Legislative Framework
Financial Stability

Legislative Framework

In Malaysia, the main statutes relating to banking are the Central Bank of Malaysia Act 1958 (revised in 1994) and the Banking and Financial Institutions Act 1989.

The Central Bank of Malaysia Act establishes Bank Negara Malaysia, the Malaysian central bank. The bank was established on January 26 1959 and its main objectives include:

  • issuing currency and maintaining reserves to safeguard the value of the national currency;
  • acting as banker and financial adviser to the government; and
  • promoting monetary stability and a sound domestic financial structure.

The Banking and Financial Institutions Act concerns the licensing and regulation of institutions that undertake banking, finance, merchant banking and money-broking activities in Malaysia. The act took effect on October 1 1989 and, among others things:

  • sets out the licensing regime for such institutions, as well as minimum reserve fund, capital fund and asset requirements;
  • imposes credit, finance, factoring and leasing requirements upon such institutions;
  • restricts licensed institutions from carrying out certain trading activities;
  • restricts the ownership and management of licensed institutions; and
  • supervises licensed institutions.

The following legislation enables the act to regulate effectively Malaysia's financial sector.

Exchange Control Act 1953
The Exchange Control Act restricts the following:

  • dealings in gold and foreign currencies;
  • payment to and from residents;
  • securities being issued outside Malaysia;
  • imports and exports; and
  • settlements.

However, general permissions are provided under the Exchange Control of Malaysia Notices.

Islamic Banking Act 1983
The Islamic Banking Act provides for the licensing and regulation of Islamic banking business. The act also regulates the following:

  • financial requirements and duties;
  • ownership, control and management;
  • business restrictions; and
  • powers of supervision.

Currently, only two fully fledged Islamic banks are licensed under the act.

Insurance Act 1996
The Insurance Act deals with the licensing of insurers, insurance brokers, adjusters and reinsurers. Among other things, it deals with the establishment of insurance funds and matters relating to the insurance guarantee scheme fund.

Takaful Act 1984
The Takaful Act provides for the registration and regulation of Takaful (ie, Islamic insurance) business in Malaysia. Takaful is a scheme based on brotherhood and solidarity which provides for mutual financial aid and assistance to participants.

Financial Stability

An effective regulatory framework is essential in order to ensure that financial institutions operate in a sound and prudent manner, and that the risk of institutional failures and threats to financial stability are minimized. Since the Malaysian financial crisis of 1997-1998 the banking system's regulatory and supervisory framework has been continually reviewed in order to ensure that it remains up to date in light of changes in the domestic and global economies.

For further information on this topic please contact Ahmad Lutfi Abdull Mutalip or Azlin Azhar at Azmi & Associates by telephone (+603 2145 6161) or by fax (+603 2145 7171) or by email ([email protected] or [email protected]).