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The role of Bank Negara Malaysia

In Malaysia, the role of the central bank is entrusted with Bank Negara Malaysia. Its responsibility extends to the development of the financial infrastructure and participating in the overall economic development of the nation.

Today, Bank Negara Malaysia focuses on the three pillars of central banking, namely monetary stability, financial stability and the payments system. In addition, importance is given to the developmental role of Bank Negara Malaysia, in respect to economic management, institutional building and the development of the financial system.

Generally, the roles of Bank Negara Malaysia are:

To promise monetary stability and a sound financial structure

To act banker and financial adviser to the government

To issue currency and keep reserves safeguarding the value of the currency

The influence the credit situation to the advantage of the country

Monetary Stability

Monetary stability refers to the stability of the value of the Malaysian currency, which is the Malaysian Ringgit (MYR). As the country’s monetary authority, Bank Negara Malaysia is responsible to maintain monetary stability. Therefore, the best way to ensure that the value of the ringgit is preserved is by ensuring price stability. This is crucial to ensure that inflation in the country remains low and stable. By maintaining monetary stability through appropriate changes in monetary policy, Bank Negara Malaysia ensures that inflation is kept low and that the purchasing power of the ringgit is not diminished.

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Why is monetary stability so important?

Monetary stability is important because when there is monetary instability, prices are either rising (inflation) or falling (deflation) and this can result in distortions and undermine the long-term economic growth prospects of the country. If inflation is too high, people will be concerned about the purchasing power of their money balances. This would result in greater demand for real assets like houses and properties, which are thought to be more ‘inflation-proof’. There would be interest to invest in productive capacity of the economy. Similarly, savers would be less inclined to hold savings in the financial system if they expect that the value of the savings would be diminished. Fixed income earners will find that they are able to buy less goods and services and will experiences a reduction in their standard of living. High inflation would also make exports more expensive to foreigners and this would reduce the competitiveness of the exports. Persistently high inflation would therefore reduce the growth potential of the economy.

Similarly, when the rate of inflation is negative, prices are falling and businesses find their profits shrinking. They may reduce their costs by cutting expenditure and lay off staff. Workers in turn would have less money to spend and thus reduce spending, resulting in further reduction in the demand for goods and services. This creates a vicious circle of falling prices and contracting demand resulting in a contraction in the level of overall economic activity.

When there is price stability, the future value of savings and the future returns on investments are preserved, this gives savers the incentive to save while investors have greater confidence to undertaker productive activities. Increased investment leads to an increase in the productive capacity of the economy and increased economic activity leads to new job creation. Therefore, by maintaining monetary or price stability, it creates a conducive environment that allows the economy to expand in a sustainable manner at close to its potential.

Bank Negara Malaysia conducts its monetary policy by influencing the level of interest rates

When the economy is overheating and the threat of inflation is high, Bank Negara Malaysia will increase the bank reserve such as reduce the rate for Statutory Reserve Requirement (SRR) or Statutory Liquidity Requirement (SLR). Thus, monetary policy will be tightened by withdrawing funds from the banking system and raising interest rates. The higher interest rates will encourage people to save more and spend less. It would also make it more expensive for people to borrow money. This will cause consumption and investment to slow down to a level that is more sustainable and reduce the prospect for high inflation. Conversely, when economic conditions are weak or inflation is low, Bank Negara Malaysia will increase the bank reserve. For example, Bank Negara Malaysia will increase the rate for statutory Reserved Requirement (SRR) or Statutory Liquidity Requirement (SLR). Thus, funds will be injected into the banking system to reduce interest rates. With lower interest rates, spending and borrowing would increase. The resulting increase in consumption and investment would stimulate further economic activity, leading to higher income, employment and economic growth.

Financial Stability

Financial stability is an environment whereby institutions in a financial system are strong and can continue to meet their contractual obligations without interruption or without any external assistance from other banks. Market participants can also confidently enter into transactions at prices that do not fluctuate over short periods when there have not been any changes in market fundamentals.

Authorities that contribute to financial stability are:

Why is financial stability important?

Financial stability creates a conducive environment for businesses to carry out their activities and for savers and investors to enter into short-term or long term contracts. Since the financial sector has a central role in promoting economic growth, it is important that the financial system is strong, resilient and efficient in mobilising savings and undertaking lending activities. It is vital that this intermediation process continues uninterrupted even in periods of economic difficulties.

As the nation’s regulatory authority, one of the fundamental roles of Bank

Negara Malaysia is to develop a sound banking system that responds to the changing needs of the economy and society, a system that is made up of strong and resilient financial players and well-functioning financial markets. In order to preserve financial stability, Bank Negara Malaysia has also been entrusted to regulate and develop the insurance sector to be an effective mobilise of long term savings and provide wide range of insurance products while protecting the interest of policy owners. The overall objective of financial stability has been achieved not only through the formulation of strong legal, regulatory and supervisory framework, but also through the development and strengthening of new institutions and system infrastructure.

Regulatory rules have been continuously enhanced with the adoption of international standards to instil appropriate risk management system to enable financial institutions to undertake their intermediation function effectively. The enactment of new laws such as the Banking and Financial Institutions Act in 1989 and the Insurance Act in 1996 has enhanced Bank Negara Malaysia’s regulatory authority over the financial system. Similarly, the enactment of the Islamic Banking Act in 1983 has given Bank Negara Malaysia additional mandate to supervise new types of institutions, namely the Islamic banks. In addition, to avoid widespread failure and maintain public confidence in the financial system, particularly the banking system, Bank Negara Malaysia also extends the lender of last resort facility (whereby banking institutions in need of funds could come to Bank Negara Malaysia to sell their securities) to assist banking institutions in dealing with short-term liquidity problems.

Bank Negara Malaysia’s regulatory and supervisory role was extended in 1988 when the insurance industry was brought under the supervision of Bank Negara Malaysia. Recently, this regulatory oversight was further extended to six development financial institutions with the enactment of the Development Financial Institutions Act in 2001. In addition, a separate legislation was enacted to protect the financial sector from being used as a conduit for money laundering activities. The Anti-Money Laundering Act (AMLA) came into force in January 2002 and Bank Negara Malaysia was appointed as the competent authority to implement the national anti-money laundering programme.

Regulatory rules are complemented with regular examinations of financial institutions and their close monitoring.

The on-site and off-site supervision of all financial institutions under the purview of Bank Negara Malaysia is a vital process in ensuring financial stability. Bank Negara Malaysia adopts the risk-based supervision approach, whereby financial institutions are assessed and monitored based on risk profiles and adequacy of risk management systems. Pre-emptive strategies are formulated to address any adverse trend or weakness that could threaten the stability of an individual financial institution or the financial system as a whole. The supervisory framework is continuously enhanced in line with changes in the economic environment.

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Last but not least, Bank Negara Malaysia also maintains close relationship with supervisors in other countries to ensure that developments abroad, especially in countries where Malaysia has a banking presence and countries of foreign banks in Malaysia, would not threaten the stability of the Malaysian financial system.

Developmental Role

As a central bank in an emerging economy, Bank Negara Malaysia has an important developmental role. This role ranges from developing the necessary institutions and market infrastructure for the development of a modern and strong financial system to contributing to the strengthening of the foundation of the economy. In strengthening the financial market infrastructure, Bank Negara Malaysia has built a strong payment system. These systems are regularly “upgraded” to address the impact of technology on the banking system.

Furthermore, to promote a good credit culture among banking institutions, Bank Negara Malaysia also operates the Central Credit Reference Information System. The first of its kind in this region, this system collects and disseminates credit information on all borrowers. This allows banking institutions to make informed decisions on loan applications.

Payment system

The payments system is an important part of the financial system. It provides a means of transferring funds between parties and for commercial transactions to be conducted effectively and efficiently. Bank Negara Malaysia is entrusted with the role of ensuring that the payments system of the country is stable and operates smoothly.

Why is the smooth functioning of the payments system important?

This is because, any failure of a financial institution to settle its obligations in a timely manner would result in spill over effects, resulting in other financial institutions not being able to settle their financial obligations.

Bank Negara Malaysia has the important role of ensuring the safety and efficiency of the payments system. Bank Negara Malaysia therefore:

Other responsibilities of Bank Negara Malaysia

Bank Negara Malaysia serves as the economic and financial adviser to the Government and also participates in international meetings to strengthen co-operation with other countries as well as to discuss the important issues from the perspective of emerging market economies.

Role of economic adviser

As the economic and financial adviser to the Government, Bank Negara

Malaysia analyses and assesses the developments in the international and domestic economy and highlights the areas that need to be addressed. Bank Negara Malaysia also undertakes economic intelligence and surveillance and carries out forecasts on the economic condition of the country. Based on these assessments, Bank Negara Malaysia presents policy recommendations at regular briefings to the Minister of Finance as well as at various economic policy making forums at the national level.

Role of financial adviser

Bank Negara Malaysia does not provide financing to the Government. However, as the financial adviser to the Government, Bank Negara Malaysia gives regular advice to the Government on the management of its domestic and external debts and the terms and timing of Government loan programmes. Bank Negara Malaysia also acts as the agent for the Government in negotiations and concluding of loan agreements. Bank Negara Malaysia is also responsible for trading, registering, settlement and redemption of Government securities through its computerised systems (RENTAS, FAST and BIDS).

Additional findings

Our group has found an article from The Edge. This article is about overnight policy rate (OPR) in Malaysia. This article mentioned that Bank Negara Malaysia has decided to maintain the overnight policy rate at 2.75% after its first monetary policy committee meeting. In its opinion, the existing monetary policies are consistent with the current economic growth and inflation prospect.

Overnight policy rate is an interest rate set by Bank Negara Malaysia; it is target rate for day to day liquidity operations of the central bank. Therefore, any changes in OPR rate might have impact on base lending rate, short term interest rate, fixed deposit rate, foreign exchange rate and etc. Currently the statutory reserve requirement rate is 1% in the country. Although bank Negara had decided to maintain the OPR rate but additional policy tools such as SRR and macro-prudential lending measures might be considered if there were risk of macroeconomic and financial imbalance.

According to the statement by Bank Negara Malaysia, global economy is recovering and shift in global liquidity has resulted significant flow of capital into emerging economies, in particular Asian region. This trend has brought risk to macroeconomic and financial stability. Furthermore, rise in global commodities and food prices also affected domestic food prices and overall inflation. In Malaysia, inflation rate has reached 2.2% in December 2010 after government reduced subsidies on sugar and fuels. Economist foresees that prices are expected to increase in coming months in 2011 due to rising global commodities prices. However, economist do not expect OPR rate to increase in the first half of 2011 unless inflation rate escalated rapidly.


In a nutshell, BNM is committed to develop a well-organized financial market that has efficient information and settlement system, orderly trading and a good code of conduct among the participants. Currently, new products and computerized system are gradually being introduced by BNM to add depth and efficiency in the money and foreign exchange markets.


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