework (Capital Components):; Capital Adequacy Framework for Islamic Banks (Capital Components):

41 Sections 161 and 179, MDICA.

42 Sections 98 and 99, MDICA.

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

44 Section 172, FSA.

45 Section 176, FSA.

46 Section 188, FSA.

47 Section 193, FSA.

48 Sections 204, 205, 207, IFSA.

49 Section 205, FSA; Section 216, IFSA.

50 Guidelines on International Islamic Banks 2008:

52 BNM Financial Stability and Payment Systems Report 2016:

53 Financial Services (Financial Ombudsman Scheme) Regulations 2015: and Islamic Financial Services (Financial Ombudsman Scheme) Regulations 2015:

56 BNM Financial Stability and Payment Systems Report 2017:

58 Financial Technology Regulatory Sandbox Framework:

60 id.

66 BNM Financial Stability and Payment Systems Report 2018:

68 BNM's Annual Report 2019, p. 8:

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

71 BNM's Economic and Monetary Review 2019 (Executive Summary), p. 15:

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

74 ibid.

80 Mid-Term Review of the Eleventh Malaysia Plan 2016-2020: New Priorities and Emphases (18 October 2018):

84 Supplementary Notice on Foreign Exchange Administration Rules – Measures to Promote The Development of Malaysian Financial Market:

85 BNM press release dated 6 December 2016:

86 Supplementary Notice (No. 2) on Foreign Exchange Administration Rules and Amendment to the Definitions of the Notices on Foreign Exchange Administration Rules – Measures to Promote Development of Malaysian Financial Market:

89 Bank Negara Malaysia issues policy document for digital currencies:

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

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

99 BNM's Annual Report 2019, p. 52:

Get unlimited access to all The Law Reviews content