Chapter02_Updated_PDF.pdf

Chapter 2
Firms and
the Financial
Market

Copyright ©2014 Pearson Education, Inc. All rights reserved. 2-2
Slide Contents
• Learning Objectives
1.The Basic Structure of the Malaysia Financial
Markets
2.The Financial Marketplace: Financial
Institutions
3.The Financial Marketplace: Securities
Markets
• Key Terms

2.1 THE BASIC STRUCTURE
OF THE MALAYSIAN
FINANCIAL MARKETS

Three Players in the Financial
Markets
Within the financial markets, there are three
principal sets of players that interact:
– Borrowers (individuals and businesses)
– Savers (mostly individuals)
– Financial Institutions (Intermediaries) (ex.
Commercial banks)

Figure 2-1 Financial Markets,
Institutions, and the Circle of Money

THE FINANCIAL MARKETPLACE:
FINANCIAL INSTITUTIONS

Financial Institutions
• Banking System
– BNM
– Banking Institution
• Commercial Banks
• Finance Companies
• Merchant Banks
• Islamic Banks
Financial
Intermediaries
Non- Financial
Intermediaries
• Provident and Pension Funds
• Insurance Companies
• Development Finance Institution

Financial Intermediaries
Financial institutions like commercial banks,
finance companies, insurance companies,
investment banks, and investment companies
are called financial intermediaries as they
help bring together those who have money
(savers) and those who need money
(borrowers).

Bank Negara Malaysia (the Central Bank
of Malaysia)
• was established on 26 January 1959, under
the Central Bank of Malaya Ordinance 1958.
• The objectives of BNM are :
– To issue currency and keep reserves to
safeguard the value of the currency;
– To act as a banker and financial adviser to the
Government
– To promote monetary stability and a sound
financial structure
– To influence the credit situation to the
advantage of Malaysia

Commercial Banks(Everyone’s Financial
Marketplace)
• the largest and most significant providers of
funds in the banking system.
• The main functions are :
– Retail banking services such as the acceptance
of deposit, granting of loans and advances, and
financial guarantees
– Trade financing facilities such as letters of credit,
discounting of trade bills, shipping guarantees,
trust receipts and Banker’s Acceptances;

Finance Companies
• Defined as a person who carries on finance
company business
• the second largest group of deposit-taking
institutions in Malaysia.
• were initially governed by BNM through the
Finance Companies Act 1969.
• This was replaced in 1989 with the Banking and
Financial Institutions Act 1989.
– The business of receiving deposits on deposit account, saving account or
other similar account;
– The lending of money
– Leasing business or the business of hire purchase; and
– Any other such business as BNM with the approval of the Minister may
prescribe

Merchant Banks (also known as Investment
Banks)
• Introduced by BNM on March 2005- to strengthen
Malaysian Fin. Sector
• Investment banks is licensed to perform
investment banking functions by Securities
Commission and BNM.
– providing credit facilities, providing consultancy and advisory services
relating to corporate and investment matters of making investments on
behalf of customers
– to complement banking system by providing avenue for individuals and
corporations to source funding for their business activities as well as
diversifying their portfolio investment.

Sources and Uses of funds
Sources of Funds Uses of Funds
1. Deposits from
customers
2. Deposits and
placement of banks
and other financial
institutions
3. Balance due to
clients and brokers
4. Borrowing
1. Loan, advances and
finance
2. Deposit placement
with financial
institution
3. Investment into
subsidiary
companies
4. Property plant and
equipment

Investment Banks in Malaysia

Islamic Banks
• In Malaysia, separate Islamic legislation
and banking regulations exist side-by-side with
those for the conventional banking system
• The banking activities of Islamic banks are based
on Syariah principles (the Islamic principles)
• Eg: Bank Islam Malaysia Berhad
: Bank Muamalat Malaysia Berhad
• Apart from Islamic banks, other financial
institutions alsooffer Islamic banking services
through the “Islamic Banking Scheme”

Non-Financial Intermediaries
Provident and Pension Funds
• designed to provide members and their
dependents with a measure of social
security in the form of retirement, medical,
death or disability benefits
• Eg: EPF,SOCSO,Armed Forces Fund

Development Financial Institutions
• Established by the Government to promote the
development of certain identified priority sectors
and sub-sectors of the economy, such as
agriculture, infrastructure development and
international trade.
• Eg:
– Bank Pertanian Malaysia
– Bank Industri & Technologi Malaysia
– Bank Pembangunan & Infrastruktur Malaysia Berhad
– EXIM Bank
– Malaysian Industrial Development Finance (MIDF)

Insurance Companies
• Currently, the total number of licensees under the
Insurance Act 1996 stands at 141, comprising 64
insurers, 36 brokers and 41 adjusters.
• Sell insurance to individuals and businesses to
protect their investments.
• They collect premium and hold the premium in
reserves until there is an insured loss and then pay
out claims to the holders of the insurance contracts

THE FINANCIAL MARKETPLACE:
SECURITIES MARKETS

Money versus Capital Market
• Money market - markets for short-term
debt instruments (such as T-bills,
Commercial paper).
• Capital market - markets for long-term
debt and equity instruments (such as
Common stock, Preferred stock, Corporate
bond).

Security
• A security is a negotiable instrument that
represents a financial claim. It can take the
form of ownership (stocks) or a debt
agreement.
• The securities market allow businesses and
individual investors to trade the securities
issued by public corporations.

Primary versus Secondary Market
• Primary market – a market in which
securities are bought and sold for the first
time. The firm selling securities receives the
money raised.
• Secondary market – a market for
subsequent trading of previously issued
securities. The issuing firm does not receive
any new money.

Figure 2.2 Security Markets Provide a Link
between the Corporation and Investors

Types of Securities
Debt Securities: Firms borrow money by
selling debt securities in the debt market.
Debt is classified based on maturity period:
Less than one year (issued in money market),
one to ten years (called Note, issued in
capital market), more than 10 years (called
bond, issued in capital market)

Types of Securities (cont.)
Equity securities represent ownership of the
corporation. There are two major types of
equity securities: common stock and
preferred stock.

Types of Securities (cont.)
• Common stock represents equity
ownership in a corporation, provides voting
rights, and entitles the holder to profits in
the form of dividends.
• Preferred stock is an equity security. It
gives preference, relative to common
stockholders, with regard to dividends and
claim on assets.

Stock Markets
A stock market is a public market in which the
stock of companies is traded. Stock markets
are classified as either organized security
exchanges or the over-the-counter (OTC)
markets.

Stock Markets (cont.)
• Organized security exchanges physically
occupy space and financial instruments are
traded on their premises. For example, the
New York Stock Exchange (NYSE) located in
New York.
• Today, the NYSE is a hybrid market,
allowing for face-to-face trading on the floor
of the stock exchange in addition to
automated electronic trading.

Securities Commission
• Officially established on 1st March 1993 under the Securities
Commission Act 1993.
• Prior to that, securities regulation in Malaysia was governed
by Companies Act 1965 & Securities Industry Act 1973.
• Significantly for investor protection
• Streamlined and cost effective regulation.
• The need for central regulatory agency.
• Before SC was established few agencies was overseeing the
securities industry such as MoF, KLSE, BNM, etc.
• The proposal came when Tun Daim Zainuddin suggests the
establishment of SC in March 1986 and supported by the IMF
in 1990.
• It was part of the Sixth Malaysian Plan (1991)
• First SC Chairman Dato’ Dr Mohd Munir Abdul Majid (1993-
1999)

Capital Market
• Marketplace for buying and selling equities and
debt based instruments.
• Retail and institutional investors (pension funds &
mutual funds) versus government, businesses,
individuals, etc.
• Capital to generate the economic output.
• Mainly for medium and long term debt or equity
like stocks and bonds.
• The more developed and bigger the economy of a
country, the more complex and bigger the size of
the capital market.
• Provide significant source of funds for domestic
economic activities and developing the economy.

Significant Move
• Capital Markets Promotion Council (CMPC) was
established in 2013 to promote the
development of securities and derivatives
markets in Malaysia.
• It was timely to lay out proper infrastructure
and legal framework for the next phase.
• 2015 Malaysia will chair the ASEAN. This has
given a new momentum for the capital market
growth.
• Open market policy and government ETP.
• No 5 fastest growing equity market in Asia.
• Foreign company can own 100% shares in
UTMC

Economic Outlook
7.40%
5.10%
5.60%
4.70%
5.70%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
2010 2011 2012 2013 2014*F
Malaysia's Economic Outlook
Malaysia's Economic Outlook

Capital Market Growth (RM Billion)
976.9
640.3
336.6
463.8
2732
1646.8
1029.9
1541.2
0
500
1000
1500
2000
2500
3000
Capital
Market
Equity
Market
Debt Market Islamic
Capital
Market
2003
2013

Islamic Capital Market (ICM)
• It all started in 1960s through Lembaga Urusan Tabung
Haji (later known as Lembaga Tabung Haji).
• Islamic Banking Act 1983 was passed with the
establishment of Bank Islam Malaysia.
• Takaful Act 1984 with the establishment of Syarikat
Takaful Malaysia in 1984.
• By end of 2014, Islamic Finance assets projected to
surpass us$ 2 trillion. (KFH Research)
• September 2014, United Kingdom first western country
to issue sukuk, followed by Hong Kong and Luxembourg
amounted US$1 billion and 200 million euro.
• As at Dec 2013, size of ICM stood at US$466 billion or
56% of market capitalization.

Regulatory Framework
• High domestic savings and establishment of private
pension funds, fast growing fund management
industry needs an efficient regulatory framework.
• According to PWC report, Asian economies are set
to grow faster than in the developed countries.
• KLRCA was established in 1978.
• CMSA 2007.
• SC has outlined
1. Fiscal incentive & tax neutrality
2. Strong corporate governance structure
3. International clearing and settlement systems
4. Diversity of financial intermediaries.
5. Adoption of global legal and regulatory best practices.

Market Movement
• Will Malaysia be fully liberalized?
• Is Malaysian attractive enough to foreign
investors?
• Is current oil prices affecting growth of
Malaysia?
• Job losses happening in oil and gas sector?
• Is GST really needed by Malaysia?

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