BankNegara Malaysia - insuranceinfo

1 bank Negara MalaysiaGENERALINFORMATIONBank NegaraMalaysiaA consumer education programme by:1 Introduction2 Formation of bank Negara MalaysiaObjectives of bank Negara Malaysia3 Monetary stability7 Financial stability10 Developmental role13 Payments system14 Other responsibilities of bank Negara Malaysia16 The organisation of bank Negara Malaysiacontents DisclaimerThis document is intended for your general informationonly. It does not contain exhaustive advice or informationrelating to the subject matter nor should it be used as a substitute for legal : 21 January 2003 The role of a central bank is entrusted with bank Negara MalaysiaIntroductionMost countries have established central banks as the monetary authority to oversee the financial system and the economy. While central banks maydiffer in terms of structure and modus operandi, they share the commonresponsibility of maintaining monetary and financial stability. For others,its responsibility extends to the development of the financial infrastructureand participating in the overall economic development of the Malaysia , the role of the central bank is entrusted with bank role and function of bank Negara Malaysia , its operations and activitiesare described in this OF bank NEGARA MALAYSIAThe Central bank of Malaya Ordinance1958 (CBO) (Central bank of Malaya untilthe formation of Malaysia in 1963) wasenacted on 23 October 1958, while theCentral bank of Malaysia was establishedon 24 January 1959.

2 At the same time, theBanking Ordinance, 1958, which providedfor the licensing and regulation of thebusiness of banking in the Federation ofMalaya also came into force. The CBO wasrevised in 1994 and is now the CentralBank of Malaysia Act 1958 (CBA).OBJECTIVES OF bank NEGARA MALAYSIAThe objectives of bank Negara Malaysia asoutlined in the CBA are: To promote monetary stability and a soundfinancial structure To act as a banker and financial adviser tothe Government To issue currency and keep reservessafeguarding the value of the currency To influence the credit situation to theadvantage of the countryOver the years, the roles and responsibilitiesof bank Negara Malaysia have evolved and expanded. Today, bank NegaraMalaysia focuses on the three pillars ofcentral banking, namely monetary stability,financial stability and the payments addition, importance is given to thedevelopmental role of bank NegaraMalaysia, in respect to economicmanagement, institutional building andthe development of the financial to the stabilityof the value of theMalaysian currency,the ringgit3 MONETARY STABILITYAs the country's monetary authority, BankNegara Malaysia is responsible to maintainmonetary stability.

3 Monetary stability refers to the stability of the value of theMalaysian currency, the ringgit. The bestway to ensure that the value of the ringgit ispreserved is by ensuring price stability, thatis, to ensure that inflation in the countryremains low and stable. By maintainingmonetary stability through appropriatechanges in monetary policy, bank NegaraMalaysia ensures that inflation is kept lowand that the purchasing power of theringgit is not is monetary stability so important? It is important because when there ismonetary instability, prices are either rising(inflation) or falling (deflation) and this canresult in distortions and undermine thelong-term economic growth prospects ofthe inflation is too high,people will beconcerned about the purchasing power oftheir money balances. This would result ina greater demand for real assets likehouses and properties, which are thoughtto be more "inflation-proof". There wouldbe less interest to invest in productivecapacity of the economy.

4 Similarly, saverswould be less inclined to hold savings inthe financial system if they expect that thevalue of their savings would be income earners will find that they areable to buy less goods and services and willexperience a reduction in their standard ofliving. High inflation would also makeexports more expensive to foreigners andthis would reduce the competitiveness ofthe exports. Persistently high inflation wouldtherefore reduce the growth potential ofthe , when the rate of inflation isnegative,prices are falling and businessesfind their profits shrinking. They mayreduce their costs by cutting expenditure4and laying off staff. Workers in turn wouldhave less money to spend and thus reducespending, resulting in a further reduction inthe demand for goods and services. Thiscreates a vicious circle of falling prices andcontracting demand resulting in a contractionin the level of overall economic there is price stability, the futurevalue of savings and the future returns oninvestments are preserved.

5 This gives saversthe incentive to save while investors havegreater confidence to undertakeproductive activities. Increased investmentleads to an increase in the productivecapacity of the economy and increasedeconomic activity leads to new job , by maintaining monetary orprice stability, it creates a conduciveenvironment that allows the economy toexpand in a sustainable manner at close toits Negara Malaysia conducts itsmonetary policy by influencing the level ofinterest ratesthat borrowers have to pay ontheir loans and that depositors earn on theirdeposits. When the economy is overheatingand the threat of inflation is high, monetarypolicy will be tightened by withdrawingfunds from the banking system and raisinginterest rates. The higher interest rates willencourage people to save more and spendless. It would also make it more expensivefor people to borrow money. This will causeconsumption and investment to slow downto a level that is more sustainable andreduce the prospect for high , when economic conditions areweak, funds will be injected into thebanking system to reduce interest lower interest rates, spending andborrowing would increase.

6 The resultingincrease in consumption and investmentwould stimulate further economic activity,leading to higher income, employment andeconomic Negara Malaysia has a number ofmonetary instruments at its disposal toinject and withdraw funds to influence the level of interest rates in the financialsystem. Examples of these instrumentswould include the purchase and sale ofWhen there ispricestabilitythe future value ofsavings and thefuture returns on investments are preserved5 bank Negara Malaysia and MalaysianGovernment papers, changes in the statutoryreserve requirements and direct lendingand borrowing in the interbank is one of the most open economiesin the world. This means that theperformance of the Malaysian economy issignificantly influenced by developmentsoutside its borders. The economicperformance of Malaysia 's trading partnerswould affect the demand for Malaysia 'sexports. By maintaining a low inflation raterelative to our trading partners, monetarypolicy contributes to making Malaysiangoods competitive Negara Malaysia also manages theforeign exchange reservesof the country to ensure that Malaysia is able to meet itsinternational obligations, therebycushioning any temporary shifts in inflowsand outflows in Malaysia 's balance ofpayments and thus promote a stable andfundamentally sound ringgit exchange exchange control policies in Malaysiaare directed at ensuring the stability of theBANK NEGARA MALAYSIAE conomic Growth/InflationBank Reserves(Liquidity)Money SupplyConsumer &Business SpendingInterest RatesExchange RateHow bank Negara Malaysia s Monetary Policy Affects the Economyand InflationMonetaryOperationsWhen bank Negara Malaysia wants to STIMULATEthe economyWhen bank Negara Malaysia wants to CONSTRAINthe economy6ringgit as well as encouragingthe use of thecountry's financial resources for productivepurposes.

7 There is generally free movementof funds into and out of the country subjectto certain prudential regulationsadministered by bank Negara Malaysiaunder the Exchange Control Act effectively manage the financial andeconomic conditions, bank NegaraMalaysia collects data and informationabout the domestic economy, the financialsystem and the international at bank Negara Malaysiaanalyse these developments to provide the assessment which becomes the basis for the policy making process. The sourcesof information are diverse and includepublications of a wide range of domesticand international agencies and regulardialogues with various groups from theprivate sector. An important source ofinformation is also from the financial able to monitor closely the activitiesof the financial institutions allow BankNegara Malaysia to monitor efficiently theimpact of its policy HighInflationVery LowEconomicGrowthExceedingPotentialShort -termInterest RatesShort-termInterest RatesLoansLoans7 FINANCIAL STABILITYF inancial stability refers to an environmentwhere institutions in a financial system arestrong and can continue to meet theircontractual obligations without interruptionor without any external assistance.

8 Marketparticipants can also confidently enter intotransactions at prices that do not changesubstantially over short periods when therehas not been any changes in is financial stability important?Financial stability creates a conduciveenvironment for businesses to undertaketheir activities and for savers and investorsto enter into short-term or long the financial sector has a central role in promoting economic growth, it isimportant that the financial system isstrong, resilient and efficient in mobilisingsavings and undertaking lending is vital that this intermediation processcontinues uninterrupted even in periodsof economic the nation's regulatory authority, one of the fundamental roles of BankNegara Malaysia is to develop a soundbanking system that responds to thechanging needs of the economy andsociety, a system that is made up ofstrong and resilient financial players andwell-functioning financial markets. In the context of preserving financialstability, bank Negara Malaysia has alsobeen entrusted to regulate and developthe insurance sector to be an effectivemobiliser of long term savings andprovide wide range of insurance productswhile protecting the interest of policyowners.

9 The overall objective of financialstability has been achieved not onlythrough the formulation of strong legal,regulatory and supervisory framework,but also through the development andstrengthening of new institutions andsystem a conduciveenvironment for businesses toundertake theiractivities and forsavers and investorsto enter intocontracts8 Developing the institutions and marketinfrastructure are part of bank Negara Malaysia sdevelopmental role bank Negara Malaysia 's regulatory andsupervisory role was extended in 1988when the insurance industry was broughtunder the supervision of bank NegaraMalaysia. Recently, this regulatoryoversight was further extended to sixdevelopment financial institutions withthe enactment of the DevelopmentFinancial Institutions Act in 2001. Inaddition, a separate legislation wasenacted to protect the financial sectorfrom being used as a conduit for moneylaundering activities. The Anti-MoneyLaundering Act (AMLA) came into force inJanuary 2002 and bank Negara Malaysiawas appointed as the competent authorityto implement the national anti-moneylaundering rules are complemented withregular examinations of financialinstitutions and their close on-site and off-site supervision of allfinancial institutions under the purview ofBank Negara Malaysia is a vital process in9 Regulatory rules have been continuouslyenhanced with the adoption ofinternational standards to instil appropriaterisk management system to enablefinancial institutions to undertake theirintermediation function effectively.

10 Theenactment of new laws such as the Bankingand Financial Institutions Act in 1989 andthe Insurance Act in 1996 has enhancedBank Negara Malaysia 's regulatory authorityover the financial system. Similarly, theenactment of the Islamic Banking Act in1983 has given bank Negara Malaysiaadditional mandate to supervise new typesof institutions, namely the Islamic banks. Inaddition, to avoid widespread failure andmaintain public confidence in the financialsystem, particularly the banking system, bank Negara Malaysia also extends thelender of last resort facility (wherebybanking institutions in need of funds couldcome to bank Negara Malaysia to sell theirsecurities) to assist banking institutions indealing with short-term liquidity problems. DEVELOPMENTAL ROLEAs a central bank in an emerging economy, bank Negara Malaysia has an importantdevelopmental role. This role ranges fromdeveloping the necessary institutions andmarket infrastructure for the developmentof a modern and strong financial system tocontributing to the strengthening of thefoundation of the economy.