statutory requirements - bnm.gov.my · other financial institutions 190 discount houses 190...

Statutory Requirements

In accordance with section 48 of the Central Bank of Malaysia Act 1958, Bank Negara Malaysia herebypublishes and has transmitted to the Minister of Finance a copy of this Annual Report together with acopy of its Annual Accounts for the year ended 31 December 2005, which have been examined andcertified by the Auditor-General. The Annual Accounts will also be published in the Gazette.

Zeti Akhtar AzizChairman

Board of Directors22 March 2006

Statutory Requirements 3/18/06, 10:37 AM1

Board of Directors

Dr. Zeti Akhtar AzizD.K. (Johor), P.S.M., S.S.A.P., D.P.M.J.Governor and Chairman

Dato’ Ooi Sang KuangD.M.P.N.Deputy Governor

Datuk Zamani bin Abdul GhaniD.M.S.M., D.S.M., K.M.N.Deputy Governor

Dato’ Sri Izzuddin bin DaliS.S.A.P., D.S.P.N., K.M.N.

Datuk Oh Siew NamP.J.N.

Tan Sri Datuk Amar Haji Bujang bin Mohd. NorP.S.M., D.A., P.N.B.S., J.S.M., J.B.S., A.M.N., P.B.J., P.P.D.(Emas)

Tan Sri Dato’ Seri Dr. Mohd. Noordin bin Md. Sopiee (deceased)P.S.M., D.G.P.N., D.I.M.P., D.M.S.M.

Dato’ N. SadasivanD.P.M.P., J.S.M., K.M.N.

Tan Sri Dato Sri Mohd Hassan MaricanP.S.M., S.P.M.T., D.S.M.T., P.N.B.S., A.M.K.

Datuk Oh Siew Nam, Tan Sri Datuk Amar Haji Bujang bin Mohd. Nor, the late Tan Sri Dato’ Seri Dr. Mohd. Noordinbin Md. Sopiee and Dato’ N. Sadasivan were reappointed as members of the Board effective 1 March 2005.

The late Tan Sri Dato’ Seri Dr. Mohd. Noordin bin Md. Sopiee passed away on 29 December 2005.

Board of Director 3/18/06, 10:36 AM1

Governor Dr. Zeti Akhtar Aziz

Deputy Governor Dato’ Ooi Sang KuangDeputy Governor Datuk Zamani bin Abdul Ghani

Assistant Governor Dato’ Mohamad Daud bin Hj. Dol MoinAssistant Governor Dato’ Mohd Razif bin Abd. KadirAssistant Governor Muhammad bin IbrahimAssistant Governor Nor Shamsiah binti Mohd Yunus

Secretary to the Board Dato’ Mohd Nor bin MashorAdvisor (Special Projects) Dr. Aini binti Ibrahim

DirectorGovernor’s Office Ng Chow SoonCorporate Communications Abu Hassan Alshari bin YahayaInternal Audit Hor Weng KengLegal Gopala Krishnan SundaramSpecial Investigation Kamari Zaman bin JuhariFinancial Intelligence Koid Swee Lian

EconomicsMonetary Assessment and Strategy Dr. Sukhdave SinghEconomics V. VijayaledchumyInternational Ismail bin AlowiFinance Abdul Aziz bin Abdul Manaf

RegulationBank Regulation Dato’ Mohd Razif bin Abd. KadirInsurance Regulation Donald Joshua JaganathanIslamic Banking and Takaful Bakarudin bin IshakDevelopment Finance and Enterprise Marzunisham bin OmarRisk Management Santhini a/p Chandrapal

SupervisionBanking Supervision I Che Zakiah binti Che DinBanking Supervision II Chung Chee LeongInsurance Supervision Mahdi bin Mohd. AriffinInformation Systems Supervision Ramli bin SaadPayment Systems Ahmad Hizzad bin Baharuddin

Investment and OperationsInvestment Operations and Financial Market Norzila binti Abdul AzizForeign Exchange Administration Wan Hanisah binti Wan IbrahimStatistical Services Chan Yan Kit

Organisational DevelopmentIT Services Hong Yang SingHuman Resource Management Mior Mohd Zain bin Mior Mohd TahirHuman Resource Development Centre Lim Lai HongStrategic Management Lim Foo ThaiCorporate Services Dato’ Mohd Nor bin MashorSecurity Ahmad bin MansurProperty and Services Zulkifli bin Abd RahmanCurrency Management and Operation Tengku Zaib bin Raja Ahmad

Chief RepresentativeLondon Representative Office Lillian Leong Bee LianNew York Representative Office Mahendran a/l Kanagaratnam

Branch ManagerPulau Pinang Raman a/l KrishnanJohor Bahru Abdul Aziz bin AhmadKota Kinabalu Mohd Ramzi bin Mohd SharifKuching Ishak bin MusaKuala Terengganu Mokhtar bin Mohd NohShah Alam Mohd. Khir bin Hashim

Senior Officer List 3/18/06, 10:37 AM1

Contents

Governor’s Statement

The Malaysian Economy in 20052 Overview6 White Box: Potential Output of the Malaysian Economy9 White Box: Development of Small and Medium Enterprises

16 Sectoral Review33 Domestic Demand Conditions38 Prices and Employment46 External Sector60 White Box: Compilation of Malaysia’s External Debt: Treatment of Offshore

Financial Entities in Labuan IOFC as Residents65 Flow of Funds

Monetary and Fiscal Developments68 Monetary Policy in 200569 Monetary Developments in 200574 Exchange Rate Developments76 Fiscal Policy and Operations

Outlook and Policy86 The International Economic Environment92 Malaysian Economy in 200698 Monetary Policy in 200699 Fiscal Policy in 2006

100 White Box: Key Measures Announced in the 2006 Budget101 Financial Sector Policy in 2006

The Financial System108 Sources and Uses of Funds of the Financial System112 Progress of Financial Sector Masterplan Implementation

The Banking System116 Management of the Banking System123 White Box: Data and Systems Challenges in the Implementation of Basel II126 White Box: The Deposit Insurance System in Malaysia129 White Box: Establishment of the Credit Counselling and Debt Management Agency133 White Box: Banking Measures Introduced in 2005136 Performance of the Banking System149 White Box: Malaysia’s Anti-Money Laundering and Counter Financing of

Terrorism (AML/CFT) Programme

The Islamic Financial System156 Management of the Islamic Banking System159 White Box: Maximising the Potential of Islamic Banking Business163 White Box: The International Centre for Education in Islamic Finance165 Performance of the Islamic Banking System170 Islamic Interbank Market

Development Financial Institutions174 Overview174 Policies and Developments177 Performance of Development Financial Institutions

TOC 3/18/06, 10:37 AM4

Other Financial Institutions190 Discount Houses190 Provident and Pension Funds191 Venture Capital193 Unit Trust Industry

Financial Markets198 Overview199 Money Market201 Foreign Exchange Market202 Equity Market205 White Box: Key Capital Market Measures in 2005208 Bond Market212 Exchange-traded Derivatives Market

The Payment and Settlement Systems216 Management of the Payment System217 Reducing Risks in the Payment System217 Managing Payment System Stability and Confidence218 Enhancing Competition and Increasing Payment Efficiency220 Migration to Electronic Payments221 Moving Forward223 Performance of the Payment Systems

External Relations230 Economic Surveillance230 Multilateral Relations231 Financial Services Negotiations233 Islamic Banking233 Combating Money Laundering and Terrorism Financing235 Economic and Financial Co-operation238 White Box: Key International Events Hosted by Bank Negara Malaysia in 2005

Organisation and Human Resource242 Organisational Development247 Risk Management in Bank Negara Malaysia249 Organisation Structure

Annual Accounts255 Balance Sheet as at 31 December 2005

263 Annex

TOC 3/18/06, 10:37 AM5

Economic expansion strengthened in 2005, driven by strong domestic demand and reinforced by theimprovement in external demand. For the third successive year, the private sector has continued to bethe main driver of growth. The improved growth performance in the second half of 2005 is expectedto be sustained in 2006 as the external environment continues to improve and as domestic demandremains robust. The growth for 2006 is expected to be supported by a more broad-based expansionin all sectors of the economy. This will strengthen further the structure of the economy and itspotential for sustained growth over the medium term.

A distinctive and important feature of the Malaysian economy is its high degree of flexibility. Malaysia’scompetitiveness has been derived from this high degree of flexibility. This economic flexibility has beenimportant in mitigating the impact of external shocks and in sustaining Malaysia’s growth performancefor more than three decades. Going forward, the medium-term growth prospects for the domesticeconomy will thus hinge on measures to further strengthen this economic flexibility in this morechallenging and competitive global economy. Therefore, the renewed emphasis on investments inhuman capital will be vital in enabling the work force to adjust and support Malaysia’s transition towardhigher value added activities and to new growth industries. This is vital to meet the increased demandfor adequately qualified and highly skilled personnel. This will reinforce the ongoing efforts to identifynew sources of growth to diversify the economic base and to enhance competitiveness of the economy.While the public sector is committed to providing the enabling environment for enhancing the flexibilityof the economy, the private sector also has an important role in adjusting to the changes that areoccurring in both the international and domestic fronts and in capturing the new opportunities that areemerging in this more dynamic environment.

A major challenge confronting the world economy in 2005 has been the sustained high energyprices during the year. While high and volatile energy prices continue to remain a risk, the worldeconomy has, however, been better positioned to manage its economic consequences. Improvedenergy efficiency and the globalisation of production have contained its impact on the globaleconomy. The pressure on prices has also been modest. For several economies, however, thesetrends have prompted increases in interest rates, particularly in countries where interest rates havebeen at exceptionally low levels. In Malaysia, notwithstanding the increase in prices in response tothe rise in energy prices, the rate of inflation has remained within a manageable range. The growthin labour productivity and capacity expansion combined with increased competition havemoderated the price increases. In 2006, the rate of inflation is expected to rise further before itmoderates during the latter part of the year. The macroeconomic conditions, therefore, continue toremain favourable, providing a positive and stable environment conducive for the economy.

Macroeconomic policies will continue to remain supportive of the economy while financial conditionsare expected to remain favourable. Policy initiatives will continue to focus on promoting high qualitygrowth in an environment of macroeconomic stability. The Federal Government’s overall financialposition is expected to strengthen in 2006 as economic growth gains momentum. The Governmentwill also continue its policy of fiscal sustainability with the financing from non-inflationary sources.Later this month, the Government will launch the Ninth Malaysia Plan, which will outline thestrategies for strengthening the growth potential of the economy and enhancing national resilienceover the Plan period, 2006-2010.

Governor’s Statement

Governor Statement 3/18/06, 10:36 AM1

In 2005, monetary policy has continued to remain accommodative. As the risk of slower growthdiminished in the second half of the year, the policy rate, which had remained at historical lows sincethe 1998 currency crisis, was raised twice, on 30 November 2005 and on 22 February 2006. Theincrease aimed to align the monetary conditions to the current economic environment. Goingforward, monetary policy will respond appropriately to ensure sustainable growth in an environmentof price stability. With interest rates still below neutral levels, monetary policy continues to remainsupportive of the economy. The macroeconomic conditions are also supported by stable conditions inthe assets markets. Malaysia’s long record of strong growth performance in an environment of lowinflation over several decades has provided a basis for anchoring inflationary expectations. In addition,the increased level of Central Bank communications on inflation and on the monetary policy processaims to promote a greater understanding on the conduct of monetary policy and to provide a furtherbasis for anchoring expectations and thereby contributing towards achieving price stability.

Significant progress has been made in strengthening the role of the banking system and the capitalmarket to intermediate funds, thereby enhancing their ability to support and facilitate the economicgrowth process. Indicators show increased financial strength and further gains in operationalefficiency essentially reflect the payoffs from the earlier restructuring, consolidation andrationalisation. Portfolio quality has also improved with the non-performing loans ratio continuing itsdownward trend. The successful winding up of Pengurusan Danaharta Nasional Berhad in December2005 marked the completion of the final chapter in the financial sector restructuring exerciseundertaken to address the vulnerabilities that surfaced during the Asian currency crisis. As part of thisrestructuring process, there was also further strengthening in risk management and governance in thefinancial institutions during the year. This has also been reinforced by the introduction of a moredynamic prudential regulatory framework, supervisory oversight and surveillance.

To further diversify sources of financing in the economy, several initiatives were also taken to enhancefurther the role of the bond market in the financial system, in particular the private debt securitiesmarket. These included measures to enhance the liquidity of the market and to promote a moreeffective price discovery process and thereby enhance the efficiency of the market. The private debtsecurities market now accounts for 52% of GDP exceeding the significance of the government debtmarket, as it becomes an increasingly more important source of financing for the corporate sector.

With the strengthening of the economic and financial resilience, the opportunity was taken to furtherderegulate and liberalise the domestic environment to promote greater flexibility and efficiency in theeconomy. A major policy initiative in this direction was the shift in the exchange rate regime to amanaged float in July 2005. The adoption of the new regime was to better position Malaysia torespond to the structural changes taking place in the regional and international environment. In thecontext of this shift, there was no change in the monetary policy framework and the conduct ofmonetary policy. Under the new regime, the exchange rate will reflect Malaysia’s economicfundamentals and developments in the exchange rates of the currencies of Malaysia’s tradingpartners. The regime also accords greater leverage for Malaysia to respond to external shocks. Inoperating under this regime the Central Bank does not target any particular level of the exchangerate, and intervenes only to smoothen exchange rate volatility, in particular, when large short-termcapital flows create excessive movements in the exchange rate. While the developments in the


exchange rate are an important consideration in the setting of monetary policy, it is important toemphasise that the Central Bank does not use the exchange rate as an instrument to achievemonetary policy objectives. The orderly transition to the new regime has been positive for theeconomy.

The financial sector continued to be progressively transformed during the year following therationalisation among existing institutions, the introduction of new institutions and the strengtheningof the international dimension in the financial system. The rationalisation efforts through the phasingout of traditional players such as finance companies and discount houses have resulted in theemergence of new specialised institutions. The consolidation of the retail banking business into asingle entity with the merger of finance companies and commercial banks is now complete. Themerger of merchant banks, stockbroking companies and discount houses currently being undertakenwill see the emergence of investment banking in the financial landscape. These rationalisations aim toincrease the capacity of the financial system to meet more effectively and efficiently the new changingand differentiated requirements of the economy. The consumer protection framework was alsostrengthened with the establishment of the deposit insurance corporation, which is now fullyoperational.

There has also been greater regional and international integration of the financial system. Newlicences have been issued to foreign Islamic financial institutions of which one institution has alreadycommenced operations. In addition, the potential for foreign participation in the investment banksand in the Islamic subsidiaries have been raised to 49%. A number of domestic players have alsoincreased their presence in foreign markets. To-date, our banking sector has representations in twentycountries. As part of the process of facilitating increased international integration, the liberalisation ofthe foreign exchange administration rules in April 2005 has allowed for greater flexibility andefficiency in foreign exchange transactions, as well as higher foreign participation in the issue ofringgit-denominated papers in the domestic bond market. This has contributed to further enhancingour economic and financial inter-linkages with other parts of the world.

During the year, aggregate spending by the household sector has continued to be robust. While thishas been supported by increases in income, the banking sector has also provided increased financingto the sector. In order to sustain the contribution to growth by the household sector, new institutionalarrangements have been put in place to ensure that the expansion is commensurate with the capacityof the sector to absorb the higher level of indebtedness. As part of these efforts, a Credit Counsellingand Debt Management Agency is being established as a pre-emptive measure to address issuesrelating to household financial commitments, to essentially provide financial counselling and loanrestructuring for the household sector.

Other key policy initiatives in 2005 included ensuring that all segments of the economy have access tofinancing. The development of a more inclusive financial system is an important element that needs tobe taken into account in the development of the domestic financial system. The focus on financialinclusion ensures that institutional mechanisms are in place in the formal credit market to facilitateaccess to credit by micro enterprises, small and medium scale businesses, and the lower income groups.The aim is to bring these target groups into the economic mainstream, reduce poverty and promote a


more balanced growth. The strengthening of the institutional arrangements that include specialiseddevelopment financial institutions, micro financing institutions and cooperatives has been instrumentalin promoting financial inclusion.

Important progress was made in 2005 to expedite the development of SMEs in the economy. Effortshave focussed on strengthening the supporting infrastructure for SME development, the introductionof capacity building measures and in enhancing the access to financing. As the Secretariat to theNational SME Development Council, the Bank was actively involved in developing the National SMEDevelopment Blueprint for 2006. The blueprint outlines the Government’s objectives, targets andstrategies, including the action plans and programmes for 2006 to accelerate the development ofSMEs. An important milestone was the launch of the SMEinfo Portal, a one-stop online informationgateway to provide comprehensive information to SMEs on access to financing, Government supportfacilities and training and development programmes for SMEs. The Portal also serves as a platform forSMEs’ networking and marketing activities. During the year, SME access to financing continued toreceive priority. In addition to the establishment of the SME Bank, banking institutions have launchedtwo new trade finance products to encourage greater SME participation in the export market.Following increased access to financing from the banking sector, SME loans now account for 43% ofbusiness loans.

Significant progress was achieved in both the Islamic banking and takaful sectors in 2005. At thesame time, developmental efforts in Islamic finance have also been intensified to position Malaysia asan international Islamic financial hub. These efforts have been directed towards institutionaldevelopment, enhancing the domestic financial infrastructure, strengthening the Shariah and legalinfrastructure, and promoting greater international integration. The year also witnessed theintroduction of new foreign players and the transformation of the Islamic windows in conventionalbanks to Islamic subsidiaries. In addition, the Bank further strengthened the regulation andsupervision of takaful intermediaries.

In line with the considerable progress made in the Islamic banking and takaful sectors, the Islamiccapital market also recorded impressive developments in terms of higher issuances of Islamic papersand the introduction of innovations, which have contributed to broaden and deepen the domesticIslamic capital market. Moving forward, efforts to enhance Malaysia’s position as an internationalIslamic financial hub will be strengthened with the establishment of the International Centre forEducation in Islamic Finance (INCEIF) which will commence operations in March 2006. This representsthe investment in human capital which is vital for the development of the Islamic financial servicesindustry. INCEIF will serve as an international centre of educational excellence in Islamic finance,specialising in developing professionals and specialists in Islamic finance. Such talents are muchneeded to sustain market competitiveness and meet the future challenges of the Islamic financialindustry. The Bank has established an endowment fund of RM500 million to support this initiative.

The payment system represents an important pillar of the overall financial system and the Bankcontinued to accord priority in strengthening the efficiency, reliability and security in the paymentsystem. Continued efforts have been directed at developing and improving the major payment systeminfrastructure to ensure its robustness and to mitigate any systemic risks to the financial system and


the wider economy. Initiatives have also been made to encourage the migration from paper-basedpayments to electronic payments to increase efficiency and reduce costs. Improvements in thepayment systems operated by the Bank included the establishment of a “payment versus payment”mechanism to reduce inter-bank foreign exchange settlement risks and the introduction of a chequetruncation system to reduce the physical handling of cheques and its related costs. To enhance thesecurity of payment cards, banking institutions have also successfully completed the installation ofchip-based terminals in 2005, making Malaysia the first in the region to complete a national chipmigration exercise. Moving forward, intensive efforts will be made to promote debit cards as analternative and more cost-effective means of payment. Efforts have also been intensified to increasepublic awareness on the various payment channels, products and innovations. The agenda isessentially to increase the use of electronic payments through initiating changes in the infrastructureand processes, enhancing accessibility and facilitating the right incentive structure to encourage theactive use of electronic payments.

The Bank has always accorded priority to organisational development to ensure that the Central Bankcontinually enhances its capacity to manage the new challenges emerging in this ever-changingenvironment. In addition to increased investments in staff development, changes were made inorganisational structure, as well as the introduction of ICT enhancements to raise the level ofconnectivity, enhance access to information and to strengthen networking. Other initiatives includethe adoption of a performance-based culture and further efforts toward becoming a Knowledge-Based Organisation. Attention was also given to work and space management to enhance efficiency,security and the effectiveness of the functioning of the Bank. During the year, work commenced onthe construction of the Financial Services Resource Centre. Upon completion, it is envisaged that itwill become a centre of excellence for knowledge and learning, to support the requirements of theBank, as well as the South-East Asian Central Banks (SEACEN) Research and Training Centre, and theIslamic Financial Services Board (IFSB). The Centre will also house the Bank’s Knowledge ManagementCentre, Financial Museum and Art Gallery. Given the challenging environment in which the Bankoperates, these initiatives aim to ensure that the Bank delivers the expected results with the highestlevel of competence and professionalism.

Zeti Akhtar AzizGovernor

22 March 2006


Overview White Box:Potential Output of the Malaysian Economy White Box:Development of Small and Medium Enterprises Sectoral ReviewDomestic Demand ConditionsPrices and EmploymentExternal Sector White Box:Compilation of Malaysia’s External Debt: Treatment of Offshore Financial Entities in Labuan IOFC as ResidentsFlow of Funds

2-166

9-1416-3333-3838-4646-6560-63

65-66

The Malaysian �Economy in 2005

2

OVERVIEW

Notwithstanding the persistently high oil prices and thedownturn in the global electronics cycle, real grossdomestic product (GDP) expanded by 5.3%. Growth wasprivate-sector driven and was underpinned by supportivemacroeconomic policies and favorable financial conditions.Private consumer demand was sustained at a strong pacewhile the resilience in private investment further supportedeconomic expansion. The public sector continued to takethe opportunity of a favourable environment toconsolidate its finances to more sustainable levels.

The Malaysian Economy in 2005

Real GDP expanded by 5.3% in2005. Appropriatemacroeconomic policies andfavourable financial conditionscontinued to enhance economicresilience and supportedbalanced economic expansion.

Growth was balanced and broad based, with most sectorsof the economy, (except the construction sector) registeringpositive growth rates. Value added in the manufacturingsector increased by 4.9%. The developments in themanufacturing sector were influenced by the cyclical turns inthe global electronics industry. The first half-yearexperienced slower production growth, mainly as a result ofthe mild downturn in the global electronics cycle which wascaused by accumulation of excess inventories in the secondhalf of 2004. Domestic manufacturers undertook aninventory adjustment exercise and rationalised production atthe beginning of the year. However, the subduedperformance of the electronics and electrical (E&E) industrywas cushioned by the strong growth in selected resource-based industries, namely the chemical products and off-estate processing industries, as well as strong performancein selected domestic-oriented industries.

The manufacturing sector was stronger in the second half-year as the export-oriented industries regained strength andother major domestic industries continued to expand.During this period, global semiconductor sales began to pickup as global demand from both businesses and consumersworldwide increased. Sales in the Asia Pacific regionimproved in the second half-year (18.5%; 1H2005: 14.1%)spurred by strong demand for mobile computers due to theincreasing popularity of wireless systems as well as the pick-up in global demand for consumer electronic products suchas mp3 players, digital cameras, digital televisions andcellular phones. Malaysian producers, who had completedtheir inventory adjustment in the earlier part of the year,were well-positioned to take advantage of the higherdemand and as a result, production and sales expanded. Inthe domestic-oriented industries, output of the foodproducts and transport equipment industries increased dueto resilient domestic demand while output of theconstruction-related industries contracted due to the slowconstruction activities.

Growth in services sector was sustained at 6.5%, surpassingthe overall GDP growth rate. Growth was underpinned bythe strong private consumption and increased tourismand increased business activities. The expansion in thewholesale and retail trade, hotels and restaurants sub-sector(8%; 2004: 7.1%) was bolstered by strong consumerspending. Higher spending was particularly evident duringcertain periods of the year when there were the annualnationwide sales and the year-end festivities. In theintermediate services, the transport, storage andcommunication sub-sector expanded at a moderate pace of6.3%, reflecting the lower spending of the new but less

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Annual change (%)

Graph 1.1 Real GDP, World Trade and Inflation Rate

-10

-5

0

5

10

15

GDP World Trade CPI

The estimates indicate that the economy was on abalanced growth path in 2005 as potential outputgrowth was sustained at 5.7%. As a result, the outputgap, (the difference between actual and potentialoutput expressed as a percentage of the potentialoutput level) was low at +0.7%. The data also showedthat the contribution of productivity growth to totalgrowth had improved, suggesting the gradual shift upthe productivity ladder and the more efficientutilisation of factor inputs (Details in Box 1).

C01 Malaysian Economy pg02-27 3/14/06, 9:11 PM2

3


affluent mobile phone subscribers. Although world andregional trade performance was strong in 2005, it slowedfrom the exceptionally strong growth rates registered in2004. This coupled with the more moderate growth in thedomestic manufacturing sector tempered the growth in thetransportation industry. The finance, insurance, real estateand business services sub-sector recorded a sustainedgrowth at 5.4% during the year, as demand for funds andother financial and business services increased in tandemwith economic activity. Furthermore, the new businessservices such as shared services and outsourcing activitiescontinued to provide the impetus to growth in the sector.

Value added in the agriculture sector recorded a moderateincrease of 2.1% in 2005. Palm oil production was markedlyhigher, growing by 7%, although higher yields were offsetby the weaker performance in the other agriculture activitiesincluding rubber, fisheries and paddy. Growth in the miningsector also moderated (0.8%) due to lower production ofcrude oil, though natural gas output was substantiallyhigher. The decline in crude oil production was a result ofshutdowns of several oil installation facilities during the yearfor maintenance and repair purposes. In contrast, theincrease in natural gas output was supported by the strongdemand from the domestic power generators, industrialsectors as well as foreign buyers. The higher demand wasaccommodated by the increased capacity utilization at theMNLG plants.

Value added in the construction sector contracted for thesecond consecutive year (-1.6%; 2004: -1.5%) as civilengineering activities were subdued following thecompletion of several large infrastructure projects inrecent years. However, the residential and non-residentialsegments continued to expand due to resilient demandfor houses and firm interest for office and retail space.Reflecting the increased demand, occupancy rates for

office and retail space improved in 2005. In theresidential sub-sector, continuing income growth andstable job prospects encouraged demand fromhouseholds. In addition, the low interest rates andinnovative property loans also supported this demand asthey helped make purchases of houses affordable.

Aggregate domestic demand remained resilient,growing by 7.3%, as the economy was able to adjust tothe impact of the escalating oil prices. The staggeredincrement of retail petrol prices did not have a disruptiveeffect on the cost structure of companies whocontinued to register reasonable profit margins.Producers had partly absorbed some of the priceincreases and thus moderated the increase in domesticprices. The cost-push increase was mainly seen in thetransport and communications category while the coreinflation remained at 2% (2004: 1%). As a result,

Annual change (%)

Graph 1.2 Real GDP and Aggregate Domestic Demand

GDP Aggregate domestic demand

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

-30

-25

-20

-15

-10

-5

0

5

10

15

20

Percentage point

Annual change (%)

Graph 1.3 Contribution to Real GDP Growth

Domestic demand (LHS)

Net exports (LHS)

Change in stocks (LHS)

Real GDP growth (RHS)

-10

-5

0

5

10

15

2000 2001 2002 2003 2004 2005-10

-5

0

5

10

15

Graph 1.4Efficiency of Energy Usage

1Q'99 3Q1Q'00 3Q1Q'013Q 1Q'02 3Q 1Q'03 3Q 1Q'04 3Q 1Q'05 3Q 4Q0.010

0.012

0.014

0.016

0.018

0.020

0.022

0.024

0.026

Energy consumption/manufacturing sales

Source: Department of Statistics, Malaysia and Tenaga Nasional Berhad


4

Table 1.1: Malaysia – Key Economic Indicators

2003 2004 2005p 2006f

Population (million persons) 25.3 26.0 26.7 27.2

Labour force (million persons) 10.4 10.8 11.3 11.5

Employment (million persons) 10.0 10.5 10.9 11.1

Unemployment (as % of labour force) 3.6 3.5 3.5 3.5

Per Capita Income (RM) 14,870 16,616 18,106 19,484

(USD) 3,913 4,373 4,781 5,145

NATIONAL PRODUCT (% change)

Real GDP 5.4 7.1 5.3 6.0

(RM billion) 232.4 249.0 262.0 277.6

Agriculture, forestry and fishery 5.6 5.0 2.1 2.0

Mining and quarrying 5.8 3.9 0.8 5.0

Manufacturing 8.4 9.8 4.9 7.0

Construction 1.5 -1.5 -1.6 1.0

Services 4.5 6.8 6.5 6.0

Nominal GNP 10.5 14.1 11.3 9.7

(RM billion) 372.5 425.1 473.1 519.1

Real GNP 6.9 7.3 6.4 5.8

(RM billion) 217.2 233.1 248.0 262.5

Real aggregate demand1 6.1 7.5 7.3 5.9

Private expenditure1 5.5 13.1 9.5 7.4

Consumption 6.6 10.5 9.2 6.8

Investment 0.4 25.8 10.8 10.0

Public expenditure1 7.2 -2.1 3.1 3.0

Consumption 11.5 6.0 5.9 3.2

Investment 3.9 -8.7 0.4 2.7

Gross national savings (as % of GNP) 36.5 37.3 37.1 38.1

BALANCE OF PAYMENTS (RM billion)

Goods balance 97.8 104.5 126.5 138.4

Exports (f.o.b.) 398.0 481.2 536.9 601.9

Imports (f.o.b.) 300.2 376.8 410.5 463.5

Services balance -15.3 -8.8 -10.2 -10.3

(as % of GNP) -4.1 -2.1 -2.2 -2.0

Income, net -22.5 -24.5 -21.5 -23.7

(as % of GNP) -6.1 -5.8 -4.5 -4.6

Current transfers, net -9.3 -14.6 -17.0 -15.0

Current account balance 50.6 56.5 77.8 89.4

(as % of GNP) 13.6 13.3 16.4 17.2

Bank Negara Malaysia international reserves, net2 44.9 66.7 70.5 -

(in months of retained imports) 6.6 7.9 7.8 -

PRICES (% change)

CPI (2000=100) 1.2 1.4 3.0 3.5 - 4.0

PPI (1989=100) 5.7 8.9 6.8 -

Real wage per employee in the manufacturing sector 2.9 1.9 0.8 -

Note: Figures may not necessarily add up due to rounding.1 Exclude stocks.2 All assets and liabilities in foreign currencies have been revalued into ringgit at rates of exchange ruling on the balance sheet date and the gain/loss has been reflected

accordingly in the Bank’s account.

p Preliminary

f Forecast


5


Table 1.2: Malaysia – Financial and Monetary Indicators

2003 2004 2005pFEDERAL GOVERNMENT FINANCE (RM billion)Revenue 92.6 99.4 106.3

Operating expenditure 75.2 91.3 97.7

Net development expenditure 38.3 27.5 27.3

Overall balance -20.9 -19.4 -18.7

Overall balance (% of GDP) -5.3 -4.3 -3.8

Public sector net development expenditure 83.3 56.7 71.0

Public sector overall balance (% of GDP) -4.9 4.1 1.4

EXTERNAL DEBTTotal debt (RM billion) 186.7 200.6 195.9

Medium- and long-term debt 153.2 156.8 149.7

Short-term debt1 33.5 43.7 46.2

Debt service ratio (% of exports of goods and services)

Total debt 6.4 4.6 4.7

Medium- and long-term debt 6.3 4.4 4.5

Change in 2003 Change in 2004 Change in 2005RM billion % RM billion % RM billion %

MONEY AND BANKINGMoney supply M1 13.0 14.6 12.2 11.9 9.8 8.5

M2 42.5 11.1 108.1 25.4 82.0 15.4

M3 48.5 9.7 68.0 12.4 49.7 8.0

Banking system deposits 49.5 9.8 70.1 12.7 68.6 11.0

Banking system loans2 21.6 4.8 40.1 8.5 44.2 8.6

Manufacturing -0.2 -0.3 1.9 3.2 -2.4 -3.7

Broad property sector 14.6 8.4 19.7 10.5 20.5 9.9

Finance, insurance and business services -0.6 -2.1 1.7 5.7 -0.8 -2.6

Loan-deposit ratio (end of year) 80.9% 78.4% 77.5%

Financing-deposit ratio3 91.7% 87.7% 85.8%

2003 2004 2005% % %

INTEREST RATES (AVERAGE RATES AS AT END-YEAR)Overnight Policy Rate (OPR) - 2.70 3.00

Interbank rates

3-month 2.87 2.80 3.20

Commercial banks

Fixed deposit 3-month 3.00 3.00 3.02

12-month 3.70 3.70 3.70

Savings deposit 1.86 1.58 1.41

Base lending rate (BLR) 6.00 5.98 6.20

Treasury bill (3-month) 2.77 1.96 2.96

Government securities (1-year) 2.93 2.24 3.30

Government securities (5-year) 4.28 3.64 3.73

2003 2004 2005% % %

EXCHANGE RATESMovement of Ringgit (end-period)

Change against SDR -8.5 -4.3 8.9

Change against USD4 0.0 0.0 0.5

1 Excludes currency and deposits held by non-residents with resident banking institutions.2 Includes loans sold to Cagamas.3 Adjusted to include holdings of private debt securities.4 Ringgit was pegged at RM3.80=USD1 on 2 September 1998 and shifted to a managed float against a basket of currencies on 21 July 2005.

p Preliminary


6

Potential Output of the Malaysian Economy

Potential output is the trend level of output that is consistent with the aggregate productive capacity of aneconomy. It traces the sustainable growth path of the economy. Conceptually, the growth in potential output isprimarily determined by the expansion and non-inflationary utilisation of physical capital and the labour force, aswell as total factor productivity (TFP) growth. TFP growth captures productivity increase arising from improvementsin the utilisation of factor inputs due to technological progress and overall efficiency improvement. Therefore, thesustainability of long-term growth of an economy depends not just on factor accumulation but also crucially onimprovements in skills, capital efficiency, the overall economic environment, as well as technological progress.

1 The output gap is the difference between the levels of actual and potential output and the gap is measured as a percentage of potential output. A positive outputgap indicates that actual output is above potential output, while a negative output gap indicates the reverse.

0

60

120

180

240

300

% of potentialoutput

Graph 1Actual and Potential Output

93 94 95 96 97 98 99 00 01 02 03 04 05 06-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

RM billion

Actual Output (GDP) Potential Output

Output Gap (RHS)

Table 1Actual GDP and Potential Output

Actual PotentialInvestment Labour

OutputGDP Output Gap

Period (% ofpotentialoutput)

1994-1998 5.8 7.3 2.7 3.1 0.91999 6.1 1.0 -6.5 3.7 -3.12000 8.9 6.4 25.7 4.3 -0.12001 0.3 3.3 -2.8 1.6 0.02002 4.4 2.8 0.3 3.5 -0.82003 5.4 4.8 2.7 3.6 -0.42004 7.1 5.8 3.1 4.0 0.72005e 5.3 5.7 4.7 4.1 0.7

e Estimates

(Annual change in %)

0

1

-1

2

3

4

5

6

7

8% point contribution

Graph 2Factor Contributions and TFP Growth

1994-1997 1998-1999 2000-2002 2003-2005

Labour Capital TFP

The latest estimates for Malaysia show that potential output grew at 5.7% in 2005, with the output gap1 estimatedat positive 0.7% of potential output. This indicated that the Malaysian economy was operating slightly above itspotential in 2005. Overall, the period corresponding to the 8th Malaysia Plan (2001-2005) was characterised byrelatively balanced growth, with the economy expanding close to its potential capacity. Amidst a backdrop of arecovering capital stock, potential output grew at an average annual rate of 4.6% compared with 4.5% for actualoutput during this period. The output gap, which captures the extent to which the economy is deviating from thenon-inflationary trend of output, was on average less than ±1% of potential output. Despite numerous externalshocks to the region and the growing global imbalances during this period, the economy did not experience anylarge deflationary or inflationary cycles, indicating Malaysia’s growing economic resilience.

The period of 2001-2005 also witnessed a transition of the Malaysian economy in terms of factor contributions andthe general level of economic efficiency. As shown in Graph 2, the growth in potential output was driven mainly bythe accumulation of capital in the early 1990s, with moderate contributions from labour and TFP growth. However,beginning 1997, the contribution from capital accumulation began to decline and from 2001, TFP growth started toimprove. This shift suggests that Malaysia has been moving from a factor-driven to a productivity-driven economy.

Going forward, potential output of the economy isexpected to grow at a pace of 6% in 2006 withthe positive output gap closing towards the end ofthe year due to the continuous improvement inproductivity and expansion of both capital stockand labour force. This trend of a balancedexpansion of the Malaysian economy is expectedto be sustained into the future, given thecontinued upward trend in productivity andincreased resilience.

C01 Malaysian Economy pg02-27 4/14/06, 11:586

7


inflation which peaked at 3.7% in August, was lowerthan the increase in commodity prices. More importantly,higher energy prices also appeared to have increased thepace of transformation towards greater efficiency anddrive for higher productivity in order to minimize costs,thereby helping to contain inflation at manageable levels.The data indicates a downward trend in the energyintensity of the manufacturing sector.

Private consumption increased at a strong pace of 9.2%as positive developments in the economy, in particular,the increase in job vacancies, rising disposable incomesand the accommodative financing conditions supportedthe growth. While consumers were affected by higherfuel prices, there was a willingness to moderate theirsavings rate in order to maintain their level ofconsumption, further underscoring their confidence onincome growth and positive outlook for the economy.Reflecting this confidence, the Malaysian Institute ofEconomic Research (MIER)’s Consumer Sentiments Indexremained over the 100-point threshold throughout 2005,rising to 116.1 by end-year. In addition, the Governmenttook active measures, following the adjustment inadministered prices by reinstating allowances to mitigatethe increase in the cost of living and reducing road taxeson smaller vehicles used by the lower-income group.

Private investment registered a strong growth of 10.8% in2005 as companies expanded their capacity, upgraded andreplaced old and obsolete machinery. Although volatileenergy prices may have increased the firms’ uncertaintyregarding the outlook for aggregate demand, this wasbalanced by positive factors, particularly the strengtheningof the electronics cycle in the second half of the year as wellsustained strength in domestic demand. Higher capitalexpenditure was seen in all sectors of the economy withservices, mining and manufacturing sectors recording strongincreases in capital expenditure. In contrast, the capitalspending in the construction sector declined as a result ofthe end of the construction of several privatized roads.

While external demand expanded at more moderate pacecompared to 2004, its contribution to growth turnedpositive in 2005 (1.5 ppt; 2004:-2.5 ppt). The positivecontribution to growth was primarily due to exportsgrowing (11%) at a faster rate than imports (8.5%). Theexpansion in exports was more subdued than in 2004 as aresult of the softening of the IT sector, which was felt at thebeginning of the year. Exports of primary commoditieshowever remained strong (16%, 2004: 21.8%) reflectingthe higher prices of crude oil and liquefied natural gas(LNG). Malaysian crude oil, which is of the “light sweet”,grade commands a premium over the “heavy and sour”crude grade.

Import growth moderated to 8.5% (2004: 26.4%), resultingin a larger trade surplus. The slower growth in imports ofintermediate goods reflected the subdued performance ofthe E&E sector. As a result, the trade surplus widened toRM99.8 billion (2004: RM80.7 billion).

The services account recorded a larger deficit of RM10.2billion (2004: -RM8.8 billion) as the smaller deficit in thetransportation account was offset by higher paymentsfor travel abroad as well as a higher deficit in the otherservices account. Similarly, the income account alsorecorded a deficit in 2005, albeit smaller than in 2004 (-RM21.5 billion; 2004: -RM24.5billion). Outflows of profitsand dividends accruing to foreign investors was partlyoffset by higher receipts from earnings accruing toMalaysian investors abroad as well as higher returns on theexternal reserve holdings. The combined effects of a widertrade surplus with a smaller income account deficit resultedin a higher current account surplus of 16.4% of GNP, thehighest level achieved since 1999 (2004: 13.3%).

Given its strong fundamentals and the structural changestaking place in the region, Bank Negara Malaysia adjustedthe exchange rate regime on 21 July 2005, moving from apegged exchange rate against the US dollar to a managedfloat. The more flexible regime allows Malaysia to respondto changes in the international and domestic environment.The ringgit since appreciated to reach 3.7460 to the USdollar before closing the year at 3.78. Reflecting Malaysia’sstrong external conditions, the rate has continued toimprove further to 3.7055 in 3 March 2006.

Speculative portfolio investment, which flowed in at thebeginning of the year in anticipation of an appreciation ofthe ringgit, was unwound in the second half of the year.The portfolio flows have subsequently returned to normallevels in an orderly price discovery process. Apart from theportfolio funds, the larger repayment of external loans bythe public sector and larger extension of trade credits byMalaysian exporters also contributed to the outflows in thefinancial account during the period. As a result of theseoutflows, the financial account recorded a net outflow ofRM42 billion in 2005 (2004: +RM15.1 billion).

On a gross basis, foreign direct investment (FDI)increased to RM25 billion (2004: RM23.5 billion), or5.3% of GNP. The FDI inflows were seen mainly in theservices, oil and gas and manufacturing sectors. In theservices sector, the FDI inflows were broad based,channeled mainly into the finance, insurance andbusiness services as well as restaurants, hotels,wholesale and retail sub-sectors. Reflecting theincreased interest by Malaysian companies to diversifyabroad, outflows for overseas investment also increased.


8

The current account surplus remained and more thanoffset the net outflow in the financial account andforeign exchange revaluation losses arising from thestrengthening of ringgit against the major currencies. Assuch, the international reserves increased further toRM266.3 billion or equivalent to USD70.5 billion at end2005. By 28 February 2006, the international reserveslevel rose further to RM272.7 billion or USD72.2 billion,adequate to finance 7.6 months of retained imports andis 6.7 times the short-term external debt.

Malaysia’s external debt declined to RM195.9 billion in2005 (2004; RM200.6 billion), reflecting mainly thehigher repayment of external loans by both the FederalGovernment and the non-financial public enterprises(NFPEs). The repayments by the Federal Governmentmarked the maturity of a Euro bond issued in 2000 andsome scheduled principal repayments of syndicatedloans while in the case of the NFPEs, the maturity of USdollar-denominated bonds as well as prepayments ofseveral loans. In contrast, the slight increase in short-term debt was due mainly to the increase in short-termdebt of the banking sector arising from hedgingactivities on trade-related transactions and treasuryactivities. Malaysia’s external debt position remainssustainable with the debt service ratio holding steady at4.7% with its ratio to GNP declining to 41.4% (2004:47.2%). Further, the short-term debt remained low,accounting for only 23.6% of total external debt.

In an environment of economic expansion andmacroeconomic stability, financial sector soundnesscontinued to improve. Capitalisation remained strong,accompanied by continued growth in profits and in thequality of loan portfolios. The capital position of thebanking system remained strong with the risk-weightedcapital ratio (RWCR) and core capital ratio (CCR) at13.1% and 10.2% respectively (2004: 14.4% and11.4% respectively). In addition, the improvements inthe asset quality of the banking system were evident,with the 6-month net non-performing loan (NPL) ratioimproving to 4.6% (2004: 5.8%) while the 3-month netNPL improved to 5.8% (2004: 7.5%).

Macroeconomic ManagementThe prudent macroeconomic management by theGovernment further enhanced fundamentals of theMalaysian economy in 2005. The current account in thebalance of payments remained in surplus, savingsremained high, reserves increased, inflation remained atmanageable levels and the external debt declined. In thiscontext of sustained growth performance andfundamentals, the Government’s continued commitmentto strengthen its budgetary position was reflected in the

narrowing of its budgetary deficit to 3.8% in 2005 from4.3% of GDP in 2004. The Government’s focus was onreallocating resources to smaller projects particularly inagriculture, construction, housing and for infrastructuredevelopment in rural areas. This progressive reduction inthe deficit would provide the policy flexibility for theGovernment to mitigate potential adverse effects fromuncertainties in the external sector. The Governmentrecognised the need to help mitigate the higherinternational oil prices while ensuring price signals weretransmitted efficiently, thus allowing economic agents tomake the necessary adjustments to these developments.In 2005, the Government removed the price subsidiesgradually, while in early 2006, a further adjustment wasmade to fuel prices effective 28 February. In order toimprove predictability and allow agents to plan ahead,the Government also announced that no furtheradjustments would be made in 2006.

Macroeconomic managementin 2005 focused on sustainingeconomic growth whileimproving the capacity of theeconomy to generatesustainable growth.In managing the economy, public policy in 2005 focusedon accelerating the shift towards higher value-addedactivities, strengthening the business environment todevelop new sources of growth and enhancingcompetitiveness. In Budget 2005, the incentive structurewas enhanced further to promote investment,particularly in new areas in the agriculture,manufacturing and services sectors, while efforts atimproving the delivery system were intensified. Inparticular, the National Biotechnology Policy (NBP) waslaunched on 28 April 2005, to be implemented in threephases over 15 years. The objectives of NBP are topromote the establishment of new companies in orderto develop the sector. When fully implemented, thebiotechnology industry is expected to contribute up to5% of GDP and provide strong links to upstreamactivities, most notably agriculture and manufacturing.Another important initiative taken was the setting up ofthe Tax Review Panel to ensure a more efficient taxsystem that is business-friendly and provides greaterclarity and transparency.

To further enhance and promote the activities by small-and medium enterprises (SMEs), the National SMEDevelopment Council, which is chaired by the PrimeMinister and with Bank Negara Malaysia acting as the


9


Secretariat, announced new initiatives to accelerate SMEdevelopment. New trade financing products wereintroduced; SME info portal and online training portal werelaunched; a comprehensive definition for SMEs in varioussectors for targeted development was released; and aframework for SME Development Planning and Evaluationwas developed. The Council also endorsed the NationalSME Development Blueprint 2006, which includes a totalof 245 programmes in all sectors to accelerate thedevelopment of SMEs. An allocation of RM3.9 billion hasbeen committed by the Government to implement these

programmes. The SME Bank commenced operations on 3October 2005 to promote and expand SMEs contributionto the economy. The SME Bank specialises in providingboth financial and non-financial assistance, includingmeeting business advisory needs, and providing educationand training to SMEs. To further promote Malaysia’s exportof goods and services, the functions of Malaysia ExportCredit Insurance Bhd (MECIB) has been absorbed by theExport Import Bank of Malaysia, in an effort to furtherimprove the facilities for Malaysian exporters to enhancetheir competitiveness in the global market.

Development of Small and Medium Enterprises

The development of competitive small and medium enterprises (SMEs) is an important focus of Governmentpolicy. The efforts are aimed at:– strengthening enabling infrastructure for SME development;– building the capacity and capability of SMEs; and– enhancing access to financing by SMEs.

The National SME Development Council1 has provided the strategic direction for the Government policies onSME development so as to ensure coordination and effectiveness of Government programmes for SMEs.

(i) Strengthening Enabling Infrastructure for SME Development

(a) Framework for SME Development Planning and EvaluationIn view of the extensive SME programmes undertaken by a large number of Ministries and Agencies, it isimportant to ensure that the implementation of these programmes are coordinated and effective indeveloping the SMEs. A Policy Formulation and Evaluation Framework has been introduced to enhance theformulation and coordination of SME policies and programmes, as well as to monitor the implementation andoutcomes of the programmes. The Framework involves the identification ofbroad strategic priorities, programmes and targets for SME development, as well as the establishment ofcomprehensive key performance indicators to evaluate effectiveness of the programmes on an annual basis.

(b) National SME Development Blueprint 2006Following the adoption of the Framework for SME Development Planning and Evaluation, the NationalSME Development Blueprint for 2006 (Blueprint 2006) was endorsed by the Council in December2005. The Blueprint 2006 is a one-year action plan of the Government to promote the developmentof SMEs. It outlines the following:– Objectives and targets for SME development in 2006;– Key strategies, programmes and financial commitments; and– Ministries and Agencies involved in implementing these programmes.

For 2006, a total of 245 programmes involving financial commitment of RM3.9 billion have beenidentified for implementation to accelerate the development of SMEs. These are aimed at strengtheningthe enabling infrastructure to support SME development; building the capacity and capability of SMEs;and enhancing SMEs’ access to financing. The programmes will cover all sectors, including SMEs inagriculture and agro-based industries, and those involved in knowledge-based industries. Efforts will alsobe directed to developing progressive and resilient Bumiputera entrepreneurs and SMEs.

1 The National SME Development Council is chaired by the Prime Minister and comprises of Ministers and Heads of 18 key Ministries and Agencies involved in SMEdevelopment.


10

A total of 170 key programmes will be implemented to build capacity and capability of SMEs, mainlyin the areas of entrepreneurial and human resource development, as well as marketing andpromotion. These include programmes to inculcate entrepreneurship at schools and institutes ofhigher learning, as well as initiatives to assist SMEs in expanding their market network, throughmarket expansion programmes and developing linkages with large corporations, government-linkedcompanies and hypermarkets.

Forty-two key programmes will be implemented to strengthen the infrastructure to support SMEdevelopment, which include incentives to encourage SMEs to upgrade their business premises as wellas establishment of incubation centres. For greater access to financing, 33 key programmes will be

implemented in 2006. These include the establishment of a RM300 million venture capital fund foragriculture, an additional RM300 million allocation for the Fund for Food, pre-seed funding for the ICTsector and the transformation of the Credit Guarantee Corporation Berhad to further strengthen theinfrastructure for SME financing.

(c) Adoption of Definitions for SMEs in MalaysiaAll Ministries, Agencies and financial institutions involved in the development of SMEs have adopted thenew definitions of SMEs in the primary agriculture, manufacturing, manufacturing-related services and

PROMOTING DEVELOPMENT OF COMPETITIVE AND RESILIENT SMEs IN ALL SECTORS TOWARDS INCREASING THEIR CONTRIBUTIONS TO THE ECONOMY

Overview of SME Development: Objectives, Strategies, Key Programmes and Financial Commitment in 2006

Developing progressive & resilient

Bumiputera SMEs &

entrepreneurs

Promoting development of SMEs in knowledge-based

industries

Enhancing viability of SMEs

across all sectors

Socio-EconomicEconomic

Targets

41 Key Programmes(New: 15)

RM1.61 b across 11 Ministries

Financial Commitment of RM2.29 bacross 9 Ministries

Key

Prog

ramm

esStrateg

ic Th

rusts

Ob

jectives

Building capacityand capability

Strengthening enablinginfrastructure

Enhancing access to financing

98 Key Programmes(New: 3)

106 Key Programmes (New: 13)


11


services sectors. The definitions are based on the criteria of annual sales turnover or number of full-timeemployees. The adoption of a common identifier for SMEs in these sectors will facilitate the identificationof issues and prospects of the sectors concerned to enable appropriate policy actions to be taken. It willalso allow for closer monitoring of SME performance and contribution to the economy.

(d) Profile and Contribution of SMEs to the EconomyThe availability of relevant data on the development and performance of SMEs is critical to facilitatethe formulation of effective policies to support the creation and growth of SMEs. As a result, theCensus of Establishment and Enterprise for the agriculture, manufacturing and services sectors waslaunched in March 2005, covering about 1.7 million companies and businesses. At end-December2005, 492,806 completed responses were received. A preliminary assessment of responses from349,617 companies and businesses (including large enterprises) highlighted the following:

• Of the 349,617 establishments, 99% or 346,211 respondents are SMEs (includingmicroenterprises). Of this, 81% are microenterprises operating with less than 5 full-timeemployees, while 17% and 2% are small and medium enterprises respectively; and

• The SMEs contributed to 38% of total output and accounted for 55% of total workforce of these349,617 business establishments.

The preliminary findings reinforced the need for aggressive efforts to be undertaken in a strategic andcoordinated manner to support the expansion of SMEs and strengthen their capacity andcompetitiveness, given the potential for them to contribute more effectively to the nation’s economy.A detailed analysis of the profile and performance of SMEs will be provided in the first Annual Reporton SME Development 2005, scheduled to be released in June 2006.

(ii) Building Capacity and Capability of SMEs

(a) SMEinfo Portal: A One-Stop Online Information Gateway for SMEsThe SMEinfo Portal (www.smeinfo.com.my), launched in January 2006, is a one-stop onlineinformation gateway to provide comprehensive information on all aspects of SME development. TheSMEinfo Portal provides SMEs with convenient access to information on Government support anddevelopment programmes, financing, advisory services and training programmes. In addition, thePortal also provides links to relevant websites that contain useful information for SMEs, includingwebsites of financial institutions. An important feature of the Portal is the free SME Directory, whichoffers an opportunity for SMEs to advertise their companies and products to large potential customers.

(b) Online Training Portal for SMEsTo facilitate SMEs to obtain information and register for training, the Human Resource DevelopmentPortal (HRD Portal), a web-based training portal developed by Pembangunan Sumber Manusia Berhad,was launched in March 2005. The HRD Portal, www.hrdportal.com.my, will assist employers to search,identify and register for training programmes online, and at the same time, allow training providers tooffer their training programmes and activities online. By providing access to a central pool of traininginformation, the HRD Portal will facilitate and encourage employers, particularly SMEs, to retrain andupgrade the skills of their employees in order to enhance productivity and competitiveness.

(c) Publication of Annual Report on SME DevelopmentA report on SME development, that will provide a comprehensive assessment on the status andperformance of SMEs in all sectors, as well as details and achievements of the Government’sprogrammes for SMEs, will be published every year. The publication is part of the initiatives to enhancethe dissemination of information on SMEs, and therefore, increase the awareness among SMEs andothers on the status of SME development and programmes to support SMEs. The Annual Report onSME Development 2005 is scheduled for release in June 2006.


12

(iii) Enhancing Access to Financing by SMEs

Banking institutions are the largest provider of financing to SMEs. In 2005, the banking system approvedRM35.8 billion of new loans to more than 85,000 SME accounts, representing an increase of 13.1% from2004 (2004: RM31.6 billion; 92,000 SME accounts). Loan disbursements grew by 10.2% to RM110.7 billion(2004: RM100.4 billion), while loans outstanding to SMEs expanded by 8.7% to RM96 billion as at end-2005(end-2004: RM88.3 billion). Loans to SMEs accounted for 42.6% of business loans outstanding as at end–2005, compared with 40.3% as at end 2004. On a sectoral basis, lending to SMEs was diversified, withalmost two-thirds being channelled to distributive trade, manufacturing and construction sectors. Gross non-performing loans (NPLs) of SMEs declined marginally to RM10.2 billion and the gross NPL ratio declined to10.6% (end-2004: RM10.6 billion; 12%).

A number of development financial institutions (DFIs) also provide financing to SMEs. In 2005, the DFIsapproved RM2.3 billion of loans to 5,223 SME accounts (2004: RM2.4 billion to 5,397 SME accounts), anddisbursed RM1.5 billion (2004: RM1.2 billion). The loans outstanding of DFIs to SMEs increased by 3.3%to RM3.1 billion as at end-2005 (end-2004: RM3 billion). Another source of financing for SMEs is theleasing and factoring companies, which provide an alternative mode of financing to finance equipmentand working capital requirements. In 2005, RM819 million of financing was extended by leasing andfactoring companies to businesses in services, manufacturing and general commerce sectors (2004:RM996 million). For newly established businesses, especially in the ICT sector, financing could also beobtained from venture capital companies. The total available funds for venture capital investmentsincreased by 14.3% to RM2.6 billion as at end-2005 (end-2004: RM2.3 billion). The funds were investedin 380 companies as compared with 332 companies as at end-2004.

Special Funds for SMEsBank Negara Malaysia has five special funds to assist SMEs to have access to financing at reasonable costs(lending rates ranging from 3.75% to 5.00%). The funds are channeled through participating institutionscomprising banking institutions, DFIs and ERF Sdn. Bhd.:• Fund for Small and Medium Industries 2 (fund size: RM4.75 billion);• New Entrepreneurs Fund 2 (fund size: RM2.35 billion);• Fund for Food (fund size: RM1.3 billion);• Rehabilitation Fund for Small Businesses (fund size: RM200 million); and• Bumiputera Entrepreneurs Project Fund (fund size: RM300 million).

Due to strong demand, allocations for the Fund for Small and Medium Industries 2 and New EntrepreneursFund 2 had been increased in 2005 by RM250 million and RM350 million to RM4.75 billion and RM2.35billion respectively.

Initiatives to Improve Access to Financing by SMEsThe policy on enhancing access to financing by SMEs during the year continued to focus on:• Strengthening the existing infrastructure to ensure a more effective intermediation of funds to SMEs;• The provision of advisory support and awareness programmes; and• Assisting in debt restructuring of financially distressed SMEs with viable business.

Among the new initiatives introduced in 2005 are:

(a) Transformation of Credit Guarantee Corporation Malaysia BerhadOne of the initiatives to strengthen the infrastructure of SME financing is the transformation of CreditGuarantee Corporation Malaysia Berhad (CGC) involving the enhancement of its role and expansion in therange of products and services offered by CGC. In enhancing SMEs’ access to financing, CGC will take aholistic approach by providing wider range of credit enhancement products, advisory services on financialand business development, and credit information services. These services are aimed at facilitating greater


13


lending to SMEs while promoting sound financial management practices by SMEs. To meet its newexpanded role, the composition of the Board of CGC has been broadened to include members withexperience in business and finance, while efforts are being taken to strengthen the resources of CGC.

(b) Venture Capital for Agriculture SectorTo support the Government’s objective of realising the potential of the agriculture sector as the third engine ofgrowth, Bank Negara Malaysia is establishing two venture capital funds of RM150 million each for theagriculture sector in 2006. The objective of the funds is to create and develop an integrated agriculturalbusiness through the provision of venture capital financing, as well as technical and business support, with itsspill over effects that will benefit and enhance the whole value chain of the agriculture sector. The targetedareas for investments are integrated farming and fisheries, as well as biotechnology-related ventures.

(c) Establishment of the SME BankThe SME Bank commenced operations on 3 October 2005 as a result of integration andrationalisation exercise between Bank Pembangunan dan Infrastruktur Malaysia Berhad and BankIndustri & Teknologi Malaysia Berhad, to support the development of the SME sector. The SME Bankwill complement the banking institutions through the provision of financial and business supportservices to the SMEs. These include equity financing, working capital, term loans, industrial hirepurchase, leasing, factoring, contract financing as well as bank guarantees. In addition, the SMEBank will also provide business and consultancy support services, such as advisory services andpreparation of business plans.

(d) New Trade Finance Products for SMEsTwo new trade finance products for SMEs were introduced in January 2006, namely the Multi CurrencyTrade Finance (MCTF) and Indirect Exporter Financing Scheme (IEFS), under both conventional and Islamicfinancing. These products are aimed at encouraging SMEs to export their goods and services, particularly tothe non-traditional markets such as members of the Organisation of Islamic Countries. The MCTF providesfinancing to Malaysian direct exporters in Ringgit and major foreign currencies in the form of pre and postshipment financing. The IEFS provides Ringgit financing to indirect exporters without recourse, whereby theparticipating banks will discount their trade invoices arising from the supply of goods and services to directexporters. These products benefit the SMEs by lowering financing costs, without collateral requirements.Under the arrangements, the SMEs can obtain financing from the participating banks, with the credit risksbeing shared between the bank and Export-Import Bank of Malaysia Berhad.

Financial Advisory ServiceBank Negara Malaysia provides financial advisory services to SMEs in the following areas:• information on various sources of financing;• assistance in facilitation of loan application process; and• advice on financial requirements and problems of SMEs.

In 2005, the number of enquiries and assistance sought by SMEs increased to 4,019 cases (2004:1,399 cases) reflecting heightened awareness among SMEs as well as a result of the establishmentof Laman Informasi, Nasihat dan Khidmat (LINK), in Bank Negara Malaysia, Kuala Lumpur. Of these,81% were enquiries on special funds provided by the Government and advice on loan matters, and19% were complaints against financial institutions, mainly for cases of loan rejection and poorresponse on SMEs’ loan applications.

Performance of Small Debt Resolution SchemeThe Small Debt Resolution Scheme was established on 1 November 2003 to facilitate the restructuring ofnon-performing loans (NPLs) of SMEs with on-going business. Under the mechanism, a Small DebtResolution Committee undertakes independent assessments on the viability of the businesses, loanrestructuring and financing requirements of the SMEs.


14

As at end-2005, 394 applications with NPLs of RM278 million were received under the scheme (end-2004:228 applications with NPLs of RM180.2 million). Of these, 286 applications, involving NPLs of RM183million, have been approved for restructuring and RM16 million new financing was approved under theRehabilitation Fund for Small Businesses. A total of 83 cases, with total NPLs of RM83 million, wererejected due to non-viability. Another 25 cases involving NPLs of RM12 million are being evaluated assome of the cases could not be processed due to the inability of applicants to provide the necessaryinformation required to facilitate evaluation. The performance of the scheme has shown that therestructuring of NPLs is more important than the provision of new financing in ensuring the viability andsustainability of financially distressed SMEs.

In addition to new initiatives, the Governmentimplemented further new measure to improve deliverysystem and quality of services. A number of customerservice offices and one-stop centres were established,leveraging on ICT to expand public sector’s reach andresponse time to investors, businesses and consumers.

Moving forward, the 2006 Budget put forth various pro-active measures to enhance national resilience and theability to face external challenges, arising from higher oilprices, higher global interest rates and increasing globalcompetition. Incentives have been given to develop newgrowth areas such as biotechnology, high technologymanufacturing and ICT industries. The National BiofuelPolicy was launched at the end of 2005 to encourageprivate sector involvement in the production ofbiodiesel. In terms of special development funds, theGovernment has announced an increase of RM300million for the Fund for Food; the creation of MalaysianLife Sciences Capital Fund for investment inbiotechnology with RM100 million contribution fromthe Government; and an RM1 billion fund to assist andencourage local entrepreneurs, especially bumiputeras,to venture abroad via facilities such as trade financing,overseas projects financing and credit insuranceguarantee. In addition, selected companies undertakingICT and multimedia services will be given Pioneer Status,which allows for tax exemption or tax allowances of upto 50% for five years. The Government increased thepace of developing the Multimedia Super Corridor(MSC) by awarding the status to cybercities of BayanLepas, Pulau Pinang and the Kulim High TechnologyPark in Kedah. The Government also continues tosupport the development of soft infrastructure byproviding a large allocation to the education andtraining sector, focusing on developing skills in order toincrease productivity and value-add from the workforce.

The overall motivation of macroeconomic management ofMalaysia is the policy of pursuing balanced growth in anenvironment of social and political stability. At end-March2006, the Government will launch the Ninth Malaysia Plan

(9MP), 2006-2010, which provides the foundation forfurther development and strengthening the prospects forthe Malaysian economy. The Plan will also focus on theimportance of making progress in the new growth areas inorder to achieve the successful transformation of Malaysiainto a more resilient knowledge-based economy, while re-emphasising the Government’s commitment tomaintaining macroeconomic stability.

The monetary policy stance in 2005 aimed to promotesustainable growth in an environment of price stability.In formulating the stance of monetary policy, BankNegara Malaysia undertakes a careful assessment of therisks to inflation and economic growth. In 2005, aparticular challenge was to respond appropriately to thehigher oil prices, recognising that price increases arosedue to a multitude of factors with cost-push factorsbeing dominant. Following the increases intransportation charges and retail prices of petrol anddiesel in May, the inflation rate breached the 3% level.Demand-driven inflation, as measured by core inflation,was however well contained and registered a moregradual increase in the first half of the year. Real andmonetary indicators did not suggest that demandpressures were a source of inflationary concern. Growth,which had been high at 6.2% in the first quarter, hadalso slowed to 4.4% in the second quarter.

Consumption and investment activity appeared to holdsteady while financing activities and money supplycontinued to increase at relatively stable rates. In thesecond half of the year, the growth momentum pickedup, with private sector demand growth becoming moreentrenched. In the third quarter, real GDP growthaccelerated to 5.3%, with the outlook for externaldemand becoming more optimistic. Growth in theglobal economy had remained relatively resilient to thehigher oil prices while the semiconductor down-cyclehad reached its trough by mid-year, with global salesand shipments picking up thereafter. Consequently, theOvernight Policy Rate (OPR) was raised by 30 basispoints to 3% on 30 November 2005 to align the rates


15


to the prevailing monetary conditions. At 3%, the OPRcontinued to remain below its neutral level, andtherefore, continued to remain supportive of economicactivity. With the release of the fourth quarter GDPdata, which showed that the growth momentum wassustained at 5.2% while the underlying pressure onprices remained strong, Bank Negara Malaysia raised theOPR by another 25 basis points on 22 February 2006.

The institutional framework for developing,implementing and communicating monetary policy wasfurther enhanced in 2005. Starting in December 2005,the Monetary Policy Committee (MPC) decided that theMonetary Policy Statement (MPS) would be issued afterevery MPC Meeting, further enhancing the transparencyin communicating monetary policy. The Decemberannouncement also included the schedule of MPCmeetings for 2006. This would allow marketparticipants to better anticipate and understand BankNegara Malaysia’s policy stance and direction.

On the external front, there was an increase in netportfolio flows in the first half year, followingspeculation that there would be a revaluation of theChinese yuan resulting in an appreciation of regionalcurrencies including the ringgit. These inflows were atmanageable levels and Bank Negara Malaysia sterilisedthe additional liquidity. On 21 July, Bank NegaraMalaysia announced the change from a fixed exchangerate system to a managed float exchange rate regime.The ringgit’s value is now based on a basket ofcurrencies of major trade partners and regionalcountries. The new arrangement would enhanceeconomic flexibility without sacrificing the stabilityaccorded by the previous arrangement. Following thefloating of the ringgit, speculative portfolio positionsthat had been built-up in the first half of the year wereunwound. The unwinding of these flows was orderly,indicating that the price discovery process in thefinancial markets has been able to function efficiently.The strong reserves level provided an added cushion forthese outflows, some of which were large, while thedomestic financial system continued to operate in anenvironment of ample liquidity.

Of significance, the change to the floating rate regimewas preceded with the setting up of the necessary riskmanagement infrastructure to ensure a smoothtransition. Rules on hedging were liberalised in April2004 to allow both residents and non-residents to enterinto hedging arrangements with licensed onshorebanks. The rules allow greater flexibility to residents inmanaging their investments by facilitating wider optionsand avenues for risk management. In addition, Bank

Negara Malaysia took steps to further liberalise theforeign exchange administration rules in order toimprove the delivery system and enhance flexibility inthe financial system and the economy. Effective 1 April2005, further changes were made to give greaterflexibility for overseas investment, including changingthe thresholds for investment abroad, extension ofcredit facilities to non-residents and placement of fundsby residents. Residents are also now allowed to openforeign currency accounts onshore or offshore, withoutrequiring the approval from the Central Bank. Similarly,limits on foreign currency credit facilities that can beobtained by residents have been increased.

In managing the financial sector, the year saw furtherprogress in implementing the longer-term developmentplans for the sector. With the Financial Sector Masterplan(FSMP) entering the second of its three phases, the stageswas set in 2005 to create investment banks. Investmentbanks would mainly be involved in capital marketactivities and would be formed by the rationalisation ofmerchant banks, stock-broking companies, and discounthouses. Similarly, universal brokers would also be allowedto seek partners to form investment banks. Thisintegration will enhance the efficiency and effectivenessof capital market players by minimising duplication ofresources and overlapping of activities, leveraging on thecommon infrastructure and reaping benefits of synergiesand economies of scale. The framework is among the keyinitiatives to strengthen the capacity and capabilities ofdomestic banking and financial groups to contributetowards economic transformation and developing a moreresilient, competitive and dynamic financial system.Another sign of the growing maturity of the financialsystem was the announcement that the limits to foreignownership in local investment banks was now raised to49%, compared with 30% for domestic banking groups.

To further increase competition in the bankingindustry, operational flexibility has been awarded tothe locally incorporated foreign banking institutions(LIFBs) operating in Malaysia. LIFBs are allowed toestablish four additional branches in 2006, whichrepresents the first of a phased approach ofbranching liberalisation. This will allow greaterparticipation of LIFBs in financial intermediation to allsegment of the Malaysian society and economy. Thewider dispersion of LIFB’s branches across the countrywill further enhance consumers’ access to a widerrange of banking services and increase competition inproviding wider spread of products to less developedareas of the country. The policy of graduallyderegulating and liberalising the banking system iscomplementary with the objectives of bringing


16

increased benefits by lowering the cost ofintermediation and increasing the quality of financialservices provided.

In the capital market, the launch of RM760 millionWawasan Bond by the International Bank of Reconstructionand Development (IBRD) in April 2005 was a significantdevelopment. This issuance further widened and deepenedthe domestic bond market. The Government has also issuedshort-term Islamic Treasury Bills and longer-term Islamicbonds to meet investor demand and diversify further Islamicfinancial instruments. Ensuring tax neutrality betweenIslamic and conventional capital market products wouldfurther facilitate the development of the Islamic bondmarket. To further enhance market turnover, Bank NegaraMalaysia has actively used repurchase agreements (repo)since January as a monetary instrument, introduced theInstitutional Custodian Programme to enable borrowing andlending of securities, and provided a securities lendingfacility for principal dealers. The implementation of thesemeasures are also aimed at improving the price discoveryprocess and increasing liquidity in the financial market andthe development of a reflective benchmark yield curve. Theringgit bond market has continued to become anincreasingly important source of financing to the economy.

In 2005, Bank Negara Malaysia adopted a multi-prongedapproach in empowering consumers. In strengtheningthe consumer protection and education infrastructurevarious initiatives were implemented, and these includethe establishment of Bank Negara Malaysia LINK (LamanInformasi Nasihat dan Khidmat), the introduction of BasicBanking Services Framework, the establishment of theFinancial Mediation Bureau, the introduction of a DepositInsurance System and the establishment of the CreditCounselling and Debt Management (CCDM) Agency. Inparticular, the Bank Negara Malaysia LINK aims toenhance the effectiveness of Bank Negara Malaysia’sinterface with the public and is established as acentralised point of contact with the public on issues thatrelates to Bank Negara Malaysia’s policies and operations,the financial sector and consumer education in the areaof finance. Bank Negara Malaysia LINK also assists SMEson issues that relate to access to financing by providing acentralised point of contact, and thereby contributingtowards enhancing their contribution to the economy.These initiatives involve both infrastructure andinstitutional capacity development that includes financialeducation, advisory services, distress management,rehabilitation and putting in place avenues for redress.These steps are part of the efforts to ensure stability ofthe financial system as promoting a sound andprogressive financial system is a pre-requisite to achievingsustainable economic growth and development.

SECTORAL REVIEW

Manufacturing SectorValue added in the manufacturing sector grew at amoderate pace of 4.9% in 2005 (2004: 9.8%), as thedomestic electronics and electrical product (E&E)segment experienced a soft patch in the first half of theyear following the mild downturn in the globalsemiconductor industry. However, the slowdown wasbrief and by the second half of the year, the recovery inthe E&E segment led to a stronger performance of themanufacturing sector (2H: 6.4%; 1H: 3.8%). Theimpact was also cushioned by continued growth inselected resource-based industries, such as the chemicalproducts and off-estate processing industries. In thedomestic-oriented industries, food and beverages andpaper products industries also strengthened furtherduring the year, while the transport equipment industrywas firm supported by the strong domesticconsumption. However, industries that are related to theconstruction sector, namely basic metal, non-metallicmineral products and fabricated metal productsremained weak affected by the subdued performance ofthe construction sector.

The manufacturing sectorcontinued to contribute togrowth despite the slowdownin the electronics and electrical(E&E) product segment. TheE&E recovery in the secondhalf-year improved theperformance in themanufacturing sector.In 2005, the share of the manufacturing sector tooverall GDP was largely unchanged at 31.4% (2004:31.6%). Given the continued additions in capacityamidst the new investments, the overall capacityutilisation rate of the manufacturing sector was lower at75% in 2005 (2004: 79%). The export-orientedindustries operated at 77%, while the domestic-oriented industries operated at 73% during the year(2004: 81% and 75% respectively).

Based on the latest statistics from the revisedIndustrial Production Index (2000=100),manufacturing production grew by 5.1% in 2005(2004: 12.8%). Of significance, output growth of theelectronics and electrical products (E&E) industry


17


slowed down to 3.5% in 2005 (2004: 19.3%)affected by the global semiconductor down-cycle inthe first half of the year. In an environment of anoversupply situation, while world demand continuedto remain relatively steady, an early inventoryadjustment by industry players across the varioussegments helped in the speedier recovery processduring the second half of the year. Of significance,producers in the computer segment had normalisedtheir inventory levels by the end of first quarter of2005. Furthermore, global demand for computerswas also supported by a structural shift in consumerdemand from desktop computers to mobile and

portable computers, such as laptops, pocket personalcomputers (PCs) and handheld PCs with wirelessconnectivity function. Being a major exporter ofcomputers with renowned multinational companiesoperating in Malaysia, the country had benefitedfrom the positive developments in the computersegment throughout 2005. Computers and partsaccounted for 27.5% of total manufactured exportsand 41.8% of the E&E exports.

Despite the slowdown, domestic E&E manufacturerscontinued to invest and upgrade to higher value-addedproducts. Of significance, major European electronicsmanufacturers continued to shift some of theirproduction lines of more advanced semiconductors toMalaysia to benefit from the cost-efficient and maturedmanufacturing base. The move had broadened anddeepened the industrial linkages within the sector.

By the second half of 2005, the global semiconductorindustry began to show signs of recovery. Globalsemiconductor sales compiled by the SemiconductorIndustry Association (SIA) gradually picked up torecord a growth of 8.6% by December 2005 afterbottoming out in July 2005. The US book-to-bill ratioof semiconductor equipment also rebounded to 0.93by-end 2005 from its low of 0.77 recorded inFebruary and the US new and unfilled orderscontinued to register positive growth. Industry expertsexpect the recovery to become more entrenched in2006 and to continue into 2007. Growth would beincreasingly broad based, supported by expansion inall categories of semiconductors, particularlyconsumer electronics which is expected to be the nextdriver of growth in the E&E industry.

Table 1.3Manufacturing Sector: Value Added andProduction

2004 2005

Annual change in (%)

Value-added(Constant at 1987 prices) 9.8 4.9

Overall Production 12.8 5.1

Export-oriented industries 14.8 5.7 of which:

Electronics 25.6 5.2

Electrical products 5.5 -0.8

Chemicals and chemical products 15.1 11.0

Petroleum products 9.8 10.8

Textiles, wearing apparel and footwear -4.8 3.4

Wood and wood products 12.8 1.5Rubber products 8.1 -0.4Off-estate processing 2.7 8.1

Domestic-oriented industries 5.2 2.8 of which:

Construction-related products 1.3 -0.5Food products 2.0 7.6Transport equipment 11.7 8.5Fabricated metal products 11.4 -4.9

Source: Department of Statistics, Malaysia

Graph 1.5 Manufacturing Sector: Sales, Production and Exports

* 2005's production data were based on the new IPI figures (2000=100).

0

510

15

2025

30

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

2004 2005*

Sales Production Exports

Annual change (%)

Graph 1.6 Capacity Utilisation in the Manufacturing Sector

60

65

70

75

80

85

1999 2000 2001 2002 2003 2004 2005p

%

-20

-10

0

10

20

30

Capacity utilisation (LHS) Output (RHS)

Annual change (%)

p PreliminaryOutput data from 2001 onwards is based on the new Industrial Productionindex (2000=100)Source: Department of Statistics, Malaysia Bank Negara Malaysia


18

The chemicals and chemical products industrycontinued to register a double-digit growth in 2005(11%; 2004: 15.1%), led mainly by the stronggrowth in production of plastic products (21.5%;2004: 19%) and other chemical products (10%;2004: 25.5%). Higher domestic and externaldemand, emanating from the packaging, householdand automotive segments supported the strongerexpansion in the output of plastic products.Meanwhile, production of other basic industrialchemicals expanded further in 2005 due mainly tohigher production of oleochemicals, which is aderivative of crude palm oil.

The off-estate processing industry recorded a robustgrowth in 2005, expanding by 8.1% (2004: 2.7%)benefiting from the higher output of crude palm oil duringthe year. Production of palm oil expanded at a faster rateof 7% (2004: 4.7%) attributable to increases in matureareas as well as higher yields.

Growth in output of rubber products declinedmarginally by 0.4% in 2005 (2004: 8.1%), due mainly toa decline in production of tyres and tubes, while therubber gloves industry continued to expand. Theproduction of tyres and tubes during the year wasaffected by a number of factors, including shortage ofraw materials in line with the lower rubber production,temporary disruption in production of a major tyremanufacturer due to upgrading of machineries as well ascompetition from other regional producers.

Output growth of wood and wood products meanwhilemoderated in 2005 (1.5%; 2004: 12.8%) due partly toweaker demand for Malaysian products from the majorindustrial countries such as the US, United Kingdom (UK)and Japan. During the year, the industry also faced

shortages in supply of raw materials, particularly rubberwood. Subsequently, the Government took measures toalleviate the supply shortage by banning the export ofrubber wood sawn timber as of 8 June 2005.

Output growth of the textile, wearing apparels andfootwear industry recovered to expand by 3.4% in2005 (2004: -4.8%) as Malaysia was one of thecountries that benefited from the diversion of demandfrom China following the exhaustion of US importquota on China’s textile products. Initially, in the earlypart of the year, production was soft as the expiry of theAgreement on Textile and Clothing (ATC), which cameinto effect on 1 January 2005, had an adverse effect ondemand as industrial countries shifted their orders fortextile and wearing apparels to lower-cost countries,particularly China. However, following the influx oftextile import from China, the US authorities respondedby imposing a growth limit on imports of Chinese textilegoods to the US. As China’s import quota for the yearwas filled up by July 2005, the excess new orders oftextile products from the US were diverted to othertextile-exporting countries in the region, includingMalaysia, hence benefiting the textile output of thesecountries particularly towards the end of the year.

Production of petroleum products was also favourableduring the year due mainly to robust oil refiningactivities amidst the higher domestic demand. Growthwas also supported by activities related to liquefactionof natural gas for the export market.

In the domestic-oriented industries, production oftransport equipment continued to expand strongly in2005 due to the rapid growth in the car assemblyactivities and the spillover effects on production of partsand accessories for motor vehicles. Assembly of motorvehicles expanded by 7.5% (2004: 12.6%), led by thesustained demand for passenger cars which wassupported by increases in household incomes andattractive financing packages offered by financialinstitutions, together with the introduction of new andaffordable car models during the year. Meanwhile, theincreasing localisation of the new models introducedduring the year had also benefited the local productionof car parts and accessories (12.1%; 2004: 1.1%).

On the other hand, output of industries in theconstruction-related products remained subdued(-0.5%; 2004: 1.3%), in line with the performance ofthe construction sector. In particular, production of ironand steel was affected by the slowdown in thedomestic civil engineering segment, which is the majoruser of iron and steel. On the export front, external

Graph 1.7 Production and Exports of the Electronics IndustryAnnual change %

2005

Production of electronics in Malaysia

Electronics exports of Malaysia

Worldwide sales of semiconductors

-10

0

10

20

Jan Mar Mei NovJul Sep


19


demand for iron and steel also softened substantially in2005, due to the excess production in China, thusresulting in an overcapacity situation in the globalmarket. Meanwhile, output growth in the non-metallicmineral products recovered during the year aided bythe turnaround in the output of glass products.However, production of cement, structural clay andceramic products continued to decline in line with thesubdued performance of the construction sector.

Production of fabricated metal contracted for the firsttime since 2001, declining by 4.9% (2004: 11.4%) in2005. The weak performance of this industry wascaused mainly by the contraction in product segmentssuch as wire products, metal fasteners, pewter andaluminium products. Meanwhile, the performance ofother segments remained positive, particularly forstructural metal products such as tanks, boilers, pressurevessels and heaters which are used mainly in thepetroleum, food and off-estate processing industries.

Output growth in the paper products industrystrengthened to 7.5% in 2005 (2004: 4.2%), supportedby demand for pulp and paper products and continuedgrowth of containers and paperboards, led by theincrease in packaging activities emanating from thefood and beverages industry.

Output of the food and beverages industries washigher in 2005, underpinned by strong privateconsumption. Of significance, the higher growth in thefood industry was led mainly by the improvements inthe segments related to dairy products as well aschocolate and sugar confectionary. The tobaccoindustry contracted by 3% (2004: 2.9%) due to lowerdemand for cigarettes arising from the higher pricesfollowing the increase in sales tax on cigarettes.

Services SectorIn 2005, the services sector continued to be themajor driver of growth, contributing to 3.8percentage points of the 5.3% GDP growth. Value-added growth of the services sector remained high at6.5% (2004: 6.8%), surpassing the overall GDPgrowth during the year. As a result, the share of thesector to overall GDP increased further to 58.1%(2004: 57.4%; 1995: 51.2%).

An important contributing factor for the continuedlead performance of the services sector in 2005 wasthe strong growth in private consumption.Correlation between final services and privateconsumption is significant (1Q 2000 – 4Q 2005:0.66). Besides the robust private consumption, the

services sector was also driven by higher tourism andbusiness activities and, to a lesser extent by trade-related activities, which picked up towards the latterpart of the year in line with the upward momentumin manufacturing production and exports.

The services sector remainedthe key driver of growthunderpinned by strong growthin private consumption.

In addition, efforts by the Government in recent yearsin promoting new areas of growth in the servicessector also began to yield results and contributetowards the services sector’s growth. These are highvalue-added activities such as information technology(IT) services; shared services and outsourcing (SSO);Islamic finance; investment banking; and health andmedical tourism.

Given the strong private consumption, the finalservices segment (comprising the utilities; wholesaleand retail trade, hotels and restaurants; Governmentservices and other services sub-sectors) registered ahigher growth of 7.1% (2004: 6.6%), the highestrecorded since 1995. Meanwhile, the intermediateservices segment (comprising the transport, storageand communication; and finance, insurance, realestate and business services sub-sectors) grew at amoderate pace of 5.7% (2004: 7.1%). The impact ofthe moderation in manufacturing growth andregional trade was to some extent offset by strongerperformance of other business activity.

p Preliminary

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

1995 1997 1999 2001 2003 2005p

Annual change (%)

Sevices

Graph 1.8 Growth in Private Consumption, Final Services andthe Overall Services Sector

Final services Private consumption


20

The wholesale and retail trade, hotels andrestaurants sub-sector, which accounts for one-fourth ofthe services sector recorded another year of strong growthof 8% (2004: 7.1%). The strong performance wassupported by higher spending by domestic households andforeign tourists. In particular, the distributive trade(wholesale and retail) industry strengthened significantly.The motor vehicles trading and related accessories stores,one of the major components of the distributive tradeindustry recorded a robust performance supported by the13% growth in vehicle sales.

Increase in domestic tourism activity following the fulladoption of the five-day working week for the civilservice since July 2005 was another contributory factorfor the robust performance of the wholesale and retailtrade, hotels and restaurants sub-sector. In addition, thevarious promotions and strategies undertaken by theMinistry of Tourism and the private sector, the change inthe Mega Sales Carnival from twice previously to oncea year (23 July 2005 to 4 September 2005) and theYear-end Sales (new programme: 1 December 2005 to31 January 2006) resulted in increased shopping activitiesduring the year. The strong consumer sentiment andconfidence in the economy also contributed to the higherconsumer spending during the year.

Besides higher domestic tourism, the country also saw anincrease in foreign tourist arrivals, which contributed tothe growth of the wholesale and retail trade, hotels andrestaurants sub-sector in terms of increase in revenuefrom shopping, dining and hotel accommodation. Theincreased number of high-spending and long-haultourists from the Oceanic (Jan-Nov 2005: 28.9%),

Southern Asian (27%), West Asian (15.6%) andEuropean (13%) countries contributed to the growth inthe sector. As a result, the average hotel occupancy raterose to 63.6% in 2005 (2004: 60.8%).

In addition, there was also an increase in long-termtourists as reflected by the 36.4% growth in thenumber of ‘Malaysia, My Second Home’ (MMSH)programme participants (2004: 16.5%). The highernumber of new participants was a result of theincreased efforts taken by the Government inpromoting the programme. Among the key measurestaken by the Government to make the programmemore attractive to foreigners include extending thesocial visa from five years to ten years. Under thecurrent MMSH programme (2002 – 2005), close to7,000 foreign participants have been able to travel andlive in Malaysia for an extended period, as well as tobring their families, purchase residential property andsend their children to Malaysian schools.

Growth in the finance, insurance, real estate andbusiness services sub-sector was sustained at 5.4%in 2005 (2004: 6.3%). Growth emanated fromexpansion in bank lending activities as well as increasedcollection of insurance premiums. Despite the narrowingspreads between the lending and deposit rates amidstthe competition as well as mergers between commercialbanks and finance companies, the increase in total loansoutstanding by 8.6% contributed to the higher netinterest income during the year. The finance segmenthas also been increasingly supported by fee-basedincome arising from the introduction of new bankingservices and products. Islamic banking gained further

Table 1.4Growth in the Services Sector at Constant 1987 Prices

2004 2005p 2004 2005p

Annual change (%) % share of GDP

Services 6.8 6.5 57.4 58.1

Intermediate services 7.1 5.7 23.8 23.9

Transport, storage and communication 8.5 6.3 8.8 8.8

Finance, insurance, real estate and business services 6.3 5.4 15.1 15.1

Final services 6.6 7.1 33.5 34.1

Electricity, gas and water 8.2 5.5 4.1 4.1

Wholesale and retail trade, hotels and restaurants 7.1 8.0 14.3 14.7

Government services 1 6.5 8.8 7.3 7.6

Other services 2 4.9 4.9 7.8 7.8

1 Include general public services (general public administration, external affairs and public order and safety), defence, health, education and others.2 Include imputed rent from owner-occupied dwellings; community, social and personal services; products of private non-profit services to households and domestic

services of households.p Preliminary



21


prominence during the year with the establishment ofthree new Islamic banking subsidiaries and one foreignIslamic bank. As a result, growth in total loans (16.5%),deposits (15.1%) as well as assets (17.7%) of theIslamic banking system continued to remain firm.

Insurance activity was also strong amidst the increasein the penetration rate in the life insurance industry(38.7%; 2004: 37.9%), led mainly by strong growthin premiums collected from new businesses fromendownment; and medical and health insurance, andstronger growth in general insurance, particularly themotor vehicles industry. The increase in net premiumswas also contributed by the higher net contributionfrom the takaful industry, emanating from both thefamily and general takaful funds.

The performance of the business services segmentthat includes the SSO industry and IT services wasalso encouraging. During the year, an additional 19operational headquarters, 15 internationalprocurement centres and three regional distributioncentres were approved. In addition, 37 new SSOcompanies were granted Multimedia Super Corridor(MSC) status during the year, thus bringing the totalto 57 as at end-2005. These entities undertakevarious types of shared services activities with theirrelated and unrelated companies within andoutside Malaysia.

With regards to IT services, the Governmentcontinued to promote MSC as a global ICT hub andto increase the usage and adoption of innovativedomestic ICT products and services. As part of thegradual rollout of the MSC to the rest of the country,Penang and Kulim Hi-tech Park in Kedah weredeclared cybercity status in 2005, thus enabling newMSC-status companies to be based in the northernregion. In the second phase of the rollout (2004 -2010), the focus is on accelerating the MSC flagshipapplications, increasing adoption and introducingnew initiatives to increase its competitiveness. As atend-2005, a total of 1,421 companies have beengiven MSC-status with total approved investment ofRM18.2 billion.

The transport, storage, and communication sub-sector continued to expand by 6.3% in 2005 (2004:8.5%). In the telecommunications industry, growthwas mainly contributed by the cellular segment wherethe number of cellular subscribers and usage of bothvoice and data services continued to increase stronglyduring the year. Cellular subscribers rose by 33.8%(2004: 31.3%) to 19.5 million (74.1% penetration

rate), while short messaging system (SMS) traffic rosesignificantly by 130.8%. During the year, SMS wasincreasingly used as a means of communication andto substitute for telephone voice calls; and in variousapplications, especially in the entertainment andleisure industry. Demand in the telecommunicationsindustry was also induced by the introduction of 3Gcellular phones services during the year. Meanwhile,the number of Internet subscribers rose to 3.7 millionat end-2005, representing a growth of 11.5% (2004:14.3%). As at end-2005, the penetration rate forInternet stood at 13.9% (2004: 12.7%). In the caseof broadband, its usage continued to increase withthe penetration rate rising to 1.9% as at end-2005(end-2004: 1%).

Nevertheless, growth in the telecommunicationsindustry was more moderate compared to 2004,following the downward trend in average revenue peruser (ARPU) of cellular phones during the year. Thiswas due to the keen competition amongtelecommunication players, as well as lower spendingby new cellular subscribers, consisting mainlystudents and other lower income groups attracted bythe introduction of low-priced starter packs.

Table 1.5Selected Indicators for the Services Sector

2004 2005p

Annual change (%)

Electricity production index 8.2 5.8Loans outstanding in the banking system 8.5 8.6

Insurance premiums 16.3 7.7

Bursa Malaysia (turnover, volume) -4.2 -4.7

Bulk cargo throughput at five major ports1 9.2 3.4

Container throughput at six major ports2 10.7 4.6

Airport passenger traffic 18.9 4.8

Air cargo handled 10.5 4.3

Consumption credit outstanding 16.4 18.7

Imports of consumption goods 24.1 5.9

Tourist arrivals 48.5 4.33

SMS traffic 54.7 130.8

%

Hotel occupancy rate 60.8 63.6

Penetration rate:

- Internet dial-up 12.7 13.9

- Broadband 1.0 1.9

- Mobile phone 56.5 74.1

- Fixed line 17.2 16.61 Port Klang, Johor Port, Penang Port, Sabah Ports and Bintulu Port2 Port Klang, Johor Port, Port of Tanjung Pelepas, Penang Port, Sabah Ports and

Bintulu Port3 Refers to Jan-Nov data

p Preliminary

Source: Department of Statistics, Malaysia; Malaysia Airports Holdings Berhad; BursaMalaysia Berhad; Malaysian Communications and Multimedia Commission; Ministryof Finance; Relevant port authorities; Malaysia Tourism Promotion Board and BankNegara Malaysia.


22

Meanwhile, the transportation segment grewmoderately in line with the slower expansion intrade-related activities and moderate growth inpassenger travel. Total container throughput at thefive major ports increased by 4.6% in 2005 (2004:10.7%), while the air cargo volume increased by4.3% (2004: 10.5%). After a significant increase intourist arrivals in 2004 in the post-SARs recoveryperiod, air passengers at all airports grewmoderately by 4.8% in 2005 (2004: 18.9%). Totalpassenger traffic at the Kuala Lumpur InternationalAirport recorded a growth of 10.2% (2004: 20.6%)to reach 23.2 million passengers in 2005, supportedby new landings and increase in flight frequencies ofseveral international airlines as well as growth in thebudget airlines. Passengers carried by the domesticbudget airline rose by 30.1% or 1.1 million to atotal 4.8 million in 2005. The significant increasewas in response to new routes introduced by thebudget carrier during the year. The year also saw ahigher growth in land and rail passenger traffic asreflected by an increase in toll revenue from majorhighways as well as higher light rail transitriderships.

In the Government services sub-sector, theintroduction of new allowances and increase inexisting allowances for selected civil servants, yearlyincrements as well as bonus payments led to higheremoluments, with the sub-sector recording a highergrowth of 8.8% (2004: 6.5%).

Growth in the other services sub-sector was sustainedat 4.9% supported by expansion in other privateservices, namely entertainment and new areas such asprivate medical and healthcare services, private highereducation services and multimedia broadcastingservices. Malaysia is increasingly becoming a choicecentre for medical tourism, particularly in niche areassuch as cardiology, radiology, general surgery andwellness programme. Revenue from the privatehealthcare services, including private hospitals, recordeda strong growth as a result of more Malaysians andforeigners seeking medical treatment and healthscreenings in private hospitals and clinics. As at end-2005, 35 private hospitals are recognised by theMinistry of Health for the promotion of health tourism.In the private higher education services industry, thereare more than 550 private higher educationalinstitutions in 2005, including 11 private universities, 12university colleges, five foreign university branchcampuses and 537 private colleges, serving around312,000 local students and 27,000 foreign students.The majority of the foreign students were from PR

China and Indonesia, which accounted for a combinedshare of about 53.5% of total foreign students.

Meanwhile, the utilities sub-sector expanded by 5.5%(2004: 8.2%), supported by continued strong expansionin the economy, which resulted in sustained demand forelectricity, particularly from the commercial andhousehold sectors.

Agriculture SectorGrowth in the agriculture, forestry and fishing(agriculture) sector expanded at a more moderatepace of 2.1% in 2005 (2004: 5%). The growth wasmainly supported by strong performance in the palmoil sector and higher growth in livestock, particularlypoultry. Meanwhile, output of other agricultureactivities including rubber, fisheries, saw logs, cocoaand paddy, declined during the year affected byfactors related to nature. During the year, theGovernment together with the private sectorcontinued in efforts to revitalise the agriculturesector and to sustain its importance as the thirdlargest economic sector in the country. This wasreflected in terms of the share of the sector tooverall GDP (8.2%) as well as employment, with12.9% of the overall labour force or 1.41 millionpeople involved in the activity. On the external front,

The agriculture sectorcontinued to expand, ledmainly by strong performancein the palm oil sector amidst thefavourable commodity prices.

foreign exchange earnings from agriculture exportsgrew by 3.4% to account for 7% of total grossexports during the year.

While the palm oil sector benefited from high yieldsand an increase in mature areas, performance of theother agriculture crops were affected during the yearby unfavourable weather conditions. In the initialpart of the year, the after-effects of the Tsunami aswell as the dry weather spell affected fishing andrubber activities. This was subsequently followed byrainy conditions towards the end of the year whichdisrupted rubber tapping and harvesting activities ofmany crops. Nevertheless, plantation companies andfarmers continued to be encouraged by thefavourable commodity prices in the global market.At the same time, yields continued to rise as a resultof Good Agriculture Practices, which placed


23


emphasis on intensive application of agriculturalinputs such as fertilizers and utilisation of labour-saving technologies among estates and smallholders.

During the year, the Government continued tointensify its efforts to deepen and broaden theagriculture base as well as to encouragedownstream activities to strengthen the linkages tothe other sectors of the economy. Governmentministries and agencies have begun implementingplans to transform and modernise the agriculturesector through higher productivity, acceleratedprivate sector involvement (including government-linked companies) and deeper linkages betweenupstream activities and downstream agro-basedindustries.

Of significance, the food crops sub-sector, whichaccounts for about 40% of the value added in theagriculture sector, has vast potential for creation ofdownstream value-adding activities such asprocessed and manufactured products for bothdomestic consumption and exports. These newactivities would not only accentuate the growthpotential of the economy and increase exportearnings, but would also ensure that the ruralcommunities involved in the agriculture sector enjoyhigher and more stable income.

Crude palm oil (CPO), which is the most importantcrop in terms of value added in the agriculture sector(37%), saw another year of strong expansion, growingby 7% to reach a record high of 14.96 million tonnes

Table 1.6Agriculture Sector: Value Added, Production and Exports

2004 2005p

Volume and Value Annual change (%) Volume and Value Annual change (%)

Value Added (RM million at 1987 prices) 21,137 5.0 21,585 2.1

Production1

of which:

Crude palm oil 13,976 4.7 14,961 7.0

Rubber 1,169 18.6 1,124 -3.8

Saw logs 21,509 -0.1 21,334 -0.8

Cocoa beans 33 -7.8 28 -16.3

Fish landings 1,528 3.2 1,424 -6.8

Exports (RM million) 36,176 7.4 37,421 3.4of which:

Palm oil

(‘000 tonnes) 11,788 -5.6 13,073 10.9

(RM/tonne) 1,706 5.5 1,456 -14.6

(RM million) 20,107 -0.4 19,036 -5.3

Rubber

(‘000 tonnes) 1,105 16.7 1,128 2.1

(sen/kilogramme) 470 24.3 513 9.0

(RM million) 5,198 45.1 5,787 11.3

Saw logs

(‘000 cubic metres) 5,207 -5.9 5,759 10.6

(RM/cubic metre) 398 8.9 428 7.7

(RM million) 2,070 2.5 2,465 19.1

Sawn timber

(‘000 cubic metres) 3,166 13.5 3,685 16.4

(RM/cubic metre) 1,015 -10.4 1,099 8.3

(RM million) 3,214 1.7 4,051 26.0

1 All in ‘000 tonnes, except for saw logs in ‘000 cubic metres.p Preliminary

Source: Department of Statistics, MalaysiaMalaysian Palm Oil BoardForestry Departments (Peninsular Malaysia, Sabah and Sarawak)Malaysian Cocoa BoardFisheries Department, Malaysia


24

in 2005. This represented the third consecutive year ofstrong growth (2004: 13.98 million tonnes, +4.7%;2003: 13.36 million tonnes, +12.1%). The increase inproduction was mainly in the first half-year (20.3%)due to a bumper harvest. The substantial increase wasattributed to two main factors.

First, during the year, the mature oil palm acreage rosesubstantially by 5.2% (179,790 hectares) to 3.63 millionhectares (2004: +4.5%). The increase was reflectedacross all regions, with mature acreage in PeninsularMalaysia rising by 5.3% to 2.07 million hectares,Sabah’s acreage increasing by 3.9% to 1.12 millionhectares, while Sarawak’s was higher by 8.3% to 0.44million hectares. Of significance, production in Sabah(the largest producer by state accounting for 5.33million tonnes or 35.6% of total production) andSarawak recorded double-digit increases of 11.9% and19.7%, respectively, while production in PeninsularMalaysia rose by 2.4%. Overall, Peninsular Malaysiacontinued to account for a majority share of about 55%to total Malaysian CPO production (2004: 58%).

The second factor contributing to the strongproduction was the continued uptrend in palm oil yieldproductivity as reflected by the increase in oilextraction rates (OER) and output of fresh fruitbunches (FFB). The Malaysian OER continued to remainabove the critical 20% threshold for the secondstraight year, rising to 20.15% (2004: 20.03%). This isa key performance indicator in the industry as every1% increment in OER translates to an estimated

increase of about 500,000 tonnes in CPO output. FFByields were also higher by 1.5% to 18.88 tonnes permature hectare (2004: 18.60 tonnes per mature hectare).In the light of these positive developments, Malaysiacontinued to maintain its status as the world’s largestpalm oil producer and exporter, accounting for 45% ofworld output and 51% of world exports.

Prices of palm oil remained supportive of the industry in2005 with the CPO local delivery price averagingRM1,398 per tonne. Nevertheless, compared with theprevious year, the price was lower by 16% (2004:RM1,664 per tonne). Palm oil prices began toconsolidate since the second half of 2004 due to theincrease in the supply of global edible oils as well as theincrease in domestic palm oil stocks. The trend continuedinto 2005 with the price declining in the first half-year by24.7% to RM1,391 per tonne before stabilising atRM1,405 per tonne in the second half-year. The sharpincrease in palm oil harvests (1H 2005: +20.3%; 1H2004: -2.3%) and the attendant increase in domesticpalm oil stocks (May: 1.48 million tonnes) led to softerprices. Nevertheless, prices remained relatively stable inthe second half-year supported by other mitigatingfactors such as the sluggish soybean harvest in the LatinAmerican region as well as expectations of futuredemand for palm oil-based biodiesel. Overall, CPOremained competitive against other major edible oils, asthe price discount of CPO to that of soybean oil andrapeseed oil widened further during the year to USD123per tonne and USD237 per tonne, respectively.

The People’s Republic of China (PR China) remained asthe largest importer of Malaysian palm oil in 2005,accounting for 22.1% of the total exports. However,export growth to PR China grew at a more moderatepace (2005: 2%; 2004: 13.1%) despite the fact that PRChina’s import quota for palm oil was raised from 2.7million tonnes in 2004 to 3.2 million tonnes in 2005. The

2001 2002 2003 2004 2005p0

2

4

6

8

10

12

14

16

Graph 1.9 Oil Palm: Area, Production and Yield

Production in million tonnes (RHS)

Hectare Tonne

Mature area in '000 hectares (LHS)

Yield of CPO in tonnes per mature hectare (RHS)

p Preliminary

Source: Malaysian Palm Oil Board (MPOB)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

400

800

1,200

1,600

0

500

1,000

1,500

2,000

0

Price (RM/tonne)

1Q 1Q 1Q 1Q2Q 3Q 4Q 2Q 3Q 4Q 2Q 3Q 4Q 2Q 3Q 4Q

Source: Malaysian Palm Oil Board (MPOB)

2002 2003 2004 2005

Graph 1.10Palm Oil Price and Stocks

Stocks ('000 tonne)

CPO local delivery price

Stocks


25


moderation in demand was due to Chinese importersreducing their purchasing activities in the second half-year in anticipation of the impending changes in importduties. In line with PR China’s commitment under theWorld Trade Organisation, effective 1 January 2006, thequota for edible oil imports was abolished and astandardised import tariff of 9% was imposed across alledible oils. This would be a positive development forpalm oil exports to PR China.

Meanwhile, demand for palm oil from the US increasedsubstantially by 79.4% (534,137 tonnes; 2004: +28.7%),as US food manufacturers began to increase the usage ofpalm oil as a substitute to other edible oils. Beginning 1January 2006, the US Food and Drug Administration(FDA) would require food manufacturers to labelproducts that contain trans fatty acid as clinical studieshave linked trans fatty acid to serious diseases. Palm oil,which is trans fatty acid free, has benefited from thisregulation. During the year, purchases from India declinedfurther (-28.2%; 2004: -44%) as the discriminatoryincrease in import tariff rates for palm oil compared tosoybean oil had resulted in higher import prices and,consequently, lower demand from Indian buyers.

The Malaysian palm oil industry continued to makesignificant progress in terms of research anddevelopment. The Malaysian Palm Oil Board (MPOB)introduced 43 new technologies and products forcommercialisation in the industry, and undertook 312research projects during the year. The new breakthroughswere mainly in developing cost-effective milling andrefining techniques, improving yields, minimisingwastage, eradicating diseases and creating higher value-added palm-based products, as well as palm-basedbiomass.

Another important development in the palm oil industryin 2005 has been the commercialisation of palm oil-based biofuel at a global level. Amidst the increase inenergy prices, countries began to seek alternative sourcesof energy, particularly from renewable resources. Amongthe renewable energy resources, palm oil has distinctadvantages over other sources both in terms of pricecompetitiveness as well as ready availability as Malaysianpalm oil stocks have consistently been above 1 milliontonnes over the last three years. Malaysia has pioneeredthe development of this technology through sustainedresearch and development efforts which began a fewyears ago. The current high energy price environment hasmade it both feasible and necessary for Malaysia toembark on palm oil-based biofuel on a large scale. Thiswould help to meet the higher demands in energyconsumption from domestic users, create a new source

of export earnings and stabilise the volatility in CPO pricemovements.

In line with this development, in August 2005, theGovernment announced the formulation of the NationalBiofuel Policy, which will be completed in 2006. Thepolicy would provide guidelines on biofuel usage for allrelated sectors (particularly transportation, petroleumcompanies and palm oil industries), in addition tostandardising the B5 biodiesel mixture for the domesticmarket (5% from processed palm oil, 95% frompetroleum diesel), and ensuring that the palm biodiesel(chemically known as methyl ester) produced for theexternal markets conform to international standards. Aspart of the biofuel policy, attractive incentives would alsobe provided to encourage the growth in the biodieselindustry in Malaysia. To date, the interest in this industryhas been tremendous with five palm biodiesel plants inthe pipeline to commence operations in late 2006. Atthe same time, a pilot project to utilize B5 biofuel intransportation vehicles would be implemented byselected Government agencies.

After expanding at a strong pace in the last two years,natural rubber production declined in 2005 by 3.8% to1.12 million tonnes (2004: 1.17 million tonnes).Nevertheless, the output level remained above the keythreshold mark of 1 million tonnes. The decline inproduction during the year was due entirely to adverseweather conditions. Usually rubber trees produce lesslatex during the wintering months of February to April,

Production in million tonnes (RHS)

Export prices in sen per kg (LHS)

Average yield in kg per tapped hectare (RHS)

sen

p Preliminary for average yield

Source: Malaysian Rubber Board (MRB) and Department of Statistics.

'000 tonne or kg

Graph 1.11 Natural Rubber: Production, Prices and Yield

2001 2002 2003 2004 2005p0

50

100

150200

250

300

350

400450

500

550

0

200

400

600

800

1,000

1,200

1,400


26

but in 2005, exceptionally dry weather conditionsduring this period further aggravated the situation,thus resulting in declines in output on a year-on-yearbasis. In the last two months of the year, adverseweather, namely excessive rain, reduced tappingactivity by smallholders, who account for almost 95%of total Malaysian rubber output. At the same time,the total tapped areas continued to decline, by 4% to767,340 hectares, as more rubber land holdings wereeither being replanted with new rubber trees (2005:23,000 hectares, with 94% replanted bysmallholders), or in the process of being convertedinto other economic activities during the year.Nevertheless, Malaysia retained its position as thethird largest producer of natural rubber after Thailandand Indonesia, with a 13% share of world output.

On the price front, Malaysian natural rubber pricescontinued on a strong upward trend in 2005 in linewith developments in the global market. Prices ofSMR20, the Malaysian benchmark, showed a double-digit growth for the third consecutive year, rising by13.4% to average 523 sen per kilogramme in 2005(2004: 461 sen/kg). In particular, prices rosesignificantly in the second half of the year to reachthe highest daily traded price of 632 sen perkilogramme on 30 December 2005, while themonthly high of 588 sen per kilogramme wasrecorded in October 2005. The firming of rubberprices was supported by seasonal and fundamentalfactors. On one hand, global rubber supply wasconstrained due to adverse weather conditions in thekey producing regions. Meanwhile, global demandcontinued to remain strong, particularly fromPR China, driven by the rapid expansion in theautomotive industry.

The strong demand coupled with the low productionresulted in a significant fall in global stocks to reach arecord low level, especially in the latter half of theyear, thus exerting upward pressure on prices. Inaddition, natural rubber’s closest substitute, syntheticrubber, which is a petrochemical product continuedto record higher prices in line with higher crude oilprices. For the first time in 23 years, natural rubberprices rose above synthetic rubber prices.

Export proceeds from rubber rose markedly by11.3% to RM5.8 billion in 2005, accounting for1.1% of total gross exports. Almost one-third of therubber exports during the year comprised shipmentsto PR China (2004: 26.1%). For the fourthconsecutive year, PR China continued to increase its

rubber purchases at a double-digit rate (33.7%;2004: 39.2%). The higher off-take was fuelled bystrong demand from tyre manufacturers arising fromthe rapid expansion in the domestic automotiveindustry. Apart from PR China, the other majorbuyers were the European Union (EU) countries,particularly Germany and France, accounting for28.3% of total rubber exports.

In recent years, natural rubber has regained itsstatus as one of the key commodities in theMalaysian agriculture sector due to its stronglinkages to the overall economy, both to the rural-based smallholders, as well as to key export-oriented downstream rubber industries, such asrubber glove and tyre manufacturing. The strongnatural rubber prices have benefited thesmallholders in terms of raising their income levels,and this has been a significant factor in revivinginterest in the sector. Besides increasing tappingactivities, smallholders have also adopted betterexploitation technologies such as the low frequencytapping system (LITS) and Good AgriculturalPractices by using stimulants to improve yields inorder to take advantage of the high prices.

In addition, the Government has also encouragedrubber smallholders to undertake replanting activitiesto ensure sustainable production in the coming years.As of end-2005, the programme has succeeded inreplanting of rubber trees covering 23,000 hectaresof land, supported by rising confidence amongsmallholders and the effects of high rubber prices.Smallholders were also encouraged to replant latextimber clones (LTC) which yield higher latex and alsoensure an adequate supply of rubber wood, once thetrees become too aged to produce latex. This wouldhelp meet the expected increase in domestic demandfrom the local furniture industry in the coming years.

Performance of other agriculture commodities,comprising fisheries, livestock, as well asmiscellaneous agriculture (which includes paddy,fruits and vegetables) showed a mixed trend in 2005.Value added in the livestock sub-sector increased by4.7%, led mainly by higher growth in output ofpoultry (+5.7%), as many large-scale poultryoperators, primarily public-listed companies tookadvantage of the incentives provided by theGovernment to modernise their operations. Thus,these companies have invested substantially onpoultry rearing techniques using the climate-controlled closed house system that not only


27


increased production, but most importantly,maintained internationally-recognised hygieneconditions. The increase in poultry output and theassurance on quality have been the main factorsbehind the substantial rise seen in external demand,in addition to meeting demand from the domesticfood processing industries.

Meanwhile, output in the fisheries sub-sectordeclined by 6.8% in 2005 to 1.42 million tonnes(2004: 1.53 million tonnes), due mainly to lowermarine landings (2005: -9.2%; 2004: 3.8%) as aresult of the after-effects of the Tsunami, as well asthe rise in diesel prices which affected fishingactivities. However, this was partially mitigated bythe increase in aquaculture harvests, whichaccounted for about 15% of the total output in thefisheries sector (2005: +9.8% to 215,475 tonnes).Aquaculture products such as seaweed, surimi andornamental fish are high value-added activitiesmainly targeted for the export market. Meanwhile,output of paddy also declined in 2005 due toadverse weather conditions.

In the forestry sector, logging activities declined in2005 in line with Malaysia’s policy on conservationby implementing sustainable forest managementpractices. Production of saw logs declined slightly by0.8% to 21,334 million cubic metres (2004: 21,509million cubic metres). Nevertheless, global demandfor Malaysian logs and sawn timber strengthenedsignificantly during the year, particularly from PRChina and the EU countries. The strong demand wasalso due partly to the continued ban on exports oflogs and sawn timber by Indonesia since 2004.Consequently, average Malaysian log prices reacheda record high of RM428 per cubic metre in 2005.Amidst the increase in export prices (7.7%) and therise in volume of 10.6%, export receipts from sawlogs rose significantly by 19.1% to RM2.5 billion. Interms of sawn timber, export proceeds strengthenedby 26% to RM4.1 billion, due to higher volume(16.4%) and prices (8.3%).

With regards to the environment, Malaysia has beenat the forefront in driving initiatives on responsibletrade in tropical timber products. In the last fewyears, the Malaysian timber industry has taken vitalsteps in addressing the issue of illegal logging,unsustainable forest management and trade inendangered tropical species. Malaysia has developedits own timber certification scheme that assuresimporters and consumers that Malaysian timber

products are from legal and sustainable sources. Byend-2005, the Malaysian Timber CertificationCouncil (MTCC) has awarded the Certificate forForest Management to eight states in PeninsularMalaysia and the Upper Ulu Baram region inSarawak, covering a total of 4.73 million hectares ofpermanent reserve forests.

In addition, 83 timber companies had been certifiedfor ‘chain-of-custody’, ensuring that the timberproducts are sourced from MTCC-certified forestsand are legally harvested. The credibility of thesecertification efforts has been recognised by majorbuyers of Malaysian timber products, most recentlyby a number of EU countries (United Kingdom,Germany, France, Belgium and the Netherlands) thathave a public procurement policy aimed ateradicating imports of timber from illegal sources. Inaddition, the Government has also been vigilant inenforcing regulations on trade in endangered timberspecies (such as Ramin, Karas and Gaharu) fromneighbouring countries, in accordance with theregulations under the Convention for InternationalTrade of Endangered Species of Wild Flora andFauna (CITES). As part of the strategy onimplementing sustainable forest management, theGovernment also continued its efforts on forestplantation. During the year, it was announced that aRM200 million grant would be given to establish aforest plantation programme to reduce thedependence on tropical timber.

Meanwhile, output of cocoa declined further by16.3% to 27,964 tonnes (2004: 33,423 tonnes). Thedecline in production was mainly attributable tocontinued reduction in cultivated area to 33,313hectares (2004: 41,612 hectares; 1990: 393,000hectares) mainly reflecting active conversion ofcocoa land into other crops. The lower productionwas also attributable to the lack of application ofinputs such as fertilizers and pesticides by cocoafarmers as a result of the rising cost of these inputs.To encourage cocoa planting among smallholders,the Malaysian Cocoa Board implemented the CocoaSmallholders’ Development Programme. Currently,there are 4,860 farmers who are actively involved inthe programme, with a total area of 5,368 hectares.The Government has also announced that cocoasmallholders will be given a 100% replanting grant,in addition to the prevailing assistance given in theform of high-yielding clones, disease-resistantplanting materials as well as technologicalassistance.


28

Mining SectorThe mining and quarrying (mining) sectorexpanded by 0.8% in 2005 due entirely to higherproduction of natural gas and condensates, whilecrude oil production was lower. Production of tin-in-concentrates rose slightly by 2% to 2,800 tonnes.During the year, the global energy market wascharacterised by high prices arising from thecontinued fine balance between demand and supplyof energy sources amidst the lack of spare outputcapacity in the major oil producing countries. As a netenergy-exporting nation, Malaysia benefited from thehigh prices, leading to a significant increase in exportproceeds from minerals for the third consecutive year(+27.1% to RM52.3 billion; 2004: +38.2% toRM41.2 billion). Of significance, the proportion ofmineral exports to total gross exports rose further to9.8% (2004: 8.6%), further underlining thesignificance of the oil and gas industry to theMalaysian economy.

Value added in the miningsector was sustained,supported by strongperformance in natural gasamidst the high energy prices.Production of crude oil including condensatesaveraged 726,860 barrels per day (bpd), representing adecline of 4.9% from the level recorded in 2004(762,318 bpd or +3.6%). The lower output was duemainly to the decline in production of crude oil, whilecondensates rose sharply in line with the upward trend innatural gas production. The lower production of crudeoil to 571,359 bpd (2004: 623,957 bpd) was caused byshutdown of several oil installation facilities during theyear for repair and maintenance purposes. Nevertheless,the production was within the range set for the yearunder the National Depletion Policy, which has been

Table 1.7Mining Sector: Value Added, Production and Exports

2004 2005p

Volume and Value Annual change (%) Volume and Value Annual change (%)

Value added (RM million at 1987 prices) 17,372 3.9 17,504 0.8

Production

Crude oil and condensates (barrels per day) 762,318 3.6 726,860 -4.9

of which:Crude oil (barrels per day) 623,957 0.6 571,359 -8.7Condensates (barrels per day) 138,361 19.6 155,501 12.1

Natural gas - net(million standard cubic feet per day) 5,196 4.0 5,800 11.3

Tin-in-concentrates (tonnes) 2,745 -18.3 2,800 2.0

Exports (RM million) 41,177 38.2 52,321 27.1of which:

Crude oil and condensates(‘000 tonnes) 18,090 1.0 17,719 -2.0(USD/barrel) 40.81 34.8 55.93 37.0(RM million) 21,318 36.1 28,508 33.7

Liquefied natural gas (LNG)(‘000 tonnes) 20,729 19.7 21,948 5.9(RM/tonne) 824 6.8 947 15.0(RM million) 17,079 27.9 20,790 21.7

Tin(tonnes) 29,966 96.6 33,610 12.2(RM/tonne) 31,585 68.6 27,827 -11.9(RM million) 947 231.5 935 -1.2

p Preliminary

Source: PETRONASDepartment of Statistics, MalaysiaDepartment of Minerals and Geoscience, Malaysia


29


implemented since 1980 to ensure a sustained andregulated development of the country’s oil resources. Thedepletion policy and discoveries of new oil fields over theyears has led to the expansion in Malaysia’s oil reservelifespan to 20 years (2002: 15 years).

Meanwhile, production of condensates increased ata double-digit rate (12.1%) for the fourthconsecutive year, to a record high of 155,501 bpd(2001: 86,855 bpd). Condensates, which in itsnatural state is in gaseous form but condenses toliquid upon production, shares the same propertiesas that of the Malaysian light, sweet crude oil. Inrecent years, the contribution of condensates tototal Malaysian oil production has increasedsignificantly. Condensates now account for 21.4%of the total oil output of 726,860 bpd in 2005(2001: 13%), thus complementing the country’sproduction of crude oil as the source of liquid fuelfor purposes of exports and fulfilling the domesticconsumption requirements. In 2005, export proceedsfrom crude oil and condensates rose further by33.7% to RM 28.5 billion (2004: +36.1% to RM21.3billion), thus accounting for an increased share of5.3% of total exports (2004: 4.4%).

Prices of the Malaysian benchmark crude oil grade,Tapis Blend, continued to strengthen by 39.3% toUSD57.26 per barrel in 2005 (2004: USD41.12 perbarrel) in line with developments in the globalenergy markets. In particular, there was a strongdemand for “light sweet” crude oil, primarily fromthe US market. US refineries are mainly catered toprocess light sweet crude that has low sulphurcontent which enables uncomplicated and cost-effective refining processing. Tapis Blend, a “light

sweet” variety, which has always commanded apremium over other “sour” crude, benefited furtherduring the year, as the premium widened in 2005.

The increase in global crude oil prices during the yearwas supported by strong fundamentals. The market wasinfluenced by a combination of high global demand andtight supply amidst lack of spare production capacity(2005: 1.5 million bpd; 2001: 4.5 million bpd) as aresult of under-investment by major oil producingcountries in the last few years. According to theInternational Energy Agency, global demand for crudeoil in 2005 rose to 83.3 million bpd, mainly fuelled bydemand from the US and PR China, while global supplywas only slightly higher at 84.1 million bpd. Despite theOrganisation of Petroleum Exporting Countries (OPEC)’sdecision in July 2005 to effectively suspend its outputquota system among the member countries byproducing at 28 million bpd, the highest level in over 25years, prices continued to remain high. The high priceswere also partly due to the lack of refining capacities inthe major consuming nations, particularly in the US,which had resulted in an inability to sufficiently producerefined petroleum products (such as gasoline anddistillates) to meet the high demand during the summerand winter seasons. Consequently, the market wassensitive to movements in stock levels, particularly in theUS, as it was a reflection of the risk of short supply.

During the year, market sentiment was also highlysusceptible to events that could potentially disruptsupply given that the major producing countries wereoperating at close to full capacity. Thus, when HurricaneKatrina struck the US in late August, which saw theshutdown of about 70% of the supply in the Gulf ofMexico region, oil prices (West Texas Intermediate andTapis Blend) soared close to the USD70 per barrelthreshold. Market participants also remained highlysensitive during the year to geopolitical events occurring

2001 2002 2003 2004 2005p

Barrels per day (bpd)

Graph 1.12Production of Crude Oil and Condensates

p Preliminary

Source: PETRONAS

Crude oil Condensate

0

200,000

400,000

600,000

800,000

Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05

West Texas Intermediate (WTI)

Tapis Blend

USD per barrel

Graph 1.13 Crude Oil Prices (1-Month Futures) in 2005

Dec-05

Highest level recorded on 1 Sept:Tapis USD69.91WTI USD69.47

354045505560657075


30

in major producing countries. The global benchmark oilprices, namely West Texas Intermediate and North SeaBrent, averaged higher at USD56.59 and USD54.86 perbarrel, respectively (2004: USD41.40 and USD38.34 perbarrel, respectively). The Tapis Blend ended the year atUSD62.05 per barrel, which was almost USD20 higherthan the price at 1 January 2005 (USD42.11 per barrel).

Natural gas production continued to strengthen in 2005,growing by 11.3% to a record high of 5,800 millionstandard cubic feet per day (2004: 5,196 mmscfd). The risein output was driven by increasing demand from traditionalbuyers, consisting of domestic power generators(accounting for about 70% of total domestic gas users) andindustrial users (primarily in the manufacturing sector), aswell as major importers of liquefied natural gas (LNG). Thishas subsequently led to increased utilisation rate at theMLNG plants in Sarawak, as well as the Gas ProcessingPlants (GPPs) in Peninsular Malaysia.

During the year, LNG prices also rose significantly in linewith developments in the global energy markets. In thesecond-half of 2005, natural gas prices in the globalmarket strengthened sharply following the disruption insupply in the US in the aftermath of Hurricane Katrina. TheMalaysian LNG export price rose to breach the RM1,000per tonne threshold for the first time in September, andpeaked at RM1,066 in December. For the year as a whole,the Malaysian LNG export prices averaged RM947 pertonne, an increase of 15% (2004: 6.8%).

Given the higher prices and increase in export volume,LNG export proceeds for the year rose substantially by21.7% to RM20.8 billion (2004: RM17.1 billion), resultingin its share to total exports rising to 3.9% (2004: 3.6%).The higher export volume (5.9% to 21.9 million tonnes;2004: 20.7 million tonnes) was mainly due to higherofftake from traditional buyers, particularly Japan and

Korea which rose by 9.1% and 3.8% respectively to caterfor their power generation industry.

The Malaysian oil and gas industry received furtherboost in 2005 with new discoveries of oil and gasresources following some major discoveries offshoreSabah from 2002 through 2004. During the year, sevennew offshore oil fields were discovered, of which fourwere in Sabah, two in Sarawak and one in PeninsularMalaysia. This brought the total number of oil fieldsdiscovered in Malaysia to 153. In addition, 12 newproduction sharing contracts (PSCs) were signed duringthe year, thus resulting in the total number of PSCs inMalaysia to increase to 59. In 2005, 54 exploration wellsand 78 development and production wells were drilled.

Production of tin-in-concentrates rose slightly by 2%to 2,800 tonnes in 2005 (2004: 2,745 tonnes). Averageprices of tin, as traded on the Kuala Lumpur Tin Market,remained relatively high at USD7,356 per tonne (2004:USD8,494 per tonne), supported by high demand fromthe electronics industry. In recent years, arising from theenvironmental guidelines set by the European Union,lead has been gradually replaced with tin as the mainmaterial in soldering activities in the electronics industry.

Construction SectorValue added in the construction sector declined by1.6% in 2005. The contraction was due to weakactivity in the civil engineering sub-sector followingthe completion of many privatised infrastructure

Activity in the constructionsector was supported by theresidential and non-residentialsub-sectors. Civil engineeringmeanwhile, continued tocontract.projects in recent years. However, the residential andnon-residential sub-sectors continued to expand duringthe year. The residential sub-sector was supported byfavourable demand, particularly in choice locationsamidst the attractive financing environment.Meanwhile, the non-residential sub-sector benefitedfrom the buoyant business and retail activities.

The civil engineering sub-sector remained weak, inthe absence of new large infrastructure projects. Theexcess capacity in this sub-sector encouraged manyMalaysian construction companies to venture abroad.Among the successfully secured contracts were in road

Table 1.8Malaysia: Crude Oil and Natural Gas Reserves1

As at end

2004 2005p

Crude oil (including condensates)Reserves (billion barrels) 5.29 5.38Reserve/Production (year) 19 20

Natural gasReserves (trillion standard cubic feet) 85.20 84.92Reserve/Production (year) 33 33

1 The National Depletion Policy was introduced in 1980 to safeguard theexploitation of the national oil reserves by postponing the development andcontrolling the production of major oil fields (with reserves of 400 million barrelsor more).

p Preliminary

Source: PETRONAS


31


building, housing, power generation and airportprojects in the regional and Middle Eastern nations.In particular, India continued to be the majordestination for Malaysian contractors given itscurrent huge spending on infrastructuredevelopment. On the domestic scene, ongoingprojects related to power generation plants, roads,ports, water and sewerage continued to support thecivil engineering activity. Furthermore, constructionactivity in the oil and gas sector was high, supportedby investments in oil rigs, following recent oildiscoveries in Malaysia.

Activity in the non-residential sub-sector continued toimprove in 2005, underpinned by firm demand foroffice and retail space amidst the robust businessactivities. Overall occupancy rates for office and retailspace improved to 83.8% and 80% respectively as atend-September 2005, from 82.1% and 79.6%respectively at end-2004. Reflecting the increaseddemand, average monthly rentals for prime office spacein the Klang Valley edged up slightly from RM46 per sq.metre in 2004 to RM48 per sq. metre in 2005, whilerentals for retail space in shopping complexes rose fromRM242 per sq. metre to RM254 per sq. metre.

In the office segment, 17 new office buildings, mainlyGovernment buildings, with a total space of 605,000square metres were added on to the market. As aresult, total stock of office space as at end-September2005 was 14.1 million sq. metres (end-2004: 13.5million sq. metres). Meanwhile, in the retail segment,an additional 209,000 sq. metres were completed,

bringing the total stock to 7.3 million sq. metres.Demand for retail space was encouraged by the stronggrowth in the retail segment, supported by buoyantprivate consumption activities during the year.

In the case of hotels, 15 new hotels were completedduring the year, bringing the total sum to 2,239 hotelsin the country, providing 149,106 rooms. Averageoccupancy rates for hotels improved to 63.6% from60.8% in 2004, supported by increased tourist arrivalsand domestic tourism activity.

The residential sub-sector remained important insupporting construction activity during the year. Demandfor residential property was sustained by interest in newproperties, especially in prime locations. The increase in

Graph 1.14 Supply and Occupancy Rate of Purpose-Built Office Space in Malaysia: 2001 - 2005

Existing Stock

Net lettable area('000 sq.m)

Occupancy rate (%)

Occupancy Rate (%)

Occupied Space

p PreliminarySource: NAPIC, Valuation and Property Services Department.

0

4,000

8,000

12,000

16,000

70

75

80

85

90

2001 2002 2003 2004 3Q 2005p

Graph 1.15 Supply and Occupancy Rate of Retail Space in Malaysia: 2001 - 2005

Existing Stock

Net lettable area ('000 sq.m)

Occupancy rate (%)

Occupied Space

Occupancy Rate (%)

p PreliminarySource: NAPIC, Valuation and Property Services Department

0

2,000

4,000

6,000

8,000

70

75

80

85

90

2001 2002 2003 2004 3Q 2005p

1999 2000 2001 2002 2003 2004 2005

Graph 1.16Average Monthly Rentals for Prime Office and Retail Space in the Klang Valley 1

RM/sq.m RM/sq.m

Prime office space (LHS)

Prime retail space (RHS)1 Refers to Kuala Lumpur and Selangor. Source: CH Williams Talhar & Wong Sdn. Bhd.

38

40

42

44

46

48

50

0

50

100

150

200

250

300


32

income levels amidst the stable employment market,low interest rates and attractive financing packagesoffered by financial institutions supported buyinginterest. Nevertheless, activity was more moderatethan the growth seen in 2004, which was induced bythe incentives provided under the 2003 EconomicPackage. This was evidenced by the lower take-uprates in the first half of 2005 of 32.7% compared to48% in 2004. Purchasers became more discerning inbuying properties, due to the intense competitionamong developers and the wide choice of newconcepts and products offered in the market. Amongthe concepts that were well-received include the gatedcommunity concept and focus on green landscaping.

On the supply side, 130,000 more new residential unitscame on stream in the first nine months of 2005,bringing the total stock to 3.59 million units. Whileapprovals of new housing projects continued to decline in2005, new sales and advertising permits increasedmarkedly by 15.9% (2004: -5.9%). Among the newlaunches, houses priced above RM400,000 on averageaccounted for 24% of the total launches in the KlangValley (average for 2004: 23%), indicating the sustainedinterest for higher-end properties in the city area.Nevertheless, providing affordable housing remained apriority to the country. In Budget 2006, the Governmentallocated RM1 billion for low-cost housing programmes,namely Program Perumahan Rakyat Dimiliki, ProgramPerumahan Rakyat Disewa and Program PerumahanRakyat Bersepadu. The Ministry of Housing and LocalGovernment (KPKT) had also taken the initiatives toimprove the application procedure for low-cost housing.Among the key changes instituted included liberalisingthe ceiling of the monthly salary of applicants fromRM1,500 to RM2,500, reducing the number ofsupporting documents for applications and standardisingthe procedure for all states. In 2005, a total of 55,209low-cost housing units were constructed.

Given the above developments, the Malaysian HousePrice Index increased moderately by 1.7% in the firsthalf of 2005 (2004: 4.8%). The slowest increase inprices was recorded in the high-rise and semi-detachedcategories. Among the states, Selangor, Terengganu,Kelantan, Sabah and Sarawak registered lower prices,while in other areas, prices continued to increase.

Meanwhile, the overhang situation of new propertiesshowed a mixed trend. Latest data compiled by theNational Property Information Centre (NAPIC) of theValuation and Property Services Department showedthat the overhang in residential property, retail shopsGraph 1.17

New Launches of Residential Property1 in Klang Valley by Prices

<RM100,000

RM100,001-RM200,000

1 Landed property only

Source: Jones Lang Wooton

0%

20%

40%

60%

80%

100%

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

2004 2005

RM200,001-RM400,000

>RM400,0002000 2001 2002 2003 2004 1H 2005 p

Graph 1.18 Malaysian House Price Index

0

2

4

6

8

Annual change (%)

p PreliminarySource: NAPIC, Valuation and Property Services Department

Table 1.9Residential Property Indicators

2004 2005

Units

Residential property transactionsUnits 195,241 181,762Value (RM billion) 29.3 28.4

Approvals1 174,671 169,960Developers’ licences

New 1,071 1,209Renewals 353 407

Sales and advertising permitsNew 1,038 1,203Renewals 1,510 1,726

Loans by banking system- Value (RM billion)

Outstanding 132.9 149.2Approvals 35.7 36.6

1 Units approved for construction by private developers.

Source: NAPIC, Valuation and Property Services Department, Ministry ofHousing and Local Government and Bank Negara Malaysia


33


Table 1.10Overhang of Residential Property in Malaysia by Price Range

RESIDENTIALUnits Share (%) Units Share (%)

Price Range

As at end-2004 As at end-Sept 2005p

RM50,000 Or Less 5,245 33.7 3,397 19.8

RM50,001 - RM100,000 3,546 22.8 5,196 30.2

RM100,001 - RM150,000 3,063 19.7 3,523 20.5

RM150,001 - RM200,000 1,774 11.4 2,336 13.6

RM200,001 - RM250,000 651 4.2 974 5.7

More Than RM250,000 1,279 8.2 1,753 10.2

Total 15,558 100 17,179 100

p Preliminary

Source : NAPIC, Valuation and Property Services Department

and shopping complexes worsened, while that ofpurpose-built office improved. In the case of residentialproperty, the overhang increased to 17,179 units, with atotal value amounting to RM2.3 billion as at end-September 2005 (end-2004: 15,558 units; RM1.8billion). These units were mainly concentrated in Johorand Selangor. The bulk of the properties were pricedbetween RM50,001-RM150,000.

Financing remained important in supporting theconstruction sector. Loans approved by the banking systemfor the broad property sector rose by 8.2% in 2005 (2004:18.8%), while loans disbursed increased by 4.3% (2004:12.6%). Loans outstanding to the broad property sector asat end-2005 was RM229 billion, representing an increaseof 9.9% over 2004 (2004: 10.5%). Meanwhile, loansapproved for the housing sector by other housing creditinstitutions as a group increased by 11.6% to RM7.6billion in 2005 (2004: 15.7%).

In the early part of the year, activity in the constructionsector was temporarily affected by the amnesty programfor illegal foreign workers that began in late 2004 andended on 28 February 2005. The slow return of legalforeign workers caused some delays in projects, but thesituation improved after prompt measures taken by theGovernment to alleviate the problem. During the year,the Government also announced the decision to expediteprojects worth RM2.4 billion from the Ninth MalaysiaPlan to rejuvenate the civil engineering segment.

Another important development that influenced activityin the property sector during the year was the release ofthe Guidelines on Real Estate Investment Trusts (REITsGuidelines) on 3 January 2005 by the SecuritiesCommission. This marked the rebranding of propertytrust funds (PTF) that have existed since the late 1980s

as REITs, in an effort to accelerate the growth and toestablish a competitive REITs industry in Malaysia. In thelast three years, the Government had also takenmeasures to create a more conducive environment forthe development of REITs with the granting of specialincentives. These measures include the following: i. Exemptions from Real Property Gains Tax for gains

from disposal of real property to REIT or PTF; ii. Exemptions from stamp duty for instruments of

transfer of real property from individuals orcompanies to REIT or PTF;

iii. Exemptions from income tax on chargeable incomedistributed to unit holders of REIT or PTF;

iv. Income distributed to unit holders is taxed at theirrespective tax rates. For non-residents, tax payable isat 28% and is withheld by REIT or PTF;

v. The accumulated income that has been taxed andsubsequently distributed is eligible for tax credit inthe hands of unit holders; and

vi. Allowing selected fees (consultancy, legal andvaluation services) incurred in the establishment ofREITs to be tax deductable.

As at end-2005, three REITs funds were listed on BursaMalaysia. Assets of these REITs consist of office andretail buildings in the Klang Valley.

DOMESTIC DEMAND CONDITIONS

Domestic demand conditions remained favourable in2005, registering a strong growth of 7.3% during the year(2004: 7.5%). Growth in aggregate domestic demandwas supported mainly by the buoyant expansion in privatesector activities. Despite concerns arising from rising oilprices and the uncertain external outlook in the early part ofthe year, consumer spending was sustained at a high levelthroughout the year. Consumers benefited from the


34

continued increase in disposable incomes arising from highexport earnings and favourable job market conditions.Measures by the Government to contain inflationarypressures and the competitive credit environment providedfurther support to household spending. Private investment,which has been on a positive trend since the second half of2003, strengthened further in 2005, with positive growth inall sectors except construction. Business confidence was

Domestic demand conditionsremained favourable in 2005,supported mainly by thebuoyant expansion in privatesector activities. Public sectorexpenditure remainedsupportive of private demand.

Real aggregate domestic demand

Real private consumption

Real base lending rate (RHS)

Percentage point contribution to growth

(%)

Graph 1.21 Real Interest Rate and Domestic Demand

2001 2002 2003 2004 2005

0.0

2.0

4.0

6.0

8.0

0.0

1.5

3.0

4.5

6.0

1999 2000 2001 2002 2003 2004 2005

Total household debt

Residential property

Transport vehicle

Deposit/Loan

% of total loans Ratio

Graph 1.22 Household Debt and Deposit/Loan Ratio

19980

10

20

30

40

50

60

70

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1999 2000 2001 2002 2003 2004 2005

Graph 1.20 GNP per Capita

Annual change (%)RM '000

Nominal GNP per capita (LHS)

Nominal GNP per capita growth (RHS)

Nominal private consumption growth (RHS)

-5

0

5

10

15

20

-5

5

0

10

15

20

1999 2000 2001 2002 2003 2004 2005

Graph 1.19 Real Domestic Demand Aggregates

Annual change (%)Annual change (%)

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

Real aggregate domestic demand (excl. stocks)

Real private consumption

Real public expenditure

Real private investment (RHS)

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

sustained throughout the year, while positive cash flowsenabled companies to utilise internally-generated funds tofinance their capital expenditure. Nevertheless, the surplusnarrowed somewhat in 2005 and companies also accessedthe financial system for funds, encouraged by the low costof financing. Meanwhile, the Government continued tofocus on developmental efforts while improving essentialservices and the public delivery system in order to enable theprivate sector to sustain the growth momentum. As a result,the Government was able to maintain its policy of a gradualconsolidation of its fiscal position.

In spite of concerns on high oil prices and some uncertaintyon the external outlook in the early part of the year, privateconsumption was sustained at a high level throughout2005, growing by 9.2% for the year (2004: 10.5%).Consumer confidence remained buoyant as incomecontinued to grow due to high export earnings and


35


civil servants at the end of the year, boosted consumerconfidence. The improved sentiment was reflected bythe increase in the CSI in the fourth quarter.

The increase in the Overnight Policy Rate (OPR) on 30November 2005 has not hampered households’ abilityto borrow, as interest rates remained below neutrallevels. Households continued to borrow, mainly for thepurchase of residential properties and transport vehicles.Consumers’ willingness to spend by accumulating debtwas evidenced by the deposit-to-loan ratio stayingbelow 1 for the second consecutive year. Nevertheless,this increase in household debt remained manageable.The financial position of the household sector remainedrelatively healthy with the non-performing loan (NPL)ratios for both consumption credit and credit card debtdeclining further to 7.3% and 4.5% respectively in2005 (2004: 8.1% and 4.7% respectively).

Following the robust growth in the previous year,the strong momentum of private sector capitalspending continued into 2005, despite the tougherbusiness climate due to rising crude oil prices andthe mild down-cycle in the electronics sector in theearly part of the year. Private investmentcontinued to expand strongly during the year,posting a growth of 10.8% (2004: 25.8%), spurredby higher investment in the manufacturing, servicesand upstream oil and gas sectors. Companies wereable to take advantage of their strong financialpositions to fund the bulk of the investmentthrough internally generated funds. In addition, thesupportive financing environment also promotedinvestment activities as evidenced by the loansdisbursed to businesses, which increased by 7.4%during the year. Investment indicators such as

Table 1.11Private Consumption Indicators

20042005

1Q 2Q 3Q 4Q Year

Sales of passenger cars(incl. 4WD)

‘000 units 392.1 101.5 103.1 110.0 111.2 425.8Annual change (%) 17.0 19.5 3.0 0.8 13.5 8.6

Imports of consumptiongoods

RM billion 23.2 5.6 6.0 6.4 6.6 24.6Annual charge (%) 24.1 10.7 4.3 5.2 4.2 5.9

Tax collectionSales tax

(RM billion) 6.4 1.2 1.9 1.6 2.3 7.1Service tax

(RM billion) 2.3 0.5 0.7 0.5 0.9 2.6

Narrow money (M1)Annual change (%) 11.9 9.4 11.0 9.9 8.5 8.5

Loans disbursed bybanking system

Consumption credit(excl. passenger cars)Annual change (%) 16.8 7.0 12.6 10.4 10.7 10.2

Retail trade, restaurantsand hotelsAnnual change (%) 19.5 21.8 21.1 19.1 6.3 16.5

MRA retail salesAnnual change (%) 8.0 4.8 10.2 n.a. n.a. n.a.

Credit card operationTurnover spending

(RM billion) 36.8 9.9 9.8 10.8 11.4 41.8Annual change (%) 19.2 15.7 12.8 12.2 13.0 13.4

MIER ConsumerSentiments Index - 120.9 109.8 102.5 116.1 -

KL Composite Index 907.4 871.4 888.3 927.5 899.8 899.8

Commodity pricesCPO (RM/tonne) 1,664 1,363 1,418 1,387 1,423 1,398Crude oil (USD/barrel) 41 49 54 65 60 57Rubber (sen/kg) 461 468 467 552 604 523

Graph 1.23Investments, Capacity Utilisation and Profitability

% change (%)

1Q2002

2Q 3Q 4Q 1Q2003

2Q 3Q 4Q 1Q2004

2Q 3Q 4Q 1Q2005

2Q 3Q 4Q

77

78

79

80

81

82

83

84

1/ Source: Malaysian Institute of Economic Research (MIER)

-12-10-8-6-4-2024

68

101214

Investment

Capacity Utilisation 1/ (RHS)

ROE

favourable employment conditions. The MIER ConsumerSentiment Index (CSI), which reflects consumers’assessments of their personal finances and the economy,peaked at 120.9 in the first quarter of 2005. However,higher oil prices started to impact consumer sentiments,which softened in the second and third quarters of the year.To a large extent, consumers were insulated from largeincreases in oil prices through the Government’s subsidy forfuel, though a portion of the subsidies was removed. TheGovernment also announced a temporary halt on priceincreases on fuels and toll rates, and a reduction in road tax.

In the second half-year, improvements in labour marketconditions were also accompanied by higher commodityprices, especially prices of rubber, leading to risingdisposable income of households in both urban andrural areas. This, together with the bonus payments to


36

2005

Graph 1.24 Private Investment by Sector (% share)

Manufacturing34%

Construction15%

Services26%

Agriculture9%

Mining16%

1998 1999 2000 2001 2002 2003 2004 2005

Source: Malaysian Industrial Development Authority

Graph 1.25 Private Investment in the Manufacturing Sector

RM billion No.

Domestic approvals

Foreign approvals

No of approvals

0

5

10

15

20

25

30

35

40

0

200

400

600

800

1000

1200

Table 1.12Private Investment Indicators

2005

1Q 2Q 3Q 4Q Year

Sales of commercialvehicles (incl. 4WD)

‘000 units 95.5 30.5 34.8 40.3 34.5 140.2 Annual change (%) 35.1 57.1 47.1 65.6 23.1 46.8

Import of capital goods(RM billion) 55.5 12.3 15.5 17.0 15.9 60.7Annual change (%) 36.0 0.7 16.3 21.0 0.3 9.5

Approvals by MITI(manufacturing sector)

No. of projects 1,101 181 306 276 263 1,026Capital investment(RM billion) 28.8 2.4 10.6 6.9 11.0 31.1

Foreign 13.1 0.7 5.9 3.9 7.5 17.9Local 15.6 1.8 4.8 3.0 3.6 13.2

Loans disbursed bybanking system

Manufacturing sectorAnnual change (%) 10.2 13.9 4.9 2.5 -2.0 4.5Construction sectorAnnual change (%) 10.4 4.5 0.8 5.8 -8.6 0.3Business servicesAnnual change (%) 19.0 -12.4 1.5 24.2 9.4 5.1

Private Debt Securities(excluding Cagamas)

Total funds raised(RM billion) 28.0 5.3 6.8 9.7 13.8 35.7New activities 13.0 1.2 3.6 5.6 7.3 17.7

Initial Public Offerings(Bursa Malaysia)

Total funds raised(RM billion) 4.0 1.9 2.0 0.7 0.8 5.3

MIER BusinessConditions Survey

Business Conditions Index - 104.1 106.0 102.7 100.5 -Capacity UtilisationRate (%) - 82.8 82.8 83.2 83.0 -

MSC-Status CompaniesNo. of companies 190 55 56 80 67 258Approved investment(RM billion) 2.0 0.2 0.6 0.6 0.3 1.8

2004

import of capital goods and sales of commercialvehicles also indicated that private investmentcontinued to increase in 2005. Throughout theyear, the MIER’s Business Conditions Indexremained above the 100-point threshold level,reflecting the generally positive business sentiment,particularly in the manufacturing sector.

Investment in the manufacturing sector remainedstrong during the year, mainly driven byexpenditure on new machineries and equipment. In2005, MITI approved a total of RM31.1 billion in1,026 manufacturing projects. Of the total, morethan half were joint projects with foreign partners,

pointing to continued interest from foreigninvestors in the manufacturing sector. Approvedcapital spending for expansion or diversificationactivities are higher than for new projects,signifying that manufacturers were also venturinginto high value-added manufacturing activities. Theapproved projects were mainly concentrated in theelectrical and electronic products, basic metalproducts, and chemical and chemical productsindustries. Of importance, the approvedinvestments, particularly in the electronics segment,have continued to move towards technology andskill-intensive projects. The emphasis andpromotions on high value-added manufacturing-related activities have also attracted R&D projectsinto the country, where a number of electronics


37


companies were planning to set up R&D centres,and design and test operations in the country.

Investment was substantially stronger in the servicessector due to notable development of utilitiesinfrastructure and capacity expansion by transportationcompanies. Higher capital spending for the utilities sub-sector was attributed to the development of powerplants and water projects. The independent power plant(IPP) projects include IPP Tanjung Bin, IPP Jimah, IPPSepangar Bay and IPP Teluk Salut. Meanwhile, thespending on water projects was largely for the SungaiSelangor Project Scheme 3 (SSP3), the StormwaterManagement and Road Tunnel (SMART) project as wellas the expansion and upgrading of water treatmentplants and water distribution in several states. In the


Electrical & electronics

44%

Graph 1.26 Approved Manufacturing Investment by Industry, 2005 (% share)

Basic metal products

10%

Chemical & chemical products

6%

Food manufacturing

5%

Scientific & Measuring Equipment

5%

Transport Equipment

5%

Others 25%

transport sub-sector, port operators such as PTP, NorthPort and West Port continued to invest in improvingport facilities and equipment arising from the need toincrease port capacity. At the same time, investment onair transport was higher as companies embarked onfleet expansion programmes. Meanwhile, in thetelecommunication sub-sector, cellular operatorscontinued to spend on improving the reliability andefficiency of networks, as well as optimising andupgrading existing network equipment to cater forhigh-speed mobile services. In the retail sub-sector, anumber of new outlets were established during theyear, particularly buoyed by strong consumer spendingactivities.

In the mining sector, higher capital expenditure waspredominantly in the upstream oil and gas segment.During the year, production-sharing contractorsaccelerated exploration and production capital spendingdue to rising oil prices and increasing demand for crudeoil. Of importance, intensified exploration during theyear was spurred by aggressive exploration campaign indeepwater and ultra-deepwater oil fields. In addition,discoveries of new oil and gas resources since 2002continued to support capital spending in productionfacilities and development projects.

In 2005, a large part of investment in the constructionsector reflected activities from residential construction,arising from the development of new townships andurban centres, with the emphasis on high-end propertyprojects. On the other hand, capital spending on roadswas lower due to the completion of two major projects,namely the Butterworth Outer Ring Road and GuthrieCorridor Expressway, as well as the delay in theconstruction of the Kajang-Seremban Expressway.Nevertheless, ongoing development of several privatisedroad projects such as the Senai-Desaru Expressway andJelutong Expressway continued to support investment inthe sub-sector.

Capital expenditure in the agriculture sector remainedlargely driven by activities in commercial crop plantation.The expenditure for the development of commercialcrop plantations remained at high levels, especially forpalm oil, as stronger demand and firm CPO prices haveencouraged further capital spending by privateplantation companies. The expenditure was mainly toexpand and upgrade milling capacity and supportreplanting activities.

Public consumption increased by 5.9% in 2005,mainly on account of the continued high expenditure onsupplies and services, defence as well as emoluments.

1995 1999 2000 2001 2002 2003 2004 2005

New investment


Reinvestment

Graph 1.27 Share of Approved New Investments and Reinvestments in the Manufacturing Sector

%

90

80

70

6050

4030

20

10

0

100


38

The increased expenditure for supplies and services waslargely to further improve the administrative machineryand delivery system of the public sector. Reflecting theGovernment’s efforts to continue enhancing humanresource development in strengthening the nation’sproductivity and competitiveness, expenditure onemoluments remained high.

Public investment turned around to register a marginalgrowth of 0.4% in 2005 (2004: -8.7%). The FederalGovernment continued to focus on developmentalprojects that improved economic and social servicessectors of the country. Most importantly, theseprogrammes were implemented based on the emphasisof achieving a greater balance between the developmentof urban and rural areas. In the economic sector,expenditures were mainly focussed on modernising theagriculture sector, improving infrastructure in rural areas,enhancing industrial growth and improvingtransportation infrastructure. At the same time, capitalexpenditures for the social services sector were mainlyallocated towards enhancing and upgrading of essentialservices, namely education, training and health andmedical services as well as provision of affordable housesto the people. Meanwhile, capital expenditures by theNFPEs were stronger during the year, largely attributed tocapacity expansion efforts and commitment to improveefficiency by the NFPEs, such as Petroliam NasionalBerhad (PETRONAS) and Telekom Malaysia Berhad (TM).During the year, investment by PETRONAS increasedlargely due to intensified exploration activities in theupstream oil and gas sectors as well as expansion ofshipping fleet to cater for stronger demand for LNG andpetroleum-related products. Capital spending by TM wasalso higher, mainly for the deployment of newinfrastructure for residential and business premises as wellas provision of infrastructure in new areas with highdemand for broadband services. Meanwhile, TenagaNasional Berhad’s investment continued to focus onmaintenance activities and improvement projects, such asupgrading and replacement programmes of powertransmission and distribution systems.

Despite sustained growth in consumption, grossnational savings (GNS) increased further by 10.9% in2005, in line with the expansion in nominal grossnational income. In the private sector, both householdsand the corporate sector continued to enjoy betterdisposable incomes and cash flows, as a result of higherexport earnings and better employment growth duringthe year. This enabled private sector savings to continueto increase by 17.9% in spite of the strength of privateconsumption. The main source of the increase was due tohigher corporate savings. New deposits placed by

business enterprises with banking institutions were higherat RM37 billion in 2005, compared with RM31.6 billion inthe previous year. Meanwhile, public savings continued toexpand by 2.8% in 2005, due mainly to the strongperformance of the major NFPEs during the year.

Overall, the share of GNS to Gross National Product(GNP) remained high at 37.1% (2004: 37.3%). Thishigh rate of savings has enabled Malaysia to continue tofinance its growth primarily from domestic sources.Given a lower gross domestic capital formation(including stocks), the savings-investment balance,therefore, recorded a larger surplus of RM77.8 billion or16.4% of GNP in 2005.

PRICES AND EMPLOYMENT

Consumer PricesIn 2005, inflation emerged as one of the areas ofmacroeconomic concern in the global economy. A keyfactor behind this development was the significantincrease in international oil prices over the course of theyear. Malaysia, as a small open economy, was notinsulated from this global phenomenon.

The inflation rate, as measured by the annual changein the Consumer Price Index (CPI), increased from1.4% in 2004 to 3% in 2005. The increase ininflation during the year was primarily due to thesupply-related factors following the increase ininternational oil prices. Core inflation, which is CPIinflation excluding price-volatile items and price-administered items, rose to 2% (1% in 2004) duringthe period. The rise in core inflation was driven bystrong domestic demand, as favourable labour market

Graph 1.28Gross National Savings and the

Savings-Investment Gap

RM million

Gross CapitalFormation

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

2000 2001 2002 2003 2004 2005

Savings-Investment Gap

Public Savings

Private Savings

Gross National Savings


39


conditions, a competitive credit environment and highcommodity prices supported income and spurredconsumer spending.

All categories in the CPI registered higher increase in2005. The most significant increase in prices during theyear was seen in the transport and communication andfood categories, both of which are sensitive to thefluctuations in the prices of energy and non-energycommodities. It should be noted that although theuptrend in international oil prices gained momentum inlate 2004, the upward pressure on domestic inflationwas relatively less. This was partly due to the bufferprovided by the subsidy on retail fuel prices and controlson gas prices and power rates. The escalation on theglobal price of crude oil however has exerted anincreasing burden on the Government’s operatingexpenditure, while raising concerns over themisallocation of resources and costs of enforcement. Inaddressing this issue, the Government has removed partof the oil subsidy, thereby limiting the inflationaryimpact on consumers. Domestic retail fuel prices wereadjusted three times during 2005 (Table 1.13),contributing approximately 0.4 percentage points to theinflation rate for the year.

Although there were concerns that the increase indomestic oil prices would cascade down into theprices of other goods, the subsequent outturn forinflation was rather moderate. This could beattributable to several factors. Firstly, labourproductivity, as measured by the real sales peremployee in the manufacturing sector increased by

-0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

Headline

Food

Beverages and tobacco

Clothing and footwear

Gross rent, fuel and power

Furniture, furnishing, etc

Medical care and health expenses

Transport and communication

Recreation, entertainment, etc

Miscellaneous goods and services

Graph 1.29Contribution to CPI inflationGraph 1.29Contribution to CPI inflation

percentage point

-0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

2005 2004

Table 1.13Changes in Prices of Administered Goods andServices in 2005

Contribution

Effective % to 2005

date CPI items (weight: 12%) increase inflation(in pct. points)

Jan-05 Chicken prices 14.6%* 0.29Jan-05 Toll charges 10% 0.04Mar-05 Diesel prices 6% 0.01May-05 Public transport fares1 6.7%* 0.10May-05 Prices of retail petrol & diesel 7.4% 0.24Aug-05 Prices of retail petrol products2 6.8% 0.15Sep-05 Prices of alcoholic

beverages & tobacco 7.1%** 0.05

Total Contribution to Headline Inflation 6.50% 0.88

1 Includes public transport fares such as railway, ship (ferry), airlines, bus and taxi.2 Includes retail petrol, diesel and cooking gas (LPG).* Average increase in 2005.** Average increase post Budget-2006.

Source: Department of Statistics, Malaysia.

10% in 2005, surpassing the 0.8% growth in thereal wages per employee in the manufacturingsector. This, coupled with the intensification ofcompetition amongst producers and from importshave somewhat contained the secondary effectsfrom higher oil prices. In addition, capacityexpansion amongst businesses played a role inincreasing supply and mitigating possible demandpressures. Active surveillance and enforcementefforts undertaken by the relevant Governmentagencies also ensured that prices of controlledessential goods and services are transparent and notraised opportunistically.


40

In the Monetary Policy Statement (MPS) released in August2005, the Bank stated that the cumulative effect ofprevious price adjustments was expected to translate intoinflation peaking in the third quarter of 2005, and tomoderate thereafter. However, it was highlighted thatthere remained considerable uncertainty on the directionof oil prices. Monetary policy would therefore take intoaccount the need to ensure that the level of monetaryaccommodation is balanced with the need to ensure pricestability. In the third quarter of the year, the economybegan to show evidence of stronger economic growth,

with indications that the momentum would continue intothe fourth quarter and into 2006. As the risk of slowereconomic growth diminished, the balance tipped towardsthe increased risks to inflation. Consequently, on the 30November 2005, BNM raised the Overnight Policy Rate(OPR) by 30 basis points to 3 percent.

Producer PricesProducer price inflation, as measured by the annualchange in the Producer Price Index (PPI), moderated to6.8% in 2005 (8.9% in 2004). Despite the strong increasein crude oil prices during the year, the commodity-relatedcategories registered a slower annual growth of 10.8%(15.6% in 2004). This was largely due to the consolidationin the prices of crude palm oil and rubber in the first half ofthe year. Excluding these commodity-related categories,producer prices increased slightly by 2.2% (2% in 2004)due mainly to the higher prices for food and live animals;and machinery and transport equipment. Meanwhile, theannual growth in the PPI for imported goods moderated to1.5% (2% in 2004), in part due to the increased globalcompetition, increased supply from low cost producingcountries and the stronger ringgit against Malaysia’strading partners during the year.

Labour Market DevelopmentsThe domestic labour market continued to be healthy andstable in 2005. The unemployment rate remainedsteady at 3.5% as both total employment and labourforce increased by 4.1% to 10.9 million and 11.3 millionrespectively. Total retrenchments declined by 19%,

Table 1.14Price Indicators

Weight 2004 2005

Consumer Price Index Annual change(2000=100) (%)

100.0 1.4 3.0

of which:Food 33.8 2.2 3.6Beverages and tobacco 3.1 7.8 10.5Clothing and footwear 3.4 -1.8 -1.0Gross rent, fuel and power 22.4 1.0 1.2Furniture, furnishings and

household equipment andoperation 5.3 0.4 2.0

Medical care and health expenses 1.8 1.4 1.6Transport and communication 18.8 0.8 4.4Recreation, entertaiment,

education and cultural services 5.9 -0.1 0.5Miscellaneous goods and services 5.5 1.8 2.4

Consumer Price IndexDurable goods 9.4 0.2 0.4Semi–durable goods 5.4 -0.9 -0.1Non-durable goods 40.2 2.4 5.0Services 45.0 1.0 2.1

Producer Price Index(1989=100) 100.0 8.9 6.8 of which:

Local Production 79.3 10.3 7.9Imports 20.7 2.0 1.5


Labour market conditionsremained healthy as vacanciesrose and retrenchmentsdeclined.

Table 1.15Labour Market Indicators

2001 2002 2003 2004 2005e

Labour force (‘000) 9,724.2 10,064.3 10,426.4 10,846.0 11,290.5(annual change in %) 1.6 3.5 3.6 4.0 4.1

Employment (‘000) 9,378.8 9,709.0 10,047.2 10,463.7 10,894.8(annual change in %) 1.1 3.5 3.5 4.1 4.1

Unemployment rate (% of labour force) 3.6 3.5 3.6 3.5 3.5Labour productivity (GDP/Employment)

(annual change in %) -0.8 0.8 1.9 2.9 1.1Real wage per employee in manufacturing sector

(annual change in %) 1.7 3.2 2.9 1.9 0.8

e Estimate

Source: Economic Planning UnitDepartment of Statistics, MalaysiaBank Negara Malaysia


41


reflecting the recovery in economic activities in thesecond half-year following slower growth in the secondquarter and the flexibility accorded to the employers totake alternative measures such as temporary layoffs andinstituting pay cuts. In 2005, the number of job vacanciesincreased to a record high of 304,500 positions (previoushigh, 2002: 162,787 positions). Nevertheless, the numberof unplaced job seekers was also higher, though thesituation improved towards year-end. Meanwhile, jobplacements were stronger, reflecting increased efficiencyin labour-matching process.

In 2005, lower retrenchments were recordedfollowing the pick-up in economic activities in thesecond half-year. Total retrenchments declined by 19%to 16,109 persons (2004: 19,956 persons), with thebulk occurring in the manufacturing and selectedservices sectors, in particular, the wholesale and retailtrade. Most of the retrenched workers wereproduction-related workers (53%) as well as those inthe professional and technical positions (17%), andsales and service workers (11%). Among key reasonscited for retrenchments during the year were highcosts of production, reduction in demand for products,and sale of companies.

More jobs were available in 2005, especially during thesecond half-year. Total job vacancies reported to theManpower Department of the Ministry of HumanResources surged to 304,500 positions (2004: 49,975)

due in part to a new ruling that makes it compulsoryfor employers to report job vacancies to the ElectronicLabour Exchange before they can apply for foreignworkers. Higher job openings were recorded across allkey sectors, especially in the agriculture, forestry andfishery, construction and manufacturing sectors. Interms of total positions available, the manufacturingsector continued to generate the highest number ofvacancies, accounting for 37% of total job vacancies,followed by the services sector (21%). The bulk ofvacancies were for elementary occupations, plant andmachine operators and assemblers as well as forclerical, managerial and professional positions.

Meanwhile, the number of unplaced job seekersregistered with the Manpower Department increasedto 72,573 persons in 2005. However, the data is notcomparable with previous years because from Mayonwards, the registration period during which jobseekers are deemed to be actively seeking jobs waslengthened from three months to six months. Based onthe new definition, the number of active job seekersthat were still unplaced as at end-year has moderatedfrom May (78,546 persons) and from the peakrecorded in August of 104,714 persons. Jobplacements also increased, rising from 6,192 personsin 2004 to 17,459 persons in 2005, reflecting in partan improved labour-matching process, as well as somesuccess in the Government’s initiatives to increase theemployability and marketability of job seekers via skills

Total retrenchment

Retrenchment in the manufacturing sector

Retrenchment in the services sector

Retrenchment in the agriculture & mining sectors

Retrenchment in the construction sector

Number of workers

Source: Ministry of Human Resources

Graph 1.30 Retrenchment according to economic sectors

2002 2003 2004 20050

5,000

10,000

15,000

20,000

25,000

30,000

Number of workers

Source: Ministry of Human Resources

Graph 1.31 Reasons for Retrenchment

1 High production costs2 Reduction in demand for products3 Sale of companies4 Company reorganisation and automation5 Relocation to foreign countries6 Relocation locally7 Closure of companies8 Others

2004

2005

0

1,000

2,000

3,000

4,000

5,000

6,000

1 2 3 4 5 6 7 8


42

retraining programmes and the nation-wide job fairs toraise awareness regarding job opportunities. A largeproportion of successful job placements continued tobe recorded in the manufacturing (38%) and theservices (30%) sectors.

The Beveridge Curve, which tracks the pattern ofunemployment and vacancies in the labour market,moved almost vertically upwards in 2005, reflecting thefact that in spite of higher vacancies, the unemploymentrate did not decline. This could mean that furtherimprovements in the labour-matching process wereneeded. Despite efforts made by the Government topublicise the Electronic Labour Exchange Programme(ELX), which has been in place since 2002, many jobseekers (employed and unemployed) were still unawareof the facility. The ELX provides free services to jobseekers from school leavers to graduates, and helps

them secure jobs. In order to increase the awareness ofELX to the job seekers, the Ministry of HumanResources plans to set up ELX booths in selectedshopping malls and two mobile units equipped withcomputers and Internet access to traverse the countryespecially in rural areas, to register job seekers and toprovide them with career guidance. Meanwhile, thejob clearing system within the ELX also helpsemployers to look for potential workers. In 2005,17,625 employers utilised the ELX to advertise a totalof 304,500 job vacancies (2004: 5,553 employers and49,975 positions). Although successful matches via theExchange increased to 308,291 positions in 2005(2004: 37,295 positions), only 17,459 persons wererecruited (2004: 6,192 persons). This could be due tothe tendency of employers to be more selective infilling vacancies, as reflected in the Curve’s lowerelasticity, and also to the fact that that the number ofjob placements could be under-reported as it is notcompulsory for employers and job seekers to reportsuccessful job placements.

Overall, most key economic sectors recorded higheremployment in 2005, except for the agriculture andconstruction sectors. The services sector continued tobe the largest employer, engaging slightly more than50% of total workers, particularly the wholesale andretail trade, hotels and restaurants (18%) andgovernment services (10%) sub-sectors, followed bythe manufacturing (29%) and agriculture, forestry andfishery (13%) sectors.

In 2005, nominal wages were higher as moreemployers linked their employees’ annual incrementsand bonuses to performance or productivity. Wagesalso rose in part due to improved labour marketconditions as well as to reflect the higher cost of living.

Graph 1.34Total Employment by Sector

Source: Economic Planning Unit

0 1,000 2,000 3,000 4,000 5,000 6,000

Construction

Agriculture &Mining

Manufacturing

Services

(Number of person, '000)

200520042003


Department of Statistics, Malaysia

Annual change (%) As % of labour force

Graph 1.33 Output and Employment

Employment

Real GDP

Labour force

Unemployment rate (RHS)

1

0

2

3

4

5

6

7

8

2001 2002 2003 2004 20053.0

3.2

3.4

3.6

3.8

4.0

Unemployment rate (%)

Vacancy rate (%)

Graph 1.32 Beveridge Curve for Malaysia (1998-2005)


Ministry of Human Resources

Bank Negara Malaysia

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8

1999

20002001

2002

1998

2003

2004

2005


43


• The Salary and Fringe Benefits Survey undertakenby the Malaysian Employers Federation (MEF)showed a higher increase in the average privatesector salary of 5.8% in 2005 (2004: 5.6%), withboth categories of employees, executives (5.9%)and non-executives (5.7%), receiving higher salaryincreases. On a sectoral basis, the average salaryincrease in the non-manufacturing sector (5.9%)continued to outpace that of the manufacturingsector (5.7%) (2004: 6.1% and 5% respectively).The average minimum monthly salary offered tothose with a basic degree without prior workingexperience was marginally higher at RM1,707(2004: RM1,666).

• Similarly, findings from the Salary, Benefits andEmployment Conditions Survey in theManufacturing Sector conducted by theFederation of Malaysian Manufacturers alsorevealed higher salary increments to employees in2005. The average salary increment given toemployees was 6.3% (2004: 5.6%). Meanwhile,the average basic salary offered to a fresh graduatewith a degree qualification was RM1, 917 (2004:RM1, 799).

Productivity is a measure of the efficiency with whichinputs are transformed into outputs within theproduction process. Total factor productivity growthcaptures productivity increase arising fromimprovements in utilisation of factor inputs due totechnological process and overall efficiencyimprovement. Recent estimates by Bank Negara

Malaysia showed that total factor productivity improvedin 2005, registering a growth of 3% (2004: 2.7%),indicating more efficient use of resources andtechnology. At the same time, data from the MonthlyManufacturing Survey conducted by the Department ofStatistics, Malaysia showed that labour productivity, asmeasured by real sales per employee, rose by 10%,surpassing the 0.8% growth in real wage per employee.Almost all the manufacturing industries such aspetroleum and chemicals, basic metal, E&E, textiles,transport and off-estate recorded higher growth inlabour productivity vis-à-vis wages. Meanwhile, reallabour productivity for the whole economy, as measuredby real GDP per worker rose by 1.1% during the year.

In order to enhance flexibility in the labour market toimprove competitiveness, the Government hasadvocated the use of a productivity-linked wagesystem (PLWS). By implementing PLWS, companieswould be able to put in place a flexible andcompetitive wage system that would enable them torespond quickly and effectively to changing businessconditions, leading to higher productivity gains, lowercosts and improvement in competitiveness. In addition,a PLWS would also provide a clear incentive to workersto upgrade their performance and productivity. Foremployees, high performers would reap more benefits.PLWS components include non-contractual bonuses,bonuses based on profits, and salary increments basedon merit or performance. Industry data showed thatmore companies are adopting PLWS. According to theMEF’s 2005 Survey, about 80% of its respondentcompanies linked salaries to performance for theexecutives, and 74% for non-executives. Similarly,latest available data from the National ProductivityCorporation showed that out of 322 collectiveagreements (CAs) signed in 2004, a total of 201 or62% contained PLWS components (2003: 45% out of367 collective agreements). In the agriculture sector, allof the eight CAs contained PLWS components,compared to 83 (77%) in the services sector, and 110(53%) in the manufacturing sector.

Although the Government has always encouragedemployers to hire more local workers and to adoptlabour-saving devices such as increased mechanisationand automation to achieve higher efficiency andproductivity, foreign workers still play a major role inalleviating labour shortages in selected sectors of theeconomy. As such, in 2005, the Government allowedregistered foreign workers whose contracts haveexpired to change employers within the sameeconomic sector as long as their work permits werestill valid. In addition, to ensure a more efficient system

Graph 1.35Manufacturing Sector: Output and Productivity

Value added at constant price

Real sales per employee

Real wages per employee


Bank Negara Malaysia

-5

-10

0

5

10

15

20

2001 2002 2003 2004 2005

Annual change (%)


44

of recruiting foreign workers, the Governmentestablished a One-Stop Centre to expedite processingof applications for foreign workers, eliminate the use ofmiddlemen or agents and to reduce red tape in theGovernment sector. The Centre would processapplications within 24 hours, thereby speeding up theadministrative processes significantly. The Centrecommenced operations in August 2005 and wasmanned by officers from relevant government agencies,including Ministry of Home Affairs, Ministry ofInternational Trade and Industry, Ministry of Agricultureand Agro-based Industry, Ministry of PlantationIndustries and Commodities, Construction IndustryDevelopment Board and Ministry of Human Resources.The major changes in the process of hiring foreignworkers are as follows:• New levy system for foreign workers, whereby

rates differ according to the location (PeninsularMalaysia or East Malaysia) and sector of economicactivity. For instance, foreign workers employed inthe services sector in Peninsular Malaysia aresubjected to a higher levy compared to that inSabah and Sarawak.

• An increase in the levy for each foreign workerengaged in the plantation and services sector inPeninsular Malaysia to RM540 and RM1,800 perannum respectively (previously: RM360 andRM1,200 respectively). The levy for hiring morethan one maid is also increased to RM540 perperson (previously: RM360).

• To ensure that employers hire only the requirednumber of workers, employers are required to paythe levy at the Centre based on the number offoreign workers approved.

• Employers are required to register with theManpower Department before applying forforeign workers. Employers also need to advertisejob openings in the Job Clearing System to givelocal job seekers priority in applying for jobs. If thepositions remained unfilled, then companies areallowed to engage foreign workers.

• Employers need to attend an interview at theCentre, thereby eliminating the need formiddleman and the potential for fraud.

Meanwhile, beginning 1 February 2006, theGovernment also requires all non-professional foreignworkers (except Indonesians) to attend an inductioncourse on communication skills, Malaysian culture andlaws, conducted at centres in the source countries incollaboration with MLVK-approved training centres inMalaysia. Foreign workers who completed the coursewould be given the Certificate of Eligibility, which is apre-requisite for a working visa in Malaysia.

In 2005, the Government undertook measures to reducethe number of illegal foreign workers and to improvethe security of the population. The Amnesty Programmethat was launched on 29 October 2004 was extended toend-February 2005. Altogether, about 89,510 illegalworkers left Malaysia in the first two months of the year(October - December 2004: 309,248 persons), themajority of whom were Indonesians (84%), followed byIndian nationals (5%) and Bangladeshis (3%).Nevertheless, there were still some illegal migrantworkers who chose to remain in Malaysia despiteGovernment efforts to legitimise them. Thus, on 1 March,the Government mounted a full-scale operation calledOps Tegas involving stricter enforcement. During theperiod from 1 March to 31 December, 11,916 moreillegal migrants were arrested.

Although the Amnesty Programme was designed to allowthe speedy return of the now-legitimised foreign workersto Malaysia, delays emerged due to some administrativebottlenecks in the major source country, Indonesia. InMarch, the slow return of legal foreign workers created atemporary shortfall in labour in the manufacturing,construction and plantation sectors. Hence, theGovernment lifted the two-month freeze on hiring of newforeign workers in April, and allowed foreign workers froma number of different countries such as Vietnam, Pakistan,India, Nepal and Myanmar to work in Malaysia.

As at end-year, total registered foreign workers inMalaysia numbered 1,815,238 persons, representing anincrease of 23.5% from the previous year (2004:1,470,090 persons). The large increase reflected in partnew hires as well as the success of the Government’sAmnesty Programme whereby some illegal migrantworkers returned to Malaysia as registered foreignworkers. In total, foreign workers account for about16.7% of total employment and are engaged mainly inthe manufacturing (32%), plantation (24%) andconstruction (16%) sectors, as well as domestic helpers(18%). In terms of nationalities, Indonesian workers stillconstitute the largest group with 67%, followed byNepalese (11%) and Indian nationals (7%).

In 2005, the Government intensified efforts to addressthe rising number of unemployed graduates.According to a week-long survey conducted by theEconomic Planning Unit in September, nearly 60,000graduates were jobless, with most being unemployed formore than one year. Among key reasons cited for beingjobless include no job experience; weak command of theEnglish language and a lack of communication skills; andpossessing university degrees that were not relevant tomarket needs. The large number of unemployed


45


graduates is a concern as it could hamper the country’saim to be a knowledge-based economy. Therefore, in2005, the Government continued to focus on trainingand embarked on various programmes to address theissue of mismatch of skills between the unemployedgraduates and market requirements. The status of someof the programmes and training schemes are as follows:• Graduate Training Scheme III: Launched in

August 2005, the Scheme aims to equip localgraduates who have been unemployed since year2003, with specialised skills such as web publishingand application, tourism (tourist guide) and eventmanagement, ICT and English language amongothers. A total of 11 courses were offered, eachrunning for about two-and-a-half to five months.About RM100 million has been allocated for thisScheme, with plans to train 15,500 unemployedgraduates. In 2005, 7,992 unemployed graduatesenrolled in the programme, mainly in Englishlanguage courses, followed by executivedevelopment and web-based courses.

• Graduate Reskilling Scheme: This Schemetargets engineering and selected technicalgraduates with no previous employment history.The objective of the Scheme is to upgrade skillsand knowledge of graduates in related technicalfields, such as manufacturing-plant operation andmaintenance in the automotive industry,semiconductor chip design, and supply chainmanagement. Courses are of Certificate level, andconducted in skills development centres andselected participating colleges and universities. Asat end-2005, a total of 2,370 graduates haveparticipated in the courses.

• Graduate Apprenticeship Programme: Thisprogramme was initiated in 2005 and managed bythe Ministry of Higher Education. A total of 79skills-related courses are offered in various publicuniversities, with apprenticeship in selected privatecompanies. Up till mid-September, a total of 9,225graduates benefited from this programme.

• National Dual Training Scheme: Theprogramme’s overarching objective is to produceknowledge workers that match industry needs.The two-year training programme, similar to thatimplemented in European countries, consists oftwo components – 20-30% of training beingtheoretical in nature, conducted in selectedNational Vocational Training Council (MajlisLatihan Vokasional Kebangsaan, MLVK) traininginstitutes; and the balance in the form of practical

training in various companies, includingGovernment-linked ones as well as multinationalfirms. Launched in July 2005, participants wouldbe trained in four specialised areas, namelyautomotive mechatronic; plant operation in thepetrochemical, oil and gas industry; processautomation in industrial electronics industry; aswell as tool making (mould and dye). The firstintake has benefited about 71 school leavers,university graduates and employed workers. Uponcompletion of the 2-year training programme,participating companies can choose to absorb thetrainees into their workforce.

• Attachment and Training Scheme: Introduced in2001, the Scheme seeks to provide unemployeddiploma and degree graduates with workexperience, thereby improving their chances ofgetting jobs. Trainees were attached to Governmentdepartments and agencies and were exposed to ICT,English language and statistics or researchmethodologies courses. As at end-2005, seven outof eight programmes under this scheme werecompleted, benefiting about 38,210 graduates.

The cost of the training programmes is wholly borneby the Government and to attract furtherparticipation, trainees were provided with monthlyallowances of RM350. In October, in view of thehigher cost of living, the allowance was increased toRM500 per month. To further encourage the privatesector to provide employment opportunities tounemployed graduates, the 2006 Budget proposedthat double deduction be given on the allowancespaid by companies listed on Bursa Malaysia toparticipants of Unemployed Graduate Trainingprogramme. This incentive would be available forthree years and is expected to benefit at least 1,000unemployed graduates. The Government alsoapproved additional RM100 million for training ofunemployed graduates. Meanwhile, Skills TrainingCentres at the state levels would increase studentintakes and introduce new courses under theIndustrial Skills Enhancement Programme. Forunemployed graduates who are interested inparticipating in economic activities, the Governmentintends to implement ‘Young Entrepreneurs’ Scheme’that focuses on ICT, tourism, halal products, and foodprocessing and packaging. In addition, the PROSPERGraduate Programme seeks to encourage graduatesto become entrepreneurs. An initial batch of 200graduates is expected to benefit from the programmein 2006, each getting RM50,000 in financing aid toassist them in setting up businesses.


46

In 1993, the Human Resource Development Fund(HRDF) was established with matching grant from theGovernment to encourage the private sector employers inthe manufacturing and services sectors to retrain andupgrade the skills of their employees. The HRDF operateson the basis of levy system, whereby employers who havepaid the levy will qualify for training grants from the Fundto defray or subsidise training costs for their Malaysianemployees. The rate of financial assistance is 100% ofthe allowable costs incurred for training in Malaysia andup to 50% for costs incurred overseas, subject to theavailability of levy in the employers’ accounts withPembangunan Sumber Manusia Berhad (PSMB) whichadministers the Fund. In 2005, the PSMB approved535,266 training places, with financial assistance ofRM228.7 million. Among others, the PSMB offerstraining for retrenched and unemployed workers as wellas run apprenticeship programme for SPM school leavers.Given the increasing importance of the services sector interms of its contribution to the economy and its need forknowledge workers, the scope of the PSMB Act 2001was expanded to include more services industries such asport services; warehousing services; R&D; support servicesand maintenance engineering; hypermarkets,supermarkets and department stores; security services;private hospitals; and direct sales. With the inclusion,employers in these industries would need to contributeto the development levy for the purpose of training,retraining and upgrading the skills of their employees soas to be in line with business needs and the country’seconomic strategy.

EXTERNAL SECTOR

Balance of PaymentsThe overall balance of payments remained strongand recorded a surplus in 2005. The larger currentaccount surplus was due mainly to a stronger goodssurplus, reflecting sustained expansion in commodity

Graph 1.36 HRDF: Number of Training Places Approved

1993 1995 1997 1999 2001 2003 2005

Number of training places

Source: Pembangunan Sumber Manusia Berhad

0

100,000

200,000

300,000

400,000

500,000

600,000

Direct investment Portfolio investment

Graph 1.37bCapital and Financial Account

e Estimate

-50-40-30-20-10

010203040

2003 2004 2005e

RM billion

Other investment - official sector Other investment - private sector

Balance on capital and financial account

Net international reserves

Graph 1.37cNet International Reserves

RM billion

Balance on capital and financial account

Balance on current account

-50

0

50

100

150

200

250

300

2003 2004 2005

Graph 1.37a Current Account

Goods exports

Balance on servicesand income

e Estimate

Goods imports

Balance on currentaccount (RHS)

-100

0

100

200

300

400

500

600

2003 2004 2005e

RM billion

0

10

20

30

40

50

60

70

80RM billion


47


The larger current accountsurplus was due mainly to astrong trade surplus, driven bythe continued expansion inmanufactured and commodityexports, and an improvementin the income account.

Current AccountIn 2005, the current account continued to record alarge surplus of RM77.8 billion, equivalent to 16.4%of GNP (2004: RM56.5 billion or 13.3% of GNP),due to a larger surplus in the trade account and, to alesser extent, an improvement in the incomeaccount. The export growth was underpinned by anexpansion in manufacturing exports and higherprices for commodity exports. A larger outflow inother services account and higher payments fortravel abroad led to a larger deficit in the servicesaccount. The income account recorded an

Table 1.16Balance of Payments

Item2004 2005e

+ - Net + - Net

RM million

Goods 481,240 376,766 104,474 536,931 410,476 126,455Trade account 480,740 400,077 80,663 533,788 434,010 99,778

Services 63,717 72,496 -8,780 72,202 82,452 -10,249

Balance on goods and services 544,958 449,264 95,694 609,133 492,928 116,205

Income 16,023 40,572 -24,549 20,469 41,937 -21,470Current transfers 1,700 16,333 -14,633 1,131 18,094 -16,963

Balance on current account 562,681 506,169 56,511 630,734 552,960 77,772% of GNP 13.3 16.4

Capital account – –

Financial account 15,083 -41,952Direct investment 9,739 2,711Portfolio investment 33,829 -11,881Other investment -28,485 -32,782

Balance on capital and financial account 15,083 -41,952

Errors and omissions 11,467 -23,000of which:

Foreign exchange revaluation gain (+) or loss (-) 7,997 -15,496

Overall balance 83,061 12,820

Bank Negara Malaysia international reserves, net 253,513 266,334USD million equivalent 66,714 70,483

Note: Numbers may not necessarily add up due to rounding.

e Estimate

Source: Department of Statistics, Malaysia and Bank Negara Malaysia

exports and continued growth in manufacturingexports. Meanwhile, the financial account recordeda net outflow attributed mainly to the unwinding ofportfolio positions in the fourth quarter and higherexternal loan repayments by the official sector. Errorsand omissions, including exchange loss fromrevaluation of Bank Negara Malaysia’s internationalreserves due to the strengthening of the ringgitagainst major currencies, was RM23 billion.Revaluation losses on reserve holdings arising fromthe appreciation of the ringgit against the majorcurrencies amounted to RM15.5 billion. Afteradjusting for errors and omissions, the overallbalance of payments recorded a surplus of RM12.8billion. As a result, the net international reserves ofBank Negara Malaysia increased by RM12.8 billion toRM266.3 billion (USD70.5 billion) as at 31 December2005. The reserves increased further to RM272.7billion or equivalent to USD72.2 billion as at 28February 2006. This reserves position is adequate tofinance 7.6 months of retained imports and cover6.7 times the short-term external debt. Malaysia’sreserves remained usable and unencumbered.


48

Table 1.17Gross Exports

2005p

RM million Annual change (%) % share

Manufactured goods 429,873 10.1 80.5of which:

Electronics, electrical machinery and appliances 282,779 10.0 53.0Electronics 208,232 10.4 39.0

Semiconductor 89,967 0.7 16.9 Electronic equipment & parts 118,265 19.1 22.2

Electrical machinery & appliances 74,547 8.9 14.0 Consumer electrical products 22,632 2.1 4.2 Industrial & commercial electrical products 28,608 11.0 5.4 Electrical industrial machinery and equipment 20,476 15.1 3.8 Household electrical appliances 2,831 3.9 0.5

Chemicals & chemical products 29,718 7.0 5.6Manufactures of metal 17,157 6.3 3.2Optical and scientific equipment 12,318 6.5 2.3Textiles, clothing and footwear 10,520 1.9 2.0Wood products 8,860 2.1 1.7Food 8,488 9.2 1.6Furniture & parts 7,666 6.1 1.4Transport equipment 6,993 31.3 1.3Rubber products 6,777 12.3 1.3

Agricultural commodities 37,421 3.4 7.0of which:

Palm oil 19,036 -5.3 3.6Rubber 5,787 11.3 1.1Sawn timber 4,051 26.0 0.8Saw logs 2,465 19.1 0.5

Minerals 52,321 27.1 9.8of which:

Crude oil and condensates 28,508 33.7 5.3LNG 20,790 21.7 3.9Tin 935 -1.2 0.2

Other exports 14,173 9.5 2.7

Total 533,788 11.0 100.0

p Preliminary


improvement during the year due mainly to higherearnings from larger reserves as well as sustainedprofits and dividends accruing to Malaysiancompanies investing abroad. The current transfersaccount recorded a higher outflow attributable tothe one-off remittance by illegal foreign workersunder the Amnesty Programme in the first twomonths of 2005.

Despite the global semiconductor down-cycle in thefirst half of the year, gross exports expanded at adouble-digit rate of 11% during the year (2004:20.8%). The growth was due to the strongperformance in the commodities sector, particularlymineral exports (27.1%) underpinned by the higherenergy prices. Receipts from manufacturing exportsalso remained relatively strong during the year,expanding by over 10%, while agriculture exports

rose at a moderate rate of 3.4%. The increase inoverall exports was reflected both in terms of highervolume (8%) as well as unit value (3.2%).

Receipts from manufactured goods grew by 10.1%in 2005 (2004: 19.7%). Arising from the slowdownin the global semiconductor cycle, growth in exportsof E&E products grew moderately by 10% (2004:15.3%). The slowdown in exports of semiconductorsand electrical products was cushioned by thecontinued strength in shipment of computers andparts. Exports of chemical products expanded at aslower pace of 7% in 2005 (2004: 31%) due mainlyto the slowdown in exports of organic chemicals,particularly demand for oleochemicals from thePeople’s Republic of China (PR China). However,external demand for plastic products continued toremain strong during the year. The top two export


49


destinations for Malaysian made plastics were Europeand Japan. Among the resource-based industries,exports of rubber products continued to expand by adouble-digit rate in 2005, driven largely by the strongglobal demand for rubber gloves. Meanwhile, exportsof other resource-based products such as petroleumproducts, food, beverages and tobacco continued toexpand during the year. In the case of metal products,after experiencing a strong expansion in 2004(43.6%), growth slowed down to 6.3%, due to globaloversupply of steel arising from aggressive capacity

expansion by Chinese steel millers which led to lowerprices. Overall, both increases in volume (8.8%) andunit value (1.2%) resulted in the higher exportproceeds from the manufacturing sector in 2005.

The primary commodities sector continued toremain an important source of foreign exchangeearnings in the Malaysian trade account with its shareto total gross exports rising further during the year to16.8% (2004: 16.1%). Commodity exports grew by16% (2004: 21.8%), reflecting the strong growth inexports of energy products, while agriculture exportscontinued to grow at a moderate rate. The growth incommodity exports was largely driven by higherexport prices (13.1%), and further supported by anincrease in volume (4.3%).

Mineral exports grew strongly for the third consecutiveyear, rising by 27.1% to RM52.3 billion (2004: +38.2%to RM41.2 billion). Exports of crude oil and condensatesrose significantly by 33.7% to RM28.5 billion, drivenentirely by the marked increase in crude oil prices, whichrose by 37% to an average of USD55.93 per barrel for2005 (2004: USD40.81). However, export volumedeclined by 2% in line with the lower output of crudeoil for the year. LNG export performance was alsofavourable, rising by 21.7% to RM20.8 billion, due toboth higher prices (15%) as well as volume (5.9%).

Export receipts from agriculture rose at a moremoderate pace of 3.4% to RM37.4 billion in 2005.Despite the higher export volume of palm oil(10.9%), earnings from palm oil fell by 5.3% during

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Export Value

1 Volume and prices are estimates based on Bank Negara Malaysia's

survey of selected companies.

Source : Department of Statistics, Malaysia Bank Negara Malaysia

Export Volume1

Export Prices1

Graph 1.38Export Performance of the Manufacturing Sector

Annual Change (%)

2004 2005

-5

0

5

10

15

20

25

30

Graph 1.39 Exports of Manufactured Goods by Destination

2005

2000

0 5 10 15 20 25% share

United States

Source : Department of Statistics, Malaysia

Singapore

Japan

People's Republic of China,Hong Kong China,Korea &

Chinese Taipei

ASEAN excl. Singapore

European Union

Others

Table 1.18External Trade

2004 2005p

RM billion

Gross exports (f.o.b) 480.7 533.8

Annual change (%) 20.8 11.0

Annual change (%)

Volume1 25.1 8.0Prices1 0.7 3.2

Gross imports (c.i.f) 400.1 434.0

Annual change (%) 26.4 8.5

Annual change (%)

Volume1 27.6 3.5Prices1 2.7 4.9

Trade balance 80.7 99.8

1 Volume and prices for 2005 are estimates.

p Preliminary



50

the year to RM19 billion due entirely to lower prices(-14.6% to RM1,456 per tonne from RM1,706 pertonne in 2004). Prices consolidated during the yearamidst the increase in global production and stocksof crude palm oil (CPO), coupled with the increase inharvests of soybean, which is palm oil’s closestsubstitute in the global edible oil market.Nevertheless, offtake by major buyers of Malaysianpalm oil, namely the European Union (EU), Pakistanand PR China with a combined share of almost 46%of total palm oil exports, increased by 14.7%,10.8% and 2% respectively. Rubber exportscontinued to perform favourably, rising by 11.3% toRM5.8 billion (2004: RM5.2 billion) driven by bothhigher prices (9%) and volume (2.1%). Externaldemand for rubber remained strong, led by PRChina, which increased its purchase by 33.7% to386,058 tonnes (2004: 288,732 tonnes). The sharpupward trend in demand has enabled PR China tobecome the largest purchaser of Malaysian rubber,surpassing the EU (2005: 319,612 tonnes) for thefirst time in 2005.

Gross imports increased by 8.5% (2004: 26.4%),reflecting mainly imports of inputs for manufacturedexports as well as higher demand for consumer andinvestment goods. Import prices increased by 4.9%,attributed to higher prices across most goods,particularly, manufactured goods, crude materials,mineral fuels as well as chemicals.

Imports of intermediate goods, which accounted for71% of imports, grew by 7.2%, due mainly to demandfor electrical and electronics, and resource-basedproducts, particularly from the US and regionalcountries. Increased sourcing of intermediate inputs

from PR China, Singapore and Thailand wasunderpinned by the manufacturing supply chain as wellas extensive production network and linkages in theregion. These imports comprised mainly computercomponents and machine parts, and industrial suppliessuch as metals and chemicals. Intermediate importsrelating to the manufacture of goods for the domesticmarket also expanded. Consistent with the strongperformance of the motor assembly industry in linewith higher demand for passenger cars, imports ofparts and accessories of transport equipment recordeda strong growth. In tandem with higher oil prices,imports of fuel and lubricants grew strongly.

Reflecting the further expansion in private investment,imports of capital goods increased by 9.5%. Capitalimports excluding lumpy items grew by 9.3%. Theimpetus for growth came from capacity expansion andupgrading for new technologies. Capital imports werechannelled mainly into the manufacturing and servicessectors. The higher level of business activity andinvestment to improve the quality and efficiency of theinfrastructure in the services industry led to the increase inimports of office equipment and generators, turbines andelectric motors for power generation. Imports of industrialmachinery and equipment in the manufacturing sectorremained strong. Continued capacity expansion in themanufacturing sector occurred in areas such as higher-end electrical and electronics products, metals andplastics. New technologies and products as well as theextension of network infrastructure underpinned thegrowth in imports of telecommunication equipment.Growing intra-regional trade between ASEAN and NorthAsia and firm external demand for commodity exports ledto higher imports of ships to service these markets.

In line with higher disposable income, imports ofconsumption goods increased by 5.9%. Importgrowth reflected demand for food and beverages aswell as consumer goods particularly durable and non-durable consumer goods, namely, sound and videoreproducing equipment, household electrical goods,jewellery and medicine. The share of consumptiongoods imports to total imports remained low,accounting for 5.7% of total imports.

Consonant with increasing intra-regional trade, importsfor re-exports expanded by 26.9%. These importswere mainly electrical and electronic products,telecommunication equipment and iron and steelproducts which were packed, labeled and assembled inthe free commercial zones at major ports and airports.These imports were largely re-exported to Singapore,Thailand, US, PR China and Hong Kong China.

Manufactured Exports

Source : Department of Statistics, Malaysia

Electronics Non-electronics

Graph 1.40 Export Performance of Electronics and Non-electronics Industries

Annual Change (%)

0

10

20

30

40

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

2004 2005


51


Table 1.19Gross Imports by End Use

2005p

RM Annual million change (%)

% share

Capital goods 60,734 9.5 14.0Capital goods (except transport equipment) 53,939 10.0 12.4

Industrial machinery and equipment 14,419 9.1 3.3Office equipment 11,291 23.5 2.6Telecommunication equipment 6,999 0.6 1.6

Transport equipment 6,795 5.3 1.6

Intermediate goods 308,335 7.2 71.0Food and beverages, mainly for industry 8,352 -5.6 1.9Industrial supplies, n.e.s. 96,599 6.0 22.3

Metals & metal products 31,870 15.6 7.3Chemicals 11,667 9.6 2.7

Fuels and lubricants 27,492 42.3 6.3Parts and accessories of capital goods(except transport equipment) 163,660 2.7 37.7Electronics 105,710 2.7 24.4Parts and accessories of telecommunication equipment 7,249 -2.5 1.7

Parts and accessories of transport equipment 12,232 34.8 2.8

Consumption goods 24,600 5.9 5.7Food and beverages, mainly for household consumption 9,280 4.0 2.1Transport equipment, non-industrial 318 -4.9 0.1Consumer goods, n.e.s. 15,002 7.4 3.5

Consumer durables 3,514 12.3 0.8Consumer semi-durables 4,671 0.4 1.1Consumer non-durables 6,817 10.2 1.6

Dual use goods 11,308 21.5 2.6Motor spirit 6,424 35.4 1.5Passenger motor cars 4,884 7.0 1.1

Others 7,171 0.8 1.7

Re-exports 21,862 26.9 5.0

Gross Imports 434,010 8.5 100.0

Note: Numbers may not necessarily add up due to rounding.n.e.s. Not elsewhere specified.p Preliminary


Malaysia’s total external trade expanded by 9.9% toRM967.8 billion in 2005. The share of Malaysia’s tradewith the major trading partners, namely the US,Singapore, Japan and the EU declined slightly andaccounted for 53.8% of total trade. However, trade withregional countries (excluding Japan) grew, and accountedfor 44.4% of Malaysia’s exports and 49% of imports.Trade links with Australia and India strengthened, drivenmainly by higher demand for electrical and electronicsand petroleum-related products.

Exports to the US, Malaysia’s largest trading partner, grewby 16.5% to account for an increased share of 19.7% oftotal exports. The impetus to the export growth stemmedfrom higher demand induced by the replacement cycle forwireless computers and computer-related items. Exports of

optical and medical instruments and resource-basedproducts, namely wood, rubber and chemical products,strengthened further. The US remained the second largestsource of imports for Malaysia. Approximately 80% ofimports were intermediate inputs for the electrical andelectronics industry. As exports to the US increased whileimports declined, the bilateral trade surplus widened toRM49.1 billion (2004: RM32.3 billion).

Singapore remained the second most importanttrading partner with a share of 13.9% of totaltrade (2004: 13.2%). Electrical and electronicproducts continued to be the largest exportreceipts, accounting for 57.8% of total exports toSingapore. Other export items which recordedstrong growth include crude petroleum and


52

resource-based products, namely petroleum,chemical, iron and steel products. On the importsside, Singapore was the third largest source forMalaysia with imports comprising mainly electricaland office machinery, chemical products as well asrefined petroleum products.

Despite a decline in the share of trade to 11.7%(2004: 12.7%), Japan continued to be the thirdlargest trading partner of Malaysia. The trade balancewith Japan, which has been in Japan’s favour,improved to register a smaller deficit of RM13.1 billionas imports declined while exports continued to grow.Export growth of 2.8% was underpinned by increasedexport receipts from LNG, manufactures of plastics andmetals. Imports declined by 1.2%, reflecting lowerimports of transport equipment, optical, medical andsurgical instruments. Japan remained the principalsource of imports for Malaysia, accounting for 14.5%(2004: 15.9%) of total imports, although its share ofimports has been declining as Malaysia diversifies its

trade and intensifies its trading link with other regionalcountries.

The growth in trade with countries in the EUmoderated to 4.4% in 2005, reflecting theslowdown in economic activity in the EU. A tradesurplus of RM12.1 billion (2004: RM12.4 billion) wasrecorded, attributed mainly to trade surplus with theNetherlands (RM14.1 billion), UK (RM2.9 billion),France (RM1.3 billion) and Spain (RM1.2 billion)while trade deficits were recorded in trade withGermany and Italy of RM8 billion and RM2 billionrespectively. Within the group, Germany, theNetherlands and the UK remained the leadingtrading partners. Exports to the EU comprised mainlyintegrated circuits and furniture while imports weremainly iron and steel products, passenger cars andelectrical machinery.

Trade with economies in North East Asia (excludingJapan), which accounted for 21.2% of total trade,

Table 1.20Direction of External Trade

2005p

Exports Imports Trade balance

RM million % share RM million % share RM million

ASEAN countries 139,208 26.1 106,976 24.6 32,232Singapore 83,333 15.6 50,828 11.7 32,505

Thailand 28,723 5.4 22,889 5.3 5,834

Indonesia 12,580 2.4 16,566 3.8 -3,986

Philippines 7,476 1.4 12,192 2.8 -4,716

Other ASEAN countries 7,096 1.3 4,501 1.0 2,595

Selected North East Asia countries 99,184 18.6 106,254 24.5 -7,070The People’s Republic of China 35,221 6.6 49,880 11.5 -14,659

Hong Kong China 31,205 5.8 10,797 2.5 20,409

Chinese Taipei 14,813 2.8 23,974 5.5 -9,160

Korea 17,945 3.4 21,604 5.0 -3,659

European Union (EU) 62,629 11.7 50,512 11.6 12,117United Kingdom 9,470 1.8 6,522 1.5 2,948

Germany 11,259 2.1 19,265 4.4 -8,007

Netherlands 17,452 3.3 3,351 0.8 14,101

Other EU countries 24,449 4.6 21,374 4.9 3,075

United States 105,033 19.7 55,918 12.9 49,115

Japan 49,918 9.4 62,982 14.5 -13,064

India 14,972 2.8 4,164 1.0 10,808

Australia 18,042 3.4 8,171 1.9 9,872

Rest of the world 44,801 8.4 39,033 9.0 5,769

Total 533,788 100.0 434,010 100.0 99,778

Note: Numbers may not necessarily add up due to rounding.p Preliminary



53


expanded by 11%. Increased sourcing of cheaperinputs caused import growth from these countries tocontinue to outpace exports. Consequently, thetrade balance recorded a deficit of RM7.1 billion in2005. PR China was Malaysia’s fourth major sourceof imports, with imports comprising mainlyintermediate components such as integrated circuits,machinery, appliances and parts, chemical and metalproducts. Exports to PR China which recordedgrowth were electronic and electrical products, ironand steel and rubber products. Imports from Koreawas underpinned by imports of integrated circuits,office machine parts and passenger cars whileexports were largely supported by LNG, computerand components and chemical products.

Increasing intra-regional trade and better economicperformance of ASEAN countries resulted inMalaysia’s trade with ASEAN countries (excludingSingapore) expanding by 12.3% in 2005. Exports toASEAN were supported mainly by exports of electricaland electronics and resource-based products such aschemicals, iron and steel as well as plastic products.Imports from this region comprised mainly electricaland electronic products, chemical products andmanufactures of metal.

The services account deficit widened to RM10.2billion or 2.2% of GNP (2004: -RM8.8 billion or–2.1% of GNP). Higher demand for importedservices as the economy moved up the productionvalue chain, led to a higher net payment of RM12.3

billion (2004: -RM9.7 billion) in the other servicesaccount. The outflows were attributable mainly tohigher payments for royalties and license fees,construction services, and other business services.Royalties and license fee payments continued toincrease, reflecting acquisition of intellectualproperty rights for design and development of newproducts by the manufacturing sector, particularly inthe E&E industry, and services sector. More than70% of payments for royalties and license fees weremade to the UK, US and Japan. Net payments for

Graph 1.41Direction of Exports (% share): 1995 Direction of Exports (% share): 2005

1 ASEAN excluding Singapore2 Hong Kong China, Korea and Chinese Taipei

1 ASEAN excluding Singapore 2 Hong Kong China, Korea and Chinese Taipei

Singapore20.3% Singapore

15.6%

Japan12.7%

Japan9.4%

People's Republicof China 2.7%

People's Republicof China 6.6%

United States20.7%

United States19.7%

European Union(EU)14.2%

European Union(EU)11.7%

Rest of the world11.2%

Rest of the world14.5%

NIEs2

11.3%

NIEs2

12.0%

ASEAN1

6.9% ASEAN1

10.5%

Table 1.21Services and Income Accounts

2004 2005e

RM billion

Net + – Net

Services Account -8.8 72.2 82.5 -10.2% of GNP -2.1 -2.2

Transportation -17.8 16.2 31.9 -15.7Travel 19.4 32.4 14.2 18.1Other services -9.7 23.3 35.6 -12.3Government transactions n.i.e. -0.7 0.4 0.8 -0.4

Income Account -24.5 20.5 41.9 -21.5% of GNP -5.8 -4.5

Compensation of employees -1.1 4.2 4.7 -0.5Investment income -23.4 16.2 37.2 -21.0

Note: Numbers may not necessarily add up due to rounding.n.i.e. Not included elsewhere.e Estimate

Source: Department of Statistics, Malaysia and Bank Negara Malaysia.


54

construction services increased, despite higherearnings from construction projects abroad, duemainly to higher imported services for power as wellas oil and gas exploration projects. The largeoutflows for ‘other business services’ reflectedmainly payments for professional services as well asoperational leases for ships, tugs and aircrafts.Meanwhile, computer and information servicesreceipts improved, underpinned by the expansion inbusiness process outsourcing and provision of groupnetwork support services. About half of theseearnings were from Singapore, the UK and US.

Despite a marginally smaller net inflow, the travelaccount remained the largest contributor to services

receipts, accounting for 44.8% of gross servicesreceipts in 2005. Tourist arrivals in Malaysia grew by4.4% to 16.4 million visitors (2004: 15.7 million),with gross foreign exchange earnings amounting toRM31 billion. Visitors from Singapore, Thailand andIndonesia accounted for 76.1% of tourist arrivals.While visitors from PR China and Hong Kong Chinadeclined, the growth in tourist arrivals wassupported by tourists from West Asia, Korea, India,Australia and New Zealand as well as long-haultourists from the US and UK. Malaysia has benefitedfrom the expansion in regional travel, particularlyfrom countries such as Vietnam, Thailand andIndonesia, as well as various strategies to promotetourism products including hosting of meetings,international conventions and events (MICE) such asFormula One Petronas Malaysia Grand Prix andMalaysia Mega Sale Carnival.

On the payments side, higher income and increasedbusiness activities overseas led to travel outflowsincreasing by 21.1% to RM14.2 billion (2004: RM11.8billion). These outflows were attributable to the highernumber of Malaysians traveling as well as higherpayments for education abroad. Payments for travel toborder towns increased by 24.2% to RM3 billion.Education outflows increased by 16.5% due mainly to anincrease in the number of Malaysian students studyingabroad, particularly, in Australia, the US and UK.

The transportation account recorded a smaller deficit ofRM15.7 billion (2004: -RM17.8 billion), as the increase inreceipts by major domestic shipping companies and airlines

1998 1999 2000 2001 2002 2003 2004 2005e

e Estimate Source: Malaysia Tourism Promotion Board and Department of Statistics, Malaysia

Tourist arrivals Tourism receipts

Graph 1.42Tourist Arrivals and Tourism Receipts

Tourist arrivals in million

Receipts inRM million

0

2468

10121416

18

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Graph 1.43 2005: Components of Gross Receipts in the Services Account (% share)

Travel44.8%

Other services32.2%

Governmenttransactions n.i.e.

0.6%

Transportation22.4%

Graph 1.44 2005: Components of Gross Payments in the Services Account (% share)

Transportation38.7%

Governmenttransactions n.i.e.

0.9%

Other services43.1%

Travel17.3%


55


Higher returns from largerexternal reserve holdingstogether with sustained profitsand dividends accrued toMalaysian companies from theirinvestment abroad contributedto an improvement in incomeaccount.outpaced the increase in payments abroad. Gross receiptswere supported by earnings from shipments of petroleum,LNG and carriage of cargo following the expansion in intra-regional trade between North Asia and ASEAN, as well ashigher freight rates. Gross outflows reflected higher freightcharges as well as increased volume of trade.

The income account recorded an improvement, withthe deficit narrowing to RM21.5 billion or 4.5% ofGNP (2004: -RM24.5 billion or –5.8% of GNP). Thesmaller deficit reflected mainly higher returns fromlarger external reserve holdings of Bank NegaraMalaysia. Meanwhile, the profits and dividendsaccruing to Malaysian companies from their investmentabroad were sustained at RM4.1 billion. The bulk ofthe receipts were from the oil and gas, utilities andmanufacturing sectors.

The profits and dividends accruing to foreign investorsin Malaysia remained large, in line with the expansion inexports of electrical and electronics industry and the oiland gas sector. Nevertheless, a substantial portion ofthese profits and dividends was retained in Malaysia forreinvestment, and credited as inflows of foreign directinvestment in the financial account of the balance ofpayments. A profile of Malaysia’s income account from1999 to September 2005 is published under the SpecialFeature in the Bank Negara Malaysia’s Fourth Quarter2005 Quarterly Bulletin.

In line with the continued efforts by the Governmentto reduce illegal foreign workers in Malaysia, a total of398,758 illegal workers returned to their homecountries during the Amnesty Programme from 29October 2004 to end-February 2005. Reflecting theone-time lump sum repatriation by these workersreturning home under this Programme, the currenttransfers account recorded a larger net outflow ofRM17 billion (2004: -RM14.6 billion). About 58% ofthe registered foreign workers in Malaysia wereemployed in the manufacturing and agriculture sectors.

Financial AccountIn 2005, the financial account recorded a net outflowof RM42 billion (2004: +RM15.1 billion), attributedmainly to the unwinding of speculative short-termpositions in the fourth quarter, larger repayment ofexternal loans by the official sector and higherextension of trade credits by Malaysian exporters.Reflecting the increased interests by Malaysiancompanies to diversify abroad, outflows for overseasinvestment also increased. Meanwhile, foreign directinvestment was sustained at a high level.

On a gross basis, foreign direct investment (FDI)increased to RM25 billion (2004: RM23.5 billion), or5.3% of GNP, with broad-based inflows across themajor sectors such as the oil and gas, services andmanufacturing sectors. Of significance, there was amarked increase in FDI from the major investingeconomies, namely the US, Hong Kong China andGermany. The bulk of FDI continued to be in the form ofreinvested earnings, reflecting continued expansion anddiversification of operations by existing MNCs,particularly in the manufacturing and oil and gassectors, amidst favourable investment conditions inMalaysia. After taking into account the adjustments forhigher outflows due largely to loan repayments toparent companies abroad, net FDI recorded an inflow ofRM15.6 billion (2004: RM17.6 billion) or 3.3% of GNP.

FDI into the oil and gas sector increased significantly,particularly in the upstream activities, encouraged byrising oil prices and greater global demand for crude oil

Table 1.22Balance of Payments: Financial Account

2004 2005e

RM billion

Financial Account 15.1 -42.0

Direct Investment 9.7 2.7In Malaysia 17.6 15.6Abroad -7.8 -12.9

Portfolio Investment 33.8 -11.9

Other Investment -28.5 -32.8Official sector -1.1 -11.1of which:

Federal Government (net) 0.1 -3.5Gross borrowing 1.1 0.7Repayment -1.0 -4.2

NFPEs (net) -1.3 -7.6Gross borrowing 11.4 6.3Repayment -12.7 -13.9

Private sector -27.3 -21.7

Note: Numbers may not necessarily add up due to rounding.e Estimate



56

during the year. These activities were mostly undertakenby the national oil and gas company in joint venturewith its international partners, for deepwater and ultra-deepwater oil explorations, particularly in offshore EastMalaysia, as well as for the extraction operations fromexisting and new oil fields.

In the services sector, foreign investments were receivedmainly in the finance, insurance, real estate and businessservices sub-sector, followed by the wholesale and retailtrade, hotels and restaurants sub-sector and thetransportation and communication sub-sector. Inflowsinto the finance, insurance, real estate and businessservices sub-sector reflected mainly investments receivedby investment holding companies, while one of the threeforeign banks which were awarded licenses for Islamicbanking in 2004 commenced its operations during theyear. Of significance, Malaysia maintained the attractionfor MNCs to locate their shared services and outsourcingactivities, thus, encouraging higher value-added activityand establishing linkages across the different segments ofthe services sector. This was reflected in the A.T. Kearney2005 Offshore Location Attractiveness Index, whichranked Malaysia as the third most attractive investmentdestination for Shared Services & Outsourcing (SSO) forthe second consecutive year, citing favourable factorssuch as world-class infrastructure, attractive fiscalincentive packages and availability of skilled labour.During the year, there was an increase of 169international and regional facilities, of which 19 wereoperational headquarters (OHQs), 132 regional andrepresentative offices, 15 international procurementcentres (IPCs) and three regional distribution centres(RDCs). Investments in the wholesale and retail trade,hotels and restaurants sub-sector remained firm,supported by strong domestic consumption in trade andtourism-related services. Meanwhile, investments in the

transportation and communication sub-sector weremainly for the expansion of activities in the courier as wellas air and ocean freight services.

The manufacturing sector continued to be a majorrecipient of FDI. About one-half of the investmentswere concentrated in the electrical and electronicindustry, primarily for plant expansion as well asupgrading of machinery and equipment, to enlargecapacity as well as for production of higher-endproducts. Significant investments were alsochannelled into the downstream petroleum refiningand petroleum-related product industry, in line withthe higher investment in the upstream oil and gasactivities. Meanwhile, investments in the othermanufacturing industries were varied, ranging fromindustrial chemicals and other chemical-relatedproducts, plastic-based products to themanufacturing of fabricated metal products andmachinery and equipment.

Direct investment abroad by Malaysians increased toRM12.9 billion in 2005 (2004: -RM7.8 billion),reflecting increased interests by Malaysian companiesto acquire foreign interests as well as to exploitopportunities to diversify their operations abroad. Thetop destination for the investment was the ASEANcountries, which accounted for about half of totaldirect investment abroad. Other major destinationsinclude PR China, US and Hong Kong China althoughsome of Malaysia’s investments were channelledthrough international offshore financial centres beforere-directed to its final destination. The scope ofinvestment has become increasingly broad-based,ranging from the oil and gas and manufacturingsectors, to the services sector. On a sectoral basis, alarge share of overseas investments was effected bycompanies in the services sector, in particular, thetransport and communication sub-sector as well as thefinancial services sub-sector. Most of these investmentswere undertaken through equity acquisitions by severallarge Malaysian companies, including the takeover ofan Indonesian mobile telephone operator, as well asthe acquisition of a shipping company in Singapore. Inaddition to the investments that were carried out bylarge corporations, many small and medium-sizedMalaysian companies also invested in low-costeconomies, taking advantage of cheap labour,availability of raw materials and new market base.

In the oil and gas sector, the national oil companycontinues to forge joint venture partnership with severalforeign oil companies for exploration and extraction,lending technical expertise and providing working

The financial account recordeda net outflow, attributedmainly to the unwinding ofspeculative portfolioinvestment, larger repaymentof external loans by the officialsector and higher extension oftrade credits. Overseasinvestment by Malaysians wasalso higher, while FDI wassustained at a high level.


57


capital for investment. Meanwhile, overseas investmentsin the manufacturing sector were led by companies inthe semiconductor and other electronic component, andship building- and repairing-related industries. Apartfrom the provision of equity capital financed mainlyfrom internal funds, higher overseas investments werealso effected through higher loans extension by theparent companies in Malaysia to their subsidiariesabroad. These companies sought to expand productionfacilities in new markets for entry into the new andoften fast-growing markets. Several big companiesfrom furniture and wood-related products, as well asbasic metal industries in Malaysia have also investedabroad to achieve cost effective production while at thesame time, enhanced the prospects for new exportoutlet for business expansion. Meanwhile, investmentsabroad by construction companies continued to besignificant following their earlier success in bidding andon-going work of several large infrastructure, roads andhighway projects abroad.

Malaysia’s investments abroad continued to yieldpositive results. Reflecting the success of theiroperations abroad, the net profits and dividendsaccruing to Malaysian companies investing abroad,particularly from the oil and gas sector and financialservices sub-sector, was sustained at RM4.1 billion in2005 (2004: RM4.3 billion).

In 2005, portfolio investment registered a net outflowof RM11.9 billion (2004: +RM33.8 billion). In the firsthalf-year, portfolio investment recorded a net inflow ofRM8.1 billion, reflecting mainly foreign interest in short-term money market papers, debt securities as well asequities. The strong interest observed in Malaysia’scapital market since last year was partly associated withthe periodic anticipation of exchange rate realignmentsin the region. However, the flows reversed in the secondhalf of the year, recording a net outflow of RM20billion. The outflows, which commenced in Septemberand continued into October and November, arosemainly from the liquidation of short-term money marketpapers and debt securities, and to a lesser degree,equity securities. These outflows subsided in December.

The other investment recorded a higher net outflowof RM32.8 billion (2004: -RM28.5 billion), reflectingmainly larger repayment of external loans by the officialsector while net outflows by the private sector declined.The official sector recorded a net repayment positionfor the third consecutive year, amounting to RM11.1billion (2004: -RM1.1 billion), in line with Malaysia’sprudent external debt management strategy and theGovernment’s commitment towards fiscal consolidation.

Meanwhile, other investment by the private sector,which comprises mainly borrowing and lending,placements and withdrawals of deposits by the bankingsector as well as non-bank private sector transactionswith unrelated counterparties, recorded a lower netoutflow of RM21.7 billion (2004: -RM27.3 billion). Theimprovement was due largely to a reversal in thebanking sector position registering a net inflow duringthe year, arising mainly from the withdrawal of depositsplaced abroad. These inflows had partially offset thehigher outflows by the non-bank private sector, duemainly to higher trade credits extended by Malaysianexporters, as well as larger repayments of external loansby the private sector.

External DebtMalaysia’s external debt management strategycontinues to focus on providing a stable foundation fora sustainable debt environment over the longer term.The country’s manageable debt situation is achievedthrough prudent debt management practices supportedby a well-functioning debt reporting and monitoringsystem. The prudential safeguards include efforts tominimise risk exposure against global interest rateshocks, adverse exchange rate movements and shift ininvestor sentiment. Meanwhile, the debt monitoringsystem enables the authorities to monitor the overalldebt level, the structure of the debt as well as servicingobligations of both the public and private sectors.

External debt positionimproved, reflectingcontinued net repayment bythe public sector. The share ofshort-term debt to total debtremained low.

In an effort to improve the compilation of the externaldebt data for better risk assessment and to be in line withthe international standards and practices, the Bankinitiated the compilation of external debt data with theoffshore financial entities in Labuan InternationalOffshore Financial Centre (Labuan IOFC) being treated asresidents. Under this approach, data on debt transactionsand exposure of the offshore financial entities in LabuanIOFC vis-à-vis the rest of the world are included as part ofMalaysia’s external debt. Meanwhile, debt transactionsand exposure of residents with offshore financial entitiesin Labuan IOFC, which were currently included in thenation’s external debt, are excluded. The aggregated dataof offshore financial entities in Labuan IOFC was obtained


58

from the Labuan Offshore Financial Services Authority(LOFSA). The external debt position under this newdefinition is provided in the Box Article titled“Compilation of Malaysia’s External Debt: Treatment ofOffshore Financial Entities in Labuan IOFC as Residents”.In the transition period, the official external debt datapublished by Bank Negara Malaysia for 2005 and 2006would continue to follow the existing definition oftreating offshore financial entities in Labuan IOFC as non-residents. The Bank would simultaneously compile the

external debt position under the new definition i.e.treating offshore financial entities in Labuan IOFC asresidents for 2006, with the target of fully adopting andpublishing only the external debt position under the newdefinition starting with reporting period of first quarter of2007 for release in May 2007. Thus, the development ofMalaysia’s external debt position in 2005 in this sectionwas analysed and reported based on the data compiledusing existing definition i.e. treating offshore financialentities in Labuan IOFC as non-residents.

In 2005, the total external debt outstanding declined by2.4% to RM195.9 billion (USD51.3 billion), due largely tolower gross borrowings while repayment increased. Theimprovement in the external debt position was also reflectedin the decline in ratios of external debt to GNP and toexports of goods and services to 41.4% and 32.2%respectively (2004: 47.2% and 36.8% respectively). Theratio of short-term debt to international reserves was stableat 17.3% while both the overall debt service ratio (excludingprepayment) and the share of short-term debt to total debtremained low at 4.7% and 23.6% respectively.

The medium- and long-term external debt declined by4.6% to RM149.7 billion (USD39.2 billion) as at end of2005 (2004: RM156.8 billion), due mainly to a significantlylarger net repayment of external loans of RM11.1 billion(2004: -RM1 billion) by the public sector. The decline wasalso due partly to the exchange revaluation gain of RM3.3billion following the appreciation of the ringgit againstmajor currencies. Meanwhile, as the increase in grossborrowings outpaced a higher loan repayment during theyear, the private sector registered a larger net drawdownof RM4.2 billion (2004: RM2.9 billion).

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005p

RM billion %

Interest paymentRepayment

Debt service ratio (RHS)

Graph 1.45b Debt Servicing

p Preliminary

0

5

10

15

20

25

30

35

0

1

2

3

4

5

6

7

8

Graph 1.45aOutstanding External Debt

RM billion %

Short-term1

NFPEsFederal Government

Private Sector

Debt/GNP (RHS)

1 Excludes currency and deposits held by non-residents with resident banking institutions.

p Preliminary

0

2040

6080

100120

140160

180200

220

0

10

20

30

40

50

60

70

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005p

Table 1.23Outstanding External Debt

2004 2005p 2004 2005p

RM RM USD USDmillion million million million

Total debt 200,586 195,865 52,786 51,310Medium- and long-term 156,849 149,682 41,276 39,212Short-term1 43,737 46,183 11,510 12,098

As % of total debt 21.8 23.6 21.8 23.6As % of net

international reserves 17.3 17.3 17.3 17.3

As % of GNPTotal debt 47.2 41.4Medium- and long-term

debt 36.9 31.6

As % of exports of goods and services

Total debt 36.8 32.2Medium- and long-term

debt 28.8 24.6

Debt service ratio (%) 4.6 4.7

1 Excludes currency and deposits held by non-residents with resident bankinginstitutions.

p Preliminary

Source: Ministry of Finance and Bank Negara Malaysia


59


The medium- and long-term debt continued to be largelydenominated in the United States dollar, accounting for80.1% of total medium- and long-term debt outstandingas at end-2005. The share of yen-denominated debtdeclined marginally to 11.9% (2004: 12.8%) while theeuro-denominated debt accounted for only 2.2% (2004:5.2%) due largely to the settlement of a euro-denominated bond by the Federal Government in thefourth quarter. The remaining 5.8% of the medium- andlong-term external debt was denominated in otherinternational currencies, including the pound sterling,Singapore dollar and Hong Kong dollar.

The public sector recorded its third consecutive yearof net external debt repayment in 2005, reflectinglower gross borrowings by both the FederalGovernment and NFPEs while the repayment washigher following the maturity of several largeborrowings and prepayment of some external loans.Consequently, the outstanding external debt of thepublic sector declined sharply by 11.1% to RM86.2billion (USD22.6 billion) as at end-2005 (2004: RM96.9billion) to account for a lower share of 44% (2004:48.3%) of total external debt.

In 2005, the Federal Government maintained itspractice to source its funding requirements mainlyfrom non-inflationary domestic sources. For thesecond consecutive year, no new market loan wasraised from the international capital market. Thegross external borrowings by the Government werelower (RM0.7 billion; 2004: RM1.1 billion) whilerepayments increased significantly to RM4.2 billion(2004: -RM1 billion), reflecting mainly the maturity ofa Euro bond of RM2.9 billion in November 2005 andsome scheduled principal repayments of syndicatedloans. The drawdown of external loan was attributedentirely to project loans committed earlier from thebilateral sources such as under the MiyazawaInitiative, as well as from multilateral sources, such asthe World Bank, Islamic Development Bank and AsianDevelopment Bank. Accordingly, the FederalGovernment external debt declined further to RM30billion (USD7.9 billion) or 15.3% of total externaldebt as at end-2005 (2004: RM34.7 billion or 17.3%of total external debt).

Reflecting Malaysia’s strong economic fundamentals,the interest spread on Malaysia’s benchmark securitiesremained low in 2005 while Malaysia’s sovereignratings on long-term foreign currency obligationswere generally maintained by the international ratingagencies. The spread on Malaysia’s Global Bond due2011 over comparable US Treasury Securities stood at

2001 2002 2003 2004 2005

Global Bond (2009)

Global Bond (2011)

Petronas Bond (2006)

Graph 1.46 Spread of Sovereign Bonds and Selected NFPE Bond Over Comparable US Treasury Securities

Yield Spread

J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N0

50

100

150

200

250

300

56 basis points at the end of 2005 while the spreadon the Global Bond due 2009 remained stable at 55basis points at end-2005. On 25 April 2005, Ratingand Investment Information Inc. affirmed Malaysia’sforeign currency rating at A- and revised the ratingoutlook from stable to positive. Moody’s InvestorServices affirmed Malaysia’s long-term foreigncurrency rating at A3 and maintained a rating outlookof stable on 28 April 2005. In a similar move, on 25May 2005, Standard & Poor’s affirmed Malaysia’slong-term foreign currency ratings at A- andmaintained a rating outlook of stable. On 18November 2005, Fitch affirmed Malaysia’s long-termforeign currency ratings at A- and maintained a ratingoutlook of stable.

In 2005, the NFPEs registered a markedly higher netrepayment of RM7.6 billion (2004: -RM1.1 billion),reflecting mainly a higher gross repayment of externaldebt of RM13.9 billion (2004: -RM12.6 billion) duepartly to the maturity of US dollar-denominated bondsissued by companies in the oil and gas andmanufacturing sectors as well as prepayments of severalloans. In contrast, gross borrowings was significantlylower at RM6.3 billion (2004: RM11.5 billion).Consequently, the outstanding external debt of NFPEsdeclined to RM56.2 billion (USD14.7 billion) or 28.7%of total external debt as at end-2005 (2004: RM62.2billion or 31% of total external debt).

As at end-2005, the private sector external debt(including short-term debt) increased to RM109.7 billionor USD28.7 billion (2004: RM103.7 billion), andaccounted for 56% of the total external debt. Themedium- and long-term external debt recorded a largernet borrowing of RM4.2 billion (2004: RM2.9 billion) as


60

the increase in gross borrowings outpaced a higherrepayment of loans during the year. The largerdrawdown of external loans was mainly by companiesin the services, plantation, manufacturing and oil andgas sectors. Despite a higher borrowing, the overall riskprofile of the private sector medium- and long-termdebt remained low as the bulk of these loans have anatural hedge. Most of these loans were used to financeexport-oriented activities and overseas investment withforeign exchange earnings and income. Furthermore, alarge share of these loans was sourced from theoffshore shareholders and parent or associatecompanies with more flexible terms and atconcessionary interest rates. Meanwhile, the bulk of therepayments was effected by companies in the

plantation, services and manufacturing sectors. Thus,the private sector medium- and long-term external debtoutstanding increased to RM63.5 billion (USD16.6billion) as at end-2005 (2004: RM60 billion).

The outstanding short-term external debt (maturityof one year or less) rose by RM2.4 billion to RM46.2billion (USD12.1 billion) in 2005, due entirely to anincrease in the short-term external borrowing by thebanking sector, mainly for hedging activities on trade-related transactions and treasury activities. Meanwhile,short-term debt by the non-bank private sector,comprising mainly term loans, revolving credits andoverdraft facilities, declined further to RM7.3 billion in2005 (2004: RM8.4 billion).

Compilation of Malaysia’s External Debt: Treatment of Offshore Financial Entitiesin Labuan IOFC as Residents

The Fifth Edition of the Balance of Payments Manual (BPM 5) of the International Monetary Fundclassifies offshore entities in an economy as residents for compilation of external data, includingexternal debt data. Similarly, the External Debt Statistics Guide for Compilers and Users1 (2003), alsostates that ‘The residence of offshore enterprises — including those engaged in the assembly ofcomponents manufactured elsewhere, those engaged in trade and financial operations, and thoselocated in special zones — is attributed to the economies in which they are located.’ As such, thedebt liabilities of offshore entities that are owed to non-residents are to be included as part of aneconomy’s external debt.

In the current definition of external debt in Malaysia, the offshore entities in Labuan InternationalOffshore Financial Centre (Labuan IOFC) are treated as non-residents for foreign exchangeadministration purposes. Thus, these entities are not subject to the foreign exchange administrationrules applicable to residents, including statistical reporting to Bank Negara Malaysia. As a result, whilethe external debt data compiled and disseminated by Malaysia include debt transactions and exposureof residents with offshore entities in Labuan IOFC, they exclude debt transactions and exposure of theoffshore entities vis-à-vis the rest of the world.

As part of our continuous efforts to improve the compilation of external debt data for better riskassessment as well as in conformity with international best practices, Bank Negara Malaysia, with theassistance of the Labuan Offshore Financial Services Authority (LOFSA) has compiled the new externaldebt data of Malaysia, starting with position as at end-2004. This data includes borrowings by theoffshore financial entities in Labuan IOFC from non-residents, while the borrowings by residents fromthese offshore financial entities are excluded. A comparison of the existing definition of external debtand the new definition is given in Diagram 1.

Implication on Malaysia’s External Debt

(i) Comparison of newly defined external debt with existing definition for 2004 position

Table 1 provides a comparison of Malaysia’s external debt levels with offshore financial entities inLabuan IOFC being treated as non-resident (existing definition) and as resident (new definition)

1 A guide jointly prepared by the Bank for International Settlements (BIS), Commonwealth Secretariat, Eurostat, International Monetary Fund (IMF), Organisation forEconomic Co-operation and Development (OECD), Paris Club Secretariat, United Nations Conference on Trade and Development (UNCTAD) and World Bank.


61


New Definition: Coverage of External Debt with OffshoreFinancial Entities in Labuan IOFC as Resident

The rest ofthe world

Labuan

Malaysia

External Debt = A + C

Diagram 1Malaysia's External Debt Compilation

Existing Definition: Coverage of External Debt with Offshore Financial Entities in Labuan IOFC as Non-resident

The rest ofthe world

Labuan

Malaysia

External Debt = A + B

A

B

C

A

B

C

respectively. The shift from the existing definition in compilation of external debt to the new definitionin accordance with BPM 5 has resulted in some changes in level and profile of external debt as follows:• Under the new definition, Malaysia’s total external debt as at end-2004 was higher at

RM209.9 billion (USD55.2 billion) or equivalent to 49.4% of GNP compared with the existinglevel of RM200.6 billion (USD52.8 billion) or 47.2% of GNP.

• The medium- and long-term external debt was lower at RM146.4 billion under the newdefinition (RM156.8 billion under existing definition) due largely to lower external debt of theFederal Government following the reclassification of several market loans sourced from offshorefinancial entities in Labuan IOFC as part of domestic borrowings. Some of these loans werereflected instead in the medium- and long-term external debt of the banking sector.Consequently, the share of public debt to total external debt was lower at 41.1% comparedwith 48.3% under existing definition.

• Correspondingly, the share of the private sector debt (medium- and long-term plus short-term debt)to total external debt was larger at 58.9% compared with 51.7% under existing definition. Withinthis sector, the external debt of the non-bank private sector was lower at RM54.8 billion (RM67.7billion under existing definition), following the reclassifications of the external loans from theoffshore financial entities into domestic borrowings. Some of these loans were reflected in theexternal debt of the banking sector. As a result, the share of the external debt of the non-bankprivate sector to total debt declined to 26.1% from 33.7%.

• Meanwhile, the external debt of the banking sector was higher at RM68.7 billion (RM36 billionunder existing definition) with its share to total external debt increasing to 32.8% from 18%,reflecting mainly short-term interbank borrowings by offshore financial entities in Labuan IOFC fromfinancial institutions outside Malaysia arising from their investment and treasury operations. As aresult, the total short-term external debt was higher at RM63.4 billion (RM43.7 billion underexisting definition), accounting for a larger share of 30.2% of total external debt (21.8% underexisting definition).


62

(ii) Developments in 2005 based on new definition

As at the end of 2005, Malaysia’s total external debt increased by RM10.1 billion to RM220 billion(USD57.6 billion). Nevertheless, the newly defined external debt position accounted for 46.5% of GNPat the end of 2005 compared with 49.4% of GNP at the end of 2004.

The higher external debt level was due to an increase in short-term debt to RM69.4 billion (USD18.2billion), reflecting mainly the higher inter-bank borrowings by offshore banks in Labuan IOFC arisingfrom their investment and treasury operations. Accordingly, the ratio of short-term debt of the bankingsector to total debt also increased to 29.1% as at end-2005 compared to 27.5% as at end-2004.Including the short-term debt of the non-bank private sector, the overall ratio of short-term debt tototal external debt increased to 31.6%.

Table 1Outstanding External Debt

Offshore Financial Entities inLabuan IOFC as

Non-Resident Resident1

2004 2004 2005

(RM billion)

Total external debt (ED)2 200.6 209.9 220.0Medium- and long-term (MLTD) 156.8 146.4 150.6

Federal Government 34.7 23.8 22.5NFPEs 62.2 62.4 60.0Private Sector 60.0 60.3 68.1

Bank 0.7 11.0 12.4Non-Bank 59.3 49.2 55.6

Short-term (STD) 43.7 63.4 69.4Bank 35.3 57.7 64.0Non-Bank 8.4 5.7 5.4

Memorandum items:Private sector debt (MLTD + STD) 103.7 123.5 136.9

Bank 36.0 68.7 76.4Non-Bank 67.7 54.8 60.5

(percent)

ED/GNP 47.2 49.4 46.5STD/ED 21.8 30.2 31.6STD/Reserves 17.3 25.0 26.1Public debt/ED 48.3 41.1 37.8Private debt/ED 51.7 58.9 62.2

MLTD 29.9 28.7 30.9STD 21.8 30.2 31.3

Non-Bank 33.7 26.1 27.5MLTD 29.5 23.5 25.3STD 4.2 2.6 2.2

Bank 18.0 32.8 34.7MLTD 0.3 5.2 5.7STD 17.6 27.5 29.1

1 The treatment of offshore financial entities in Labuan IOFC as residents is applicable only to the compilation of the above external debt data bythe Bank. Debt transactions and exposure by sector (public, banking and non-bank private sectors) with offshore financial entities in LabuanIOFC will continue to be treated as external debt for other publications until the end of the interim period in mid-2007

2 Excludes currency and deposits held by non-residents with resident banking institutions


63


Meanwhile, the medium- and long-term external debt increased marginally to RM150.6 billion(USD39.4 billion) as at end-2005, reflecting net repayment of loans by the public sector, comprising theFederal Government and NFPEs, being offset by net borrowing by the private sector. Consequently, theshare of the public sector debt to total external debt declined to 37.8% while the share of the privatesector debt increased to 62.2%.

Risk Assessment of External DebtDespite a higher total outstanding external debt, Malaysia’s external debt position continues to be within the prudentlevel of 46.5% of GNP in 2005. The higher short-term debt was attributed entirely to borrowings by offshore financialentities in Labuan IOFC, particularly from their head offices and branches abroad, arising from their investment andtreasury operations. A large share of these borrowings was on lent to residents in Malaysia. Including the short-termdebt of the non-bank private sector, the overall ratio of short-term debt to international reserves and the share of short-term debt to total debt at the end of 2005 remained low at 26.1% and 31.6% respectively.

The increase in medium- and long-term external debt was moderate and reflects the increase in the private sectorexternal debt. The bulk of these loans have a natural hedge as they were used to finance export-oriented activitiesand overseas investment with foreign exchange earnings and income. Furthermore, a large share of these loans wassourced from the offshore shareholders and parent or associate companies with more flexible terms and atconcessionary interest rates.

ConclusionThe compilation of Malaysia’s external debt under the new definition, with offshore financial entities in Labuan IOFCbeing treated as residents, has facilitated a more accurate assessment of the external exposure, including credit, foreignexchange and liquidity risks faced by the Malaysian economy, especially in the light of the increasing trend of residentsand non-residents establishing offshore entities in Labuan IOFC to facilitate their financing and investment activities. Inaddition, the shift towards the new definition underscores Malaysia’s commitment to international standard and bestpractices in external debt compilation and dissemination to facilitate international comparison and assessment.

International ReservesThe international reserves held by Bank NegaraMalaysia comprises holdings of foreign exchange andgold, the IMF reserve position and holdings of SpecialDrawing Rights (SDR). For the year 2005 as a whole,net international reserves increased by RM12.8 billionto RM266.3 billion (USD70.5 billion) as at 31December 2005. The net increase in the reserves in2005 reflected the fundamentals of the economy withforeign exchange inflows generated mainly fromexport earnings and foreign direct investment. Thereserves level amounted to RM272.7 billion orequivalent to USD72.2 billion as at 28 February 2006.The reserves position is adequate to finance 7.6months of retained imports and cover 6.7 times theshort-term external debt.

In the first half of 2005, the sustained repatriationof export proceeds and foreign direct investmentwas reinforced by significant inflows of portfolioinvestment. The large inflows of short-term fundsduring the period were partly in anticipation of a

change in the exchange rate regime. Following theBank’s announcement of the change in theexchange rate regime to a managed float on 21 July2005, reserves increased further, driven bysignificant inflows of short-term funds. The flowsnormalised subsequently amidst an orderly pricediscovery process. The decline in reserves, fromSeptember to November, reflected mainly theunwinding of the speculative short-term positions.Nevertheless, the outflows of short-term fundssubsided by December. The outflows during thisperiod also reflected higher import paymentsassociated with stronger domestic demand, largerrepayment of external loans by the official sector aswell as higher year-end repatriation of profits anddividends by foreign corporations.

During the year, the cumulative foreign exchangerevaluation loss amounted to RM15.5 billion (2004:+RM8 billion), following the strengthening of ringgitagainst the major currencies.


64

In managing the reserves, Bank Negara Malaysiacontinued to adopt a prudent approach to ensurecapital preservation and liquidity of reserves whilstoptimising returns. The reserves are held in theform of foreign currency deposits and sovereign andquasi-sovereign papers of high investment grade.

Reflecting Malaysia’s strong balance of paymentsposition, Malaysia was included in the FinancialTransactions Plan of the IMF by making resourcesavailable to member countries that are facing short-termbalance of payments difficulties. Nevertheless, thereserve position with the IMF declined by RM1,882million in 2005, due to the repurchase of SDR300.3million (RM1,655.5 million) following repayment to theringgit account by various member countries under theFinancial Transactions Plan, while the exchangerevaluation loss amounted to RM226.5 million.Malaysia’s holdings of reserves in the form of SDRs alsodeclined by RM17 million. Exchange revaluation loss onholdings of SDRs amounting to RM66.8 million was

partially offset by net receipt of remuneration worthRM49.8 million arising from Malaysia’s net creditorposition with the Fund.

The international reserves, held by the Bank remainsusable and unencumbered. There are no foreigncurrency loans with embedded options; and noundrawn, unconditional credit lines provided by orto other central banks, international organisations,banks and other financial institutions. Bank NegaraMalaysia also does not engage in options in foreigncurrencies with regard to the ringgit. Repo andsecurities lending activities and financial derivativeassets are also insignificant.

Table 1.25International Reserves for Selected RegionalEconomies

ReservesReserves

ReservesReserves

as atin months

as coveras coverCountry

end-2005of imports

of short-of total

(USDterm

externalbillion)

externaldebt1

debt1

Chinese Taipei 253.3 16.7 4.0 3.1

Hong Kong China 124.3 5.0 0.4 0.3

Indonesia 34.1 7.2 3.5 0.2

Korea 210.4 9.7 3.1 1.1

Malaysia 70.5 7.8 5.8 1.4

Philippines 18.5 4.9 3.0 0.3

PR China 818.9 14.9 5.7 3.1

Singapore 116.6 7.0 0.6 0.5

Thailand 52.1 5.3 3.1 1.0

1 External debt data refers to amount outstanding as at end-September 2005,except for Chinese Taipei (end-June 2005) and Malaysia (end-2005).

Source: National authorities; Asian Development Bank;SDDS, International Monetary Fund

Net international reservesincreased by RM12.8 billion in2005, reflecting thefundamentals of the economywith foreign exchangeinflows generated mainlyfrom export earnings andforeign direct investment.

Table 1.24Net International Reserves

As at end- Change

2003 2004 2005 2005

RM million

SDR holdings 685.0 765.3 748.3 -17.0IMF reserve position 3,652.0 3,068.4 1,186.3 -1,882.0Gold and foreign

exchange 166,139.3 249,704.1 264,421.6 14,717.5

Gross InternationalReserves 170,476.3 253,537.8 266,356.2 12,818.4

Less Bank NegaraMalaysia externalliabilities 23.8 24.5 22.5 -2.0

Net InternationalReserves 170,452.5 253,513.3 266,333.7 12,820.4

USD million equivalent 44,855.9 66,714.0 70,483.3 3,769.3Months of retained

imports 6.6 7.9 7.8Reserves/Short-term

external debt (times) 5.1 5.8 5.8

Graph 1.47 Net International Reserves (end-month)

200

220

240

260

280

300

320

D J F M A M J J A S O N D

RM billion Months/Times

Net international reserves, RM billion (LHS)

Retained import cover (RHS)

Reserves/Short-term external debt (RHS)

20052004

0

2

4

6

8

10


65


Table 1.26Flow of Funds: 2004

Domestic Economy

Public Private BankingSector Sector System

RM billion

Disposable Income -410.4 131.1 279.3 0Consumption 252.1 -59.3 -192.8 0Investment 91.8 -53.4 -38.4 0Change in stocks 10.0 -10.0 0

Exports of Goods and Non-Factor Services 545.0 -545.0 0Import of Goods and Non-Factor Services -449.3 449.3 0Net Factor Payments Abroad -24.5 24.5 0Net Transfers -14.6 14.6 0

Non-Financial Balance 0.0 18.4 38.2 0.0 -56.5 0

Foreign FinancingDirect Investment 9.7 -9.7 0Net Foreign Borrowings -1.1 20.3 -19.2 0Change in Net Foreign Assets

Bank Negara Malaysia -75.1 75.1 0Banking System -6.9 6.9 0

Domestic FinancingChange in Bank Credit 4.1 31.0 -35.1 0Change in Deposits1 -20.5 -67.9 88.4 0Net Borrowings from Non-Bank Sector -0.8 0.8 0

Other items (Net) -32.1 28.7 3.5 0

Sum 0 0 0 0

1 Includes currency in circulation.

NationalAccounts

SumRest of theWorld

Bank Negara Malaysia releases information on theinternational reserves position and the statement ofthe Bank’s assets and liabilities on a fortnightly basis,with a one-week lag. In addition, the Bank alsofulfills the IMF’s Special Data Dissemination Standard(SDDS) requirements on detailed disclosure ofinternational reserves and foreign currency liquidityinformation at the end of each month, with a one-month lag. The reserves data template also providesforward-looking information on the size,composition and usability of reserves and otherforeign currency assets, and the future and potential(contingent) inflows and outflows of foreignexchange of the Federal Government and the Bankover the next 12-month period.

FLOW OF FUNDS

The economy registered a higher resource surplus ofRM77.8 billion, representing 16.4% of GNP in 2005(2004: RM56.5 billion or 13.3% of GNP). In terms ofthe balance of payments, the higher resource surplusreflected the increase in net exports of goods andservices to RM116.2 billion (2004: RM95.7 billion). From

the perspective of the country’s savings-investmentbalance, the higher resource surplus mainly reflected thehigher net savings position of the private sector. Theflow of funds between various sectors of the economyin 2004 and 2005 are shown in Tables 1.26 and 1.27.

The resource surplus of the public sector was slightlyhigher at RM19.9 billion in 2005 (2004: RM18.4billion). The resource surplus reflected entirely thesurpluses from the NFPEs of RM34.1 billion, whichhelped to offset the resource gap of the generalgovernment of RM14.2 billion. The higher resourcesurplus of the public sector was due to the increase indisposable income, which more than offset theincrease in public consumption by the generalgovernment and higher investment by the NFPEs. Thedisposable income of the public sector increased by6.5% to RM139.6 billion in 2005. This was mainly onaccount of higher petroleum-related revenueregistered in the consolidated public sector. Inaddition, the Federal Government also recorded highertax revenue amid sustained economic growth andefforts taken to enhance tax collection. The resourcegap of the general government was mainly financed


66

Table 1.27Flow of Funds: 2005

Domestic Economy

Public Private BankingSector Sector System

RM billion

Disposable Income -456.1 139.6 316.5 0Consumption 280.5 -64.6 -215.9 0Investment 98.9 -55.2 -43.8 0Change in Stocks -1.1 1.1 0

Exports of Goods and Non-Factor Services 609.1 -609.1 0Imports of Goods and Non-Factor Services -492.9 492.9 0Net Factor Payments Abroad -21.5 21.5 0Net Transfers -17.0 17.0 0

Non-Financial Balance 0.0 19.9 57.9 0.0 -77.8 0

Foreign FinancingDirect Investment 2.7 -2.7 0Net Foreign Borrowings -11.1 -45.3 56.3 0Change in Net Foreign Assets

Bank Negara Malaysia -28.3 28.3 0Banking System 11.8 -11.8 0

Domestic FinancingChange in Bank Credit -1.5 44.6 -43.2 0Change in Deposits1 -7.9 -45.0 52.9 0Net Borrowings from Non-Bank Sector 0.5 -0.5 0

Other items (Net) -14.4 6.8 7.6 0

Sum 0 0 0 0

1 Includes currency in circulation.

NationalAccounts

SumRest of

theWorld

through domestic borrowings. Some of the financingobtained by the general government as well as theresource surplus of the NFPEs were partly utilised forthe repayment of foreign debt, while the rest wereplaced with the banking system.

The resource surplus of the private sector increasedto RM57.9 billion or 12.2% of GNP in 2005compared with RM38.2 billion or 9% of GNP in2004. The favourable resource surplus position ofthe private sector was supported by improvement indomestic income and exports growing at a fasterrate than imports in the external sector. Thesefactors contributed to the increase in disposableincome of the private sector to RM316.5 billion(2004: RM279.3 billion), which in turn, supportedthe continued growth in private consumption and

investment activities. In addition to the resourcesurplus, net inflows of FDI (RM2.7 billion), and loansfrom the banking system (RM44.6 billion) alsocontributed to the pool of funds available to theprivate sector. Some of the funds were channelledtowards the net payment of foreign obligations,including portfolio outflows, and the extension oftrade credit; while a portion was also placed asdeposits with the banking system.

The current account surplus remained large enoughto more than offset private and official sectoroutflows in the financial account of the balance ofpayments. As such, Bank Negara Malaysia’sinternational reserves (excluding net foreignexchange revaluation losses) increased further, byRM28.3 billion.


Monetary Policy in 2005Monetary Developments in 2005Exchange Rate DevelopmentsFiscal Policy and Operations

68-6969-7474-7676-83

Monetary and FiscalDevelopments

68

Monetary and Fiscal Developments

MONETARY POLICY IN 2005

The conduct of monetary policy in 2005 had the task ofbalancing the risks to economic growth and price stability.While the Malaysian economy benefited from thesustained expansion in global growth and world trade, thecountry also faced greater uncertainties arising fromdevelopments in the external environment, includinghigher and more volatile energy prices, volatile short-termcapital flows, large payment imbalances, and the gradualremoval of monetary accommodation globally. Theupward trend in global oil prices led to increases inheadline inflation around the world. Globally, monetaryauthorities increased interest rates in successive steps ashigh oil prices fed into higher inflation and the build-up ofinflationary expectations. Oil importing countries faceddeterioration of their current account balances, while thegrowing burden of oil subsidies in some countries wasreflected in their deteriorating fiscal positions. Despite themore challenging global environment, the Malaysianeconomy showed great resilience amid supportivemonetary conditions and the stable financial positions ofthe corporate, household and banking sectors. Inflationwas higher, largely on account of the gradual adjustmentsto administered prices and the cost-induced adjustmentsof other prices.

The response of monetary policy to oil price shocksdepends largely on the second round inflationaryeffects in terms of increases in other prices and wages.An exclusive focus on output stabilisation may lead toan inability to anchor inflationary expectations, withwages and prices self-reinforcing. On the other hand,emphasising only on neutralising the impact of oilprice shocks on inflation, risks a significant contractionin growth and welfare. Monetary policy, therefore,needs to undertake a careful assessment of both therisks to inflation and economic growth over themedium term. It is the relative balance of these risksthat formed the major consideration in the stance ofmonetary policy for 2005.

At the outset of 2005, a moderate slowdown inexternal demand was expected in the first half of theyear, arising from the continued downcycle of theglobal semiconductor industry, as well as the globalmonetary tightening cycle in response to risinginflationary concerns. Domestic GDP growth hadmoderated to 5.8% in the fourth quarter of 2004. InMay, it was evident that the economy had remainedresilient in the first quarter of 2005, with GDP

expanding by 6.2%. Meanwhile, inflation, as measuredby the annual rate of change in the CPI, increased to anaverage of 2.5% for the first four months of the year,mainly on account of the increases in administered pricesand prices of controlled items in late 2004 and early2005. The inflation rate was expected to edge upwardsover the subsequent months, mainly reflectingadjustments in costs, before moderating later in the year.

Following the increases in transportation charges andretail prices of petrol and diesel in May, the inflation ratebreached the 3% level and stood at 3.2% at the end ofthe second quarter. Core inflation, which is indicative ofdemand-driven inflation, in contrast, registered a moregradual increase in the first half of the year. Real sectorand monetary indicators did not suggest that demandpressures were a source of inflationary concern.Consumption and investment activities were holdingsteady. Bank lending and money supply continued toincrease at relatively stable rates. The lack of strongdemand pressures allowed monetary policy to continueto remain accommodative to support economic growth.

On the external front, there was an increase in netportfolio flows in the first half of the year, followingspeculation of a revaluation of the Chinese yuan andringgit. These inflows, however, were manageable. TheBank sterilised this additional liquidity. There were nosigns of excessive credit growth or sharp increases inasset prices.

On 21 July, the Bank adopted a managed floatexchange rate regime for the ringgit, with the value ofthe ringgit being determined by economic fundamentals(See Exchange Rate Developments). While thesystem by which the value of the ringgit is determinedwas changed, there was no change to the existingmonetary policy framework, where the averageovernight interbank rate continues to function as theoperating target.

At the time of release of the third Monetary PolicyStatement in August, the international environment hadbecome more challenging, with increased uncertaintyover the likely economic impact of oil prices that hadreached new record highs. In the domestic economy,indicators suggested that overt demand pressures hadbeen relatively contained in the second quarter. A moremoderate pace of economic expansion of 4.4% wasregistered during the period. In terms of productioncapacity, the weighted average of capacity utilisation in

C02 Monetary & Fiscal pg68-84 3/14/06, 9:12 PM68

69


the manufacturing sector remained stable at 76%.Furthermore, labour productivity, as measured by realsales value of products per employee in themanufacturing sector, rose by 9.6% while real wage peremployee declined by 0.4%. The risks of slower growthand higher inflation respectively appeared to be inbalance. Inflation rose to 3.7% in August, following thesecond increase in administered prices of retail petrolproducts. The Bank viewed that the cumulative impactof the price adjustments would cause inflation to peakin the third quarter and to moderate thereafter, barringfurther price adjustments during the year, as the effectof the previous year’s price adjustments lapsed.Therefore, although real returns on savings and short-term fixed deposits had turned negative, this situationwas not expected to persist for long.

Towards the latter part of the year, it became moreevident that the growth momentum of the globaleconomy remained intact. The electronics sector showedsigns of a pick-up, while domestic demand indicatorsstrengthened. The economy expanded at a higher rate of5.3% in the third quarter, with the growth momentumexpected to continue into the fourth quarter of 2005 andinto 2006. Inflation, meanwhile, moderated slightly to3.3% in October. Core inflation had increased by smallincrements and was expected to continue to increase at asteady pace going forward. A high level of uncertaintyremained with regard to the upside risk to oil prices. Withthe risk of slower growth diminishing, and inflation risksbiased towards the upside, the OPR was raised by 30basis points to 3% on 30 November 2005. At 3%, theOPR continued to remain below its neutral level, andtherefore, remained supportive of economic activity.

MONETARY DEVELOPMENTS IN 2005

In 2005, monetary conditions remained supportive ofdomestic economic activity. The OPR was maintained at2.70% in the first 11 months of the year. Towards theend of the year, with the risk of slower economicgrowth diminishing and inflation risks biased towardsthe upside, the OPR was increased by 30 basis points to3.00% on 30 November 2005.

28 February 2.70%

25 May 2.70%

24 August 2.70%

30 November 3.00%

Table 2.1Monetary Policy Decisions

The Monetary Policy Comittee (MPC) met eight times in 2005. MonetaryPolicy Statements (MPS) to convey the policy decision were issuedfollowing four of those meetings to coincide with the release of thequarterly GDP data. Since its introduction in April 2004, the OPRremained unchanged at 2.70% until the end of November 2005. On30 November, the OPR was increased by 30 basis points to 3%.

Overnight Policy Rate(OPR)

MPS Date

As growth strengthened andwith inflationary pressuresremaining strong, the OPR wasincreased to 3%.

Following the floating of the ringgit, speculative portfoliopositions that had been built-up in the first half of theyear, started to be unwound in September and continuedinto October and November. These outflows, however,subsided in December. The unwinding of these flows wasorderly. In the debt securities market, local institutionaldemand was a stabilising force. Price adjustments wereorderly in the market for short-term bills and Governmentsecurities. The high international reserves level providedsufficient cushion for outflows while the domesticfinancial system continued to be characterised by asituation of ample liquidity.

Monetary conditions remainedsupportive of economic activity.

The daily weighted average overnight interbank ratemoved in the range of 2.60% – 2.73% and averaged2.70% over the period January – November 2005.

Graph 2.1Lending Rates: Commercial Banks andFinance Companies

6.20

6.12

7.03

8.66

5

6

7

8

9

10

11

12

J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N2001 2002 2003 2004 2005

%

BLR-CB ALR-CB

BLR-FC ALR-FC


70

Table 2.2Interest Rates and Liquidity

2002 2003 2004 2005

As at end-period (%)

3-month Intervention Rate 5.0 4.5 - -Overnight policy rate (OPR) 1 - - 2.70 3.00

Interbank ratesOvernight 2.71 2.72 2.69 3.001-month 2.99 2.99 2.77 3.12

Base lending rate (BLR)Commercial banks 6.39 6.00 5.98 6.20Finance companies 7.45 6.90 6.90 7.03

Average lending rate (ALR)Commercial banks 6.51 6.11 5.98 6.12Finance companies 9.75 9.11 8.78 8.66

ALR of new loans approved by commercial banksBusiness loans 6.25 5.72 5.64 5.70

of which: SMEs 6.84 6.30 6.20 6.36Household loans2 4.66 4.32 4.34 4.09

Fixed deposit ratesCommercial banks

3-month 3.20 3.00 3.00 3.0212-month 4.00 3.70 3.70 3.70

Finance companies3-month 3.20 3.00 3.00 3.0012-month 4.00 3.68 3.70 3.70

Savings deposits ratesCommercial banks 2.12 1.86 1.58 1.41Finance companies 2.65 2.18 1.98 1.53

Average during the period (%)

Nominal interest rate differentialMalaysia ñ United States 1.31 1.66 1.16 -0.77Malaysia ñ Singapore 2.15 2.14 1.79 0.57

As at end-period (RM billion)

Resource surplus (+) / gap (-) 76.2 106.0 134.8 155.6Adjusted resource surplus (+) / gap (-) 3 24.6 45.9 77.0 98.6

As at end-period (%)

Loan-deposit ratio 84.9 80.9 78.4 77.5Financing-deposit ratio 3 95.1 91.7 87.7 85.8

1 OPR replaced 3-month intervention rate as Bank Negara Malaysia's policy rate from 26 April 2004.2 Excludes credit cards.3 Adjusted to include holdings of Private Debt Securities.

Following the increase in the OPR, the daily weightedaverage overnight interbank rate rose in December, tomove within a tight band of 2.97% – 3.01%, averaging3.00%. Interbank rates of other tenures, namely the1-week, 1-month and 3-month maturities, which hadshown mild upward trends since April on marketexpectations of an increase in the OPR, rose by 23 – 32basis points in December.

With domestic interest rates unchanged for most of theyear, interest rate differentials between domestic and USrates turned negative in February and continued towiden as the US Federal Funds rate steadily increased.Notwithstanding this development, domestic liquidity

continued to increase amid sustained inflows fromthe external sector. These inflows mainly reflected therepatriation of export earnings and foreign directinvestment, and were also reinforced by significantinflows of portfolio investment in the first half of theyear. The large inflows of short-term funds were inpart, driven by expectations of a change in the ringgitexchange rate regime. These speculative flows werelargely unwound in September through November,and subsided by December. In view of themagnitude and volatility of these flows, Bank NegaraMalaysia’s money market operation was to ensurethat conditions in the domestic financial marketsremained orderly.

C02 Monetary & Fiscal pg68-84 4/14/06, 13:2170

71


more moderately, as reflected in new loan applications,which rose by 11.7% (2004: 20.1%). The ratio of newapprovals to applications, meanwhile, remainedrelatively stable with new loan approvals amounting toRM193.4 billion or an annual increase of 11.4% (2004:13.6%). Loan disbursements increased by 8.4% (2004:10.6%), significantly exceeding loan repayments, andproviding momentum to the steady increase of 8.6% inloans outstanding at end-2005 (2004: 8.5%).

Trends in the loan indicators were reflective ofdevelopments in the real sector; with resilient growth inprivate consumption and investment, and the servicessub-sector being the main growth driver. Growth indemand for new bank loans was observed across mostbusiness sub-sectors, with total new loan applicationsincreasing at a more moderate rate of 5.7% in 2005(2004: 20%). By economic sub-sectors, the slower paceof growth in new business loan applications was mainlyattributable to a decline in applications from theconstruction sector, as well as slower increases inapplications from the manufacturing sector; thewholesale and retail trade, restaurants and hotels sector;and for the purchase of non-residential property.Notwithstanding the more moderate increase inapplications, growth in new loan approvals was stableat 9.8% while loan disbursements increased by 7.4%(2004:10.5%), with higher or sustained disbursementsrecorded to most of the business sectors. In particular,the growth in total business loan disbursements wasmainly from loans to the wholesale and retail trade,restaurants and hotels sector, which increased by 16.5%on an annual basis.

During the year, corporate financial conditions remainedhealthy as reflected by indicators such as profitability,leverage and corporate savings. Capital expenditure

In terms of retail interest rates, the average baselending rates (BLRs) of commercial banks and financecompanies remained unchanged at 5.98% and 6.90%respectively over the period January to November.Following the increase in the OPR, most bankinginstitutions adjusted their BLRs upwards in the range of25 – 30 basis points. Consequently, the average BLRsof commercial banks rose to 6.20% at end-December.Meanwhile, the average lending rates (ALRs) ofcommercial banks and finance companies, weighted byoutstanding loans, were relatively stable with a modestupward tendency over the period January toNovember. The merger of two large finance companieswith their respective commercial banks resulted insome technical adjustment to the ALRs of the latter,which in turn had a marginal upward impact on theoverall ALR for commercial banks. Following theadjustment to BLRs after the policy rate increase, theALR of commercial banks rose to 6.12%.

Meanwhile, the ALRs on new loans approved indicatedthat financing costs in general, were marginally lowerfor businesses (including SMEs) and households formost of the year compared with 2004. This wasnotwithstanding the slight upward trend in interestrates on loans approved to the household sector in thesecond half of the year.

In terms of retail fixed deposit (FD) rates, adjustment tothe rates were made by a number of bankinginstitutions. These adjustments were concentrated inthe middle tenures, such as the 6-month and 9-monthmaturities while the rates for the 1-month and 12-month maturities were mostly unchanged at 3.00% and3.70%. The slower response of deposit rates to thechange in the OPR, relative to lending rates, reflectedthe continued prevalence of ample liquidity in thefinancial system. This was also reflected by the lowerloan-deposit and financing-deposit ratios at 77.5% and85.8% respectively as at end-2005 (2004: 78.4% and87.7% respectively).

With accommodative monetary conditions, there wascontinued growth in financing of the private sectorduring the year. Gross financing extended through thebanking system and capital markets expanded by 8.9%in 2005 (2004: 5.7%), with higher loan disbursementsand higher funds raised in the private debt securities(PDS) market. On a net basis, banking system loans andPDS outstanding rose at a combined annual rate of9.3% at end-2005 (8.6% at end-2004).

Bank lending activity expanded further in 2005.Demand for new credit continued to increase, albeit

Graph 2.2Private Sector Gross Financing through theBanking System and the Capital Market

9.8%

5.8%

9.0%5.7%

8.9%

2001 2002 2003 2004 2005

Loans disbursed Gross PDS issuance Equity

200

250

300

350

400

450

500

550

600

RM billion


72

continued to increase, and was supported by internallygenerated funds as well as financing via bank loans andthe PDS market. New loan applications by largecorporations increased at a more moderate rate of 3.2%(2004: 19.1%) while loan disbursements rose by 6.2%(2004: 8.6%). Meanwhile, in the PDS market, whereborrowing costs remained competitive, funds raised bybusinesses for new activities increased, and were mainlychanneled to the utilities and construction sectors.

Following continued efforts to enhance access tofinancing by SMEs, loans to this sector continued toexpand in 2005, notwithstanding the more challengingenvironment. SMEs’ demand for loans continued toincrease as reflected in the increase of 10.3% in newloan applications (2004: 21.7%). Importantly, thisgrowth was closely matched by an increase in loanapprovals of 13.1% (2004: 22%). A total of RM110.7

billion loans were disbursed to the sector, representingan expansion of 10.2% on an annual basis, andaccounting for a slightly higher proportion of 30.7% oftotal loan disbursements to businesses.

Notwithstanding some weakening in consumersentiment during the second and third quarters,household consumption and investment activitiesgenerally remained resilient, supported by rising income,stable labour market conditions, and attractive financingoptions. The year saw a significant rise in passenger carsales, and continued growth in retail sales and importsof consumption goods. The launch of new car models,particularly of national cars, led to a strong increase of34.4% in loan disbursements for the purchase ofpassenger cars on an annual basis (2004: 18.8%).Loans disbursed for credit card transactions, meanwhile,increased by 17.6% (2004: 19.1%). At end-2005,

Table 2.3Banking System1 : Loan Indicators

During the year (RM billion) Annual growth (%)

2001 2002 2003 2004 2005 2001 2002 2003 2004 2005

TotalLoan applications 190.6 217.2 227.6 273.3 305.4 -8.7 14.0 4.8 20.1 11.7Loan approvals 125.6 137.6 152.8 173.6 193.4 -6.8 9.5 11.1 13.6 11.4Loan disbursements 373.5 411.6 441.5 488.2 529.3 3.5 10.2 7.3 10.6 8.4Loan repayments 365.4 402.7 430.4 461.6 489.2 5.3 10.2 6.9 7.3 6.0Change in loans outstanding2 16.1 19.8 21.6 40.1 44.2 3.9 4.6 4.8 8.5 8.6

BusinessesLoan applications n.a. 135.3 124.9 149.9 158.5 n.a. n.a. -7.7 20.0 5.7Loan approvals 63.5 68.5 77.3 84.9 93.2 -19.7 7.9 12.8 9.8 9.8Loan disbursements 270.4 282.0 303.3 335.3 360.1 0.1 4.3 7.6 10.5 7.4Loan repayments 276.8 275.8 299.5 319.8 343.7 2.8 -0.4 8.6 6.8 7.5Change in loans outstanding2 -5.6 -3.1 -5.2 5.5 6.5 -2.5 -1.4 -2.4 2.6 3.0

SMEsLoan applications n.a. 48.7 44.5 54.2 59.7 n.a. n.a. -8.6 21.7 10.3Loan approvals n.a. 30.7 25.9 31.6 35.8 n.a. n.a. -15.5 22.0 13.1Loan disbursements n.a. 49.5 87.1 100.4 110.7 n.a. n.a. 76.0 15.3 10.2Change in loans outstanding2 4.0 ... 7.4 6.3 7.7 5.7 … 10.0 7.7 8.7

Large corporationsLoan applications n.a. 86.6 80.4 95.7 98.8 n.a. n.a. -7.2 19.1 3.2Loan approvals n.a. 37.8 51.4 53.3 57.4 n.a. n.a. 35.8 3.7 7.8Loan disbursements n.a. 232.5 216.2 234.9 249.5 n.a. n.a. -7.0 8.6 6.2Change in loans outstanding2 -9.6 -3.1 -12.7 -0.8 -1.2 -6.1 -2.1 -8.8 -0.6 -0.9

HouseholdsLoan applications n.a. 81.9 98.4 120.2 141.9 n.a. n.a. 20.2 22.1 18.0Loan approvals 59.2 66.9 72.0 86.8 97.2 11.5 13.0 7.6 20.5 12.0Loan disbursements 87.0 105.1 114.4 130.3 145.2 14.5 20.8 8.9 13.9 11.4Loan repayments 71.5 83.7 94.1 107.0 115.1 9.9 17.0 12.4 13.7 7.6Change in loans outstanding2 23.1 26.2 26.2 33.3 40.0 14.8 14.7 12.8 14.4 15.1

1 Includes Islamic banks.2 The annual growth is for loans outstanding at end-period.

n.a. Not available... Negligible


73


Graph 2.3 Loan Disbursements by Sector: Value and Share

Credit cards (RM43 b; 8%)

2004 2005

Wholesale & retailtrade, restaurants

and hotels(RM84 b; 17%)

Construction(RM30 b; 6%)

Finance,insurance and

business services(RM37 b; 7%)

Residentialproperty

(RM39 b; 8%)

Passenger cars(RM29 b; 6%)

Credit cards (RM36 b; 7%)

Wholesale & retailtrade, restaurants

and hotels(RM98 b; 18%)

Construction(RM30 b; 6%)

Finance,insurance and

business services(RM36 b; 7%)

Residential property

(RM38 b; 7%)

Passenger cars(RM39 b; 7%)

Others (RM112 b; 23%)

Manufacturing(RM122 b; 25%)

Others (RM118 b; 22%)

Manufacturing (RM127 b; 24%)

outstanding balances on credit cards amounted toRM16.7 billion, expanding by 17.3% on an annualbasis, and accounting for 3% of total banking systemloans outstanding.

In terms of household investment in residential property,loan disbursements for the purchase of residentialproperty declined marginally by 0.9% (2004: 9.1%),after the strong increase in the previous year, which wasdriven to some extent, by the home-ownershipincentives that was implemented in June 2003 andlapsed in June 2004.

Although lending to households has continued to increase,the debt service burden on an aggregate basis remainsmanageable for households. Defaults on payments

Table 2.4Banking System1: Loans Outstanding

Annual change% share oftotal loans2004 2005

at end

RM billion 2005

Banking system loans, of whichextended to:

Business enterprises 5.5 6.5 40.4Individuals 33.3 40.0 54.5

By sector:Agriculture, hunting, forestry and

fishing 0.4 0.1 2.0Mining and quarrying -0.1 -0.2 0.1Manufacturing 1.9 -2.4 10.9Electricity, gas and water supply 0.1 -0.5 0.8Wholesale and retail trade,

restaurants and hotels 4.3 3.6 8.4Broad property sector 19.7 20.5 41.0

Construction 1.2 -0.7 5.4Purchase of residential property 16.4 16.3 26.7Purchase of non–residential

property 2.3 4.0 6.3Real estate -0.2 1.0 2.6

Transport, storage andcommunication -0.8 1.4 2.0

Finance, insurance and businessservices 1.7 -0.8 5.4

Consumption credit 14.6 19.4 22.1of which:

Credit cards 2.0 2.5 3.0Purchase of passenger cars 10.6 14.4 15.5

Purchase of securities -0.4 1.5 3.7Purchase of transport vehicles -0.8 0.4 0.5Community, social and personal

services 0.1 0.6 1.0Others -0.7 0.4 1.9

Total loans outstanding2 40.1 44.2 100.0

1 Includes Islamic banks.2 Includes loans sold to Cagamas.Note: Numbers may not add–up due to rounding.

Graph 2.4Banking System: Loans to Households(at end-period)

RM billion %

50

100

150

200

250

300

350

2001 2002 2003 2004 2005

0.0

2.0

4.0

6.0

8.0

10.0

Total household loans

Share of household NPLs to total loans (RHS)

Share of household NPLs to household loans (RHS)


74

remained relatively stable. Household NPLs as apercentage of total outstanding loans to the householdsector displayed a stable trend and stood at 7.5% atend-December 2005 (end-December 2004: 7.6%).Meanwhile, the number of individual bankruptciesdeclined by 2.4% on an annual basis. Households’ netwealth position also remained strong, with indicatorssuch as deposits and other financial investmentssuggesting that household financial assets continue toexceed household debt. These factors, along withbenign trends in house prices, support the sustainabilityof household consumption and investment activity. Thenumber of overstretched households whose capacity toservice and repay loans could be affected by unexpecteddevelopments remains small. Prudent lending practicesas well as ready access to comprehensive creditinformation among banks via the Central CreditReference Information System (CCRIS) has led toimproved risk management in the financial sector, whichhas been important in balancing credit risk exposures.

Nevertheless, as a pre-emptive measure, Bank NegaraMalaysia has established the Credit Counseling andDebt Management Agency, which will commenceoperations in the first quarter of 2006, to addresspotential credit issues that may be faced by households.

Money supply continued to increase during the year, intandem with economic and financial developments.Broad money, M3, displayed a relatively stable growthtrend in the first half of the year, which subsequentlymoderated slightly towards end-year. At end-2005, M3had increased at an annual rate of 8% (end-2004:12.4%). Higher private sector financing during the yearwas the main driver of the expansion in M3. In addition,the external sector also contributed to M3 growth,albeit to a lesser extent compared with 2004. Inparticular, in the last few months of the year, net foreignassets exerted a contractionary impact on M3, reflectingto a large extent, the unwinding of speculative longpositions in the ringgit.

Meanwhile, M1, which is a measure of transactionbalances, expanded at an annual rate of 8.5% in 2005(2004: 11.9%), roughly in tandem with the sustainedgrowth of spending activity.

EXCHANGE RATE DEVELOPMENTS

On 21 July 2005, Malaysia shifted from a fixedexchange rate regime of USD1 = RM3.80 to a managedfloat against a basket of currencies. The policy shift wastaken to better position Malaysia to respond to and

RM billion %

5

10

15

20

25

30

35

40

45

2

-

4

6

8

10

12

2001 2002 2003 2004 2005

Graph 2.5 Aggregate Value of Credit Card Transactions byMalaysian Cardholders

Cash advances Purchases

% of cash advances to total transactions (RHS)

Annual Growth (%)

Graph 2.6 Monetary Aggregates

5

7

9

11

13

15

17

19

21

Dec

02

Mar

03

Jun

03

Sep

03

Dec

03

Mar

04

Jun

04

Sep

04

Dec

04

Mar

05

Jun

05

Sep

05

Dec

05

M1: 8.5%

M3: 8.0%

Table 2.5Broad Money, M3

Change (RM billion)

2004 2005

M3 68.0 49.7

Currency 2.6 1.6Demand deposits 10.1 8.7Broad quasi money 55.3 39.4

Fixed deposits 24.7 4.9Savings deposits 6.1 1.9NIDs 8.2 12.8Repos 13.3 17.3FX deposits 3.0 2.5

Determinants of M3Net claims on Government -15.9 -5.5Claims on private sector 30.6 45.4

Loans 39.8 45.0Securities -9.2 0.4

Net external operations 82.0 16.5Bank Negara Malaysia 75.1 28.3Banking system 6.9 -11.8

Other influences -28.7 -6.7


75


benefit from the structural changes occurring in theregion. With regional countries becoming increasinglyimportant trading partners to Malaysia, their importanceis expected to increase further over time in line withregional efforts to promote closer economic andfinancial inter-linkages.

The overriding objective of the exchange rate policycontinues to be the promotion of exchange rate stabilityagainst the currencies of Malaysia’s major tradingpartners. Being a small and highly open economy, astable exchange rate environment against major tradingpartners is important to achieve sustainable growth andprice stability. Under the managed float system, theringgit exchange rate is largely determined by ringgitdemand and supply in the foreign exchange market.The Central Bank does not actively manage or maintainthe exchange rate at any particular level – economicfundamentals and market conditions are the primarydeterminants of the level of the ringgit exchange rate.In this regard, the Central Bank only intervenes tominimise volatility, and to ensure that the exchange ratedoes not become fundamentally misaligned.

The ringgit exchange rate regime, and thereforemovement in the ringgit exchange rate can bedistinguished by two periods in the year 2005. The fixedexchange rate regime of USD1 to RM3.80 was maintainedfrom 1 January – 21 July 2005, as it had been maintainedsince 2 September 1998. During this period,developments in the ringgit were driven entirely bymovements in the US dollar and the consequentrealignments of major and regional currencies against the

US currency. During 2005, the dollar appreciated againstthe major currencies amidst expectations of continuedincreases in the US Federal Funds Rate, which widenedyield differentials in favour of the US dollar, as well as oncontinued expectations that economic growth in the USwould outpace that of the euro area and Japan. The USdollar was also supported by sustained demand for USassets by international investors. Regional currencies were,in general, also affected by concerns that higher oil priceswould increase import costs and dampen demand forregional exports. Due to the US dollar strength, the ringgitappreciated against the euro (11.9%), pound sterling(10.4%) and Japanese yen (9.7%). Similarly, the ringgitappreciated within the range of 0% - 7.7% againstregional currencies, with the exception of the depreciationagainst the Philippine peso (0.6%).

Table 2.6Movements of the Ringgit

RM to one unit of foreign currency1 Annual change (%) Change (%)

1997 1998 2004 2005 20062004 2005

End-June ’97- 2 Sept.’98 - End-Dec ‘05-

End-June2 Sept. 23 End-Dec. Feb. 28Dec. 2005 Dec. 2005 28 Feb. ‘06

SDR 3.5030 5.1177 5.8818 5.4020 5.3234 -4.3 8.9 -35.2 -5.3 1.5US dollar 2.5235 3.8000 3.8000 3.7800 3.7135 0.0 0.5 -33.2 0.5 1.8Singapore dollar 1.7647 2.1998 2.3258 2.2714 2.2857 -3.9 2.4 -22.3 -3.2 -0.6100 Japanese yen 2.2088 2.7742 3.7026 3.2229 3.1907 -4.0 14.9 -31.5 -13.9 1.0Pound sterling 4.1989 6.3708 7.3169 6.5226 6.4643 -7.5 12.2 -35.6 -2.3 0.9Swiss franc 1.7368 2.6450 3.3517 2.8825 2.8106 -8.6 16.3 -39.7 -8.2 2.6Euro4 – – 5.1729 4.4867 4.4055 -7.6 15.3 – – 1.8100 Thai baht 9.7470 9.3713 9.7636 9.2049 9.4407 -1.7 6.1 5.9 1.8 -2.5100 Indonesian rupiah 0.1038 0.0354 0.0408 0.0385 0.0402 9.8 6.2 169.9 -7.9 -4.4100 Korean won 0.2842 0.2827 0.3671 0.3739 0.3827 -13.4 -1.8 -24.0 -24.4 -2.3100 Philippine peso 9.5878 8.8302 6.7706 7.1254 7.1793 1.1 -5.0 34.6 23.9 -0.8Chinese renminbi 0.3045 0.4594 0.4591 0.4686 0.4619 0.0 -2.0 -35.0 -2.0 1.5

1 US dollar rates are the average of buying and selling rates at noon in the Kuala Lumpur Interbank Foreign Exchange Market. Rates for foreign currencies other than US dollar are cross rates derived from rates of these currencies against the US dollar and the RM/US dollar rate.2 End-June 1997 represents pre-Asian Financial Crisis levels.3 Ringgit was fixed at USD1 = RM3.8000 on 2 September 1998.4 The euro began to be traded on 4 January 1999 (EUR 1= RM4.5050).

3

2

4

5

6

7

8

1999 2000 2001 2002 2003 2004 20051998

2

3

4

5

6

7

8

(Weekly average) RM/foreign currency RM/foreign currency

Graph 2.7 Exchange Rate of the Malaysian Ringgit against Major Currencies

M J S D M J S D M J S D M J S D M J S D M J S D M J S D

STG

Euro

USD

100 Yen

Ringgit fixed at USD1=RM3.80

Ringgit on amanaged float regime


76

With the ringgit strengthening significantly since thebeginning of 2005, any undervaluation that existed as aresult of the US dollar depreciation in 2003 and 2004had effectively been reversed. The exchange rate wastherefore not expected to change substantially at thetime of the change to the new regime. The pricediscovery process following the unpegging of the ringgitwas orderly, resulting in relative stability of the exchangerate. During the period after the move to a managedfloat regime, between 22 July – 30 December 2005, theringgit moved not only against the US dollar, but alsoother major and regional currencies, and reflected theoverall strength of the domestic economy. There was,however, a substantial unwinding of the largespeculative long positions in the ringgit. During theremaining part of the year, since the introduction of thenew regime, the ringgit appreciated against the USdollar (0.5%), Japanese yen (4.7%), euro (3%) andpound sterling (1.6%). Against regional currencies, theringgit depreciated within the range of 0.6% - 4.4%,the exception being an appreciation of 0.5% againstthe Indonesian rupiah.

For the year as a whole, the ringgit appreciated againstthe US dollar (0.5%), euro (15.3%), Japanese yen(14.9%) and pound sterling (12.2%). Against theregional currencies, the ringgit recorded a mixedperformance, appreciating against the Indonesianrupiah (6.2%), Thai baht (6.1%) and Singapore dollar(2.4%), but depreciating against the Philippine peso(5%), Chinese renminbi (2%) and Korean won (1.8%).

FISCAL POLICY AND OPERATIONS

Fiscal policy in 2005 remained focused on improving theFederal Government’s financial position whilesupporting capacity building to enhance economic

growth. The Government continued to play a supportiverole in facilitating the further entrenchment of theprivate sector as the main engine of growth. The FederalGovernment’s overall macroeconomic strategycontinued to concentrate on reinforcing economicgrowth by stimulating domestic sources of growth,enhancing human capital development, improvingcapacity of delivery system of the Government andpromoting higher productivity. These efforts, togetherwith supportive monetary policy, enabled total privatesector consumption and investment to sustain a strongexpansion of 9.5% to contribute 5.7 percentage pointsof economic growth.

While fiscal policy in 2005continued to focus on capacitybuilding to support economicgrowth, the FederalGovernment’s fiscalconsolidation strategy remainedon course with a lower fiscaldeficit of 3.8% of GDP.

Notwithstanding higher petroleum-related expenditure,the continued fiscal discipline and prudence in spending,combined with a favourable revenue performance, led toan improvement in the Federal Government’s financialposition. The Federal Government registered a smalleroverall deficit of RM18.7 billion or 3.8% of GDP. Thereduction of fiscal deficit for the third successive yearunderscored the Government’s strong commitment to apolicy of fiscal consolidation. With this manageabledeficit, the Government will now have the added

2000 2001 2002 200520042003

80

90

100

110

120

130

80

90

100

110

120

130

D J M J S D M J S D M J S D M J S D M J S D

Index (Dec. 2000=100) Index(End-month)

Graph 2.8Exchange Rate of the Malaysian Ringgit against Selected Regional Currencies

Note : An increase in the index represents an appreciation of the currency against the ringgit.

Peso

S$

Rupiah

Baht

Won

Renminbi

Table 2.7Federal Government Finance

2004 2005p

RM million

Revenue 99,397 106,304Operating expenditure 91,298 97,744

Current account 8,099 8,560% of GDP 1.8 1.7

Net development expenditure 27,518 27,284Gross development expenditure 28,864 30,534Loan recoveries 1,346 3,250

Overall balance -19,419 -18,724% of GDP -4.3 -3.8

p Preliminary

Note: Numbers may not add up due to rounding.

Source: Ministry of Finance


77


flexibility to provide more resources for activities that willcontribute to further strengthening the economicresilience of the economy.

Federal Government revenue continued to rise,increasing by 6.9% to RM106.3 billion in 2005,reflecting sustained growth in the Malaysian economyand higher petroleum-related revenue. Higher taxrevenue collection also reflected the concerted effortsmade by the Government to broaden the tax base.The proportion of total revenue to GDP remained at ahigh level of 21.5% (2004: 22.1%). Both categoriesof tax revenue, direct and indirect taxes, increased in2005, and resulted in larger shares of 50.4% and25.4% of total revenue, respectively (2004: 49% and23.5%, respectively). Receipts from the petroleumincome tax registered a significant growth of 26.9%following higher oil prices. Favourable businessperformance and further improvements in the taxcollection machinery contributed to the increasedrevenue from corporate income tax. Higher revenuewas achieved despite the re-computation of currentyear corporate tax after taking into account treatmentfor tax refund. In addition, several tax concessionsand incentives were introduced in 2005 to promoteprivate investment activity and to reduce thecorporate tax burden. During the year, measures

taken by the Inland Revenue Board includedenhancing its services and intensifying collectionefforts through stricter enforcement. However,individual income tax collections were lower. Duringthe year, higher tax relief was provided to assistdisabled taxpayers, for expanding the use ofinformation and communications technology byhouseholds, and to inculcate the habit of reading.Commencing in 2005, the Self Assessment Systemwas introduced for individual taxpayers as part of theGovernment’s effort to modernise and streamline thetax administrative system.

The Government continued to emphasise efficiency andeffectiveness in its financial management bystreamlining tax measures, improving tax administrationand intensifying collection efforts. In 2005, theGovernment established a Taxation System Review Panelcomprising representatives from the public and privatesectors to review the tax system. Tax administration wasenhanced with the setting up of the Fund for TaxRefund to expedite income tax refunds.

Most major sources of indirect taxes recorded double-digit growth, reflecting stronger domestic aggregatedemand during the year. Excise duties receipts weresignificantly higher due to continued high demand formotor vehicles. It also reflected the upward revision ofexcise duties on locally manufactured cigarettes and

Table 2.8Federal Government Revenue

2004 2005p 2004 2005p

RM million Annual change (%)

Tax revenue 72,050 80,594 11.0 11.9

% of GDP 16.0 16.3

Direct taxes 48,703 55,543 13.2 9.9Companies 24,388 26,381 1.7 8.2Petroleum 11,479 14,566 35.6 26.9Individuals 8,977 8,649 12.4 -3.7Stamp duties 2,381 2,460 18.6 3.3Others 1,479 1,487 160.1 0.6

Indirect taxes 23,347 27,051 6.7 15.9Export duties 1,600 2,085 38.4 30.3Import duties 3,874 3,385 -1.1 -12.6Excise duties 6,427 8,641 27.7 34.5Sales tax 6,816 7,709 -14.4 13.1Service tax 2,350 2,582 15.3 9.9Others 2,280 2,648 29.1 16.2

Non-tax revenue 27,347 25,710 -1.3 -6.0

Total revenue 99,397 106,304 7.3 6.9% of GDP 22.1 21.5

p PreliminaryNote: Numbers may not add up due to rounding.


Graph 2.9

p Preliminary

RM billion

Debt as% of GDP

Overall balance as% of GDP

Federal Government Debt

Federal Government Finance

-3.8%

46.2%

01994 1995 1996

Domestic debt

External debt

Overall balance(RHS)

1997 1998 1999 2000 2001 2002 2003 2004 2005p

-80

-60

-40

-20

20

40

60

80

-8

-6

-4

-2

2

0

4

6

8

Gross development expenditure

Operating expenditureCurrent accountRevenue

-10

10

30

50

70

90

110

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005p


78

Total Revenue: RM106.3 billion

Graph 2.10 Composition of Federal Government Revenue, 2005 (% share)

Non-tax revenue24.2%

Others3.8%

Individuals8.1%

Import duties3.2%

Sales tax7.3%

Excise duties8.1%

Export duties2.0%

Others2.4%

Service tax2.4%

Petroleum13.7%

Companies24.8%

Indirect taxes25.4%

Direct taxes50.4%

Summary of Major Tax Measures Implemented in 2005

Individuals Income Tax• Tax relief on contributions for EPF and insurance premiums increased to RM6,000.• Additional tax relief for disabled citizens and spouses increased to RM6,000 and RM3,500, respectively.• Tax rebate for purchases of computers increased to RM500.• Tax relief for purchases of books increased to RM700.• Tax exemption on retirement benefits of up to RM6,000 for each year of service.

Companies Income Tax• Tax deduction for zakat on business income paid by companies.• Tax exemption on interest income from bonds received by non-resident companies.• Tax incentives given to encourage the modernisation and commercialisation of the agriculture sector.• Tax incentives extended for existing companies for relocating manufacturing activities to promoted areas.• Scope of tax incentives extended for usage of renewable energy to companies which generate such energy

for own consumption.• Double deduction provided for expenses incurred on promoting the export of professional services.

Indirect Tax• Import duty for selected goods (surgical gloves, carpet, glassware and semi-finished components for the

wood-based industry) was abolished.• Import duty on selected raw materials for apparel industry and herbicides was reduced between 5-30%.• 5% exemption given for import duty on natural gas vehicles (NGV) conversion kits for vehicles.• Excise duty on cigarettes increased to RM81 per 1,000 sticks.• Excise duty on liquor increased between 10 sen to RM28 per litre.

Non-tax revenue• Road tax for motorcycles with engine capacity between 151-250 cc reduced by 50%.• Road tax for passenger cars with engine capacity between 1,001-1,600 cc reduced by 50%, while those

below 1,000 cc the road tax was charged at RM30 per year.• Road tax for mono gas and dual-fuel vehicles reduced by 50% and 25%, respectively.• 10% exemption given for road tax for vehicles with NGV conversion kits.• Road tax abolished for school and stage buses.


79


liquor announced in the 2005 Budget to promote ahealthy lifestyle and to curb social ills. Meanwhile, theescalating oil prices contributed to the higher exportduties receipts. In line with Malaysia’s commitment tothe Asean Free Trade Agreement (AFTA), the gradualreduction in import tariffs on Complete Built-up (CBU)motor vehicles from ASEAN countries as well as thereduction and abolishment of duties on selected goodsintroduced in the 2005 Budget, resulted in lower importduties collection during the year.

Collection from non-tax revenue declined by 6% in2005 due to lower investment income. Nevertheless, itsshare to total revenue remained favourable at 24%(2004: 27%).

The Federal Government’s gross expenditure increasedby 6.8% to RM128.3 billion in 2005. The overall thrustof the Federal Government’s expenditure was tostrengthen the fundamentals of the economy and toincrease the private sector’s resilience. In managingexpenditure, emphasis was placed on enhancingefficiency and cost effectiveness. Operatingexpenditure was higher by 7.1% or RM6.4 billion in2005. The substantially higher subsidies for petroleumproducts (RM11 billion), which was more than threetimes the amount recorded in 2004, was the majorreason for the increase in operating expenditure. Tocontain the growth of operating expenditure within areasonable range, the Government reviewed policies onpetroleum subsidies. The prices of retail petroleumproducts were raised three times during the year in viewof escalating oil prices. On 1 March, the Government

raised the diesel price by 5 sen. The retail price of petrolwas raised by 10 sen and diesel by 20 sen on 2 May and31 July respectively.

The total wage bill, which was the largest component ofoperating expenditure (26.2%), rose by 7.6%. During theyear, the Government announced salary increases forMembers of Parliament and Cabinet Ministers and higherallowances for various groups of civil servants, includingspecialists, medical officers and housemen working inGovernment hospitals. Higher disbursement for suppliesand services were largely to improve public sector deliveryand promote a culture of maintenance. The bulk of thespending was for procurement of office supplies, repairsand maintenance as well as payments for professionalservices associated with the Government’s initiative toupgrade the quality and efficiency of public services.Payments for grants and transfers to governmentagencies, statutory bodies and state governments wereextended for development and maintenance purposes.Notwithstanding the higher debt level, the debt servicecharges were contained as new borrowings were raisedat lower costs during the year.

Gross development expenditure increased by 5.8% toRM30.5 billion in 2005. The focus of developmentexpenditure was to enhance longer-term productivity andcompetitiveness, while supporting further economicactivity. Spending was reprioritised to focus on smaller-sized projects that have multiplier effects in creating moreeconomic activities in the near term. In particular, suchspending was directed to agriculture, construction,housing and infrastructure activities in rural areas. Duringthe year, expenditure efficiency was enhanced by ensuringmaximum social and economic benefits. In addition,further emphasis on the usage of the open tender systemwas undertaken to ensure competitive pricing.

In terms of sectoral distribution, economic servicescontinued to be the largest component of totaldevelopment expenditure for the second consecutive yearwith its share of total development expenditure increasingto 49% in 2005 from 35% in 2003. A large part of theincrease in spending for this sector was directed to thetrade and industry sub-sector to facilitate growth.Spending was focussed on strengthening the small andmedium-sized enterprises, industrial research andtechnological development, and tourism developmentprojects. Expenditure on the transport sub-sector was alsohigher, reflecting the Government’s concerted effort toimprove the efficiency of public transportation services andestablishing an integrated national transportation network.Funding for agriculture and rural development, as well aspublic utilities (such as rural roads, water and electricity

Table 2.9Federal Government Operating Expenditure byObject

2004 2005p 2004 2005p

RM million % share

Emolument 23,779 25,587 26.0 26.2Supplies and services 16,633 17,984 18.2 18.4Asset acquisition 1,764 1,603 1.9 1.6Debt service charges 10,920 11,604 12.0 11.9Pensions and gratuities 6,060 6,809 6.6 7.0Subsidies 5,796 12,831 6.3 13.1Other grants and transfers1 21,264 20,982 23.3 21.5Other expenditure2 5,082 344 5.7 0.3

Total 91,298 97,744 100.0 100.0% of GDP 20.3 19.8

1 Includes grants and transfers to state governments as well as public agenciesand enterprises.

2 Includes refunds, grants to international organisations, insurance claims andgratuities and others.




80

Measures Taken to Cushion the Impact of Rising Oil Prices

• Encourage the use of alternative energy sources– Provide more NGV pumps at petrol stations.– Promote the use of NGV, especially by long-haul transport vehicles.– The use of renewable energy under the small renewable energy programme.– Develop Bakun hydroelectric power Project.– Introduce the use of "green" fuels, such as biodiesel, using palm oil.

• Reduce public burden– The price of fuel for NGV was fixed at half of the price of petrol.– 50% and 25% road tax reduction for mono gas and dual-fuel vehicles, respectively.– 5% exemption on import duty and 10% on road tax on NGV conversion kits for vehicles.– Road tax abolished for school and stage buses.– Road tax for passenger cars with engine capacity between 1001-1600 cc reduced by 50%, while below

1000 cc the road tax is RM30 per year.– Road tax for motorcycles with engine capacity between 151-250 cc reduced by 50%.– Diesel subsidy provided to fishermen.

• Conserve the use of fuel– Energy conservation moves introduced in Government offices, such as switching off lights during lunch

time and increasing room temperature slightly.– Encourage the use of public transportation and car pooling.– Enhance efforts to improve the public transportation system, especially in the Klang Valley.

programmes), were made to further modernise andcommercialise the agricultural sector and improve thequality of life in rural areas.

In the social services sector, priority continued to be givento the education sub-sector as focus was placed onhuman resource development to support the strategy ofproductivity-driven growth. However, total educationexpenditure was lower, as most of the education projectsin the Eighth Malaysia Plan had been completed by 2003.Expenditure for health services remained high to providebetter quality healthcare and medical services. TheGovernment also continued to undertake housingprojects for public sector personnel and the lower incomegroups. Meanwhile, general administration spending washigher to improve further the service delivery system, aswell as to enhance the working and service environment.Expenditure was channelled for the purchase ofinformation and communications technology equipmentfor the implementation of various initiatives under theElectronic Government Application projects.

In an effort to cushion the impact of high oil prices onthe domestic economy, the Government, throughout2005, introduced several measures aimed atencouraging the use of alternative energy sources toreduce the heavy dependence on fossil fuels, lower thecost burden on the general public and to encourage

energy conservation, especially by the Governmentsector. A summary of these measures are listed in thewhite box.

Table 2.10Federal Government Development Expenditure bySector

2004 2005p 2004 2005p

RM million % share

Defence and security 4,133 4,803 14.3 15.7

Economic services 11,851 14,957 41.1 49.0Agriculture and rural

development 2,881 2,495 10.0 8.2Trade and industry 1,201 3,221 4.2 10.6Transport 6,630 7,660 23.0 25.1Public utilities 945 1,481 3.3 4.9Others 193 99 0.6 0.2

Social services 10,260 7,450 35.5 24.4Education 4,316 3,736 15.0 12.2Health 2,352 1,220 8.1 4.0Housing 1,593 1,082 5.5 3.5Others 1,999 1,412 6.9 4.7

General administration 2,620 3,325 9.1 10.9

Total 28,864 30,534 100.0 100.0% of GDP 6.4 6.2




81


External borrowing was limited to the drawdown ofexisting project loans committed earlier. A total ofRM651 million was disbursed from both bilateral andmultilateral sources. During the year, there were largeredemptions of RM4.2 billion, reflecting mainly thematurity of the 650 million Euro Bond in November.

Overall, the Federal Government recorded a smallertotal net borrowing of RM9.2 billion in 2005. As a

As a prudent measure, the Federal Government hadalways ensured that revenue exceeded operatingexpenditure. Given the reinforced fiscal prudence tocontain spending amidst higher revenue collection,the Government registered a larger current accountsurplus of RM8.6 billion in 2005. The larger savingsenabled the Government to reduce its need to sourceadditional financing for development activity. Inaddition, a large part of the development expenditurewas financed from the drawdown of accumulatedassets. During the year, the Government drew downRM9.1 billion from its accumulated assets. Financingthrough issuances of government securities werereduced in 2005.

Total gross borrowings of the Federal Government in2005 amounted to RM32.2 billion (2004: RM47 billion).The bulk of the funding (98% of total) was raised fromdomestic sources without "crowding out" the privatesector, given the ample liquidity situation in theeconomy. The Government raised a total of RM27.5billion by issuing Malaysian Government Securities(MGS) and another RM4 billion through GovernmentInvestment Issues. In 2005, new issues of governmentsecurities were raised at lower costs reflecting loweryields. New issues of government securities withmaturities of 3 and 5 years were issued at average yieldrates ranging between 3.155–3.756% (2004: 3.135–4.546%). For those with maturities of 10 and 20 years,the average yield rates ranged between 4.391–4.837%(2004: 5.094–5.734% for maturities of 10 and 15years). In terms of the ownership structure of MGS, theprovident and pension funds and insurance companiescontinued to be the major holders.

Table 2.11Federal Government Sources of Financing

2004 2005p

RM million

Net domestic borrowing 25,650 12,700Gross borrowing 45,850 31,500Less: Repayment 20,200 18,800

Net foreign borrowing 121 -3,503Gross borrowing 1,136 651Less: Repayment 1,015 4,153

Special receipts 516 454

Realisable assets1 and adjustments -6,868 9,073

Total 19,419 18,7241 Includes changes in Government’s Trust Fund balances.

A positive (+) sign indicates a drawdown in the accumulated realisable assets.p PreliminaryNote: Numbers may not add up due to rounding.


Table 2.12Holdings of Federal Government Domestic Debt

2004 2005p 2004 2005p

Nominal value in% share

RM million

Treasury Bills 4,320 4,320 100.0 100.0Social security and insurance

institutions 17 82 0.4 1.9Banking institutions 481 1,916 11.1 44.3Others 3,822 2,323 88.5 53.8

Government InvestmentIssues 9,100 10,100 100.0 100.0Social security and insurance

institutions 973 3,374 10.7 33.4Banking institutions 6,755 4,146 74.2 41.0Others 1,372 2,581 15.1 25.6

Malaysian GovernmentSecurities 154,350 166,050 100.0 100.0Social security and insurance

institutions 109,402 115,109 70.9 69.3of which:Employees Provident Fund 91,426 96,571 59.2 58.2Insurance companies 14,715 14,750 9.5 8.9

Banking institutions 23,427 25,123 15.2 15.1Others 21,520 25,817 13.9 15.5

p Preliminary

Note: Numbers may not add up due to rounding.

Total debt : Domestic : External :

Domestic debt

Graph 2.11 Federal Government Debt as at end-2005p (% share)

p Preliminary

Government Investment Issues 4.4%

Treasury Bills 1.9%

External debt accounted for only 13.1% of the total Federal Government debt

Housing Loans Fund 8.0%

RM228.7 billion RM198.7 billion RM30.0 billion

MalaysianGovernmentSecurities72.6%


82

Table 2.13Federal Government Debt Indicators

Domestic1 External1 Total Debt1 Debt servicingExternal debtservice ratio

(% of GDP) (% of revenue)(% of operating

(% of GDP)(% of exports of

expenditure) goods and services)

1985 52.6 29.7 82.4 23.9 26.9 6.5 6.71990 58.8 20.8 79.5 23.1 27.3 5.7 3.62000 31.1 5.5 36.6 14.6 16.0 2.6 1.22001 36.3 7.3 43.6 12.1 15.1 2.9 0.52002 35.5 10.0 45.6 11.6 14.1 2.7 1.02003 38.3 9.4 47.8 11.4 14.0 2.7 1.22004 40.5 7.7 48.2 11.0 12.0 2.4 0.52005p 40.2 6.1 46.2 10.9 11.9 2.3 1.0

1 Refers to end-period.p Preliminary


Table 2.14Consolidated NFPEs Finance1

2003 2004 2005e

RM million

Revenue 155,867 215,858 236,539Current expenditure2 113,900 155,137 171,732

Retained income 41,967 60,720 64,807% of GDP 10.6 13.5 13.1

Development expenditure 40,160 24,633 39,981

Overall balance 1,807 36,088 24,826% of GDP 0.5 8.0 5.0

1 Refers to 30 NFPEs in 2004 and 2005; 34 in 2003.2 Since year 2000, adjusted to include taxes and dividends paid to the Government.e EstimateNote: Number may not add up due to rounding.

Source: Ministry of Finance and non-financial public enterprises (NFPEs)

result, the Federal Government outstanding debtexpanded by a modest rate of 5.6% to RM228.7 billion.Nevertheless, the ratio of outstanding debt to GDPimproved to 46.2% of GDP as at end-2005. This level ofdebt remained manageable with the debt servicingexpenditure sustained within prudent levels. Active debtmanagement also reduced bunching of repayments,with about 60% of the debt having remaining maturityof more than three years. The bulk of the loans of about95% were raised at fixed rates, which reduced exposureto increases in interest rates.

Based on preliminary estimates, the overall financialposition of the 30 non-financial public enterprises(NFPEs) remained healthy in 2005. The consolidatedrevenue of the NFPEs rose by 9.6% to RM236.5 billion, asa result of higher earnings of NFPEs involved in oil andgas-related services and utilities sectors. These sectorsbenefited from the pick-up in economic activities andhigher crude oil prices as well as better performance ofoverseas operations.

Reflective of measures undertaken by enterprises toenhance operational efficiency and to contain the risingoperating costs, the NFPEs, as a group registered ahigher retained income of RM64.8 billion. Currentexpenditure rose by 10.7% reflecting largely higherprices of raw materials and inputs, especially for crudeoil, natural gas and coal prices. Cost-cutting initiativesundertaken by NFPEs included reviewing processes,improving efficiency and performance, outsourcing,centralising procurement, tightening credit control aswell as refinancing and prepayment of loans.

The higher capital outlay of NFPEs was channelledtowards the expansion in capacity, enhancement ofproductivity to improve efficiency and quality ofservices rendered to the public as well as higherinvestments abroad to enhance their revenue-generating capacity. The bulk of the developmentprojects were undertaken by the larger NFPEs, such asPetroliam Nasional Berhad (PETRONAS), TenagaNasional Berhad (TNB) and Telekom Malaysia Berhad(TM). During the year, PETRONAS continued to investin the international arena while reinforcing itsestablished domestic operations of both downstreamand upstream activities. Among the major domesticprojects undertaken by PETRONAS and its subsidiarieswere the construction of new service stations,debottlenecking project of MLNG2 as well asacquisition, upgrading and reconditioning of variousvessels by MISC Berhad. Meanwhile, overseasinvestments included exploration and productionprojects in Egypt as well as developing a gasprocessing plant in Ghotki, Pakistan.

TNB’s capital expenditure was largely concentratedon the interconnection and upgrading of powergeneration, transmission and distribution networks.Major expenditure incurred during the year includedthe construction of Tuanku Jaafar Power Station


83


Table 2.15Consolidated Public Sector Finance

2004 2005e 2006f

RM billion

Revenue1 116.3 122.6 134.3Operating expenditure 101.6 108.4 112.5Current surplus of NFPEs2 60.6 63.8 63.8

Current balance 75.3 78.0 85.6 % of GDP 16.7 15.8 15.8

Net development expenditure3 56.7 71.0 71.0 General government4 32.1 31.0 39.4 NFPEs 24.6 40.0 31.5

Overall balance 18.5 7.0 14.7 % of GDP 4.1 1.4 2.71 Excludes transfers within general government.2 Refers to 30 NFPEs in 2004 and 2005; 34 in 2003.3 Adjusted for transfers and net lending within public sector.4 Comprises Federal Government, state governments, statutory bodies and local

governments.e Estimatef ForecastNote: Numbers may not add up due to rounding.


Phase 2 in Port Dickson, Paka Power Stationrehabilitation, Sabah East – West Coast gridexpansion and Supervisory Control and DataAcquisition (SCADA) Phase 2 project. During theyear, TM focused on expanding and modernisingtelecommunications infrastructure and networksdomestically. It also expanded its global operationsthrough acquisitions of companies in countries suchas Indonesia, Ghana and Pakistan. Major projectsundertaken included the Asia Pacific Cable Network2 and Internet Protocol Digital Subscriber LineAccess Multiplexcer (IP DSLAM).

The consolidated public sector financial positionremained strong in 2005. It recorded an overallsurplus of RM7 billion or 1.4% of GDP (2004: 4.1%of GDP). The overall surplus was largely attributableto the larger contribution from NFPEs, particularlyPETRONAS as a result of higher crude oil prices.


Outlook and Policy

The International Economic EnvironmentMalaysian Economy in 2006Monetary Policy in 2006Fiscal Policy in 2006 White Box: Key Measures Announced in the 2006 BudgetFinancial Sector Policy in 2006

86-9292-9898-99

99-100100-101

101-105

86

THE INTERNATIONAL ECONOMIC ENVIRONMENT

Developments in 2005In 2005, global economic expansion was sustained at astrong pace of 4.3%. Growth was remarkably resilientagainst the backdrop of higher oil prices, rising interestrates, large balance of payment imbalances anddisruptions from natural disasters. While the economiesof the United States (US) and PR China remained majordrivers of global growth, the recovery in Japan and theeuro area in the second half-year gained momentum,providing additional support to the global economy.Consumer spending was sustained, reinforced to asignificant extent by wealth effects, particularly fromrobust housing markets in several major economies.Reflecting robust demand conditions, strongercorporate financial positions and rising capacityutilization, investment spending expanded further.Meanwhile, growth in the Asian region strengthened inthe second half-year as the uptrend in the global

electronics cycle became evident. Overall, higher globalgrowth was reflected in the continued expansion inworld trade, which rose at a strong pace of 7%.

Strong global demand was also a key factor in drivinghigher global commodity prices in 2005. While therelatively tight supply conditions and Hurricane Katrinadrove oil prices to new peaks in the third quarter, thestrong growth performance of the global economy alsosustained demand. Overall, global growth exhibitedgreater resilience to energy shocks, with the effects inlarge part offset by productivity gains, continued incomegrowth and wealth creation in tandem with improvedenergy efficiency and technological improvementsduring the recent two decades. Hence, while higher oiland commodity prices did have some impact onheadline inflation, the effect was relatively modest assustained improvements in productivity, theglobalisation of production and the emergence ofcompetitive sources of supply from several regions of

Table 3.1World Economy: Key Economic Indicators

Real GDP Growth (%) Inflation (%)

2004 2005e 2006f 2004 2005e 2006f

World Growth 5.1 4.3 4.3 – – –World Trade 10.3 7.0 7.4 – – –

Major Industrial Countries 3.3 2.6 2.6 2.0 2.2 2.0United States 4.2 3.5 3.3 2.7 3.4 2.8

Japan 2.3 2.8 2.5 0.0 -0.3 0.0

Euro area 2.1 1.3 1.7 2.1 2.2 1.8

United Kingdom1 3.2 1.8 2.0 1.3 2.1 1.9

East Asia 7.9 7.2 7.0 ~ 7.2 3.4 3.1 3.3 ~ 3.6

Asian NIEs 6.0 4.8 4.6 ~ 4.9 2.3 2.2 2.3 ~ 2.4

Korea 4.6 4.0 5.0 3.6 2.7 3.0

Chinese Taipei 6.1 4.1 4.3 1.6 2.3 1.7

Singapore 8.7 6.4 4.0 ~ 6.0 1.7 0.5 0.5 ~ 1.5

Hong Kong China2 8.6 7.3 4.0 ~ 5.0 -0.4 1.1 2.3

The People’s Republic of China 10.1 9.9 9.4 3.9 1.8 3.0

ASEAN3 6.4 5.4 5.1 ~ 5.9 3.8 5.9 4.8 ~ 6.0

Malaysia 7.1 5.3 6.0 1.4 3.0 3.5 ~ 4.0

Thailand 6.2 4.5 4.8 ~ 5.8 2.7 4.6 3.5 ~ 5.0

Indonesia 5.1 5.6 5.0 ~ 5.7 6.1 10.4 7.0 ~ 9.0

Philippines 6.0 5.1 5.7 ~ 6.3 6.0 7.6 8.0 ~ 8.5

1 Based on Eurostat’s harmonized index of consumer prices.2 Inflation refers to composite prices.3 Includes Singapore.e Estimatef Forecast

Source: International Monetary Fund, Datastream, OECD Economic Outlook, National Sources

Outlook and Policy

C03 Outlook & Policy pg86-106 3/14/06, 9:13 PM86

87

Outlook and Policy

the world helped to mitigate the pass-through effects.The relatively restrained inflationary environmentallowed monetary authorities across the world to raiseinterest rates at a gradual and measured pace. Financialmarket activity generally benefited from the abundantliquidity conditions and sustained economic growth.Reflecting prospects for ongoing economic recovery andimproved corporate performance, equity markets inJapan and Europe recorded strong gains. Meanwhile,rising interest rates in the US supported the US dollaragainst the other major currencies.

Among the major industrial countries, the UScontinued to lead growth in 2005. Growth wasbroad based, with strong momentum in domesticdemand, owing significantly to the strongcontribution from consumption spending,underpinned by the buoyant housing market. Inaddition, improving labour market conditionsprovided further stimulus to consumer spending.Strong corporate financial positions, housing-relatedinvestment spending and a tax measure toencourage repatriation of funds provided impetusfor a further expansion in private investment activity.Despite the impact of the hurricanes in the GulfCoast and record gasoline prices, US economicperformance remained resilient in the second half-year. Consumer confidence, labour markets andbusiness activity rebounded shortly after the impactof Hurricane Katrina. In the government sector, thefiscal deficit improved on higher tax revenue andsome expenditure reduction. However, strongdomestic demand combined with high oil prices ledto a further widening of the current account deficit.

Economic recovery in Japan was evident throughoutthe course of 2005, underpinned by stronger domesticdemand and reinforced by external demand in thelater part of the year. Domestic demand in Japan wasmainly supported by an expansion in investment whilerecovery in consumption was underpinned byfavourable developments in labour market conditions.Meanwhile, export performance picked up in thesecond-half year, in line with the pick-up in the globalelectronics cycle.

Economic recovery in the euro area was significantlystronger in the second half of 2005, supported largelyby stronger exports. This led to a modest increase ininvestment spending while industrial productiongathered momentum. Although business confidence,as reflected by the German Ifo and ZEW indicators,improved markedly towards the end of 2005,consumer sentiments remained weak, reflecting a

persistently high level of unemployment. Nonetheless,labour reforms have shown some results in terms ofimproving labour market flexibility as seen in the risinglevel of part-time and contract employment.

Meanwhile, growth in the UK slowed in 2005 as bothconsumers and firms held back on consumption andinvestment spending amidst weaker domesticconditions following the slower housing market.

In the Asian region, growth remained strong at 7.2% in2005 following a milder-than-expected slowdown in theelectronics sector. Growth, nevertheless, moderatedslightly from the high base of 7.9% in 2004 in the face ofsurging oil prices, monetary tightening cycle and someslowdown in global IT demand. PR China continued todrive regional expansion with a revised growth estimateof 9.9%. Regional growth was broad based,underpinned by both external and domestic demand.

In 2005, exports grew by 20% (2004: 28.5%). After someslowing down in the first half-year, export performancepicked up in the second half-year as the global technologycycle revived. Private consumption continued to grow at astable pace in the region, with rising incomes offsetting theimpact of higher oil prices and tighter monetary policies. InKorea, private consumption increased steadily, followingthe strengthening of household balance sheets since theburst of the credit bubble in 2002. Fixed investment, onthe other hand, grew at a more modest pace in several ofthe regional economies. However, fixed investment in PRChina continued to grow strongly despite measures by theauthorities to moderate overheating in selected sectors.

The current account surplus in the region remainedstrong but showed divergent trends. The surplus wassignificantly larger in PR China, reflecting continuedstrong exports but narrowed in a number of regionalcountries due partly to the impact of high oil prices.This, together with trends in capital flows, led to amoderation in the pace of accumulation in foreignreserves in the second half of the year.

Prospects for 2006Going forward, the outlook for 2006 is for globalexpansion to remain positive. World output and worldtrade are projected to expand at a firm pace of 4.3%and 7.4% respectively in 2006. Global growth isexpected to broaden across the major economies,with the economies of Japan and Europe playing amore significant role. Another notable feature is thestronger investment uptrend seen in several majoreconomies. For the Asian region, the globalelectronics up-cycle is expected to strengthen further


88

following higher ICT-related spending in the industrialeconomies and stronger intra-regional demand. Whilemonetary stimulus has been reduced due to increasedinterest rates, monetary conditions continue toremain accommodative to growth.

2005 is expected to continue this year. Meanwhile, thecontinued recovery in the domestic economy is alsoreflected in improvements in the health of the bankingsector as well as the asset markets.

In the euro area, economic recovery in Germany, France,Italy and Spain are expected to pick up pace in 2006.With Italy emerging from its recessionary conditions andgrowth in Germany and France strengthening further,real GDP as a whole is expected to expand by 1.7%.Nonetheless, recovery – particularly in Germany, whichaccounts for almost 30% of the euro area’s GDP –continues to be supported primarily by external demandas the growth in private domestic consumption remainsmodest. While business sentiments have improved, weakconsumer sentiments coupled with a persistently highunemployment level may constrain prospects for strongerdomestic growth in the euro area.

In the UK, real GDP growth is expected to remainmodest, projected to expand by 2% in 2006. Householdconsumption is expected to remain subdued ashousehold debts have reached record levels and thewealth effect from rising house prices has tapered off.Government spending, though expected to moderate in2006, will continue to support economic expansion inthe UK as private sector investment remains cautiousdespite strong corporate profitability. However, asrecovery in the euro area picks up, the UK is expected tobenefit as exports, which are largely channelled into theeuro area, start to recover.

US Japan Euro area UK

2006f2005e

Graph 3.1 Major Industrial Countries: Real GDP Growth (2005-2006)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5 3.53.3

2.8

2.5

1.3

1.7 1.82.0

4.0

Annual change (%)

e Estimate f Forecast

The global economy isexpected to expand at astrong pace of 4.3% in 2006,emanating from a morebalanced growth across majorindustrial countries. Growthwill be supported by anuptrend in investment andelectronics cycle as well ascontinued favourable liquidityconditions.

Industrial CountriesIn 2006, the US economy is expected to sustain thegrowth momentum from 2005, with real GDP expandingby 3.3%. Investment is expected to emerge as a strongerdriver of growth. Strong corporate positions, risingcapacity utilisation and lean inventory levels are expectedto further spur capital expenditure, especially forspending related to ICT upgrading and replacement aswell as in the energy sector for post-Katrina rebuilding.Meanwhile, despite expectations for a slight moderationdue to a cooler housing market, US consumer spendingwould continue to expand as job creation and incomegrowth are expected to strengthen further in 2006. Onthe fiscal front, spending on post-hurricanereconstruction is also expected to provide further stimulusto the US economy. The large US current account deficitis, however, expected to widen further, exacerbated byhigh oil prices, sustained domestic demand and higherinterest payment outflows.

In Japan, economic recovery is expected to remainintact, with growth sustained above 2% for a thirdconsecutive year in 2006. Domestic demand wouldremain the driver of growth, led by investment andaccompanied by sustained expansion in privateconsumption. The expansion in private consumptionwould be supported by stronger improvements inemployment, wage and income conditions, despiteconstraints due to a planned reduction in individual taxallowances and a rise in pension contributions. Recoveryin exports to the major markets since the second half of


89

Outlook and Policy

While global growth is expected to be sustained at asteady pace in 2006, several risks could adversely affectthe outlook. The risk of a sharp and prolonged spike in oilprices remains a concern as the supply-demand balancetightens further and geopolitical uncertainties persist, buthigh oil prices alone are not expected to destabilizegrowth. A prolonged and sustained rise in inflation,possibly resulting from a further surge in oil prices, couldlead to sharply higher global interest rates. In the financialmarkets, a disorderly realignment of the major currenciescould dampen trade and investment flows. However, thusfar, the international financial system and markets haveshown an improved capacity for orderly recycling of capitalflows. In addition to these concerns, the spread of avian flucould also alter the global and regional prospects.Nevertheless, following the experience with SARS, regionalcountries are better prepared in coping with the threat.

East Asian EconomiesIn line with the expected pick-up in world trade andcontinued favourable global environment, theprojection is for growth in the East Asian region to besustained at a strong pace of 7.0-7.2%. Growth will besupported by the recovery in the electronics sector andcontinued strength in domestic demand. PR China’sgrowth is expected to remain strong based on thefavourable export sector and government measures torebalance growth by promoting rural development andprivate consumption. Growth in the other Asiancountries is also projected to improve following a morepositive outlook of the export sector, strengtheningfundamentals and prospects for higher investment.

In the external sector, the global electronics cycle isexpected to trend upwards after reaching its troughin mid-2005, sustaining a stronger growth inregional exports. The recovery is expected to bebroad based, emanating from stronger demand formajor end-products such as consumer electronics,PCs, mobile phones and display devices. Similarly,regional trade is poised to gain from a firmerrecovery and increasing openness of the domesticmarket in Japan.

In the domestic sector, aggregate demand remainsstable, underpinned by favourable economicfundamentals amid continued strong growth. The riseof a younger generation with high discretionaryspending power and strong taste for consumerelectronic gadgets will drive consumption further.Private demand will also benefit from the rise of amodern retail sector characterized by large global retailgiants in response to changing spending patterns. Otherpositive developments include the huge potential in

tourism following rising income, large untappedmarkets, notably PR China and India as well as theproliferation of budget airlines. For some countries,rising worker remittances have been positive insupporting spending, reducing poverty and facilitatingdevelopment in home countries. While investment ratesin many countries remain low, recent signs suggest apick-up in investment trends. These include highcapacity utilisation, growth in import of capital goods,investment plans to increase infrastructure spending,revival of the property sector and continued FDI inflows.

In 2006, the Asian Newly Industrialized Economies(NIEs) as a group is projected to record a real GDPgrowth of 4.6-4.9%, supported by continued strength indomestic demand and stronger exports. Export growth isexpected to strengthen in response to further recovery inthe global electronics sector.

The PR China will continue to drive growth in theregion, with an expected real GDP growth of 9.4% in

A robust growth of 7.0-7.2% isprojected for the East Asianeconomy, based on a strongerrecovery in the globalelectronics cycle andcontinued strength indomestic demand.

5.35.0 ~ 5.7

5.6

5.7 ~ 6.35.1

4.8 ~ 5.84.5

4.0 ~ 6.06.4

4.34.1

4.0 ~5.07.3

5.04.0

9.49.9

6.0

2006f2005e

Graph 3.2 Regional Countries: Real GDP Growth

e Estimate f Forecast

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0

PR China

Korea

Hong Kong China

Chinese Taipei

Singapore

Thailand

Philippines

Indonesia

Malaysia

Annual change (%)


90

2006. While exports will remain a key driver, domesticdemand will play an increasing role in the economy. Inparticular, favourable tax policies such as income taxreform and removal of agriculture tax, and othersupportive measures are expected to boost consumption.Furthermore, rural development is projected toaccelerate, with the implementation of PR China’s 11thFive-Year Programme beginning in 2006. However,concern remains over a rebound in the growth of fixedasset investments and an overcapacity in several sectors,despite policy-cooling measures.

In Korea, real GDP is projected to expand at astronger rate of 5% in 2006. Economic expansion isexpected to be propelled by exports and the revival ofdomestic demand. Recovery in private consumption isexpected to continue, benefiting from furtherprogress in restructuring of household balance sheets,positive wealth effects from a rising stock market andstrengthening consumer confidence.

Growth is forecast to be at 4 - 5% in Hong Kong SAR,led by exports and private consumption. A strong labourmarket and rising wages as well as an improvinghousing market are expected to underpin consumerspending, mitigating the negative impact of higherinterest rates. Meanwhile, Chinese Taipei’s real GDPgrowth is expected to pick up to 4.3%, reflecting higherexports and steady domestic consumption. Exportperformance will likely improve in 2006 due to anupturn in the technology sector and the continuingstrength of US and Chinese demand.

In Singapore, growth is expected to reach 4 - 6%,supported by strong global demand for electronics andan improvement in the labour market, higher asset pricesand sustained tourist arrivals. In terms of industrial origin,the manufacturing sector is projected to be boosted bynew capacity coming onstream in the pharmaceuticalindustry. The building of the integrated resorts, newfinancial centre and the revamp of shopping areas areexpected to spur growth in construction activity, its firstexpansion in seven years.

The ASEAN-41 economies as a group are expected togrow by 5.3 – 5.9% in 2006. Growth in Indonesia isexpected to moderate slightly within the range of 5 –5.7%. Consumer spending will remain supported bystable employment and rising disposable income amidhigher inflation and interest rates. Another key growthfactor is the pick-up in investment, following measuresto support infrastructure spending and continuedprogress in reforms in the regulatory framework andtax law to improve the investment climate. In

Thailand, real GDP growth is expected to remainaround 4.8 – 5.8%. Economic expansion will besupported by the recovery of the global electronicsindustry, together with prospects of higher agriculturalexports following improved weather conditions and arecovery in tourism. Meanwhile, investment is alsoexpected to pick up with the implementation of megaprojects over the next few years. Meanwhile, real GDPgrowth in the Philippines is projected to expand by5.7 – 6.3%. Agricultural output is expected to recoverfrom the droughts last year, while private consumptionis expected to be sustained by strong inflows ofremittances from overseas workers. The fiscal gap isprojected to narrow further to 2.2% of GDP in 2006following the introduction of the expanded value-added tax.

While high oil prices remain a concern, its impactthus far on the region has been modest. However,inflationary pressures remain due to the potentialpass-through from stronger producer price index (PPI)especially in the ASEAN countries. In addition, despitesome recent price increases, the pass-through fromhigher oil prices remains incomplete in a number ofregional countries that offer fuel subsidies.

The growth outlook in 2006 is also subject to therisk of an avian flu pandemic. The overall economicimpact is expected to be small if the epidemic iscontained, as the poultry sector accounts for a smallshare of GDP in the affected countries. However,there are concerns that the strain of flu mightmutate into a form in which human-to-humantransmission occurs and cause human casualties andother economic costs. Its impact on regional growthcould be significantly greater than Severe AcuteRespiratory Syndrome (SARS) in view of the highermortality rate and the prevalence across widergeographical areas. In the event of a pandemic,countries with higher degree of trade openness,dependence on tourism as well as populationdensity will be most affected.

Interest Rates and Exchange RatesIn 2005, monetary policy in the major industrialcountries remained accommodative. In view ofsustained economic growth and an upturn in inflationcaused primarily by higher energy prices, severalcentral banks initiated consecutive increases in interestrates from low levels towards a more neutral stance.

In the US, against the backdrop of robust growth andconcern on inflationary pressures, the US Federal

1 Refers to Indonesia, Thailand, Malaysia and the Philippines.


91

Outlook and Policy

Reserve Board (Fed) raised interest rates eight timesby 25 basis points each time during the year, bringingthe Fed funds rate to 4.25% by year-end. In itsDecember statement, the Fed dropped the oftenrepeated phrase 'accommodative' in its policystatement, thus signaling that rates have risen closer toneutral levels from the low of 1% since mid-2004. Inthe euro area, the European Central Bank raisedinterest rates by 25 basis points to 2.25% in December2005 amid expansions in the money supply and creditgrowth to the private sector. In contrast, in the UK,slower consumer spending amid a weaker housingmarket led the Bank of England to lower interest ratesin August 2005 by 25 basis points to 4.50%.

Throughout 2005, with official short-term interest rates(uncollateralized overnight call rate) in Japan at aroundzero percent, the Bank of Japan (BOJ) continued to usequantitative easing measures, introduced five years ago, toinject liquidity into the banking system in order to counterdeflationary pressures. As at end-2005, the quantitativeeasing target for current account balances of thecommercial banks and financial institutions held at the BOJstood between 30–35 trillion yen (2001: 6 trillion yen).

During the year, regional countries have raised interestrates broadly in line with global developments. Whilerate hikes vary across countries, the moves were aimedat containing inflationary pressures and limitingsecond-round effects in the face of rising oil prices aswell as removal of fuel subsidies. Countries that haveraised rates include Indonesia, Thailand, India,Philippines and Chinese Taipei while Singaporemaintained its policy of a `modest and gradualappreciation’ of the Singapore dollar.

In 2006, the timing and magnitude of monetary policyactions would depend on country-specific factors,including the strength of economic growth, inflationaryexpectations, movements in exchange rates and theperformance of the financial markets.

In the foreign exchange markets, during the course of2005, the US dollar appreciated strongly against threemajor currencies, notably the euro, pound sterling and yen,reversing the depreciation recorded in 2004. The mainfactors that contributed to the US dollar strength were theyield differentials in favour of the US dollar and therelatively stronger economic performance in the US.

Overall, measured on a trade-weighted basis2 , the USdollar appreciated by 3.5% in 2005. Specifically, theappreciation was most prominent against the euro (10%),pound sterling (13%) and the yen (13%). The double-digit

200120001999 2002 2003 2004 20062005

Graph 3.3 Major Industrial Countries: Official Interest Rates

Rate, %

0

1

2

3

4

5

6

7

United Kingdom (Base lending rate)

United States (Fed funds rate)

Japan (Overnight rate)

Euro area (Refinancing rate)

2.50

4.50

0.0

4.50

rate of appreciation recorded by the US dollar against thethree major currencies was the strongest since 1999.Against the backdrop of a stronger US dollar, the euroended the year at E1=USD1.1849 while the yen ended theyear at USD1=¥117.75. The depreciation of the yen wasalso further affected by the strong resident outflowsfollowing increased risk appetite for foreign financial assetsas investors’ confidence rose with continued recovery inthe Japanese economy.

In the Asian region, while the exchange rateperformance was mixed, regional currencies continuedto display increased flexibility against the US dollar.Among regional currencies, the Philippine peso recordedthe strongest appreciation of 6% against the US dollar,supported by record inflows of remittances and animprovement in the country’s fiscal position. The Korean

1999 2000 2001 2002 2003 2004 20062005

Euro, Sterling Yen

Graph 3.4 Movement of the US Dollar against Major Currencies

USD/£

USD/Euro

¥/USD

0.80

1.00

1.20

1.40

1.60

1.80

2.00

100

105

110

115

120

125

130

135

140

2 US Federal Reserve Board’s broad nominal index.

C03 Outlook & Policy pg86-106 4/14/06, 12:0291

92

won and the RMB appreciated by about 2.6% and2.5% against the US dollar respectively. For the RMB,after the initial 2.1% appreciation following the changein the exchange rate regime, the RMB gained a further0.5%. The other regional currencies, however,depreciated against the US dollar, with the Indonesianrupiah recording the largest depreciation of 6%.

In 2006, the movement of the US dollar against thethree major currencies is expected to be driven by anumber of factors. These include investors’ perceptionon interest rate differentials and growth performance,the path of adjustment of global imbalances,performance of the equity and bond markets, andglobal asset reallocation among the major currencies.In addition, country-specific issues that relate toinflationary trends and geo-political risk premiumscould also affect sentiments on the major currencies.

MALAYSIAN ECONOMY IN 2006

The Malaysian economy is expected to strengthen furtherin 2006. Real GDP is projected to grow at a faster rate of6%, driven by strengthening exports and resilientdomestic demand. The global semiconductor upcycle,sustained global growth and higher prices for primarycommodities are expected to have positive effects onexports, as well as private consumption and investment.

sustainability of growth by expanding the stock ofproductive capital. In this regard, efforts will beintensified to enhance the contribution of privateinvestment to growth.

The Government will continue to focus onstrengthening the fiscal position with the ultimate aimof supporting economic growth without compromisinglong-term fiscal sustainability. In 2006, prices areexpected to increase, driven largely by cost-push factors.Nevertheless, inflation is expected to remain atmanageable levels during the year as capacity expansionand productivity improvements in the domesticeconomy will help contain price pressures. Monetarypolicy will, therefore, remain supportive of growth.While downside risks remain, the strongmacroeconomic fundamentals and diversified economicstructure will provide economic resilience.

Domestic DemandThe factors that supported domestic demand in 2005 areexpected to continue to provide further stimulus in 2006.Aggregate domestic demand is projected to increase further,by 5.9% in 2006, with private sector expenditure remainingthe main driving force. Private consumption is expected toincrease by 6.8%, exceeding the overall growth rate for theseventh consecutive year. Consumers are expected tobenefit from higher income following the expectedimprovement in the economy and employment conditions,as well as higher primary commodity prices. While interestrates have risen, the ability of households to borrow has notbeen impaired as rates continue to remain at low levels.Further, although household debt has been on an increasingtrend, the ability of the household sector to service its debtremains sustainable amidst continued growth in householddisposable income. Malaysia’s relatively large young workingpopulation with higher propensity to consume will furtherunderpin consumer demand. Therefore, consumptiongrowth is expected to be driven mainly by income growthand demographic factors, with credit conditions playing asupportive role. Notwithstanding the sustained highconsumption growth, Malaysia’s nominal privateconsumption-to-GDP ratio (43.7%) continues to be one ofthe lowest in the world. These indicators point to sustainedincreases in private consumption.

While private consumption is an important source ofgrowth in domestic demand, private investment isplaying an increasingly strong supportive role insustaining economic growth over the longer term. In2006, favourable external and domestic demand wouldprovide the impetus for private investment to grow by10%. Given the steady improvement in corporatebalance sheets, firms would continue to be able to fund

Growth is expected tostrengthen further in 2006.Underpinned by strengtheningexports and resilient domesticdemand, real GDP is forecast toexpand at a faster rate of 6%.The private sector would providethe main impetus to growth forthe fourth consecutive year.

Current indicators suggest that the upturn in the globalsemiconductor industry, which began in the second halfof 2005, would gain momentum in 2006. Malaysia isexpected to benefit from this favourable developmentwith a stronger growth in manufactured exports,particularly in the computer and semiconductorsegments. Domestic demand would be driven by theprivate sector for the fourth consecutive year ashousehold spending remains an important source ofgrowth. Equally significant, the continued expansion inprivate investment would ensure the long-term


93

Outlook and Policy

their investment activities by using internally generatedfunds. In addition, conditions in the financial marketscontinue to remain conducive for firms to use leverageor tap the capital market to fund their investments. Inview of the long-term importance of private investment,efforts have been undertaken to further enhance thecontribution of private investment to growth. TheGovernment continues to place emphasis on improvingthe public sector delivery system and has takenmeasures to reduce cost of doing business. Investmentincentives are customised to attract investment fromhigh technology and knowledge-intensive industries,particularly in the new growth areas within theagriculture, manufacturing and services sectors. Greateremphasis has also been given to human resourcedevelopment to meet the requirements of these newindustries. Recognising the increasingly competitiveglobal environment, the Government has alsointensified the promotion of domestic investment,particularly investment by the SMEs.

Private investment growth is expected to be broad-basedin 2006, with the bulk of the expenditure expected in themanufacturing and services sectors as well as in the oiland gas industry. Capital spending in the manufacturingsector, which accounts for a third of total privateinvestment, is expected to register a strong growth,supported by the upturn in the semiconductor industryand the high capacity utilisation in the sector.Manufacturing firms, particularly from the E&E andchemical and chemical products industries, are expectedto raise investment to improve efficiency and increaseproductivity to meet the stronger demand. In addition,the Government’s emphasis on high technology andhigher-skilled projects is expected to increase investmentin high value-added projects. The sustained high capitalintensity ratio of manufacturing projects approved inthese recent three years, which averaged RM324,136(2000-2002: average of RM315,249), is reflective of thiscontinuous shift towards higher value-added production.

In the services sector, stronger investment is expectedfrom the telecommunications, transportation and utilitiessub-sectors. In the telecommunications sub-sector, privatecellular operators are expected to continue investing toenhance network capacity and to intensify provision ofbroadband facilities due to the expected rise in demandfor 3G services. Meanwhile, capital expenditure in thetransport services industry is also expected to increase,mainly due to the continuation of the airlines’ fleetexpansion programmes and the development of portfacilities. In the utilities sector, capital expenditure is

While private consumptionremains an important sourceof growth in domesticdemand, growth in privateinvestment will be broad-based, across most sectors ofthe economy.

Table 3.2Real GDP by Expenditure (1987=100)

2005p 2006f 2005p 2006f

Annual change Contribution to real GDP growth(%) (percentage point)

Domestic demand1 7.3 5.9 6.6 5.5Private sector expenditure 9.5 7.4 5.7 4.6

Consumption 9.2 6.8 4.5 3.4Investment 10.8 10.0 1.2 1.2

Public sector expenditure 3.1 3.0 0.9 0.9Consumption 5.9 3.2 0.9 0.5Investment 0.4 2.7 0.1 0.4

Change in stocks -2.9 1.0

Net exports of goods and services 19.3 -5.4 1.5 -0.5Exports 8.4 8.9 9.8 10.7Imports 7.6 10.0 8.3 11.2

Real Gross Domestic Product 5.3 6.0 5.3 6.0

Note: Figures may not necessarily add up due to rounding.1 Excluding stocks.p Preliminaryf Forecast



94

expected to remain high due to the ongoingimprovement of water treatment and distribution plantsas well as the development of power plants, which willcome on stream within the next two years.

Investment in the mining sector is expected to increasestrongly, attributable to higher capital spending by theprivate oil companies operating in Malaysia. Whilespending on exploration and survey are mainly led by thecompanies involved in deepwater and ultra deepwaterdiscoveries, companies involved in non-deepwaterdiscoveries are moving from exploration activities todevelopment activities and the setting up of productionfacilities. Meanwhile, capital expenditure in theconstruction sector will be supported by the ongoingconstruction of privatised roads and residential projects.

In 2006, a modest increase in public sector expenditureis expected when the implementation of the NinthMalaysia Plan commences in April 2006. Publicconsumption is expected to increase moderately by3.2%, due mainly to higher expenditures on suppliesand services to further improve the public sector deliverysystem to support private sector activities. Prudentexpenditure management by the Government hasprovided the flexibility to focus on developmental effortsin both the rural and urban areas. The largest allocationof development expenditure in 2006 has been for theeconomic sector, namely the development andimprovement of agriculture, industry and infrastructuresectors, to achieve balanced and comprehensiveeconomic development. Meanwhile, the provision ofbetter essential services, such as education, healthcareand housing, remains the main agenda of developmentin the social sector. The capital outlays by the NFPEs areexpected to increase further in 2006, albeit at a slowerrate, following the strong expansion a year earlier. Thebulk of the capital spending would be undertaken bythe three largest NFPEs, namely Petroliam NasionalBerhad (PETRONAS), Tenaga Nasional Berhad (TNB) andTelekom Malaysia Berhad (TM). With new discoveries ofoil and gas fields in recent years and new productionsharing contracts signed, PETRONAS’ capital outlayscontinue to be dominated by its upstream investmentactivities. Improvement and expansion oftelecommunication infrastructure and power generationand distribution would be the main investment activitiesfor TM and TNB respectively. As a result, publicinvestment is projected to increase by 2.7%.

Sectoral OutlookOn the supply side, growth in 2006 is expected to bebroad based and balanced, supported by expansion in allsectors of the economy, including construction. About

5.7 percentage points of the 6% GDP growth wouldemanate from the two key sectors, namely themanufacturing and services sectors, which account forabout 90% of the economy. Growth in themanufacturing sector is expected to strengthen in linewith the upturn in the global semiconductor cycle, whilethe services sector is expected to sustain its strongperformance supported by higher trade-related activities,and continued increase in consumption and businessactivities. The commodities sector is expected to see amore broad-based growth, with improvements in theproduction of rubber, crude oil and the other agriculturesegments, while crude palm oil output consolidates afterthree years of strong performance. The constructionsector is expected to register a positive growth in linewith the improvement in the civil engineering segment.

Growth in 2006 is expected tobe broad-based and balanced,supported by expansion in alleconomic sectors, includingconstruction.

Value-added growth in the manufacturing sector isexpected to strengthen to 7% in 2006 (2005: 4.9%).The growth would be led by the electronics andelectrical (E&E) segment, and further reinforced by thestrong external demand for resource-based productssuch as chemical, petroleum, and rubber products. Inthe domestic-oriented industries, the improvement inthe construction-related industries would further lendsupport to the expansion of the sector.

In the E&E sector, the latest assessment is that the recoveryin the global semiconductor industry that began since mid-2005 will continue to gain strength into 2006. The view ofan up-cycle in the industry is supported by forward-looking

Table 3.3Real GDP by Sector (1987=100)

2005p 2006f

Annual change (%)

Agriculture 2.1 2.0

Mining 0.8 5.0

Manufacturing 4.9 7.0

Construction - 1.6 1.0

Services 6.5 6.0

Real GDP 5.3 6.0

p Preliminary

f Forecast

Source: Department of Statistics, MalaysiaBank Negara Malaysia

C03 Outlook & Policy pg86-106 4/14/06, 14:5694

95

Outlook and Policy

indicators such as the improvement in the book-to-bill ratioof semiconductor equipment since March 2005, and thesustained growth in the US new orders and unfilled ordersfor electronics. Industry experts also share the view that therecovery would be mild and sustained, with the globalsemiconductor sales projected to expand by 7.9 ~ 9.5% in2006 and 7 ~ 10.6% in 2007 (2005: 6.8 ~ 7%). Thecurrent cycle would be supported by accelerating demandfrom the Asia-Pacific region, particularly for consumerelectronic gadgets and the stronger ICT-related investmentin the industrial countries.

The up-cycle in the global semiconductor sector in 2006 isexpected to be broad-based, supported by expansion in allproduct segments, including computers, consumerelectronics, communication and the automotive segments.The wider application of chips, particularly in theautomotive segment, as well as the higher chip content inelectronic devices will further support the global demandfor semiconductors. Given Malaysia’s competitive strengthin the computer and semiconductor segments, Malaysia ispoised to benefit from this broad-based growth in 2006.During the year, continued re-investment in E&E andexpansion projects undertaken by existing multinationalelectronics companies in Malaysia would increase theproduction capacity and enable Malaysia to leverage onthe upturn in the global semiconductor industry.

The services sector would continue to remain strong in2006 recording a sustained growth of 6%. During theyear, the services sector growth would be led by theintermediate services segment, while the final servicessegment will expand at a moderate pace in line with thetrends in private consumption.

In the intermediate services segment, the expectedhigher growth in manufacturing exports and intra-regional trade will further strengthen the growth of thetransport, storage and communication sub-sector. Ofsignificance, trade-related activities such as logistics andother services allied to transportation such as ports andhaulage activities are forecast to support growth in thetransport sector. These are also part of manufacturing-related activities that would be given emphasis underthe Third Industrial Masterplan, which will beimplemented beginning 2006 until 2020. Thetelecommunications industry, meanwhile, wouldcontinue on a sustained strong expansion driven mainlyby the cellular segment amidst the increased subscriberbase and expansion in third generation (3G) services bythe major telecommunication companies.

Meanwhile, demand for trade financing and other typesof credit by businesses, especially from the small- and

medium enterprises (SMEs) are expected to increase inline with the more robust manufacturing growth andtrade activities. The higher lending activities, in additionto innovative financial products and services offered bythe banking sector, would result in increased interestand fee-based income. The expected establishment ofmore Islamic banks and takaful companies during theyear would further enhance the growth in the finance,insurance and real estate and business services sub-sector. Efforts by the Government in promoting newareas of growth, such as IT-related services and sharedservices and outsourcing (SSO) activities, includingbusiness process outsourcing, are also expected to yieldpositive results and contribute to higher growth in thebusiness services segment.

The final services segment is expected to expand at amoderate pace in line with private consumptionactivities during the year. Nevertheless, tourism activitiesare expected to gain further momentum amidst theintensification of promotional activities by both thepublic and private sectors in preparation for the VisitMalaysia Year (VMY) 2007. The Government plans toachieve a target of 17.5 million tourist arrivals in 2006and more than 20 million tourists during the VMY 2007(2005: an estimate of 16.4 million). As a result, higherspending by tourists as well as domestic householdswould support the wholesale and retail trade, hotelsand restaurants sub-sector, which is expected to expandat a sustainable rate of 6% in 2006. Consequently, theservices sector will continue to be one of the mainengines of growth, besides the manufacturing sector, insupporting the overall growth of the economy.

The agriculture sector is expected to record a growthof 2% in 2006. Crude palm oil, which accounts forabout one-third of the value-add in the agriculturesector, is expected to increase by 1.6% (2005: 7%).Output would be affected by biological yield down-cycle after three successive years of strong outputgrowth. The moderation in output growth is also duepartly to expectations of a slower expansion inmatured areas (+0.9%; 2005: 5.3%). Nevertheless,output of rubber and other agriculture produce areexpected to recover from the weak performance in2005, which was affected by the poor weatherconditions. Rubber production is expected to increaseby 2.3% to 1.15 million tonnes in 2006 assmallholders continue to intensify tapping activitiessupported by the expected strong rubber prices.

In the mining sector, growth is expected to strengthento 5% in 2005, driven mainly by an expectedimprovement in crude oil output (including condensates:


96

3.9%, 2005: -4.9%). Growth would also be supportedby the moderate increase in natural gas output duringthe year (6.9%; 2005: 11.3%) as the utilisation rate atthe MLNG plants in Sarawak approach close to itsinstalled capacity.

After two consecutive years of decline, the constructionsector is expected to turn around and register a positivegrowth of 1%, led mainly by the improvement in the civilengineering sub-sector. The civil engineering sub-sectorwould be supported by higher construction activity in theoil and gas industry as well as in public projects with thecommencement of new projects under the NinthMalaysia Plan. Meanwhile, the residential and non-residential sub-sectors are expected to expand furthersupported by the attractive financing conditions and briskbusiness activities. The residential sub-sector is expectedto expand at a moderate rate following the strongexpansion in the last few years, while the non-residentialsegment would continue to improve, benefiting from thefavourable business environment which has resulted inhigh occupancy rates of retail and office space.

Prices and EmploymentThe key supply-side factors that have kept inflation uptowards the end of 2005, namely the high prices of energyand non-energy commodities are expected to persist in2006. Cost-push inflation is expected to rise following theincrease in the price of petroleum products by theGovernment on 28 February 2006. Demand pressurescould also provide some modest upward impetus toinflation as domestic economic activity is expected to besustained in 2006. In the absence of further priceadjustments, inflation is expected to peak in the first halfof 2006. Subsequently, inflation is likely to ease in thethird quarter of 2006 following the lapse of the effects ofprice adjustments that were implemented in 2005. For2006 as a whole, the average rate of inflation is estimatedto be in the range of 3.5% to 4%.

There remains however considerable uncertainty to theinflation outlook with inflation prospects affected by bothexternal influences and domestic cost-push pressures.With no further fuel price increases during the year, themain uncertainty relates to the degree and extent of thesecondary effects of the pass-through impact of previousincreases in fuel prices that have yet to feed through thesupply chain. The sustained high level in international oilprices could put an upward bias on input costs fordomestic producers. An upward revision of electricity tariffswould also affect the inflation conditions.

To a certain extent, the upside risks to domestic inflationcould be mitigated by the on-going structural

1999 2000 2001 2002 2003 2004 2005 2006f

Graph 3.5 Consumer Price Index

Annual change (%)

f Forecast

0

1

2

3

4

5

improvements in the Malaysian economy. Theexpansion of capacity by businesses and the continuedincrease in productivity would augment the outputpotential of the economy and prevent a tightening inthe markets for factor inputs. Sustained competitionamongst businesses could also mitigate inflationarypressures.

In tandem with the stronger growth of the domesticeconomy in 2006, growth in employment is expectedto increase with more job opportunities in most sectorsof the economy. Unemployment is therefore, expectedto remain low at 3.5%. In addition to the ongoingefforts to improve the productivity of the labour force,the Government would also continue reviewing itspolicy on labour, with a view to reducing the shortageof skilled workers and closing the gap between theoutput of the educational system and the requirementsof the job market.

Balance of PaymentsThe balance of payments position is expected toremain strong in 2006 with a continued largecurrent account surplus (17.2% of GNP), supportedby a strong trade balance. Strong export growth(12.5%) underpinned by continued expansion inmanufactured exports, in particular exports ofconsumer electronics, will contribute to a largersurplus in the trade account. Growth in commodityexports is also expected to be sustained by highprices. In the financial account, the steady inflow offoreign direct investment (FDI) would alsostrengthen the overall balance of payments.

The growth in exports of manufactured goods isexpected to strengthen to 12% in 2006 (2005:10.1%) as the E&E sector rides on the upturn in theglobal semiconductor industry. Exports of E&E wouldbe supported by the strong global demand for


97

Outlook and Policy

computers, particularly for mobile computers withwireless functions, as well as the expectedimprovement in global semiconductor demandarising from wider applications of chips in varioussegments. At the same time, exports of resource-based products such as chemicals, rubber andpetroleum products are also expected to performfavourably, expanding at a strong pace underpinned

by the firm global demand as well as higher prices inline with the expected increase in commodity pricesduring the year.

The increase in commodity prices would also be reflected inhigher export receipts from agricultural commodities,which is expected to record a double-digit growth of 10.5%in 2006 (2005: 3.4%). Receipts from palm oil exports areexpected to increase by 6.3% (2005: -5.3%) amidst thehigher export price of RM1,550 per tonne in 2006 (2005:RM1,456). The increase in price would be mainly demand-driven, supported by higher global demand, particularlyfrom new users for palm-based biodiesel, as well as fromtraditional buyers. The expected higher demand from PRChina is also encouraged by the abolition of the importquota on palm oil and a standardized import duty structurefor all edible oils beginning 1 January 2006. Similarly, growthin exports of rubber is expected to strengthen further by21.6% (2005: 11.3%) benefiting from a significant increasein rubber prices (620 sen per kilogramme; 2005: 513 senper kilogramme). The strong outlook for rubber prices in2006 is a result of expectations of continued strongdemand, particularly from PR China; constraints in globalnatural rubber output; and the impact of strong crude oilprices on the price of synthetic rubber, which is apetrochemical product. For the first two months of 2006,the price of SMR20 increased by 46.2% to average 683 senper kilogramme.

Mineral exports are expected to expand further by18.6%, due to higher receipts from crude oil (includingcondensates) and liquefied natural gas (LNG). Theincrease would be supported by higher prices as well asan increase in volume, in line with the expected increasein production of these commodities. For the year as awhole, the export price of Malaysian crude oil is projectedto average USD62 per barrel (2005: USD55.93 perbarrel), or 10.9% higher from the level in 2005. In thefirst two months of 2006, the price of the Malaysian TapisBlend had averaged USD65.40. Crude oil prices wouldcontinue to be influenced by fundamental factors as thegap between global supply and demand narrows furtheramidst the improved global outlook. Sentiment on oilprices would also be affected by geopolitical factors thatmay disrupt global supply. Similarly, in line withexpectations of higher energy prices in the global market,LNG export prices are projected to rise further toRM1,120 per tonne (2005: RM947 per tonne). Amidstthe higher prices, and an increase in demand fromPR China, India and the United States, LNG exports areestimated to increase by 24.6%.

Import growth (13.4%) is expected to emanate fromhigher imports of intermediate goods, consonant with

The current account surplus isexpected to remain large,supported by a strong tradebalance. FDI inflows areexpected to increase, supportedby stronger demand arisingfrom the high capacityutilisation rate as well asinvestments in new industries.Reflecting a greater interest bycompanies to diversify abroad,overseas investment byMalaysian companies is alsoforecast to increase in 2006.

Table 3.4Balance of Payments

2005e 2006f

RM billion

Goods 126.5 138.4Trade account 99.8 108.3

Exports (% annual change) 11.0 12.5Imports (% annual change) 8.5 13.4

Services -10.2 -10.3

Balance on goods and services 116.2 128.1

Income -21.5 -23.7Current transfers -17.0 -15.0

Current account balance 77.8 89.4% of GNP 16.4 17.2

Financial account -42.0 -

Errors and omissions -23.0 -of which:

Foreign exchange revaluationloss -15.5 -

Overall balance 12.8 -

Note: Numbers may not necessarily add up due to rounding.e Estimatef Forecast



98

the forecast of stronger production and exports of themanufacturing sector, in particular, the electrical andelectronic segment. Capital imports are expected tostrengthen (11.5%) in line with capacity expansion inthe manufacturing, services and oil and gas sectors.Higher capital imports in the services industry isexpected to be led by enhancement in networkcapacity by telecommunications companies and theexpansion of investment activities by the airlines andshipping companies. Increased exploration andproduction activity in the oil and gas industry followingthe discovery of new fields will also result in anincrease in capital imports.

The services account deficit is expected to be sustainedat 2% of GNP. Outflows in the transportation accountwould be higher, in line with higher volume of trade.Meanwhile, tourism earnings would continue to remainas the largest contributor to services earnings. Theimprovement in the other services deficit is expected toemanate from exports of communications, business andcomputer and information services. Higher receipts fromcomputer and information services are consonant withthe increasing trend in outsourcing activities, provision ofgroup support and back-office processing services.

The income account deficit is projected to besustained at 4.6% of GNP. The deficit is attributableto higher profits and dividends accruing tomultinationals from their investments in Malaysia, inline with the strong export performance of theelectrical and electronics industry as well as the oiland gas industry. Profits and dividends accruing toMalaysian companies investing abroad are alsoexpected to be higher. Malaysian companies withinvestments in the oil and gas, plantation,infrastructure and utilities sectors are expected toprovide a higher contribution to income inflows.

The financial account is expected to improve,supported by long-term capital inflows, particularlyFDI. FDI is expected to increase, with a large portioncontinuing to be in the form of reinvestment by theexisting MNCs in Malaysia. Following the higher levelof FDI approved by MITI in 2005 (RM17.9 billion;2004: RM13.1 billion), particularly from the US, Japanand Singapore, FDI in the manufacturing sector isprojected to increase, with the implementation ofprojects mainly for higher-end electrical andelectronic activities. Similarly, investment in theservices sector is expected to remain high, supportedby further liberalisation and entry of new players inthe finance, insurance, real estate and businessservices sub-sector, as well as the expansion ofoperations in the wholesale and retail trade, hotelsand restaurants sub-sector. Meanwhile, the oil andgas sector will continue to receive sizable inflows,mainly for extraction and production activities,following several discoveries of new oil fields.

Investment abroad by Malaysian companies is expected toincrease further in 2006 as companies diversify andposition themselves globally to provide greater synergy totheir corporate activities. These investments will continueto be broad-based, and channelled into the oil and gas,manufacturing, utilities, construction, and services sectors.

MONETARY POLICY IN 2006

Monetary policy in 2006 would continue to emphasiseeconomic growth in an environment of price stability.The thrust of macroeconomic policy is thus to provide asupportive environment to promote a sustainable levelof economic activity in the medium term.

Economic growth prospects for the global and regionaleconomies are expected to remain bright despite high oiland commodity prices. This is expected to be furtherreinforced by the strengthening of the global electronic up-cycle. The expansionary impact from the external sector on

Table 3.5Exports and Imports

2005p 2006f

RM billion

Gross exports 533.8 600.6(% annual change) 11.0 12.5

Manufactures 429.9 481.4(% annual change) 10.1 12.0of which:

Electronics 208.2 235.1(% annual change) 10.4 12.9Electrical products 74.5 84.7(% annual change) 8.9 13.6Chemicals & chemical products 29.7 32.6(% annual change) 7.0 9.6

Minerals 52.3 62.0(% annual change) 27.1 18.6

Agriculture 37.4 41.3(% annual change) 3.4 10.5

Gross imports 434.0 492.3(% annual change) 8.5 13.4

Capital goods 60.7 67.7(% annual change) 9.5 11.5

Intermediate goods 308.3 351.8(% annual change) 7.2 14.1

Consumption goods 24.6 26.1(% annual change) 5.9 6.0

p Preliminaryf Forecast



99

Outlook and Policy

the Malaysian economy is expected to remain strong.Building on the momentum gained in the second half of2005, GDP growth is expected to improve further in 2006.Stronger export performance is expected to sustaindomestic consumption at a strong pace while thefavourable external and domestic demand conditionswould in turn provide further impetus for increasedinvestment activity.

With the economy poised to register a firmperformance, the main challenge for monetarypolicy in 2006 is to ensure that price expectationsare well contained, while financing conditions aresupportive of investments. The prospects forinflation would depend on several factors, bothforeign and domestic. On the international front, thedirection of international oil prices will continue tobe a major concern. To date, the subsidies on fuelsand energy products have somewhat sheltered theeconomy from the full impact of global oil priceshocks. While there would be no further fuel priceincreases during the year following the recentadjustment to fuel prices, some uncertainty remainson the degree of the second round impact on thegeneral price level. The sustained high level ininternational oil prices could put an upward bias oninput costs for domestic producers. However, factorssuch as capacity expansion and continuedimprovements in productivity by businesses, as wellas sustained competition amongst firms areexpected to mitigate inflationary pressuressomewhat. Taking these factors into account,inflation pressures in Malaysia are expected toremain manageable, with the inflation rate projectedto average between 3.5% to 4% in 2006.

To align monetary conditions to the currentenvironment, the OPR was raised by 25 basis pointsto 3.25 percent on 22 February. The Bank willcontinue to conduct monetary policy in a mannerthat will constantly balance the need to rein ininflationary expectations while remaining supportiveof growth. Monetary policy would thus respond tonew developments, both domestic and international,that would have implications for the medium-termprospects for price stability and sustainableeconomic growth.

The shift to a managed float exchange rate regimedoes not entail a change in the monetary policyframework or operations. Monetary policy remainsfocused on domestic considerations with the OPR asthe signaling mechanism to achieve policyobjectives. Interest rates, therefore, will not be used

as an instrument to influence capital flows or theexchange rate. Notwithstanding the two-wayintervention operations to smoothen exchange ratevolatility and excessive exchange rate movementsinduced by large short-term capital flows, the Bankwould allow the ringgit exchange rate to bedetermined by economic fundamentals and marketconditions. This is consistent with the statedexchange rate policy objective of ensuring that theringgit does not become overvalued or undervaluedin a sustained manner.

As in 2005, the Monetary Policy Committee (MPC) isscheduled to meet eight times this year, with theoption to hold additional meetings when necessary.The calendar for the MPC meetings, together withthe associated schedule of releases for the MonetaryPolicy Statement, was published on the Central Bankwebsite in December 2005. The Bank will continueto undertake additional initiatives in 2006 toenhance communication in promoting greaterunderstanding of the objectives, processes andconduct of monetary policy.

FISCAL POLICY IN 2006

The 2006 Budget is the first annual Budget for theNinth Malaysia Plan (2006-10). Fiscal policy in 2006will thus focus on initiatives to generate greaterquality growth in the near term to provide a strongfoundation for long-term sustainable growth. The2006 Budget put forth various measures to enhancenational resilience and the ability to meet emergingexternal challenges arising from rising oil prices,higher global interest rates and increasing globalcompetition.

The 2006 Budget projections were broadly in linewith the Government’s prudent fiscal stance. Withthe economy regaining its growth momentum, theFederal Government’s overall financial position isexpected to strengthen further in 2006. The fiscaldeficit has been budgeted to reduce further toRM18.4 billion or 3.5% of GDP from 3.8% in 2005.In addition, after taking into account the potentialnet revenue loss of RM1 billion arising from taxmeasures announced in the 2006 Budget, the fiscaldeficit will be at RM19.4 billion or 3.6% of GDP.

Total Federal Government expenditure (excludingcontingent reserves) was budgeted at RM134.7billion, representing a moderate increase of 5%from the actual 2005 expenditure (2005: +6.8%). Interms of development expenditure, special attention


100

was given to both the economic and the socialsectors in an effort to reduce income disparitiesbetween the rural and urban areas. In addition toimproving the efficiency and effectiveness of the

Table 3.6Federal Government Finance

RM billion % change

2005p 2006B 2005p 2006B

Revenue 106.3 114.61 6.9 7.8Operating expenditure 97.7 101.2 7.1 3.6Current account 8.6 13.3Gross development expenditure 30.5 33.5 5.8 9.7Loan recoveries 3.3 0.7

Overall balance -18.7 -19.4(% of GDP) -3.8 -3.61 Includes net revenue loss of RM1 billion arising from the tax measures announced

in the 2006 Budget.p PreliminaryB BudgetNote: Numbers may not add up due to rounding.

public delivery system, the Government introducedseveral measures to stimulate private investment,including enhancing the business-friendlyenvironment through wide-ranging tax and non-taxmeasures to improve business competitiveness;diversify sources of growth into new areas that havehigh growth potential; augment human capitaldevelopment; further develop the capital market aswell as strengthen the development of small andmedium-sized enterprises. Key measures announcedin the 2006 Budget are summarised in the whitebox.

The Government’s primary objective for fiscal policycontinues to be to ensure a sound and sustainableFederal Government financial position over themedium term. The focus would be on maintainingthe fiscal deficit at an appropriate level where abalance between sustaining economic growth andpreserving long-term fiscal sustainability is achieved.

First Strategy: Implementing Proactive Government Measures to Accelerate Economic Activity

Policy area Measures

• Allow financially autonomous statutory bodies to determine their own schemes of service.

• Expedite the issuance of visas, particularly for knowledge workers and professionalsin the fields of ICT and financial services.

• Expand the use of ICT to facilitate dealings between the public and Government.

• Introduction of new modalities of the Government procurement system in efforts toreduce cost, enhance transparency and ensure value for money.

Second Strategy: Providing a Business-Friendly Environment

• Provide group relief to all locally incorporated resident companies.

• Allow accumulated losses and unabsorbed capital allowances during the pioneerperiod be carried forward.

• Treat income of investment holding company listed in Bursa Malaysia as business income.

• Allow estimated losses on low-cost houses to be offset against estimated profits ofother real property development projects.

• Exempt stamp duty and real property gains tax on mergers and acquisitions ofcompanies listed on Bursa Malaysia.

• Allow tax deductions on legal, valuation and consultancy expenses incurred in theestablishment of Real Estate Investment Trusts.

• Allow tax deductions for discounts on an accrual basis until the maturity of thebonds for corporate issuing bonds.

Improving further theGovernment’sdelivery andprocurementsystems

Reducing cost ofdoing business

Strengthening thecapital market

Key Measures Announced in the 2006 Budget


101

Outlook and Policy

• Increase Fund for Food by RM300 million.

• Establish a new company to develop forest plantations commercially.

• Khazanah Nasional to establish the National Agriculture and Food

Corporation with a capital of RM500 million.

• Set up the Malaysian Life Sciences Capital Fund, with RM100 million from theGovernment.

• Extend tax incentives to qualifying companies operating outside MSC.

• Reduction of 50% for stamp duty charged on loans of up to RM1 million taken bysmall and medium-sized enterprises (SMEs).

• SME Bank to set up a venture capital fund of RM1 billion to finance SMEs.

• Establish Bumiputera property trust foundation, Yayasan Amanah HartanahBumiputera with an initial capital of RM2 billion.

Third Strategy: Developing Human Capital

• Automatic child relief for each child studying in local or recognised institutions ofhigher learning.

• Extend the child relief to disabled child pursuing tertiary education.

• Extend the scope of individual tax relief of RM5,000 for further education toprofessional courses, accountancy and law.

• Allow tax deductions on expenses incurred for development and regulatorycompliance of new courses by IPTS.

• Double deduction to public listed companies on the allowances paid to participantsunder the Unemployed Graduates Training programme.

Fourth Strategy: Enhancing the Well-Being and Quality of Life of the Rakyat

• Reduction of road tax by 40% for private diesel vehicles exceeding 1,600 cc, exceptin Sarawak.

• Allow husband and wife to each claim one property for exemption of Real PropertyGains Tax.

• Increase tax rates on liquor and cigarettes.

• Extend tax incentives to companies providing energy conservation services.

Modernising theagriculture sector

Developing the ICTand biotechnologysectors

Others

Intensifying humancapital development

Reducing financialburden of Malaysians

Others

FINANCIAL SECTOR POLICY IN 2006

Against the background of ongoing evolution anddevelopments that are shaping the financial landscapeand challenges brought about by economic and financialliberalisation, the thrust of policies for the financial sectorin 2006 will focus on further strengthening the role,capacity and contribution of the financial sector in the

economic transformation and, hence, the successfulrealisation of strategies outlined in the Ninth MalaysiaPlan. Specifically, policies will be geared towardspreserving the stability that has been sustained over theyears by further strengthening institutional and systemicresilience and competitiveness, maintaining an efficientand effective financial infrastructure, and promoting aconducive regulatory and supervisory environment that


102

fosters a progressive, dynamic and resilient financialsystem. These efforts will be complemented by theongoing consumer education initiatives and protectionframework to ensure well-informed and empoweredconsumers as well as fair and equitable financial dealingsamidst a stable socio-economic environment. Of equalimportance, particularly in light of the structural changesthat are taking place in the domestic economy, emphasiswould also continue to be accorded to further improvingthe efficiency of accessibility of various segments in theeconomy to financing to be able to contribute effectivelyto the economic development and transformation.

With the Financial Sector Masterplan already in itssecond phase, the locally-incorporated foreign banks(LIFBs) are expected to become more integrated withinthe domestic economy to meet the growingrequirements of the banking public. The operationalflexibility accorded to the LIFBs through theestablishment of additional branches would enhanceaccessibility of banking services to larger segments ofsociety including those outside the urban areas. Theoperational flexibility will also allow the LIFBs to betterunderstand the requirements of the different segmentsof the economy thereby enabling them to play a moredirect role in economic development. At the same time,the expanded network of the LIFBs would also providethe public with a broader range of products andservices. As the LIFBs begin to operationalise the newbranches, the Central Bank will monitor theircontribution and effectiveness.

While the progress in the area of capacity and capabilitybuilding has thus far been commendable, thedevelopment of a pool of talented and skilled personnelremains a priority. With the pace of evolution in thefinancial sector becoming faster and that there isgrowing demand for differentiated and more complexfinancial instruments by the economy, the need for thefinancial sector to have the intellectual and competenthuman resources becomes even more critical, not onlyin meeting these demands but in ensuring the readyavailability of best talents and high calibre professionalsto drive the banking industry forward. Investment insuch talents will create value and improve theperformance of the institution. While there is a shortagein such talents in Malaysia, in view of the fast pace ofdevelopments, the advanced financial systems andmarkets around the world have nurtured specialists invarious aspects of banking operations. To enable theMalaysian banking industry to tap these foreign talentsto strengthen the domestic industry and nurturedomestic capabilities, especially in newly emergingareas, review is already underway to provide amongst

others greater flexibility for banking institutions in theemployment of such expertise.

The emergence of investment banks is envisaged to pavethe way for further development and maturity of theMalaysian capital market. While the development willcreate new business opportunities, particularly cross-border activities, new risks and challenges can beexpected to emerge. Given the nature of investmentbanking activities, efforts in 2005 have been focusedtowards the harmonisation of regulations and theemplacement of a mechanism for regulatory andsupervisory coordination and cooperation between BankNegara Malaysia and the Securities Commission in orderto alleviate overlaps in functions and to ensureconsistency in policies and regulations for the investmentbanks. As these have already been completed, policyinitiatives in 2006 will focus on the operationalisation ofthe investment bank framework. Other than themerchant banks, which are existing players, prospectivenew players will appear arising from the transformationof universal brokers and discount houses into investmentbanks. Emphasis will be accorded towards assessing thestrength and capability of these new players. Given therigorous requirements which investment banks have tocomply, due diligence examination will be conducted onthese prospective players aimed at ensuring that the newplayers have the pre-requisites to assume their new roles.Apart from increasing competition, it is also envisagedthat the entry of new players into the industry willincrease staff mobility and thus the need for continuinghuman resource development. Meanwhile, theintegration of the banking and capital market activitiesunder a single entity will entail wider risks that need to beappropriately aggregated and managed in order toensure financial sector resilience, soundness and stability.

Promoting the soundness and stability of the bankingsystem remains high on the agenda of Bank NegaraMalaysia not only for the development of the sector, butalso to promote sustained growth in economic activityand national prosperity. In 2005, much emphasis hadbeen directed at promoting sound risk managementpractices and corporate governance standards withinthe banking industry. While these efforts will continueto be pursued in 2006, greater attention will be directedtowards strengthening institutional capacity of marketplayers to withstand any potential financial shocks ormacroeconomic imbalances and to have the agility toembrace future challenges. In order to prepare for this,a survey was carried out in 2005 to assess the state ofreadiness of the banking institutions to cope withemergencies and unexpected disruptions to theiroperations. The response and information gathered


103

Outlook and Policy

from this exercise has been beneficial and will be usedas input in the formulation of the guidelines onbusiness continuity management for the banking sectordue for issuance in 2006. The guidelines aim atreinforcing the importance of sound business continuitymanagement and at ensuring that banking institutionsare well-equipped with recovery capabilities necessaryfor the near or instant continuation of their criticalbusiness functions in the event of a major disruption.

In an environment where changes are constantly takingplace, the responsibility of maintaining financial systemstability is no longer the sole responsibility of the CentralBank. The banking industry, together with its customers,shareholder and other stakeholders are also accountablefor their actions and share the task of maintaining stabilityof the overall system. In realising this objective, the CentralBank has finalised the review of the shareholding policywhich is expected to be implemented this year. This policyaims at broadening the role of shareholders in overseeingthe performance and behaviours of their institutions andthe effectiveness of management in conducting thebusiness in a responsible, efficient and professionalmanner. It is envisaged that the greater participation ofinstitutional investors in the banking sector will contributetowards further developments of these aspects of thebanking institutions.

As the implementation date for the new Basel CapitalAccord (Basel II) draws near, consultations andcollaborative efforts with the banking industry willintensify, to allow both the regulator and bankinginstitutions to identify and deliberate on critical issuesand monitor the preparatory process to ensure thesmooth implementation of Basel II. Feedback from theconsultations will be used as input to the conceptpapers on Basel II. Given the complexity andextensiveness of Basel II requirements, a series ofconcept papers will be issued with the first being on thebasic approaches for credit and operational risks.

Malaysia remains committed towards aligning itsaccounting practices to international standards throughthe adoption of the new and revised Financial ReportingStandards (FRS). Of significance, is the proposedFRS 139 which specifies new accounting rules onrecognition, measurement and classification of financialinstruments in the financial statements, rules on assetimpairment and provisioning, and new requirements forthe use of hedge accounting. The adoption of theFRS 139 would in practice involve a considerable degreeof judgement and estimation, complex systems andprocedures as well as reliance on internal valuationmodels by banking institutions particularly for the

provisioning and measurement of financial instruments.Hence, the ability of banking institutions inimplementing the FRS 139 would depend on theirinternal capabilities and the availability of the necessaryinfrastructure to ensure not only that their financialstatements continue to portray a true and fair view butare sufficiently credible to be used in the context ofsupervisory assessment. In this regard, Bank NegaraMalaysia will be issuing a guideline that outlines the keycapabilities and expectations that must be met bybanking institutions prior to the adoption of theFRS 139. The scope of the supervisory expectationsincludes requirements pertaining to credit review andimpairment provisions for effective implementation ofprovisioning requirements in banking institutions,recognition and de-recognition for sell and buy backagreements (SBBA) and financing sold with recourseunder Islamic contracts and fair value option onfinancial instruments.

Continuous and comprehensive surveillance isimmensely crucial to ensure the accurate and timelyidentification and assessment of financial systemvulnerability and fragility. Given the closeinterconnectivity between the banking sector and theeconomy, the approach to and scope of surveillance bythe supervisors has, in recent years, been broadened toencompass macro and micro surveillance and theassessment of key financial soundness indicators. At themacro level, initiatives will be focused on furtherenhancing the scope and depth of the surveillanceframework by employing a broader range of forward-looking tools for monitoring the financial and economicenvironment. This involves assimilating developments inthe various components in the economy and financialmarkets with the banking sector and assessing theimplications. An area that has gained much attention inrecent periods is the growing exposure of the bankingsector to the household sector and the rapid increase inhousehold indebtedness. While this development hasthus far been within prudential levels, the Central Bankwill remain vigilant to ensure the sustainability of thehousehold sector and to preserve financial stability.These include measures to further strengthen the riskmanagement of banking institutions in managing theirexposure to this sector, as well as to prevent over-leveraging by households. This is critical to ensure thecontinued capacity of the household sector incontributing towards sustained economic expansion.

With the ongoing introduction of new financialinstruments, the task of ensuring effective surveillanceby supervisors becomes more complex and demanding.Going forward, more rigorous surveillance will also have


104

to be undertaken at the institution level. In this regard,the stress test framework will be enhanced to ensure itsrobustness as a tool in assessing the resilience ofbanking institutions to a broad range of economic andfinancial shocks. Anecdotal evidence has suggested thatknowledge and understanding of events leading up tocrises and instabilities in the past provide invaluableinformation to supervisors. As such, it is envisaged thatwith the early detection of emerging vulnerabilities andweaknesses within a banking institution, timely andappropriate intervention should be instituted to preservethe stability of the system.

The growing complexity in the group structure offinancial institutions has called for a more holisticsupervisory approach to facilitate more accurateassessment of a financial conglomerate’s risk exposuresand the adequacy of the risk management systems atthe group level. Taking into consideration the feedbackfrom the industry following the issuance of the firstconcept paper, a second concept paper on theframework for the consolidated supervision of financialconglomerates will be issued in 2006.

On the supervisory front, focus will also be accorded tofurther strengthen the capability and capacity ofsupervisors to better cope with the changing and morechallenging environment in the financial markets andeconomy. This is particularly important in view of theimplementation of the Basel II and as the Central Bankmoves towards the adoption of principle-basedregulatory framework where judgement will be a keyelement in the supervision and assessment of theresilience of a banking institution. The rigorousness ofthe analytical process under the Basel II framework isundoubtedly demanding from the supervisoryperspective, particularly in developing the appropriateresponse and assessment framework on theseprocesses. Supervisory attention will need to ensure thatthe analytical processes are undertaken to supportdecision making rather than merely meeting regulatoryexpectations or according excessive emphasis onvalidating the detailed quantitative and statisticalprocedures. It is also critical that supervisors undergoearly and rigorous training to accelerate their capacitybuilding efforts to enable the identification of therelevant issues when undertaking the supervisoryassessment. In this regard, various initiatives have beenput in place to accelerate the training and skilldevelopment in 2006.

Enhancement to the consumer education framework andthe strengthening of the infrastructure for betterconsumer protection will remain a priority, both to

promote a progressive banking sector as well as to fosterpublic confidence in the financial system. With thegrowth in complexity of financial products and services,and greater expectation on consumers to take on moreresponsibility in managing their finances, efforts willcontinue to be directed towards elevating their financialliteracy levels to facilitate more meaningful decisionsappropriate to their needs and capacity for risk. Moreconfident and financially savvy consumers will be betterequipped to exercise a stronger influence on financialservice providers and to drive competition andperformance. Significant attention continues to beaccorded to promote a higher level of disclosure andtransparency as well as comparability of information inthe financial system. In this regard, the work on theformulation of a more comprehensive producttransparency and disclosure framework will beintensified. In principle, the framework aims at providingconsumers with adequate and relevant information tomake an informed decision relating to financial productsand services. In furthering efforts to strengthen theconsumer protection framework, issues relating tomarket conduct will be greatly emphasised to ensure fairand equitable treatment of all consumers. Theestablishment of the Credit Counselling and DebtManagement Agency (CCDMA) in April 2006 will mark asignificant milestone in the development of acomprehensive consumer protection infrastructure inMalaysia. As the growth momentum in householdspending and household debt is expected to continueinto the future, the CCDMA will provide an importantavenue for individuals to seek credit counselling, debtrestructuring and settlement services, and obtain financialeducation from expertise and professionals with regard tothe management of their finances and debts.

[Please refer to the box article on the Establishment ofthe Credit Counselling and Debt Management Agencyfor details.]

Ensuring the safe and efficient operation of the paymentsystems will remain a key policy objective. Over the years,the banking industry has progressively introduced severalelectronic-based retail payment systems, completed themigration of the ATM and credit cards to chip-basedinfrastructure and leveraged on technology such asmobile telecommunication devices to provide moreconvenient payment services. Given these achievements,the policy focus in 2006 will be geared towards providingan enabling environment for more electronic paymentmethods to be introduced, promoting the use of formalpayment channels and coordinating industry efforts inthe migration to electronic payments. The efficiency incheque processing will be improved by leveraging on the


105

Outlook and Policy

imaging technology to truncate cheques, therebyreducing the physical handling of cheques in the clearingprocess. At the same time, measures will be taken toimprove the current electronic payment services toencourage the greater use of these electronic paymentchannels. To promote the use of formal paymentchannels, banking institutions will be allowed to appointthird party ‘collecting agents’ to improve accessibility oftheir remittance services. Similarly, qualified non-bankinginstitutions will also be allowed to offer remittanceservices. In leading the industry to adopt more costeffective payment methods, a coordinating body will beestablished to engage the various stakeholders inpromoting the migration to electronic means ofpayments on a nationwide basis. In addition, efforts willcontinue to be pursued in enhancing industry securitystandards and establishing mechanisms to effectivelymitigate payment risks. With the growth of e-bankingtransactions, the Internet banking guidelines will berevised to ensure that the industry adopts best practicesand devotes sufficient resources in combating cyber crimeand digital attacks. Further, a ‘payment versus payment’settlement mechanism will be introduced to mitigate therisks associated with inter-bank foreign exchangetransactions, particularly for USD and RM trades.

In 2006, the major policy thrust for the Islamic bankingsector will concentrate on further strengthening theresilience of the Islamic banking system and expandingthe capacity and capability of the Islamic financialinstitutions. This is in line with the objective ofenhancing the integration of the domestic Islamicbanking sector with the international Islamic financiallandscape, and strengthening Malaysia’s position as aleading Islamic financial centre. The regulatoryframework for the Islamic financial institutions (IFIs) willbe strengthened following the issuance of the IslamicFinancial Services Board’s (IFSB) standards on capitaladequacy and risk management. Islamic financialinstitutions are required to conform to the newrequirements with effect from 1 January 2007. Inaddition, a framework on the governance of theinvestment account holders and a revised guideline oncorporate governance for the IFIs will be introduced byBank Negara Malaysia to further reinforce theinstitutional framework. Other areas that will beenhanced include the legal and Shariah framework,product and market development, and human capitaldevelopment and consumer education.

The legal and regulatory framework is expected to bestrengthened with the tabling of the revised IslamicBanking Act 1983 in Parliament in 2006. Efforts will alsobe directed at meeting the manpower requirementsthrough the establishment of the International Centre forEducation in Islamic Finance (INCEIF) in April 2006. Talentbuilding is one of the key factors identified for thedevelopment of innovation in Islamic banking productsand services and INCEIF is expected to increase the poolof required talent in the global Islamic financial market.New policies and initiatives will also focus on making theIslamic financial services environment in Malaysia to bemore conducive and investment-friendly to theinternational Islamic financial community. Promotion andmarketing efforts will target at attracting funds fromindividuals and multinational corporations, particularlyfrom the Muslim countries, to use Malaysia as theplatform for their investment as well as financing needs.

The thrust of policy for the development financialinstitutions (DFIs) in 2006 is to further strengthen thecapacity and capability of the DFIs towards nurturingand developing efficient, effective and robust DFIs inproviding financial and non-financial support to thetargeted sectors of the economy. With the completionof the rationalisation exercise involving four DFIs in2005, initiatives going forward will focus on enhancingthe functions and scope of activities of the DFIs inmeeting their mandates and the financial anddevelopmental needs of their respective targetedsectors. These, among others, include strengtheningtheir financial capacity as well as broadening the rangeof products and services offered by the DFIs. Towardsthis end, further efforts will be undertaken to enhancethe outreach and effectiveness of the advisory servicesprovided by the DFIs to the SMEs, especially throughcollaboration with relevant Government agencies.

Another important focus will be the enhancement ofthe regulatory environment to facilitate the operationsof the DFIs through customised prudential requirementsand regulatory standards, as well as improving theirfinancial soundness and risk management practices.Emphasis will also be accorded towards enhancing theefficiency of the DFIs. In this regard, initiative will beundertaken to establish a comprehensive performancemeasurement framework for the DFIs, comprising bothfinancial and non-financial performance indicators.


The Financial System

Sources and Uses of Funds of the Financial SystemProgress of Financial Sector Masterplan Implementation

108-112112-113

108


Sources and Uses of Funds of the FinancialSystemThe continued expansion in economic activity duringthe year was reflected in the growth of total assets ofthe financial system, which grew by 8.1% orRM143.6 billion to RM1.9 trillion as at end-2005. Asat end-2005, the total assets of the financial systemwere equivalent to 386% of GDP (2004: 392.5%).

Assets of the banking system and the non-bankfinancial intermediaries (NBFIs) expanded in 2005,albeit at a slower rate at 7.7% (2004: 13.6%) and 9%(2004: 11.6%) respectively. The Central Bank’s assetsrecorded a more moderate growth in 2005 due to asmaller increase in the holdings of gold and foreignexchange reserves. A moderate growth in assets wasalso registered by commercial banks and discounthouses, while merchant banks and Islamic banksrecorded a higher increase in assets.

The contribution of assets by type of institutionschanged during the year, reflecting the continuedtransformation of the Malaysian financial system.Firstly, following the completion of the mergerexercises of five finance companies with theirrespective parent commercial banks, the assets of thecommercial banks rose by 14.4% to account for alarger share of 44.1% share of total financial systemassets (2004: 41.7%), while the share of financecompanies declined to 1.4% (2004: 3.9%). Secondly,with the greater emphasis on developing Islamicfinancial services, the share of Islamic banks’ assets in

Table 4.1Assets of the Financial System

Annual change

RM billion

Banking system 142.1 91.7 1,280.8Bank Negara Malaysia 84.0 10.6 295.4Commercial banks 127.3 106.1 842.4Finance companies -73.5 -41.5 26.9Merchant banks -1.4 3.9 46.6Islamic banks 3.9 18.6 43.5Discount houses 1.7 -5.9 26.0

Non-bank financial intermediaries 59.7 51.9 627.7

Provident, pension and insurancefunds 35.6 39.8 423.2

Employees Provident Fund 20.2 23.5 263.9Other provident & pension funds 4.8 5.6 56.8Life insurance funds 10.0 9.6 83.7General insurance funds 0.6 1.0 18.8

Development financial institutions1 12.4 8.7 100.1Other financial intermediaries2 11.7 3.5 104.4

Total 201.8 143.6 1,908.5

1 Refers to Bank Pembangunan Malaysia Berhad, Bank Kerjasama RakyatMalaysia Berhad, Bank Simpanan Nasional, Export-Import Bank of MalaysiaBerhad, Bank Pertanian Malaysia, Bank Perusahaan Kecil dan SederhanaMalaysia Berhad (SME Bank), Malaysian Industrial Development Finance Berhad,Sabah Development Bank Berhad, Borneo Development Corporation (Sabah)Sendirian Berhad, Borneo Development Corporation (Sarawak) Sendirian Berhad,Credit Guarantee Corporation Malaysia Berhad, Sabah Credit Corporation andLembaga Tabung Haji. Prior to 1 October 2005, data included Bank Industri &Teknologi Malaysia Berhad and Malaysia Export Credit Insurance Berhad andexcluded SME Bank.

2 Refers to unit trusts run by Amanah Saham Nasional Berhad (ASNB) and AmanahSaham Mara Berhad, cooperative societies, leasing and factoring companies, andhousing credit institutions (comprising Cagamas Berhad, Borneo HousingMortgage Finance Berhad and Malaysia Building Society Berhad).

p Preliminary

2004

As atend-

2005p2005p

Total Assets: RM 1,908.5 billion

p Preliminary

Graph 4.1 Assets of the Financial System as at end-2005p (% share)

Commercial banks44.1%

Life insurance funds 4.4%

Bank Negara Malaysia15.5%

Other financial intermediaries

5.5%

Employees Provident Fund13.8%

General insurance funds 1.0%

Finance companies 1.4%

Merchant banks2.4%

Islamic banks2.3%

Development financialinstitutions

5.2%

Discount houses1.4%

Other provident and pension funds 3.0%

Provident, pension and insurance funds

21.7%

C04 Financial Sector pg108-114 3/14/06, 9:14 PM108

109


Table 4.2Sources and Uses of Funds of the FinancialSystem

Annual change As atend-

2004 2005p 2005p

RM billion

Sources:Capital and reserves 18.1 9.3 176.3Currency 2.9 2.0 34.4Deposits 126.2 86.6 922.2Borrowings 3.9 3.7 56.4Funds from other financial institutions1 -15.9 12.5 84.2Insurance, provident and pension funds 32.3 36.2 374.1Other liabilities 34.2 -6.7 260.9

Total 201.8 143.6 1,908.5

Uses:Currency -0.5 0.9 6.0Deposits with other financialinstitutions 21.6 8.0 256.0Loans and advances2 56.4 66.0 721.7Securities 23.6 35.0 468.0

Treasury bills -3.1 1.3 1.7Commercial bills -5.1 -1.1 7.3Malaysian Government (MGS) 14.3 13.7 153.2Corporate 17.4 19.2 290.8

Private Debt Securities (PDS) 8.0 10.5 140.8Equities 9.5 8.6 150.0

Foreign 1.1 2.1 6.7Others -1.2 -0.1 8.4

Gold and foreign exchange reserves 9.5 8.6 264.4Other assets 17.1 19.0 192.4

1 Includes statutory reserves of banking institutions.2 Excludes loans sold to Danaharta.

p Preliminary

p Preliminary

Graph 4.2 Sources and Uses of Funds of the Financial System as at end-2005p (% share)

Total: RM1,908.5 billion

USES

SOURCES

13.7%

19.6%

10.1%

4.4%

13.9%

24.5%

3.0%

37.8%

48.3%1.8%

13.4%

9.2%

0.3%

Capital and reserves

CurrencyDepositsBorrowings

Funds from other financial institutions

Pension, provident and insurance fundsOther liabilities

Currency

Deposits with other financial institutionsLoans and advances

SecuritiesGold and foreign exchange reserves

Other assets

the financial system expanded to 2.3% of totalfinancial assets from 1.4% in the previous year. Duringthe course of the year, four additional Islamic bankswere established as a result of measures taken toliberalise and accelerate the growth of Islamic bankingindustry by allowing foreign Islamic banks to operate inMalaysia. Thirdly, as part of the framework for thecreation of investment banks, the seven discounthouses currently in operation would be rationalisedand merged with stockbroking companies anduniversal brokers to form investment banks. Arisingfrom the rationalisation process, the assets of thediscount houses declined by RM5.9 billion to accountfor a reduced share of 1.4% of total assets of thefinancial system (2004: 1.8%).

Meanwhile, the expansion in assets of the NBFIs wascontributed largely by a higher increase of theprovident, pension and insurance funds’ assets. Assetsof the provident and pension funds (PPFs) increased by10% during the year and contributed 16.8% of thetotal assets of the financial system. This growth wasattributed to the increase of investments in debt

Table 4.3Non-Financial Private Sector Deposits1 with theFinancial System2

Annual changeAs at end-

2004 2005p2005p

RM billion

Deposits3 with:Commercial banks 87.9 64.1 498.0Finance companies -35.4 -22.6 6.0Merchant banks 0.8 1.3 16.0Islamic banks 2.1 10.8 22.2Discount houses 1.8 -2.8 9.7National Savings Bank 1.8 2.2 12.2Others4 5.5 0.7 37.3

Total 64.6 53.6 601.5

Demand deposits 10.3 9.3 97.2Saving deposits 5.5 2.4 76.5Fixed deposits 35.3 19.7 362.9of which:

Up to 1 year 34.2 19.4 334.7More than 1 year 1.1 0.3 28.2

NIDs5 5.2 10.7 18.6Repos6 8.3 11.5 46.3

1 Refers to deposits placed by business enterprises (excluding NFPEs) and individuals.2 Excludes provident and pension, insurance and unit trust funds.3 Refers to demand, savings and fixed deposits, negotiable instruments of

deposits and repos.4 Includes development financial institutions, cooperative societies and housing

credit institutions.5 Refers to negotiable instruments of deposits.6 Refers to repurchase agreements.

p Preliminary


110

securities and equities, as well as from higher lendingactivity by PPFs in 2005.

Assets of the insurance funds grew at a similar pace,registering 11.6% growth and accounted for 5.4% ofthe total assets of the financial system as at end-2005. Bulk of the growth in the assets was driven bythe life insurance funds (including Takaful familyfunds) which accounted for 82% of the totalinsurance funds assets. In terms of growth, the assetsof Islamic insurance funds grew at a higher rate of14.9%, compared to the conventional insurancefunds which grew by 11.4%.

The sources of financing for the financial system werecontributed mainly by the deposits placed with thefinancial institutions as well as contributions to theprovident, pension and insurance funds. Depositsmobilised by the financial system increased by RM86.6billion, or 10.4% during the year. The banking institutionsremained the largest mobiliser of the deposits, contributing72.1% of the total increase in deposits during the year andaccounted for 77.5% of total outstanding depositsmobilised in the whole financial system.

In terms of deposits by holders, individuals and businessescontributed the bulk of the deposits placed with thebanking system and development financial institutions(DFIs). Deposits placed by individuals with the bankingsystem and DFIs increased by 5.4% in 2005 (2004: 9.6%),while deposits placed by businesses grew by 15.3% (2004:

p Preliminary

Graph 4.3 Non-Financial Private Sector Deposits with the Financial System as at end-2005p (% share)

By Institutions Total Deposits: RM601.5 billion

By Types of Deposits Total Deposits: RM601.5 billion

Finance companies1.0%

Merchant banks2.7%

Islamic banks3.7%

Discount houses1.6%

Bank Simpanan Nasional2.0%

Others6.2%

Demand deposits16.2%

Savings deposits12.7%

NIDs3.1%

Repos7.7%

Up to 1 year55.7%

More than 1 year4.7%

Fixed Deposits60.3%

Commercial banks 82.8%

18.8%). In 2005, the growth in deposits was in line withthe continued growth in the nation’s income as reflected inthe strong growth of 11.3% in GNP.

Table 4.4Direction of Credit1 to the Non-Financial PrivateSector

Annual change As atend-

2004 2005p 2005p

RM billion

Loans and advances 55.3 70.6 683.5Agriculture 0.7 0.2 14.2Mining and quarrying -0.1 -0.2 0.8Manufacturing 2.5 -0.4 58.1Construction and real estate 3.9 4.6 84.4Purchase of residential properties 19.2 18.5 187.8Retail, wholesale, restaurants and

hotels 3.2 1.6 25.7Transport, storage and

communications 0.0 3.4 18.9Business services 1.6 1.2 23.3Electricity, gas and water supply 0.7 -0.4 5.7Consumption credit 15.0 22.2 133.4Purchase of shares -0.4 1.6 20.5Others 8.9 18.2 111.0

Investments in corporatesecurities 15.6 21.2 289.0

Total 71.0 91.8 972.5

1 Excludes credit to non-financial public enterprises.

p Preliminary

C04 Financial Sector pg108-114 4/14/06, 15:00110

111


Purchase of residential property19.3%

Construction & real estate8.7%

Manufacturing6.0%

Agriculture, mining and quarrying1.5%

Retail, wholesale, hotels and restaurants2.6%

Transport, storage & communications1.8%

Consumption credit13.7%

Electricity, gas and water supply0.6%

Purchase of shares2.1%

Business services2.4%

Others11.4%

Total Credit: RM972.5 billion

p Preliminary

Graph 4.5 Direction of Credit to the Non-Financial Private Sector as at end-2005p (% share)

Investment incorporate securities

29.7% Loans and advances70.3%

Apart from deposits placed with financial institutions,contributions to the provident, pension and insurancefunds remained as the second main source offinancing to the financial system, which accountedfor 19.6% of the total financing resources. Thecontributions to the provident and pension funds(PPFs) continued to grow by 10.7% during the year

and were largely dominated by contributions to theEmployee Provident Fund (91.3% of totalcontributions to PPFs).

The increase in the total resources of the financial systemin 2005 was mainly channeled into loans and advancesas well as investment in debt securities and equities.

Graph 4.4 Loans and Advances by Institutions (% share)

2000 Total Loans and Advances: RM512.5 billion

2005p Total Loans and Advances: RM721.7 billion

Development financial institutions

4.1%


5.7%

Housing Credit Institutions

5.5%

Others3.5%

Development financial institutions

6.6%


9.1%

Housing Credit Institutions

4.8%Others 2.5%

Banking institutions81.2%

Banking institutions 77%

p Preliminary

C04 Financial Sector pg108-114 4/14/06, 13:26111

112

Loans and advances extended by the financial systemgrew by 10.1% during the year and remained the largesttype of asset in the financial system (37.8% share of totalassets). The banking institutions were the largest providerof the loans and advances with a 77% share, followed bythe PPFs and DFIs. The share of loans provided by PPFsand DFIs has expanded since 2000, reflecting the greaterrole of DFI in financing the economy as well as thediversification of asset allocation of PPFs.

In 2005, the demand for loans and advances were drivenmainly by the household sector, particularly for thepurchase of residential properties and consumptioncredit, which together accounted for 57.7% of theincrease in total loans and advances during the year.Meanwhile, within the business sector, the loansextended to the small and medium-sized enterprisesposted a higher growth of 8.7% in 2005 (2004: 7.7%).

Investment in securities (debt and equities) by thefinancial system expanded further by 8.1% in 2005(2004: 5.8%) due mainly to the increase in holdings ofsecurities by PPFs. The PPFs held 50.2% and 47.7% indebt securities and equities investment, respectively.Meanwhile, the holdings of securities by the bankinginstitutions dropped during the year reflecting a shift inportfolio allocation from long-term securities to short-term securities following the anticipation of furtherinterest rate increase in the future.

Progress of Financial Sector MasterplanImplementationThe implementation of the Financial Sector Masterplan(FSMP) is well on track and as at 31 December 2005,i.e. half-way through the 10-year FSMP period, a total of49 recommendations or more than half of the FSMPrecommendations with milestones have been fullyimplemented. Another 29 recommendations are beingimplemented on a continuous basis. The list of completedand on-going recommendations is in the Annex.

Throughout the first half of the FSMP period,significant progress was achieved in diversifying thefinancial structure including further strengthening theposition of the domestic financial institutions tooperate in a more liberalised environment. Despite amore deregulated and liberalised environment, thedomestic banking institutions remained competitiveand were able to maintain their market share. As atend-2005, domestic banking institutions maintained81.7% share of gross loans (end-2004: 81.3%) and80.5% share of total deposits (end-2004: 80.9%).Profitability levels of domestic banks continued toimprove, as exhibited by increases in return on average

assets and return on average equity from 1% and11.5% in 2004 to 1.3% and 15.2% in 2005,respectively. Productivity level also improved further asdemonstrated by lower cost to income ratio of 49% in2005 (2004: 50%). Boosted by stronger profitabilitylevel and improving cost to income ratio, the pre-taxprofit per RM employee cost of domestic banks alsoincreased from RM1.60 in 2004 to RM1.90 in 2005.Asset quality positions also continued to improve,amidst favourable economic conditions. Net NPL ratiobased on the 3-month classification declined by1.8 percentage points to 6.4% in 2005. Benefitingfrom the continued capacity building initiatives andefforts taken by domestic banking institutions tofurther enhance their operational efficiency, severaldomestic banks have emerged stronger and becomeperformance leaders. These top performers havefurther narrowed their performance gap as comparedwith the incumbent foreign banks in all major areas.

Similar to the banking industry, the domestic insurancecompanies also recorded further performanceimprovements. Domestic players maintained theirdominant position in the general insurance sector with amarket share in gross direct premiums of 73.5% in2005 (2004: 72.6%). Supported by enhancedunderwriting capabilities and infrastructureimprovements which contributed towards betterunderwriting results and efficiency gains, the combinedreturn on equity of the larger domestic insurersincreased to 29.8% (2004: 20.6%). Significantproductivity improvements were also achieved withgross premiums per employee increasing by more than14% to RM754,301 (2004: RM659,184). In the lifesector, the weaker overall growth of life business duringthe year saw the market share of domestic insurersdeclining marginally to 34.8% (2004: 35.8%) in 2005.Domestic insurers, nevertheless, maintained theirdominant position in the bancassurance market, with ashare of 81.9% (2004: 82.4%) of total new premiumsgenerated through banking institutions in 2005. Thesignificant growth of the bancassurance market since2003 has also seen a number of domestic insurersemerging among the market leaders, with several morepositioning themselves to take advantage of thesignificant growth opportunities to be reaped from theirbanking alliances.

The Islamic banking industry sustained its expansion inthe Malaysian banking system as indicated by theincreasing market share of Islamic banking assets toaccount for 11.3% (2004: 10.5%) of the total assets inthe banking system as at end-2005. The market share ofdeposits and financing also expanded to account for


113


11.7% (2004: 11.2%) and 12.1% (2004: 11.3%) of thetotal banking sector deposits and financing respectively.

During the year, various policy initiates wereundertaken towards strengthening further the financialsystem to better support the growing needs of theeconomy. Measures undertaken in the banking sector,Islamic financial services and the development financialinstitutions are discussed in detail in chaptersThe Banking System, The Islamic Financial System andDevelopment Financial Institutions of the AnnualReport 2005. Details on the insurance sector initiativeswill be covered in the Insurance Annual Report 2005.

The Malaysian financial landscape will continue toundergo structural changes given the economic

transformation and the need for the financial institutionsto sustain their competitiveness and resilience. Theentrance of new investors and financial players is expectedto inject greater dynamism in the financial industry, thusgiving more incentives to attain greater performanceimprovement by domestic financial institutions. Thecapacity building initiatives will continue to be pursued andintensified during the remaining Phase 2 of the FSMPperiod to prepare the domestic financial sector for furtherglobal integration as we move to the third phase of theFSMP. Gradual liberalisation measures, including thepossibility of introducing new foreign competition, will beappropriately sequenced to ensure the achievement of thedesired improvement and, new opportunities and benefitsto the domestic financial system while preserving overallfinancial stability.


The Banking System

Management of the Banking System White Box:Data and Systems Challenges in the Implementation of Basel II White Box:The Deposit Insurance System in Malaysia White Box:Establishment of the Credit Counselling and Debt Management Agency White Box:Banking Measures Introduced in 2005 Performance of the Banking System White Box:Malaysia's Anti-Money Laundering and � Counter Financing of Terrorism (AML/CFT) Programme

116-133123-125

126-128129-130

133-136136-149149-153

116

MANAGEMENT OF THE BANKING SYSTEM

Building on the achievements recorded in the precedingyears, further progress continues to be made inenhancing the capacity and capability of domesticbanking institutions. The enhanced competitiveness ofthe domestic banking institutions provided thefoundations on which progressive infusion of greatercompetition could be pursued through furtherderegulation and liberalisation.

In line with the objective of preserving financialsoundness and stability whilst achieving the goals ofprogressing into a more dynamic financial system, themain thrusts of policy measures in 2005 continued toplace emphasis on enhancing the competitiveness ofdomestic banking institutions and preserving resilienceof the financial sector. In this regard, efforts weredirected towards improving the structural andoperational efficiency of the banking institutions whilstintroducing a more dynamic prudential regulatoryframework, which is complemented with effectivesupervisory oversight and enhanced surveillance. Otherkey policy initiatives in 2005 included ensuringcontinuous access to financing for all segments of theeconomy and the further enhancement of infrastructurefor consumer protection and education. These are inline with the broad thrust of Phase 2 Financial SectorMasterplan (FSMP) which aims to elevate the overallperformance of the financial sector.

downward trend to 4.6%, the lowest level since theadvent of the Asian financial crisis. Supported by thestrong financial position, the banking system was well-positioned to effectively support economic growth asevident from the expansion in lending activities. Newloan approvals and disbursements increased by 11.4%and 8.4% respectively, whilst total outstanding loansexpanded by 8.6% during the year.

The winding up of Pengurusan Danaharta NasionalBerhad (Danaharta) in December 2005 marked thesuccessful completion of the final chapter in thefinancial sector restructuring efforts undertaken toaddress the vulnerabilities that surfaced in the aftermathof the Asian financial crisis. With financial systemstability fully restored and continued strongperformance by the banking sector, policiesimplemented during the year were successful inaugmenting the resilience, capacity and efficiency of thebanking institutions to effectively meet the needs of anincreasingly competitive and dynamic economy.

Enhancing Structural and Operational EfficiencyThe year 2005 continued to witness a changing structurallandscape in the banking sector. Following the flexibilitygranted to domestic banking groups to rationalise theircommercial banking and finance company businesses,the industry underwent a transformation which saw theconsolidation of retail banking businesses into a singleentity. All ten domestic banking groups have completedthe rationalisation exercise on schedule to benefit fromthe stamp duty and real property gains tax exemptionsgranted by the Government which ended on 15 January2006. The successful completion of the rationalisationexercise allows for more efficient use of the bankinggroups’ capital and resources, which in turn willstrengthen the potential of the entities to meet theincreasingly more differentiated expectations andsophisticated demands of their customers.

As financial needs grow in complexity and thedemarcation of the roles and functions of financialinstitutions becomes increasingly blurred, furtherinstitutional transformation continues to take shape inthe continuously evolving Malaysian financial landscape.One of the strategic initiatives aimed to furtherstrengthen the capacity and capability of domesticbanking groups to contribute towards economictransformation and to face the challenges ofliberalisation is the development of full-fledgedinvestment banks through mergers between merchant

The Banking System

Policy measures in 2005continued to focus onenhancing competitiveness ofdomestic banking institutions,strengthening theinfrastructure for consumereducation and protection, andensuring continuous access tofinancing.

The banking system sustained its strong performance in2005, both in terms of financial strength andoperational efficiency. The banking sector registeredRM12.4 billion in pre-tax profit and maintained therisk-weighted capital ratio (RWCR) above 13%.Non-performing loans (NPLs) ratio continued its

C05 Banking System pg116-154 4/14/06, 13:27116

117

The Banking System

Upon completion of the rationalisation process, aninvestment bank will hold both a merchant bankinglicence as well as a dealer’s licence which are issuedpursuant to the Banking and Financial InstitutionsAct 1989 and the Securities Industry Act 1983respectively. Hence, investment banks will beco-regulated by Bank Negara Malaysia and the

The framework for investmentbanks aims to strengthen thecapacity of domestic financialinstitutions to capitalise onbusiness opportunities,increase competitiveadvantage and widen therange of financial and advisoryactivities and therebystrengthen their potential tocompete effectively withinternational investmentbanks.

banks, stockbroking companies and discount houses.These financial market intermediaries currentlyundertake and offer similar products and services. Theintegration will enhance their efficiency andeffectiveness by minimising duplication of resources andoverlapping of activities, leveraging on commoninfrastructure as well as reaping the benefits ofsynergies and economies of scale. It will also furtherstrengthen the potential and capability of domesticfinancial institutions to capitalise on businessopportunities, increase their competitive advantage andwiden the range of financial and advisory activities andthereby strengthen their potential to compete effectivelywith international investment banks.

The emergence of investment banks is aimed atenhancing the dynamism and vibrancy of the capitalmarket to contribute towards economic transformationas well as enable market players to better facechallenges of liberalisation and globalisation.Recognising this, the framework for investment bankshas been formulated based on three main principles.Firstly, the framework aims to enhance the scope ofactivities for the merged entity where investmentbanks will also be allowed to undertake fundmanagement and unit trust businesses in addition tothe activities conducted based on the types of licencesheld prior to the rationalisation. Secondly, theframework seeks to enhance the capacity for growthand business expansion through industry-widerationalisation. And finally, it aims to minimise theregulatory burden that may arise from dual regulatoryregime. To facilitate the establishment of investmentbanks, incentives via stamp duty and real propertygains tax exemptions as well as tax credits foraccumulated losses of the financial institutionsinvolved in rationalisation were granted to all entitiesthat are involved in the transformation into investmentbanks within the given timeframe.

Bank Negara Malaysia announced the framework forcreation of investment banks in March 2005. Under theframework, an investment bank can be formed viavarious merger permutations, namely, via merger ofmerchant bank and stockbroking company within thesame banking group or merger of two stand-alonediscount houses with a stockbroking company. Tofurther enable the development of a more resilient,competitive and dynamic financial system, theframework was extended to allow universal brokers tobe transformed into an investment bank, via theacquisition of a discount house. All financial groupshave been given up to 30 June 2006 to undertake therationalisation exercise.

Securities Commission. Towards this end, a cleardemarcation of roles between the two regulatorshas been established. The Central Bank will beresponsible for the prudential regulations governingthe investment banks to ensure that the safety andsoundness of the financial system remains intact, aswell as to protect the interest of depositors. TheSecurities Commission will be responsible for thebusiness and market conduct of investment banks inorder to promote market integrity and provideinvestor protection. To attain these objectives, BankNegara Malaysia and the Securities Commission arecurrently finalising the details of a Memorandum ofUnderstanding which outlines all specific aspects ofthe cooperation and consultation between the tworegulators to ensure smooth and efficientcoordination of roles and responsibilities withrespect to the supervision and regulation ofinvestment banks. Further to this, to ensure that theinvestment banks are manned by capable andcompetent workforce, all personnel undertakingfunctions related to dealing in securities, fundmanagement, investment advice, and futuresactivities are required to pass the relevantexaminations and be licensed as representativesprior to undertaking such activities, as imposed bythe Securities Commission.

C05 Banking System pg116-154 3/14/06, 9:14 PM117

118

Bank Negara Malaysia and the Securities Commissionhad on 1 July 2005, jointly issued the Guidelines onInvestment Banking which details the requirementsand processes to set up investment banks as well asthe regulatory framework within which investmentbanks would operate. Policies were formed taking intoconsideration the inherent risks of the newly mergedentity and the international regulatory framework forinvestment banks. The Guidelines set a minimumcapital funds unimpaired by losses at RM2 billion on agroup basis, for investment banks that are part of adomestic banking group and RM500 million for stand-alone investment banks. These stand-alone investmentbanks have to comply with the minimum capital fundsrequirement by 31 December 2008, failing which theywould be granted a restricted licence which excludesthe ability to undertake deposit-taking activities.Investment banks will also be subjected to theInvestment Bank Capital Adequacy Framework (IBCAF),which is based on the existing capital adequacyframework applicable to banking institutions. Allinvestment banks, except stand-alone investmentbanks that do not fulfill the minimum capital fundsrequirement, will be allowed to mobilise deposits witha minimum size of RM500,000. Nevertheless, it isenvisaged that in the longer term, the investmentbanks would increasingly tap the capital market tomeet their funding needs. Recognising that theparticipation of foreign investors can provide animpetus towards enhancing the capacity and efficiencyof domestic institutions through the transfer of skills,expertise and technical know-how as well as providingaccess to international tie-ups, and in line with thegradual liberalisation approach adopted in Malaysia,the limit for foreign equity participation in investmentbanks has been set at a higher level of 49%.

As outlined in the FSMP, one of the key strategicinitiatives towards enhancing the capacity and capabilityof domestic banking institutions is through the gradualintroduction of a more competitive environment to act asa catalyst towards performance improvement. As playersin the financial system, the locally-incorporated foreignbanking institutions (LIFBs) have contributed significantlyto the development and vibrancy of the financial sectorthrough capital investment, creation of employmentopportunities, facilitation of economic activities as well astransfer of skills and technology. Supported by extensiveresearch capability and international operations network,the LIFBs have and continue to introduce new businessmodels, using information technology to enhance theirrisk management and delivery channels, and set the barfor customer service quality. This has had spillover effectson the domestic financial institutions. This, coupled with

the diagnosis of their areas of strengths and weaknesses,and areas requiring further performance improvementsunder the benchmarking exercise, have resulted in anoverall improvement of the domestic banking institutionswhich in turn has contributed towards the enhancementof banking services in the country.

With the strengthened competitiveness of thedomestic banking institutions, the LIFBs were grantedwith greater flexibility through the establishment of upto four additional branches. Given that domesticbanking institutions have a large presence in non-urban areas to fulfil the socio-economic objective ofensuring that rural areas have sufficient access tobanking services and to further enhance the dispersionof bank branches across the country, the flexibilitygranted are subjected to a predetermined ratio of theadditional branches in the market centres, urban areasand non-urban areas.

In line with efforts to further enhance the ability toprovide a comprehensive range of innovative financialproducts and services to compete more effectively in themarketplace, banking institutions have forged strategicalliances with other types of local and foreign financialinstitutions. This move has brought about the growth ofbancassurance, asset and wealth management activities,as well as provided platforms for trade in foreignequities, fixed income securities and unit trusts. Furtherto this, many banking institutions have also capitalisedon the flexibility accorded to outsource their non-coreoperational functions as a means towards achievinggreater operational efficiency. The outsourcing functionsare carried out by third party service providers or byspecially established subsidiaries to provide services toentities within banking groups. In tandem with theglobal trend towards outsourcing, Malaysia has alsobenefited from the establishment of regional processingand outsourcing centres in the country which serve theregion. This stems from the presence of conducivebusiness environment, skilled workforce, strong globalexposure and low set up cost in Malaysia. To date, fourforeign banking institutions have set up regionalprocessing centres in Malaysia with the total investmentamounting to RM343.1 million whilst 5,243 jobs havebeen created as at end-December 2005. There has alsobeen growing interest by other foreign partners,including non-banking entities to set up businessprocess outsourcing centres in the country to serve theirregional and global operations.

To facilitate greater product innovation, bankinginstitutions were accorded greater flexibility with respectto the offering of investment-linked to derivative (ILD)


119

The Banking System

products. The revised Guidelines on Offering ofInvestment-Linked to Derivative Products, which wasissued in April 2005, enabled banking institutions tostructure ILD products on any asset class, subject to theaggregate notional amount not exceeding 100% of itscapital base. Previously, this requirement wasaccompanied by additional restriction of notionalamount not exceeding 30% of capital base on eachapproved asset class. The revised Guidelines alsoallowed banking institutions to offer Ringgit-denominated ILD products linked to foreign assetclasses. Further to this, the offerings of non-principalprotected ILD products to investors are also allowed, aslong as the risks of the product are clearly highlightedand investors are informed that their maximum losspotential is limited to the amount of principal invested.Additionally, the approval period for ILD products wasreduced from 21 days to 14 days to enable faster time-to-market. In line with ongoing efforts to augmentgrowth and market reach of ILD products in Malaysia, inFebruary 2006, the Bank further liberalised variousrequirements of the earlier Guidelines. Under the latestrevision, the limit on the aggregate notional amount ofthe ILD products offered by banking institutions wasremoved, thus enabling banking institutions to engagein ILD products with greater flexibility. In addition, toaccord banking institutions with greater operationalefficiency, the products offered are deemed to beapproved upon submission to Bank Negara Malaysia,subject to meeting all conditions as stipulated in theGuidelines, which covered aspects of risk management,product characteristics, product marketing andclassification as well as disclosure requirements andregulatory compliance.

To further enhance consumers’ access to a wider arrayof financial services that are offered by commercialbanks, additional flexibility was granted in August 2005to enable commercial banks to conduct factoringservices either within their bank or through a separateentity. The separate legal entity can be in the form of afully- or partially-owned subsidiary or a joint venturewith any other parties, including foreign parties.

Given the increasingly dynamic and competitiveoperating environment, the banking sector iscontinuously challenged to improve their operationalefficiency and risk management practices. This includesmanaging their loan portfolio effectively and efficiently.To provide banking institutions with greater flexibilityand options in managing their exposures, the Bank had,in December 2005, issued the Guidelines on theDisposal/Purchase of Non-Performing Loans by BankingInstitutions. With the issuance of the Guidelines,

banking institutions are now able to sell outright theirNPLs to eligible third parties, namely domestic bankinginstitutions, LIFBs, domestic and foreign investors.Additionally, banking institutions are also allowed topurchase NPLs from other banking institutions. With thisflexibility, banking institutions are accorded with anadditional option to manage their balance sheets and toreallocate resources towards strengthening theirbusiness potential and to generate higher rates ofreturns. It also enables banking institutions to undertakegreater product innovation and releases resources forhigher investments in human capital development andtechnological infrastructure, rather than managingdistressed assets. To ensure that the flexibility does notexpose undue risk to the participating bankinginstitutions, the banking system and the consumers, theflexibility is subjected to certain general conditions andprudential requirements. One such general conditionincludes the requirement for the sale and purchase ofNPLs to domestic or foreign investors which are notlicensed institutions under the Banking and FinancialInstitutions Act 1989, to be conducted via a locally-incorporated special purpose vehicle (SPV) with foreignequity participation capped at 49%; aimed at nurturingand growing the local asset management industry. Toensure the proper conduct of the sale of NPLs, theGuidelines also set out the broad roles andresponsibilities of the board of directors and seniormanagement, as well as the legal requirements andregulatory processes to undertake such activities.

The availability of a highly competent workforce that iscustomer centric, technology-savvy, flexible and agile inthe evolving financial sector will increasingly be thedefining factor in determining the success of aninstitution and ultimately contribute towards building amore resilient and dynamic financial sector. In view ofthis, continuous enhancement to human capitalresources and intellectual capabilities is critical to drivethe performance of the financial sector, in particular thebanking industry. The International Centre forLeadership in Finance (ICLIF) continued to be committedto providing leadership development programmes forleaders in the financial services sector. In 2005, ICLIFconducted two sessions of its Global LeadershipDevelopment Programme under its structured advancedleadership programme as well as various specialisedlearning programmes on scenario planning and strategicthinking, leading change, leadership innovation and thedirectors’ forum.

In addition, as part of the strategic plan to formulateenhanced training and educational portfolios intendedto upgrade skills and sharpen competencies as well as


120

enhance managerial and organisational capabilities ofthe banking industry workforce to meet futurechallenges, Institut Bank-Bank Malaysia (IBBM) iscurrently developing a Banking and Finance IndustryCompetency Framework. The framework will providethe foundation to guide IBBM in the design of relevanttechnical programmes and assist institutions of higherlearning to align their curriculum in order to meet theindustry’s human resource needs for a pool of highlytalented professionals. Further to this, the frameworkconsists of two key output, namely, the corecompetency, which comprises the key knowledge, skillsand attitudinal attributes required for bankers and thetechnical competency, which outlines the expectedtechnical knowledge, skills and attitudinal attributesrequired for key tasks in the major banking sectors. Informulating the framework, IBBM had conducted ahigh-level focus group discussion in December 2005 todeliberate on the Core Competency Framework. Thefocus group discussion was participated by chiefexecutive officers of major banking institutions andleading academicians. The discussion contributedtowards the gathering of holistic and balanced inputand insights necessary to refine the Core CompetencyFramework and form the foundation for further workon the technical competency phase.

Continuing efforts to ensure a steady supply of highlycompetent graduates in the banking and financeindustry led to the signing of a Memorandum ofUnderstanding (MoU) between IBBM and UniversitiMalaya on 21 July 2005. The MoU will pave the waytowards the development and enhancement ofknowledge and skills of undergraduates pursuingspecialisation in banking and finance through theenhancement of the banking and finance programmeby the University as well as industrial attachments orinternship opportunities at banking institutions for theundergraduates. The strategic partnership offers anopportunity for both entities to build on each other’sstrengths for the common objective of enhancing thequality of the workforce in the banking industry.

Promoting Banking System Soundness andStabilityThe presence of a sound and stable financial system iskey in achieving sustainable economic growth andprosperity. Under the continuously evolving financiallandscape and global integration of financial markets, itis critical for the financial system to remain responsiveand capable in managing the multitude of risks thatarise. As such, due attention continued to be accordedtowards ensuring that the fundamental elements of asafe and sound financial system remain intact. These

include having a comprehensive and effectivemonitoring and surveillance framework, the presence ofstrong and dynamic prudential regulations andsupervisory oversight, as well as having an efficientfinancial infrastructure and reliable financial safety nets.

During the year, efforts continued to be directed tofurther strengthen the surveillance of the banking system.The ability to detect and assess emerging vulnerabilities iscritical in order to deploy appropriate policy measures toprevent or contain emerging risks in a timely manner. Inthis regard, initiatives continued to be undertakentowards monitoring and assessing the resilience of thebanking system using a combination of relevant financialand macroeconomic indicators, qualitative information aswell as on- and off-site surveillance. Throughout the year,domestic macroeconomic and financial marketdevelopments and their linkages, the financial systemperformance and their implications on financial systemstability; the performance of specific economic sectors,including the household and corporate sectors and theirimplications on the banking system, as well as potentialimpact of regional or global developments on the healthof the Malaysian banking system were monitored andassessed. In addition, efforts to develop the capability andtools for a more comprehensive surveillance frameworkboth at the system and institution levels, to identify,measure, assess and predict emerging vulnerabilities arecurrently underway. These include formulatingappropriate methodologies for the models andenhancing the dataset used for modelling. Further to this,the framework on stress testing is currently beingreviewed and enhanced to provide guidance to thebanking institutions on the implementation of stresstesting as a risk management tool within the institutions.The revised guidelines on stress testing will accordbanking institutions with the flexibility to develop oradopt stress tests that are most appropriate and effectivefor their respective business models. Instead ofprescribing fixed parameters for conducting the stresstests, banking institutions will identify the risk factors orcharacteristics which commensurate with the nature oftheir activities, scale of their risk factors and their riskmanagement infrastructure.

The supervisory activities undertaken in 2005 were alsopremised on the objective of promoting financialsoundness and banking system stability to support theBank’s vision of having in place a dynamic, competitiveas well as a stable banking system. The Bank continuedwith a supervisory approach which focused oncontinuous surveillance to ensure safety and soundnessof the banking institutions and undertaking pre-emptivemeasures to contain emerging risks in a timely manner.


121

The Banking System

Attention was accorded towards the identification ofsignificant business activities of the banking institutions,assessing the key risks in each significant businessactivity and the capability of the banking institutionsconcerned in managing these risks. A comprehensiveapproach to supervision of financial groups was carriedout to evaluate the capacity and capability of thegroup’s risk management and internal control systems.Bank holding companies and other risk-taking entitieswithin the group were also assessed to facilitate earlyidentification of possible contagion risks to bankinginstitutions within the group. This was further supportedby information obtained from other regulators, bothdomestic and international, to provide a holisticassessment of financial groups.

Recognising the importance of information systems (IS) inthe banking business particularly with respect to riskmanagement, product development and delivery ofcustomer service, it is imperative that the integrity androbustness of IS are maintained. In this regard, supervisoryinitiatives were focused not only on security and controlaspects of the IS environment, but also the governance ofIS activities by the board of directors and seniormanagement. In cases where most of the IS operations ofthe banking institution were outsourced to serviceproviders, the scope of examination was also extended tothese service providers. This is to ensure that bankinginstitutions have adequate oversight over the servicesextended by their service providers and that the standardsadopted by the service providers were on par, if not better,than the standards applied to the in-house IS environmentof banking institutions.

The minimum requirements and standards for planning andmanaging IS environment and for establishing IS riskmanagement measures were specified in the Guidelines onManagement of IT Environment which was issued in May2004. In the course of carrying out on-site examinations in2005, it was observed that most banking institutions haveeither complied with these minimum standards, or weremaking substantial progress in that direction. Some bankinginstitutions had also put in place more stringent controls,consistent with the size and complexity of their respective ISenvironment. In 2005, the Bank also continued its efforts tostrengthen the resilience of the Malaysian financial system inthe event of unexpected developments. The requirementsfor banking institutions to formulate a Business Resumptionand Contingency Plan (BRCP) and on its testing were alsoprescribed in the Guidelines.

Effective corporate governance practices that enhancecorporate accountability are key elements in the working ofmarket discipline and transparency. In line with the

move towards a ‘principle-based’ regulatory framework,greater responsibility is placed on the shareholders andboards of banking institutions to ensure that theirinstitutions operate in a sound and safe manner, withinthe parameters set by the Bank. The adoption of soundcorporate governance standards and practices ensuresthat licensed institutions are managed in a safe andsound manner with appropriate balance between risk-taking activities and business prudence so as tomaximise returns to shareholders whilst protecting theinterests of all stakeholders. To steer the banking sectortowards this objective, the Bank had issued theGuidelines on Corporate Governance for LicensedInstitutions (Revised BNM/GP1) in September 2005 toreplace the Guidelines on Directorship in BankingInstitutions (GP1). The revised Guidelines wereformulated based on the fundamental concepts ofresponsibility, accountability and transparency. It alsocontains broad principles relating to board matters,management oversight and audit.

The revised Guidelines place significant emphasis on aboard’s roles and responsibilities for proper stewardshipof its institution as well as to ensure that the policies andprocedures adopted by the banking institution are soundand prudent, and are adhered to at all levels of theorganisation at all times. This is achieved via rigorous anddiligent oversight over the licensed institution’s functionsand affairs, which include ensuring that the institutionestablishes comprehensive risk management policies,processes and infrastructure as well as an effectiveinternal audit review process. The board is also chargedwith the task of establishing corporate values, visions andstrategies that will guide the activities of the licensedinstitution as well as being aware of the types of materialfinancial activities pursued by the institution. The roles ofindependent directors were also enhanced to provideessential independence and objectivity to the board,ensure effective check and balance as well as mitigateany possible conflicts of interest. The supervisoryapproach and methodology adopted, which includedinterviews and assessments of individual directors’performance has contributed towards better corporategovernance. There was more active participation amongdirectors and increase in awareness on the expectationson board members in overseeing the operations of alicensed institution.

Other salient features of the revised Guidelines include aclear demarcation of roles between the chairman andthe chief executive officer (CEO), as well as a clearseparation between shareholders and management ofthe licensed institution. These are aimed at ensuring anappropriate balance of role, responsibility, authority and


122

accountability among the decision makers as well as notto impede the practice of sound corporate governance.Additionally, to ensure effective leadership, fit andproper standards for directors and senior managementwere further tightened, taking into consideration factorswhich include competency, character, integrity andprobity of the individuals. This is to enhance the level ofcompetence and capability of the board as a whole inorder to effectively discharge its duties to oversee andactively contribute to the overall strategic andoperational direction of their banking businesses. Giventhe critical roles of the deputy CEO and chief financialofficer in a licensed institution, the revised Guidelinesspecified that the Bank will complement the NominatingCommittee of the licensed institution by conductinglimited vetting on the proposed candidates for therespective positions to ensure that only qualifiedindividuals filled those positions.

In an effort to further impart and enhance knowledge ofdirectors of financial institutions on corporate governanceissues, IBBM had conducted a Directors’ Programme onthe Recent Revised Corporate Governance Guidelines inNovember 2005. The objective of the programme was tokeep board members well informed of the corporategovernance objectives and standards which would add totheir effectiveness while discharging duties andresponsibilities.

In preparation for the implementation of Basel II,banking institutions conducted detailed gapassessments in 2005 to assess their readiness to adoptthe new capital adequacy framework. The results ofthese assessments that were submitted to the Bank hadprovided valuable insights on industry’s aspirations andkey challenges faced in implementing Basel II. Whilemost banking institutions did not foresee majorproblems adopting the standardised approach beyondsystem enhancements, many of them highlighted that

the low level of penetration of external ratings wouldlimit the potential benefits to be derived from theStandardised Approach.

The gap assessments were followed by a series ofbilateral discussions that was also used by the Bank asinput in the formulation of the detailed supervisoryguidance. These supervisory guidance, to be issued in2006, would specify the design and areas ofcustomisation under both the Standardised and InternalRatings Based (IRB) approaches for credit risk. For theStandardised Approach, the detailing and customisationof the framework would involve the review of specificparameters such as the risk-weight mapping andsupervisory collateral haircuts to ensure that they reflectlocal experience, and produce capital requirements thatare comparable to those banking institutions under theIRB approach for similar types of risk being undertaken.Similarly, the appropriateness of exercising nationaldiscretions needs to be assessed thoroughly such thatthe discretions would not substantially reduce the risksensitivity of the framework.

As for the IRB approach, the focus has been on theinterpretation of the operational requirements underthe approach where sufficient consideration isneeded on promoting the adoption of global bestpractices amongst domestic banking institutions.While the adoption of global best practices wouldbe the desired long-term objective, setting thesepractices as the minimum benchmark may prove tobe unrealistic and hence discourage migration to theIRB approach. A key element in the process ofdeveloping the IRB industry guidance is balancingthe need for specific technical details and applying aprinciple-based framework in areas where marketpractice is still evolving. Guidance that are tooprescriptive may result in banking institutions beingconfined to requirements which may not beappropriate for their business models.

The concept papers to be issued by the Bank in2006 would also discuss on the implementation ofthe Basic Indicator Approach and StandardisedApproach for operational risk. The results of anoperational risk survey conducted by the Bankduring the year revealed that many bankinginstitutions have already put in place an operationalrisk management framework and have initiatedoperational risk data collection efforts. Guidelineson sound operational risk management practiceswould be issued in 2006 as a foundation forimproving the overall level of operational riskmanagement in the industry.

The Guidelines on CorporateGovernance for LicensedInstitutions places significantemphasis on Board oversight,the role of independentdirectors and the clearseparation betweenmanagement andshareholders of bankinginstitutions.


123

The Banking System

Data and Systems Challenges in the Implementation of Basel II

The complexity of Basel II continues to pose challenges in the implementation of the new capital adequacystandards among banking institutions and bank supervisors in the global financial system. Implementationissues and challenges have been widely discussed as banking institutions and bank supervisors seek to learnfrom each others’ knowledge and experience. One area that had attracted wide attention is the data andsystem readiness of banking institutions as they move closer towards the implementation deadline of Basel II intheir respective jurisdictions. Indeed, the credibility of the modelling process of the various risk parameters andhence the computation of minimum capital under Pillar 1 of the new accord depends very much on the qualityof data and system architecture and infrastructure established by the banking institutions.

Underlying the complex regulatory requirements of Basel II is the expectation for banking institutions to have inplace, robust systems and data management infrastructure that would enable sound risk managementprocesses. A fundamental aspect of this is an enhanced data infrastructure that would allow bankinginstitutions to extract information across the various systems in a consistent and timely manner. This wouldinclude having the capability to obtain a single and consolidated view of their borrowers or group of borrowersthat enables effective monitoring of borrowers and segmentation of exposures into appropriate portfoliosaccording to their risk profile. While most banking institutions have already captured the information on thevarious credit exposures of their borrowers, this information often resides in database systems which are notfully integrated. Hence, the process of extracting consolidated view of borrowers and obligors would beexposed to errors and inefficiency such as data inconsistencies and duplications. Systems integration that isrequired involves standardising the customer identifier of each borrower and firmly establishing the linkagesbetween borrowers and all their related parties and the exposures to these parties. To obtain an accurate riskprofile of the various credit facilities granted to a borrower or group of borrowers, systems that maintaininformation on the borrower and the related credit facilities must also be fully integrated with the collateralmanagement system.

The integration of the various systems capturing information related to the borrower would not only provide astrong foundation for an effective credit risk management system but also support a more efficient businessdecision making process. With enhanced capacity to monitor their respective borrowers, banking institutionswould be able to promptly detect any deterioration in the creditworthiness of the borrower or its relatedparties. The integration with the collateral management systems would also facilitate a more effectivemonitoring of collateral performance, particularly financial securities. Effective monitoring of such collateralwill ensure that any reduction in their value would allow banking institutions to undertake appropriate actionto mitigate the resulting increase in risk. At the borrower level, the overall view of the customer wouldenhance the ability of banking institutions to assess customer profitability, thus facilitating the marketing ofnew products to these customers. With the enhanced infrastructure, banking institutions will also be in abetter position to undertake better product pricing, more accurate customer and portfolio profitability analysisand more effective portfolio risk management. From a strategic perspective, such information could also beused as vital inputs for the development of the banks’ future business expansion strategy to the more profitablesegments.

Besides systems capability, the acceptability of internal estimates of the various risk drivers such as theProbability of Default (PD), Loss Given Default (LGD) and Exposure at Default (EAD) for the computation ofcapital adequacy under the Internal Ratings Based (IRB) approaches would be dependent on the quality andadequacy of input data used by the banking institutions in the modelling process. Lack of data couldpotentially result in a model that is not adequately robust to provide consistent results for the purpose ofcapital computation. There would also be difficulties in validating the model if the sample size of defaultedborrowers is either too small or have not been appropriately captured. The requirement for data that covers afull economic cycle that is typically a minimum period of ten years, for purposes of modelling the risk driversalso poses a challenge for banking institutions. In this context, a key consideration for banking institutions andsupervisors in Asia would be to deal with the impact of abnormally high default incidences and loss rates


124

during the period following the Asian financial crisis in 1997-1998. While the impact would dissipate naturallyas banking institutions populate their database with new data over time, banking institutions would still needto come to agreement with their supervisor on the adjustment methodology to normalise the impact of thecrisis data during the initial period of Basel II implementation. The objective is to ensure that the regulatorycapital is neither understated relative to the actual risks nor too excessive that it becomes very costly for thebanking institutions to conduct their business.

In the context of delivering good model performance, the data collection process is equally important inensuring data quality. Sound data management processes and procedures are critical to ensure that data isconsistently captured and sufficiently accurate. Central to this is the need for banking institutions to establishclear lines of authority and accountability in ensuring that high data quality and integrity standards areobserved at all times. This can only be achieved in an environment where the importance of having sound dataquality management practices is acknowledged both by the top leadership as well as the various business unitswithin the banking institutions.

Given the intensity of the internal data requirements under the advanced approaches for the computation ofcapital requirements for credit and operational risk, there has been a tendency to overlook the importance ofexternal data in the implementation of Basel II. In general, external data such as the default studies publishedby external credit assessment institutions (ECAIs) as well as external credit and operational loss databases mayprovide useful insights and be used to facilitate the adoption of the advanced approaches. In the context ofcorporate credit model development in particular, default and credit migration studies from ECAIs may providevaluable input for purposes of benchmarking the output of the models with the experience of ECAIs with localcorporates. The default experience of the ECAIs which are usually publicly available may be useful for banks tovalidate the appropriateness of their model output. The default studies published by the ECAIs can alsofacilitate the calibration of PD estimates to the internal rating scales. Banks intending to adopt the IRBapproaches have been provided the option to map their internal ratings with the rating scales used by ECAIsand subsequently attach the PD estimates attributed with the rating scale to their rating grades. Nevertheless,an important consideration in this process is for banking institutions to ensure the consistency and relevance ofthese external data to their own internal portfolio, both in terms of rating definition and criteria.

The ECAI ratings also act as an indicator of the relative riskiness of a corporate borrower under theStandardised Approach and are therefore used as the basis for the capital computation. While this may beappropriate in many developed countries with high rating penetration, default information associated withECAI ratings in emerging markets could be amplified by the smaller sample size of rated borrowers. The resultof these structural constraints must therefore be taken into account by both banks and regulators in emergingmarkets when ECAI ratings are used for purposes of risk management and capital computation. In thiscontext, the pooling of ratings information amongst regional ECAIs should be explored by regional supervisorsas a long-term initiative to enhance the credibility of external ratings as the basis for the capital computationunder the Standardised Approach.

Given the significance of having robust data and systems infrastructure for the successful implementation ofBasel II, Bank Negara Malaysia will be issuing industry guidance on data quality management and managementinformation systems in 2006. Whilst the guidelines will be outlining broad supervisory expectations relating todata integrity and effective management information system within banks, the expectations would be the basisfor more specific data requirements to be issued by the Bank for Basel II implementation. In particular, theguidelines will be used by the Bank in its pre-validation assessment on data and systems capabilities foreffective Basel II implementation.

In an effort to facilitate industry Basel II implementation efforts on data, the Bank is also exploring otherindustry-wide initiatives that can be undertaken to accelerate the progress made by banks. In this regard, thepossibility of leveraging existing infrastructure like the Central Credit Reference Information System (CCRIS) andthe Fraud Information Database System (FIDS) would be explored. The central credit repository system such as


125

The Banking System

the CCRIS could be enhanced with a single borrower group identifier mechanism to facilitate the monitoring ofrisk concentration on borrowers and their related parties. The information could be shared and used by allbanking institutions as benchmarks to ensure that information on borrowers and their related parties capturedinternally are accurate. The CCRIS could also be further enhanced with the inclusion of ratings on bankinginstitutions’ corporate customers, thus facilitating supervisory surveillance and the assessment of the robustnessof internal ratings systems among banks.

An industry-wide collection of data on operational risk losses is another initiative where the Bank sees potentialbenefits for the industry over the long-term. In Malaysia, the existing platform such as FIDS for the capturingof industry data on fraud is only a small portion of operational risk loss data that would be required by bankinginstitutions for the modelling of operational risk. Given the time taken to develop a meaningful operationalrisk database, the possibility of developing an expanded operational loss database at the national or even atregional level should be explored by banking institutions and supervisors to support further development inoperational risk management within the Asia-Pacific region.

From a capacity building perspective, the need to ensure and maintain a high standard of data quality andsystem capability is not confined to banking institutions. Supervisors will also need to reassess their existingreporting infrastructure from banks given the extensiveness of data required for purposes of more rigoroussupervisory monitoring and risk assessment. While there would be a need to enhance the supervisory reportingframework to meet this objective, the challenge for supervisors would be to raise the supervisory reportingstandards without putting undue and unnecessary burdens on the banking industry. For Bank NegaraMalaysia, investment in data and system capability would complement the continuing efforts and investment todevelop specialised skills and expertise for the assessment of banks’ internal models and risk estimates. Therisk specialist’s assessment would be a fundamental basis for making supervisory judgments on the credibilityand robustness of the capital calculation process under Basel II environment.

During the year, the Bank also engaged a series ofdiscussions with local external credit assessmentagencies (ECAIs) in its process to finalise the criteriafor recognition of ECAIs for the implementation of theStandardised Approach. On the international front,Bank Negara Malaysia continued to participate in activedialogues with home supervisors of foreign bankinginstitutions to gain greater clarity on the approachesundertaken by these regulators whilst forging greatercooperation with them for the implementation of BaselII. The Bank has been particularly involved in the workof the Executive Meeting of East Asia Pacific (EMEAP)Working Group on Banking Supervision, focusing onBasel II related issues that are common among membercountries, such as the recognition of ECAIs and home-host issues relating to the validation of internal models.

In addition to the initiatives that are being carried outtowards preparing for the adoption of Basel II, continuedefforts are also being channelled to strengthen the riskmanagement practices of the industry. As bankinginstitutions undertake more investment, trading andhedging activities, it becomes increasingly essential forthem to take into account the impact and potential effectsof movements in the financial market. In this regard and tocomplement the Basel II initiatives, the implementation of

the Market Risk Capital Adequacy Framework (MRCAF)which was issued in September 2004, took effect in April2005. This represented a significant shift towards explicitprovision of regulatory capital for potential losses arisingfrom activities that expose banking institutions to marketrisk. Further to this, the recent period has witnessed asignificant expansion in loans extended by bankinginstitutions for the purchase of residential properties. Toensure that such expansion is undertaken in a prudentmanner and that sufficient capital is maintained to supportthis increased exposure, the risk-weight imposed onhousing loans secured by first charge that have turnednon-performing was increased from 50% to 100%. Inaddition to the regulatory changes, the Bank also focusedits supervisory resources on assessing the adequacy of riskmanagement systems and market conduct practices inhousehold lending. Despite the incorporation of marketrisk capital requirements into the existing RWCRframework and the increased risk-weight for housing loanNPLs, banking institutions remained sufficiently capitalisedwith the RWCR maintained at levels well above theminimum requirement of 8%.

In recent years, banking institutions have begun toengage in more credit derivative transactions to hedgethemselves against counterparty risks and to reduce


126

capital requirements without affecting their existingcommercial relationship with the counterparty. In tandemwith efforts to promote sound risk management practicesby banking institutions, Bank Negara Malaysia had issuedthe Guidelines on Regulatory Treatment for CreditDerivatives Transactions in September 2005 which specifyprudential rules and regulatory capital treatment for thefour most common types of credit derivative products,namely, the credit default swap, first-to-default basket,total rate of return swap and credit-linked notes. Theregulatory capital treatment aims to ensure sufficientallocation of capital by banking institutions, either in theirposition as buyers or sellers of the credit derivativeproducts. In addition, the products offered must besubject to approval by the Bank and be supported by arobust risk management framework.

Enhancing Infrastructure for Consumer Protectionand Further Promotion of Consumer EducationIn 2005, the thrust of the initiatives on consumerprotection and education continued to be directedtowards empowering consumers to be better positioned totake responsibility for their own well-being. The strategiesadopted were two-pronged. Firstly, strengthening theconsumer protection regulatory infrastructure andsecondly, enhancing consumer education initiatives.

One of the key elements in building the foundation for aneffective consumer protection as outlined in the FSMP is thesetting up of an explicit deposit insurance system. Following

the completion of the development of a deposit insuranceframework which culminated in the passing of the MalaysiaDeposit Insurance Corporation Act 2005, the MalaysiaDeposit Insurance Corporation (MDIC) commenced itsoperations in September 2005. This significant milestonemarked a change in the approach towards providingprotection to depositors and augured well with thecontinuous objective of enhancing the financial soundnessof banking institutions through the promotion of soundfinancial, business and risk management practices.

Under the deposit insurance system, explicit depositprotection is provided to eligible deposits up to theprescribed limit of RM60,000 per depositor, per memberinstitution. This amount is inclusive of principal andinterest. A separate coverage of the same amount isprovided for Islamic deposits, accounts held under jointownership and trust accounts, sole proprietorships andpartnerships. It is envisaged that the level of coveragewill provide full protection for up to 95% of depositors.In addition to its payout function, the MDIC will also,under certain specific circumstances, undertake theresolution of banking institutions, when the need arises.

Another central objective of consumer protection is toensure that consumers are not disadvantaged amidst themove towards a more market-driven financial sector. Instrengthening consumer protection, efforts were directedtowards ensuring that the public continue to have access tobasic banking services at reasonable costs. Towards this end,

The Deposit Insurance System in Malaysia

One of the significant milestones achieved during the year was the successful establishment of theMalaysia Deposit Insurance Corporation (MDIC) in August 2005. Malaysia now joins more than95 countries that have explicit deposit insurance systems. The establishment of the MDIC furtherstrengthens the consumer protection framework in Malaysia and represents a major step forward in theongoing development of the Malaysian financial system through enhanced discipline and strengthenedrisk management practices of member institutions, in line with the recommendation outlined in theFinancial Sector Masterplan. The deposit insurance system has been carefully designed to meet the needsof Malaysians, and in particular, to provide equitable coverage for conventional and Islamic deposits. As animportant component of the safety net, the deposit insurance system complements the role and functionsof Bank Negara Malaysia in preserving overall financial stability.

MandateThe MDIC is an independent statutory body established under the Malaysia Deposit Insurance CorporationAct 2005 (MDIA) with mandates to:(i) administer a deposit insurance system;(ii) provide insurance against the loss of part or all deposits of a member institution;(iii) provide incentives for sound risk management in the financial system; and(iv) promote or contribute to the stability of the financial system.In carrying out its mandates of (ii) and (iv), the MDIC is required to minimise cost to the financial system.


127

The Banking System

MembershipMembership in the deposit insurance system is compulsory for commercial banks (including locally-incorporated subsidiaries of foreign banks operating in Malaysia) licensed under the Banking and FinancialInstitutions Act (BAFIA) 1989 and Islamic banking institutions licensed under the Islamic Banking Act (IBA)1983. Banking institutions that focus mainly on wholesale deposits, namely merchant banks, discounthouses and investment banks are automatically excluded from membership. The branches of domesticbanking institutions operating abroad and other deposit taking institutions namely, development financialinstitutions, provident and pension funds including the Employees Provident Fund and Lembaga UrusanTabung Haji (Pilgrimage Fund Management Board) and cooperative societies are also excluded from thedeposit insurance system.

CoverageDeposits which enjoy deposit insurance coverage include savings, demand, fixed, Islamic deposits (generalinvestment and special investment deposits), banker’s cheques, bank drafts and other payment instructions.Deposits that are not payable in Malaysia, foreign currency deposits, negotiable instruments of deposit or otherbearer deposits, repurchase agreements and money market placements are not insured by the MDIC.

Eligible deposits are insured for up to RM60,000, inclusive of principal and interest. This limit is applied perdepositor per member institution. Separate coverage is available for deposits that are held jointly or intrust, and deposits of sole proprietorships, partnerships or professional practices.

Islamic deposits are accorded a separate coverage limit of RM60,000, inclusive of principal and return ondeposit. This separate coverage limit ensures equitable treatment and no competitive distortion betweenconventional and Islamic deposits.

Reimbursement of depositors’ claimsWhere a member institution is unable to meet its obligations to its depositors, the MDIC is required toreimburse depositors up to the RM60,000 insured limit as soon as possible. Reimbursing depositors on atimely basis is crucial to maintain confidence in the financial system.

FundingThe deposit insurance system is funded by annual premiums assessed against member institutions basedon total insured conventional or Islamic deposits held as at 31 December.

The MDIC maintains and administers two separate deposit insurance funds for conventional and Islamic deposits.Investments held in the Islamic Deposit Insurance Fund are made in accordance with Shariah principles.

Governance structureThe MDIC is governed by a seven-member Board of Directors, comprising:• a Chairman;• Governor of Bank Negara Malaysia;• Secretary General of Treasury;• a representative from the public sector; and• not more than three representatives with relevant private sector experience and at least one with

relevant banking and financial sector experience.

Members of the Board are appointed by the Minister of Finance, with the exception of the Governor andSecretary General. Directors, officers and employees of banking institutions which are members of the depositinsurance system and their related parties are not allowed to be represented on the Board to avoid conflict ofinterest and unfair access to confidential information. The Board of Directors is responsible for the conduct ofthe business and affairs of the MDIC and has a statutory duty to act in the best interests of the deposit insurerin accordance with its mandate.


128

the Bank had in 2004, introduced the basic banking servicesframework which required the offering of a basic savingsaccount and a basic current account to all Malaysiansincluding permanent residents. Further to this, bankinginstitutions were directed to automatically convert previouslydesignated plain vanilla savings account into basic savingsaccounts (BSA) in August 2005. The mandatory conversionwould facilitate greater banking inclusion of all segments ofthe community. Concurrent with efforts to ensure financialaccess was the emphasis on ensuring fair and equitablebanking fees and charges. In recent years, in tandem withincreasing technological innovation and consumer demandfor more innovative products, banking institutions havemade substantial investments on hardware and softwareinfrastructure as well as product development to makeavailable financial products and services that are aligned toconsumer demands and which are more efficient, reliableand secure. To defray part of the costs of such investments,fees were levied on products and services provided. Toensure that the cost imposed is fair and equitable to bothconsumers and banking institutions, guidelines outlining theguiding principles for the imposition of fees and charges onbanking products and services for individuals and, small- and

medium-sized enterprises (SMEs) were issued in mid-2005.Banking institutions were required to ensure that theirexisting fees and charges framework complies with theseguiding principles and prior approval of the Bank wasrequired for new fees or charges to be imposed oncustomers.

Another important component of the consumer protectionframework is to put in place the appropriate institutionalarrangements to ensure that consumers have sufficientavenues to seek assistance and redress when they faceproblems with their financial institutions. In this regard, theBank is establishing a Credit Counselling and DebtManagement Agency (CCDMA) that will provide anavenue for individual borrowers and potential borrowers toseek advice on managing their credit and to equip themwith the necessary skills to manage their finances. Inaddition, the CCDMA will also assist consumers to pro-actively manage their debts via customised debt repaymentplans. This service is available for all debts relating tohousing loan, personal loan, credit card, charge card andhire purchase that have been obtained by individuals fromfinancial institutions regulated by the Bank.

Collaboration and coordinationBank Negara Malaysia is the primary supervisory and regulatory authority responsible for maintaining overallstability of the Malaysian banking system while the MDIC administers the deposit insurance system in a mannerthat contributes towards promoting public confidence in the financial system.

As part of its supervisory functions, Bank Negara Malaysia performs examinations on the health of financialinstitutions and provides the MDIC with reports on their findings. As such the MDIC relies extensively on theinformation provided by the Bank for assessing its risks. In addition, Bank Negara Malaysia may advise theMDIC that a financial institution is no longer viable. Upon such advice, the MDIC is required to find a least-costresolution to deal with the troubled member institution. This may involve a wide range of intervention actions,including assumption of control, applying for the appointment of a receiver or presenting a petition for thewinding-up of that member institution. This power, however, is only triggered when the Bank makes such adetermination.

As a result, close collaboration and coordination between Bank Negara Malaysia and the MDIC is crucial toensure the effectiveness and efficiency of both organisations in meeting their mandates. The importance ofsuch a relationship dictates that a strategic alliance agreement be executed between the two organisations toclearly set out how they will collaborate and coordinate their activities in fulfilling their respective roles andresponsibilities, with the objective of mitigating unproductive overlap and duplication of efforts. Such anagreement will also provide a platform for Bank Negara Malaysia and the MDIC to engage in active andcontinuous consultations to achieve optimal outcomes.

ConclusionThe establishment of the Malaysian deposit insurance system strengthens the consumer protection frameworkin Malaysia. Great care was taken in its design to complement the role and function of Bank Negara Malaysiaas the primary regulator and supervisor in promoting the safety and soundness of the financial system for thebenefit of all Malaysians.


129

The Banking System

The Credit Counselling andDebt Management Agency(CCDMA) enhances theavenues for consumers to seekredress and assistance inmanaging their finances.

Efforts to improve consumer literacy levels continuedto be directed at addressing the issue of asymmetry ofinformation through the publication and disseminationof information on retail banking products and servicesvia the consumer education programme, BankingInfo.This program is currently in its fourth year ofoperation. During the year, two new booklets, CurrentAccount and Investing Your Money were published.These publications aim at providing basic information

Establishment of the Credit Counselling and Debt Management Agency

An important part of the strategies implemented in the Financial Sector Masterplan has been thedevelopment of the consumer protection framework and the enabling infrastructure to protect consumers'interests while at the same time enhancing consumers’ financial capability to participate effectively in thefinancial system. The agenda covers a wide spectrum of initiatives involving infrastructure and institutionaldevelopment and includes financial education, advisory services, distress management, rehabilitation andputting in place avenues for redress.

In this respect, Bank Negara Malaysia has already put in place a number of institutional arrangements toensure that consumers have sufficient avenues to seek assistance and redress when they encounterdifficulties in their interface with financial institutions. These avenues include dedicated complaint unitsat banking institutions and an independent dispute resolution mechanism at the Financial MediationBureau. In addition, Bank Negara Malaysia Laman Informasi, Nasihat dan Khidmat has been establishedto act as a centralised point of contact to facilitate a rapid and effective response for members of thepublic in matters related to the financial sector. These institutional arrangements will be complementedwith the establishment of a Credit Counselling and Debt Management Agency (CCDMA) which willprovide individuals with money management and credit counselling as well as debt managementservices. Scheduled to be operational in April 2006, this institutional arrangement aims not only atproviding advisory services but also assisting individuals who are encountering difficulties in meetingtheir financial commitments.

Private consumption in the Malaysian economy has strengthened over the years, supported by positiveconsumer sentiments and increased access to banks’ financing, notably in the area of consumer loans.This trend has been accompanied by an increase in the level of household indebtedness. For a number ofconsumption-driven economies, household debts have exceeded prudent levels in the range of 80-100%of GDP. Household indebtedness of the banking sector in Malaysia has, however, remained withinprudent levels at 61.5% of GDP. Strong debt servicing capacity is also reflected in the levels of non-performing loans of the household sector which remained stable at below 8% of total outstandinghousehold loans as at end-2005, much lower than the peak of 12.2% as at end-1998. This trend isexpected to be sustained with household lending continuing to record robust growth. While prudentlending and borrowing practices will continue to be promoted with concerted efforts at educatingconsumers on wise financial management, there will be cases where consumers are affected byunexpected developments or cases in which they have overstretched themselves financially and are unableto meet their obligations.

The establishment of CCDMA is part of the many efforts by Bank Negara Malaysia to proactively ensurethat the household sector continue to be resilient by providing an avenue for existing and potentialindividual borrowers to seek advice and assistance on managing their credit while at the same timepromoting a sound and robust banking system by facilitating debt repayment efforts and minimisingincidence of non-payment arising from poor debt management.


130

and tips on current account and investment forindividuals. In addition, two information guides,Looking for Housing Loan and Basic Banking Serviceswere also published during the year to provide quickand easy reference guides for consumers. Simplechecklists to enable consumers to do comparisonshopping for retail banking products or services arealso provided.

Type of Service Description

Counselling and Advice on One-to-one counselling and advice that cover financial budget, money

Financial Management management and credit issues. Assistance will be provided to consumers in

analysing their financial situation and identifying all options available to

help them to get back on track.

Debt Management A personalised debt repayment programme designed to provide eligible

Programme borrowers with solutions for their financial situation. The programme will

include review of current financial condition, development of tailored

financial solutions in collaboration with borrowers and banking institutions.

The programme also provides ongoing counselling and education to

consumers throughout the life of the programme and serves as an

alternative means of debt settlement through out-of-court procedures

based on the agreed repayment plans between banking institutions and

the borrowers.

Financial Education Education programmes for consumers, in particular, on the proper use of

consumer credit and basic money management skills such as savings and

budgeting as well as tips on how to use credit responsibly and debt

management.

Details of Services Offered by CCDMA

The CCDMA will provide free credit counselling, education and debt settlement services to consumers. Creditcounselling and education is important as individuals have to be equipped with the necessary skills and tools tomanage their finances for long-term financial sustainability and to prevent a recurrence of such a situation. TheCCDMA will also assist consumers to proactively manage their debt via out-of-court procedures based onagreed repayment plans between the creditors and the debtors. Eligible individual borrowers will have access toassistance in restructuring debts relating to housing loans, hire purchase, credit card, charge card and personalloans that have been obtained from financial institutions regulated by Bank Negara Malaysia1. Cases involvingmultiple creditors may be referred directly to CCDMA while borrowers with single creditor should refer theircases to CCDMA when they have failed to reach an amicable work-out plan with their creditors. Amongst theservices offered by the CCDMA are:

The CCDMA will be governed by a Board of Directors of whom the majority are independent directors. TheAgency will be staffed by independent and experienced counselors who are experienced in credit counsellingand debt restructuring. The CCDMA is located at Level 8, Maju Junction Mall, Kuala Lumpur.

The establishment of CCDMA marks another milestone in the development of a comprehensive consumerprotection infrastructure and will contribute positively towards sustainable development of the consumer sector.Much progress has been achieved in developing and strengthening the consumer protection and educationframework that aims at promoting a fair, equitable and transparent financial market as well as active consumerism.

To further promote greater access to timely, reliableand accurate information as well as to minimise thecost of information search, comparative information oncredit cards and hire purchase products were publishedin the comparative tables in the BankingInfo website.These tables contain up-to-date and pertinentinformation and provide a convenient point ofreference for consumers. The tables also serve to

1 The institutions are commercial banks, merchant banks, Islamic banks, selected development financial institutions, insurance companies, takaful operators andcredit and charge card issuers.


131

The Banking System

promote transparency and drive greater competitionamongst financial services providers. With thepublication of these tables, the total number of tablespublished thus far stands at five. Currently, efforts arebeing undertaken to disseminate such tables in hardcopy format to enable consumers without internetaccess to have access to such information.

The publication of consumer education materials wascomplemented by dedicated outreach programmestargeting groups such as women, college and universitystudents as well as retirees. The outreach programmesseek to educate consumers on financial matters such asbanking products and services, budgeting and moneymanagement. Women, particularly housewives, havebeen identified as one of the priority target audienceunder the programme in view of the important role theyplay in managing the finances of the household andtheir relative limited sophistication on financial matters.The outreach programmes targeted at college andvarsity students were geared towards proactivelyequipping them with the requisite knowledge and skillsto manage their finances prior to their entry into thework force while outreach programmes for retirees weretargeted towards empowering them to take greaterresponsibility and control for their post retirementfinancial needs. In 2005, a total of 25 outreachprogrammes were conducted reaching a total of morethan 4,000 participants in these three categories.

To further enhance interface with the public and as partof its corporate social responsibility, Bank NegaraMalaysia had established the Laman Informasi NasihatKhidmat (Bank Negara Malaysia LINK) in February 2005.The Bank Negara Malaysia LINK acts a one-stopreference point for the public to seek information andclarification on issues relating to policies and operationsof the Bank and the financial sector as well as acts asone of the platforms for consumer education. Itprovides face to face interaction to walk-in visitors,including individuals and SMEs, on general enquiriesand public complaints, hence enhancing theeffectiveness and efficiency of information search. TheBank Negara Malaysia LINK also offers support to theBank’s SME Unit in various matters associated withaccess to financing by SMEs such as loan applicationsand restructurings as well as information on variousspecial funds provided by the Bank and othergovernment ministries or agencies. This will greatlyincrease the outreach capabilities of the Bank in itsefforts to promote the development of the SME sector.Further to this, the Bank Negara Malaysia LINK providesanother platform for the Bank to educate members ofthe public on their roles and responsibilities as consumers

of financial products and services, with the aim ofenhancing the level of financial literacy among thebanking public. Information to the public and SMEs ismade available via various channels, including exhibitions,interactive information kiosks and booklets. Since itsinception, the response has been encouraging, with morethan 36,000 visitors received up to end-February 2006.The bulk of the queries relate to banking and insurance,SME financing, credit information, on-line applications forexchange control approvals, returned and dishonouredcheques, and currency.

Bank Negara Malaysia participated in a number ofexhibitions and seminars throughout 2005. Theseparticipations serve as an important means forunderstanding and addressing public concerns onfinancial matters, as well as disseminating theinformation published thus far. Publicity campaigns viaadvertisements in major newspapers and radio stationswere also undertaken to promote greater consumerawareness of the consumer education programme. In2005, a total of 1.2 million booklets were taken up bythe public while the BankingInfo website recorded14 million hits, bringing the total number of hits sinceits launch in 2003 to 31 million (2004: 1.2 millionbooklets and 17 million hits).

Bank Negara Malaysia also played host to the ThirdInternational Forum on Financial Consumer Protectionand Education during the year, which was attended by42 participants from 34 organisations worldwide. Theforum, themed Fostering Greater Consumer Educationand Protection, was aimed to provide a platform forregulators worldwide to share information and insights,discuss challenges and issues as well as work togethertowards developing best practice standards onconsumer protection and education issues.

To complement the policy move towards enhancingconsumer protection and in line with rising consumerexpectations, the scope of supervisory activities in2005 was also extended to include assessment of thebanking institutions’ code of conduct in promotingfair market practices, disclosure standards as well aseffective dispute resolution mechanisms to ensurethat consumers are treated equitably and have accessto adequate and timely information to facilitateeffective decision making.

Ensuring Continued Access to FinancingAs a primary mobiliser of financial resources that arechannelled from savers to the various segments of theeconomy, the banking sector continues to play animportant intermediation role in ensuring continued


132

access to financing for all segments of the economy.The banking system remained the largest provider offunds in the economy, with an increase in loansoutstanding of 8.6% to RM558.1 billion in 2005.With the continued growth in consumer spending,the bulk of this increase were channelled to thehouseholds and SMEs, which recorded an expansionof 15.1% and 8.7% respectively in 2005. Lendingactivities throughout the year thus were supportive inmeeting the requirements of the various sectors ofthe economy, with most sectors recording sustainedgrowth in loan approvals.

With the introduction of the new interest rateframework in April 2004, banking institutions havebeen better able to price interest-based productsefficiently, based on their respective cost of fundingand business strategy. Since the introduction of thenew framework, BLRs quoted by almost all bankinginstitutions in 2005, have been maintained at the samelevel (prior to the revision of the Overnight Policy Rate).This reinforces the notion that banking institutions areoffering competitive rates even before the introductionof the new framework. Additionally, the removal of themaximum lending spread of 2.5 percentage pointsabove BLR facilitated the continued innovation bybanking institutions to meet the increasingly complexand sophisticated demands of customers. Indeed, somebanking institutions have introduced new innovativeinterest-based products, which include unsecuredpersonal loans to individuals and SMEs.

Ensuring continued access to financing for priority sectorsremains an important priority of the Bank. In line with theobjective of providing financing to the priority sectors inthe most efficient manner, banking institutions also havean important role to play. Recognising this and the needto balance social responsibility with operational efficiency,banking institutions were given the flexibility to set theirown targets for lending to SMEs and lower income groupfor the purchase of residential properties, based on theirrespective capacity and business strategy. In 2005, thedefinitions used for various priority sectors were furtherrefined. The threshold for the purchase of low-costhouses was lowered from RM180,000 to RM60,000,whilst the definition of SMEs was aligned with that of theNational SME Development Council. To further promoteBumiputera entrepreneurship, at least 50% of the targetset by banking institutions for SME lending must bechannelled to Bumiputera SMEs.

Recognising the increasingly significant role of SMEs in theeconomy, various efforts are underway to enhance thecontribution of SMEs to the growth of the economy. In

addition to the realignment of functions and institutionalstructure of DFIs, banking institutions have launched twonew trade finance products, namely, Multi Currency TradeFinance (MCTF) and Indirect Exporter Financing Scheme(IEFS), to the SMEs with the aim of encouraging greaterSME participation in the export market by lowering thefinancing cost and removing the requirement for collateral.The credit risk associated with this type of financing will beshared between the participating banking institutions andthe EXIM Bank. Further to this, the Bank will beestablishing two venture capital funds of RM150 millioneach to promote the agriculture sector, particularly in theareas of integrated farming and fisheries, as well asbiotechnology-related industries.

Completion of Financial Sector RestructuringExerciseThe year 2005 witnessed the conclusion of theinstitutional arrangements which were established tostrengthen the resilience of the banking sector duringthe Asian financial crisis. The last of the three specialisedinstitutions, Pengurusan Danaharta Nasional Berhad(Danaharta) wound up its operations on 31 December2005, having successfully fulfilled its mandate ofaddressing the NPL problems faced by the bankingsector in the aftermath of the crisis. Over its lifespan,Danaharta had effectively resolved all of the NPLsacquired and recovered a total of RM30.4 billion, whichrepresent a final lifetime recovery rate of 58%. Of thetotal amount recovered, RM26.7 billion have beenrealised in cash whilst the remaining RM3.7 billion are inthe form of residual recovery assets which includerestructured loans, securities, properties and other non-cash assets. Danaharta has also successfully redeemedall of its zero-coupon bonds which carried a total facevalue of RM11.1 billion.

The lifetime cost of operating Danaharta is estimated tobe RM1 billion. As such, out of the initial seed capital ofRM3 billion allocated for the establishment ofDanaharta, RM2 billion worth of assets, comprisingRM1.5 billion worth of residual recovery assets andRM0.5 billion in cash, were returned to its shareholder,Minister of Finance Incorporated. With the closure ofDanaharta’s operations and transfer of the control ofassets to the Minister of Finance Incorporated, the latterhad established a wholly-owned subsidiary, ProkhasSdn. Bhd., on 1 January 2006 to act as the collectionagent for the residual recovery assets and to convertthese assets into cash at the best possible value.

All in all, the cost incurred by the Government for thefinancial sector restructuring efforts through Danahartaand Danamodal Nasional Berhad (recapitalisation


133

The Banking System

agency) amounted to RM12.6 billion or 2.5% of thenation’s gross domestic product. This is expected todecline further as a result of prospective returns fromthe remaining investments. The successful completionof the financial sector restructuring exercise hasmoulded a strong foundation for future developmentefforts to ensure that the banking sector remainseffective and capable of meeting the changingdemands of an evolving economy.

Moving ForwardIn responding to the continuously evolving financiallandscape as well as changing customer requirementsand sophistication, significant efforts will continue tobe directed towards the ongoing dynamictransformation of the domestic banking system intoone that has the capacity and agility to withstand

shocks and survive the increased financial marketvolatilities. With the second phase of the FSMP wellunderway, banking institutions will progressively facegreater competition, both from within the bankingsector and from non-bank financial institutions as wellas the capital markets. The challenges of a moreliberalised and deregulated environment necessitatesthe formulation and execution of coherent enterprise-wide strategies by banking institutions, coupled withintensifying efforts to enhance efficiency, productivityand innovation to ensure sustainable performance. Inthis regard, policy initiatives will continue to be centredon enhancing the dynamism and resilience of thebanking system whilst ensuring the preservation offinancial stability and protection of consumers, while atthe same time ensuring the continued effectiveintermediation by the financial sector.

Banking Measures Introduced in 2005

In 2005, several initiatives were undertaken to strengthen the resilience of the financial system and to promoteefficiency and competitiveness of the banking industry. In addition, measures were also undertaken to enhanceconsumer protection and public confidence in the banking sector.

Enhancing Safety and Soundness of the Banking System❏ Risk-Weighted Capital Ratio Framework – Amendment to Risk Weight for Housing Loans Secured

by First ChargeTo enhance the risk sensitivity of the existing capital adequacy framework, Bank Negara Malaysia revisedthe risk weight for non-performing housing loans secured by first charge from 50% to 100% in March2005. The revision would ensure that banking institutions continue to maintain sufficient capital to supportthe expansion of financing for the purchase of residential properties.

❏ Guidelines on Electronic Broking System by Licensed Money BrokersThe Guidelines were issued in August 2005 to ensure that the electronic broking system offered by moneybrokers operate in a manner that promotes the overall integrity and stability of the financial market. It alsosets out regulatory processes, procedures, conditions, operational as well as regulatory requirements foroperating an electronic broking system.

❏ Guidelines on Corporate Governance for Licensed Institutions (Revised BNM/GP1)As part of the ongoing efforts to enhance corporate governance among licensed institutions, theGuidelines on Corporate Governance for Licensed Institutions were issued in September 2005 to replace theGuidelines on Directorships in the Banking Institutions. The Guidelines prescribe broad principles andminimum standards as well as specific requirements for sound corporate governance, which licensedinstitutions and bank/financial holding companies are expected to adopt. The revised Guidelines are basedon the fundamental concepts of responsibility, accountability and transparency, with greater emphasis onthe role of the board and management. Amongst the key changes of the revised Guidelines are:• Separation of the roles of Chairman and CEO;• Separation between shareholders and management;• Enhanced role and composition of independent directors. At least one-third of the board members must

be independent directors and they are expected to display strong elements of independence on theboard both in thought and actions;


134

• Establishment of three new board committees, namely the Nominating Committee, RemunerationCommittee and Risk Management Committee; and

• Limitation on the number of Executive Director to not more than one.

❏ Guidelines on Regulatory Treatment for Credit Derivatives TransactionsThe Guidelines on Regulatory Treatment for Credit Derivatives Transactions were issued in October 2005, tospecify the capital adequacy treatment for credit derivatives transacted by banking institutions licensedunder the Banking and Financial Institutions Act 1989 (BAFIA). The Guidelines specify regulatory capitaltreatment for the four most common types of credit derivatives products, namely, the credit default swap,first-to-default basket, total rate of return swap and credit linked notes that are recorded in either thebanking book or the trading book. Banking institutions that engage in credit derivatives transactions arerequired to obtain specific approval from Bank Negara Malaysia under the product approval process as setout under the Guidelines on New Product Approval Requirements, with the exception of products that aretransacted based on common templates already approved by the Bank.

Promoting Competition and Efficiency within the Banking Sector❏ Guidelines on Base Lending Rate, Lending Rates and Deposit Rates of Banking Institutions

Effective March 2005, fixed deposits placed by corporations or large business enterprises and non-residents areon a negotiated basis regardless of the amount placed, hence contributing towards a more market orientedpricing environment for depositors. Other categories of depositors including individuals and small mediumenterprises (SMEs) however will continue to be eligible for the Board rates for deposits up to RM1 million.

❏ Guidelines on Offering of Investments Linked to Derivative (ILD) ProductsIn line with the effort to increase choices of ILD products for eligible investors, Bank Negara Malaysia addedto its list, yield-enhancing investment products linked to foreign currency, commodities, equity and fixedincome derivatives in April 2005. As the list of products expanded, Guidelines on Offering of InvestmentsLinked to Derivative Products were issued to replace Investments Linked to Derivatives Guidelines issued on12 May 2003. The Guidelines were further enhanced in February 2006 to incorporate the followingchanges:• The cap on aggregate outstanding notional amount of ILD products offered to investors was removed;

and• ‘File and Use’ approach adopted for submission of applications pertaining to ILD products whereby ILD

products are deemed approved upon submission to Bank Negara Malaysia subject to compliance withspecified conditions in respect of risk management, disclosure, marketing and type of products offered.

❏ Investment in Units of Property Trust Funds and Unit Trust FundsEffective 20 May 2005, licensed banking institutions are allowed to invest in both property trust funds andunit trust funds, provided that:• The investment shall not exceed 5% of the issue size of the fund or 5% of the licensed banking

institution’s capital funds, whichever is lower;• The aggregate value of all such investments shall not exceed 10% of the licensed banking institution’s

capital funds; and• The aggregate value of the investment in shares and interest-in-shares, unit trust funds, property trust

funds and immovable properties does not exceed 50% of the licensed banking institution’s capital base.

❏ Guidelines on Investment BanksPursuant to Section 126 of BAFIA 1989 and Section 158 of the Securities Commission Act 1993, BankNegara Malaysia and the Securities Commission (SC) jointly issued the Guidelines on Investment Banks on1 July 2005 that specify the requirements, processes and regulatory framework for investment banks.

All financial groups involved were given a one-year period, commencing 1 July 2005 to be transformed intoinvestment banks. In facilitating this process, the Government agreed to grant stamp duty and real property


135

The Banking System

gains tax exemptions and tax credits for the accumulated losses of the acquiree financial institutions involvedin the rationalisation. Foreign equity participation for investment banks was also increased to 49% tofacilitate greater transfer of skills, expertise and technological know-how to the investment banks.

❏ Guidelines on Access to Interbank Market by Universal BrokersAs part of the measures to strengthen the capacity and competitiveness of universal brokers, universalbrokers that meet the following eligibility criteria were allowed to access the interbank market to undertakeborrowing or lending of RM funds:• Minimum shareholders’ funds unimpaired by losses of RM100 million;• Strong capital position as measured by capital adequacy ratio (CAR) imposed by Bursa Malaysia (Bursa);• Satisfactory conduct of current credit facilities obtained from banking institutions; and• Compliance with prudential and financial regulations imposed by SC and Bursa.

The Guidelines also stipulate the prudential requirements for universal brokers who wish to participate inthe interbank market. The main requirements are as follows:• Limit on aggregate interbank borrowings not exceeding two times its shareholders’ funds, unimpaired

by losses;• A robust and effective risk management framework to identify, measure, monitor and manage risks;

and• A sound liquidity management framework that encompasses strategies to manage funds, ability to

match near and short-term liquidity requirements and maintenance of sufficient credit lines, liquefiableassets in managing potential shortfall in liquidity.

These universal brokers are also allowed to borrow securities from the Bank via the repo arrangement toenhance their securities broking activity and will be subject to examination by the Bank and SC, whereappropriate.

❏ Provision of Factoring Services by Commercial BanksWith effect from 10 August 2005, all commercial banks are allowed to provide factoring services either aspart of their commercial banking business or through a separate legal entity. The separate legal entity canbe in the form of a fully or partially owned subsidiary or a joint venture with any other parties, includingforeign parties. This is to encourage competition and participation of banking institutions in areas currentlyserved by fringe institutions.

❏ Guidelines on the Disposal/Purchase of Non-Performing Loans (NPLs) by Banking InstitutionsTo allow banking institutions greater flexibility in managing their balance sheets and in reallocatingresources to strengthen their business potential and competitiveness, Guidelines on the Disposal/Purchaseof Non-Performing Loans (NPLs) by Banking Institutions were issued in December 2005. The Guidelinesallow banking institutions to undertake outright sale of their NPLs to eligible third parties, as well as topurchase NPLs from other banking institutions. It also specifies general conditions, requirements andprocesses as well as roles and responsibilities of the Board of Directors and senior management of bankinginstitutions that wish to undertake such sale or purchase. The Guidelines prescribe that NPLs can only besold to domestic banking institutions or locally incorporated foreign banking institutions in Malaysia,domestic investors or foreign investors through Special Purpose Vehicles (SPVs) with foreign equityparticipation capped at 49%. All NPLs sold to eligible third parties must be on a non-recourse basis.

❏ Establishment of New Branches by Locally-Incorporated Foreign BanksIn line with the broad strategies outlined in the Financial Sector Masterplan, locally-incorporated foreignbanks (LIFBs) are allowed to establish up to four additional branches within a period of one year with effectfrom 1 January 2006 subject to specified conditions. This operational flexibility represents the first of aphased approach of branch liberalisation. LIFBs are however, required to seek Bank Negara Malaysia’s priorapproval for the establishment of the new branches.


136

PERFORMANCE OF THE BANKING SYSTEM

OverviewResilience of the banking system strengthened further in2005 amidst favourable macroeconomic conditions withthe key financial soundness indicators exhibitingencouraging trends. The banking system’s exposure tothe household sector remained within prudent levelsand does not represent a threat to the overall systemicstability of the system. Key developments in thefinancial performance of the banking system aresummarised as follows:

• The level of capitalisation remained above 13%amidst strong expansion in asset base andcontinued strong profit performance;

• The quality of the loan portfolio continued toimprove, underpinned by lower incidence of newNPLs, higher reclassification of NPLs to performingstatus and recoveries. Specifically, the NPL ratio of thebusiness sector declined further whilst the NPL ratioof the household sector remained relatively stable;

• Lending activities remained robust, drivenprimarily by lending to the retail sector in anenvironment of greater competition; and

• Exposure to market risks remained manageable.

ProfitabilityThe banking system continued to record a strongprofit performance in 2005 underpinned byfavourable macroeconomic conditions and financialmarkets. Preliminary unaudited pre-tax profits for theyear amounted to RM12.4 billion, an increase of 7%over the level achieved in the preceding year.Reflecting the continued diversification in businessportfolio of banking institutions, growth in profitswas driven mainly by higher revenue derived fromlending and financing activities, sale of wealthmanagement products, provision of remittanceservices as well as trading and investment activities.The higher profit was achieved amidst continuingefforts by banking institutions to further strengthentheir balance sheets. As a result, return on averageequity improved to 16.9%. Meanwhile, return on

Enhancing Consumer Protection❏ Imposition of Fees and Charges on Banking Products and Services

As part of the measures to ensure access to banking services and to ensure that fees and charges levied arefair and equitable to both banking institutions and consumers, guiding principles were issued relating to theimposition of fees and charges for banking products and services. Banking institutions are required toensure that their existing fees and charges comply with these principles and prior approval from BankNegara Malaysia is required for any upward revision of existing fees and charges or for any introduction ofnew fees and charges imposed on individuals and/or SMEs.

❏ Access to Financing by Priority SectorsAs in previous years, Bank Negara Malaysia continues to place emphasis on lending by banking institutionsto the priority sectors, namely SMEs, bumiputera SMEs and low cost houses costing RM60,0001 and below.Targets on new loans approved were set for the compliance period 1 January 2006 - 31 December 2007based on various factors taking into account the capacity of the respective institutions. In addition, theinterest rate charged by banking institutions for housing loans granted under the Guideline, namely lowcost houses costing RM60,0001 and below has also been capped at BLR + 1.75%.

❏ Basic Banking ServicesTo ensure that all customers have access to banking services, under the Basic Banking Services (BBS)framework, all banking institutions that did not offer automatic conversion for previously designated plainvanilla savings account into Basic Savings Accounts were required to automatically convert all such accountswith effect from 1 September 2005.

❏ Comparative Tables on BankingInfoIn December 2005, Bank Negara Malaysia expanded the scope of comparative tables to cover banking retailproducts on its consumer education website, BankingInfo. These tables allow consumers to performcomparative shopping and is part of the efforts to promote greater access to information and to encouragemore informed decisions on managing their finances by consumers.

1 For Sabah and Sarawak, the purchase price of low cost houses are capped at not more than RM72,000.


137

The Banking System

Table 5.1Banking System1: Income and Expenditure

For the calendar year

2004 2005p Annual change

RM million %

Interest income2 40,755 43,757 3,002 7.4Less: Interest expense 20,591 22,057 1,466 7.1

Net interest income 20,164 21,701 1,536 7.6Add: Fee-based income 4,229 4,684 455 10.7Less: Staff cost 5,662 6,309 647 11.4

Overheads 6,427 7,008 581 9.0

Gross operating profit 12,305 13,068 763 6.2

Less: Loan loss andother provisions 4,587 5,476 889 19.4

Gross operating profitafter provisions 7,718 7,592 -125 -1.6

Add: Other income 3,852 4,788 936 24.3

Pre-tax profit 11,569 12,380 811 7.0

Of which: Commercial banks3 10,679 11,006 328 3.1 Merchant banks 814 1,340 526 64.6 Islamic banks 76 34 -43 -56.1

Return on assets (%) 1.4 1.4Return on equity (%) 16.3 16.9Cost to income4 (%) 49.6 50.5

1 Includes Islamic banks.2 Effective January 2005, banking institutions no longer accrue interests on non-

performing loan accounts.3 Includes finance companies.4 Only taking into account staff cost, overheads, net interest income and

fee-based income.p PreliminaryNote: Total may not add up due to rounding.

The lending rates for new loans to consumers (excludingcredit cards) averaged at 4.09% per annum in December2005 (4.34% per annum in December 2004). Theaverage lending rates on new passenger car loansrecorded the most apparent reduction, falling by219 basis points from 6.53% per annum in December2004 to 4.34% per annum in December 2005.Consequently, gross interest margin of the bankinginstitutions (measured as the difference between interestincome and interest expense, expressed as a percentageof interest-related assets) remained almost unchanged at2.65 percentage points. This was partly due to thehigher base lending rate of banking institutions followingthe increase in the Bank Negara Malaysia OvernightPolicy Rate in November 2005 which saw the 3-monthKLIBOR rates trending upwards by 40 basis points to3.20% per annum as at end-December 2005.

Revenue generated from fee-based activities posted astrong growth of 10.7% during the year, as a result ofhigher sales of wealth management products such asunit trust and bancassurance, and an increase inremittance services provided by banking institutions.Similarly, there was higher fees received from trade-related activities, such as guarantees and commissionsfrom the issuance of bankers acceptances, following thegrowth in lending. Meanwhile, the greater usage ofcards for purchases and other transactions has alsocontributed to the higher fee income of bankinginstitutions. For the year as a whole, fee-based incomefor the commercial banks and finance companies as agroup registered an increase of 11.1% to account for17.3% of gross operating income.

Income derived by the merchant banks from fee-basedactivities, on the other hand, recorded a marginal declineof 0.4% to RM0.3 billion. Whilst higher income wasgenerated from the extension of loans and financing, thiswas partially offset by a moderation in income fromcorporate advisory services. However, fee-based

average assets remained unchanged at 1.4%,following corresponding increase in total assetsduring the year.

Gross operating profits for the year rose by 6.2% toRM13.1 billion on account of higher income from interest-related and fee-based activities. Net interest income grew7.6% driven largely by the growth in interest income fromloan and financing activities (+RM1.3 billion or 4%) despitecompetitive lending conditions, coupled with higher netincome from interbank activities. The growth was, however,moderated by an increase in interest expense incurredduring the year on deposits (+RM0.9 billion or 6.2%) intandem with the higher amount of customer depositsaccepted. Consistent with the strong expansion in lendingactivities, driven particularly by the retail segment, interestincome as a percentage of interest-related assets increasedby 11 basis points to 5.35 percentage points.

Competition in the lending market, particularly in thecontinuing buoyant retail segment, resulted in furtherreduction in the average lending rates during the year.

Table 5.2Weighted Average Lending Rates for New Loans

Commercial banks

Average for December (% per annum)

2004 2005

Business loans 5.64 5.70of which: SMEs 6.20 6.36

Household loans1 4.34 4.09of which:

Purchase of residential properties 3.08 3.15Purchase of passenger cars 6.53 4.34

1 Excludes credit card.


138

income remained as the major contributor to operatingincome of merchant banks, accounting for 44.7% oftotal income in 2005. With the creation of investmentbanks, competition in fee-based activities is expectedto intensify, thus adding further pressure on revenuesustainability of the merchant banks. Meanwhile,revenue generated from trading and investmentactivities recorded a marked increase of 116.6%.

Although the banking system continued to incursubstantial amounts in staff-related costs andimprovements in IT systems and business processesduring the year, the ratio of staff cost and overheadsto gross operating income rose marginally to 50.5%.Such expenditures were necessary to enhanceprospects for further business expansion and to retainexisting talents and attract new skills into the industrygiven the growing mobility of labour. Investments inthe acquisition and development of skills have beenmade to enhance the productivity and profitability ofbanking institutions. The banking institutions wereable to generate RM2.10 in operating profits for everyringgit spent on their personnel. Meanwhile, theincrease in overheads reflected the pursuit ofaggressive marketing and sales strategies adopted byseveral banking institutions. Collectively, expensesincurred on marketing, administration and othergeneral expenses accounted for 60.2% of totaloverhead expenses compared with 57.7% in 2004.

The encouraging business and operating environmentand improving financial positions amidst favourableeconomic outlook have provided the impetus forbanking institutions to continue to pursue balancesheet strengthening strategy. During the year, thebanking sector set aside loan loss provisions totalingRM11.4 billion comprising specific provisions ofRM9.7 billion (+9.8%) and write-offs of RM0.3 billion(+216.4%). Reflecting the higher provisioning amount,net interest margin (difference between interestincome and interest expense minus overheads andprovisions as a percentage of interest-related assets)showed a small decline of seven basis points to0.37 percentage point in 2005. With this pro-activemove by banking institutions, and the resultantstrengthening of the balance sheets, the bankingsector is better positioned to continue supportingeconomic developments and activities in the future.

Lending ActivityLending activities of the banking system remainedstrong in 2005, supported by sustained economicgrowth and the resilient financing demand by bothbusinesses and households. Strengthened resilience

amidst favorable financial performance and improvedasset quality had enabled the banking system tocontinue to meet the increased financing requirementsby both the business and household sectors, thuscontributing towards supporting the growth inbusiness activity and private consumption. Meanwhile,the market lending rates remain competitive with rateson new loans by the commercial banks rangingbetween 5.62% to 6.23% per annum and 6.23% to7.39% per annum for finance companies.

Their strengthened position hasenabled the banking sector tocontinuously meet theincreased financingrequirements of the businessand household sectors, thuscontributing towardssupporting the growth inbusiness activity and privateconsumption.

Table 5.3Banking System1: Financing Activities

For the year

2004 2005Annualgrowth

(%)RM billion

Loan approvals 173.6 193.4 11.4

Loan disbursements 488.2 529.3 8.4

Loan repayments 461.6 489.2 6.0

As at end-

2004 2005Annualgrowth

(%)RM billion

Outstanding loans 513.9 558.1 8.6

Total banking system financing2 547.0 594.0 8.6

Total financing for the economy3 671.5 733.6 9.3

1 Includes Islamic banks.2 Outstanding banking system loans plus private debt securities held by the

banking system.3 Outstanding banking system loans plus outstanding private debt securities.

The demand for financing continued to register an upwardtrend, with loan applications received by the bankinginstitutions increasing by 11.7% to RM305.4 billion in2005. New loan approvals remained relatively stable with


139

The Banking System

new loans approved expanding by 11.4% to RM193.4billion to more than 3 million applications. On average,RM16.1 billion new loans were approved monthly in2005 compared with RM14.5 billion recorded in thepreceding year. With continued expansion in privatesector activities, total disbursements rose by 8.4% toRM529.3 billion, mainly attributable to the drawdownby the manufacturing sector, which accounted for24% (RM127 billion) of total disbursements.Meanwhile, undrawn loans increased by 7.9% toRM170.9 billion, much lower than the preceding year’sincrease of 16.7%, attributed mainly to unutilisedcredit card lines. As disbursements surpassedrepayments, total outstanding loans rose strongly at anannual rate of 8.6% to RM558.1 billion as at end-2005. Total holdings of private debt securities (PDS) bybanking institutions increased by 8.5% in 2005,compared with a decline of 3.1% in 2004. As a result,aggregate financing by the banking sector to supporteconomic activities increased by 8.6%.

Lending to householdsOutstanding household loans expanded by 15.1% in 2005to RM304.4 billion, to account for 54.5% of outstandingloan portfolio of the banking system. Stable labour marketconditions, increasing disposable income and attractivefinancing options contributed towards stronger consumerspending, hence stimulating demand for new financing asreflected by an 18% increase in loan applications receivedfrom individuals or 46.5% of total loan applicationsreceived by the banking sector. Total loans approved grewby 12% to RM97.2 billion, or 50.3% of total loansapproved by the banking system during the year, whilstloan disbursements recorded a corresponding increase of11.4% to RM145.2 billion, or 27.4% of the totaldisbursements in the banking system. Unutilised loanswithin this sector grew by 17.2% to RM79.5 billion,accounting for 46.5% of the total unutilised loans withinthe banking system. The increase in unutilised loans wasmainly due to a higher increase in unutilised credit cardlines, attributed to a larger number of credit cards issuedand higher approved limits granted by the bankinginstitutions to cardholders.

[A detailed analysis of lending to households is providedunder sub-topic "Exposure to the Household Sector" inthis chapter.]

Lending to businessesLending to businesses remained resilient in 2005,reflecting the stronger private sector investment andbusiness activities during the year. Demand for newfinancing by businesses grew by a more moderate rateof 5.7% to RM158.5 billion in 2005 (2004:20%). The

slower growth in new business loans was mainlyattributable to a decline in loan applications from theconstruction sector, as well as slower increase inapplications from the manufacturing sector and thewholesale and retail trade, restaurants and hotelssector. Notwithstanding the more moderate increase inloan applications, growth in new loan approvals wasstable. Total loans approved increased by 9.8% toRM93.2 billion, accounting for 48.2% of totalapprovals within the banking system. Loan approvalsto businesses were broad-based with 50.2% orRM46.8 billion of new loans approved were channelledto manufacturing, wholesale and retail trade,restaurants and hotels and construction sectors.Notably, loan approvals to the agriculture sectorrecorded a significant growth of 80% to RM5.2 billion.

Disbursements to the business sectors increased by7.4% to RM360.1 billion, accounting for 68% of totalloans disbursed by the banking system, of which 72.3%or RM260.2 billion were channelled to themanufacturing, wholesale and retail trade, restaurantsand hotels and finance, insurance and business servicessectors as the service and manufacturing sectorscontinue to benefit from strong consumer spending andhigher exports of manufactured goods. Asdisbursements were relatively higher compared withrepayments, total outstanding loans to the businesssector expanded by 2.9% to RM225.6 billion as at end-2005. Meanwhile, total unutilised loans increasedmarginally by 0.2% to RM87.4 billion.

Lending to SMEsThe banking sector continued to support the financingneeds of the SMEs with lending to SMEs continuing todrive growth of loans to businesses. Total outstandingloans to the SMEs expanded strongly by 8.7% to RM96billion as at end-2005 to account for 42.6% of loans tobusinesses or 17.2% of total outstanding loans. Reflectingthe increasing financing needs of the SMEs, the bankingsystem received loan applications from more than 100,000SMEs totaling RM59.7 billion, a 10.3% increase from theprevious year. Advancement in credit analysis, assessmenttools and methodologies, enhanced access to currentcustomer information and the liberalisation in the pricingframework facilitated the increased provision of financingto the SMEs. During the year, RM35.8 billion new loanswere approved to more than 85,000 SMEs, at lendingrates which averaged between 5.72% to 6.43% perannum for the commercial banks. The approval rate washigher at 59.9%, whilst rejections remained low,constituting 18.5% of the total applications received fromthe SMEs. Loan disbursements were also higher. Duringthe year, RM110.7 billion were disbursed to the SMEs, an


140

increase of 10.2% from the preceding year, constituting30.7% of the total disbursements to the business sectors.On a sectoral basis, lending to SMEs was generallydiversified with almost two-thirds being channelled to thewholesale and retail trade, hotels and restaurants,manufacturing and construction sectors, reflective of thebusiness focus of the majority of the SMEs.

With capacity building initiatives for SMEs in the pipeline,measures to enhance access to financing such as theestablishment of the SME Bank, securitisation of SMEloans, the introduction of new trade financing productsfor SMEs as well as the establishment of SME Portal willfurther improve access to financing for SMEs. This wouldencourage further lending by banking institutions toSMEs. In addition, in response to strong demand on SMEspecial funds allocated by Bank Negara Malaysia, Fundfor Small and Medium Industries 2 and New EntrepreneursFund 2 were further increased by RM250 million andRM350 million respectively. On aggregate, Bank NegaraMalaysia has allocated a total of RM8.9 billion for thespecial funds for SMEs. Of this, a total of RM11.2 billionhas been approved as at end-2005.

Financing through the bond marketThe bond market sustained its growth momentum in 2005.A total of RM35.7 billion of PDS was issued, an increase of27.1% compared to 2004, mainly by the utilities,construction and finance, insurance, real estate and businessservices sectors which accounted for 74.3% of totalissuance. As a result, outstanding PDS in the market rose by11.4% to RM175.6 billion as at end-2005. Total financingchannelled to the economy, which included lending by thebanking institutions, expanded by 9.3% to RM733.6 billion.

Asset QualityAmidst sustained economic performance, the loanquality of the banking system improved further in 2005,with non-performing loans (NPLs) declining to recordlow levels since the Asian financial crisis. Theimprovement in asset quality during the year wasattributed mainly to higher reclassification of NPLs toperforming status and write-offs.

The net NPLs of the banking system on the 3-monthclassification basis declined by 14.6% to RM31.3 billionas at end-2005 (end-2004: RM36.7 billion), whilst netNPLs based on the 6-month classification decreased toRM24.7 billion as at end-2005 (end-2004: RM28.6 billion).Consequently, the net NPL ratio on the 3-monthclassification improved by 1.7 percentage points to 5.8%(end-2004: 7.5%). Based on the 6-month classification,the net NPL ratio improved by 1.2 percentage points to4.6% (end-2004: 5.8%). The loan loss coverage of the

banking system also strengthened with the declining NPLlevel as well as the adoption of more prudentprovisioning policies by banking institutions. As at end-2005, the loan loss coverage ratio of the banking systemimproved to 59.2% on the 3-month basis and 65.4% onthe 6-month basis (end-2004: 54.9% and 60.1%respectively). During the year, a few more bankinginstitutions adopted the 3-month classification policy.Consequently, banking institutions that control 95.6%market share of total loans in the banking system haveadopted the 3-month classification policy.

During 2005, the decline in NPLs was also due to thehigher rate of reclassification of NPLs to performing status(+30.2%), following the overall improvement in the

012345678910

J F M A M J J A S O N D J F M A M J J A S O N D

Net NPLs (6-months) Net NPLs (3-months)

Net NPL ratio (6-months) Net NPL ratio (3-months)

RM billion %

Graph 5.1Banking System1: Net Non-performing Loans

1 Includes Islamic banks.

05

10

1520

25

30354045

2004 2005

0

20

40

60

80

100

120


RM billion

9-<12 months1-<3 months

3-<6 months 12 months and above

6-<9 months

Graph 5.2Banking System1 : Ageing Profile of Loans in Arrears


2004 2005


141

The Banking System

Table 5.4Banking System: Non-performing Loans and Loan Loss Provisions

As at end-

2004 2005

Classification

3-month 6-month 3-month 6-month

RM million

Banking systemNon-performing loans 60,379.8 50,711.5 53,558.4 45,196.1Interest-in-suspense 8,469.4 8,105.6 7,332.6 7,108.8Specific provisions 15,242.3 14,015.9 14,915.0 13,429.3General provisions 9,488.7 8,367.5 9,459.4 9,016.2

Net NPL ratio (%)1 7.5 5.8 5.8 4.6Total provisions/NPL (%) 54.9 60.1 59.2 65.4

Commercial banks2

Non-performing loans 55,730.3 46,774.8 48,818.4 41,140.5Interest-in-suspense 7,880.2 7,537.2 6,696.8 6,488.8Specific provisions 14,289.8 13,094.8 13,864.0 12,416.6General provisions 9,089.6 7,968.3 8,913.5 8,470.2


Merchant banksNon-performing loans 2,496.8 2,268.0 1,782.8 1,735.1Interest-in-suspense 373.8 364.4 356.2 355.6Specific provisions 455.4 457.5 463.5 464.6General provisions 235.8 235.9 192.9 193.0


Islamic banksNon-performing loans 2,152.7 1,668.7 2,957.1 2,320.5Interest-in-suspense 215.3 204.1 279.6 264.4Specific provisions 497.2 463.6 587.6 548.1General provisions 163.4 163.4 353.0 353.0


1 Net NPL ratio = (NPL less IIS less SP) / (Gross loans less IIS less SP) x 100%.2 Includes finance companies.Note: Total may not add up due to rounding.

repayment capacity of borrowers, and write-offs of loans(+3.1%). New classification of loans as NPLs increased by5.6% mainly due to the tightening of the NPL classificationpolicy of a number of banking institutions, but the increasewas marginal vis-à-vis the improvement in the overall assetquality of the banking system. Loans-in-arrears (net ofNPLs) of between one to three months have also declinedby 3.5% during the year, accounting for 6.5% of totalloans. Hence, risk arising from potential new NPLs in thebanking system remained manageable.

The overall decline in NPLs of the banking systemprimarily reflected improvements in the loan quality ofthe business sector. Supported by strong externaldemand and sustained expansion in domestic demand,the repayment capacity of the business sectorimproved in 2005. NPLs for the business sector showed

a marked decline of 15.8% to RM29.4 billion,accounting for 11.2% of total business loans as atend-2005 (end-2004: 13.7%). This was mainlyattributed to declines in NPLs for the manufacturing,distributive (wholesale and retail trade and restaurantsand hotels) and the construction sectors. The NPLs forthe manufacturing sector showed the largestimprovement by recording a decline of 24.8% andaccounted for 10.8% of loans to the manufacturingsector as at end-2005 (end-2004: 13.8%). The NPLratios for the distributive and construction sectorsimproved to 7.7% and 20.4% respectively (end-2004:10% and 23.7% respectively).

In tandem with the improvement in NPLs for the businesssector, the NPLs of SMEs also declined by 3.8% duringthe year. As at end-2005, NPLs of SMEs declined to


142

Table 5.5Banking System1: Non-performing Loans by Sector

As at end-

As percentage of totalNPL by sector

Change loans to the sector

2004 2005 2004 2005

RM million %

Business enterprises 34,907.0 29,383.3 -15.8 13.7 11.2of which SME loans 10,589.1 10,191.9 -3.8 12.0 10.6

Households 19,047.6 21,468.6 12.7 7.6 7.5Others 1,110.0 1,347.1 21.4 11.0 12.8

Total 55,064.7 52,199.0 -5.2 10.7 9.4

Agriculture, hunting, forestry and fishing 679.7 601.6 -11.5 6.2 5.5Mining and quarrying 90.3 123.7 37.0 9.1 15.3Manufacturing 8,705.4 6,550.1 -24.8 13.8 10.8Electricity, gas and water supply 1,296.6 1,221.2 -5.8 25.0 26.4Wholesale and retail trade, restaurants and hotels 4,356.7 3,603.3 -17.3 10.0 7.7

Wholesale trade 1,635.8 1,420.0 -13.2 6.4 5.2Retail trade 1,252.9 1,123.8 -10.3 9.6 7.6Restaurants and hotels 1,468.0 1,059.6 -27.8 30.4 21.7

Broad property sector 26,726.6 26,885.6 0.6 12.8 11.7Construction 7,286.2 6,126.4 -15.9 23.7 20.4Purchase of residential property 11,852.7 14,006.8 18.2 8.9 9.4Purchase of non-residential property 4,432.1 4,125.1 -6.9 14.2 11.7Real estate 3,155.6 2,627.3 -16.7 23.0 17.9

Transport, storage and communication 778.0 639.6 -17.8 7.8 5.6Finance, insurance and business services 1,882.9 1,778.3 -5.6 6.1 5.9Consumption credit 2,579.4 2,698.1 4.6 8.1 7.3

Personal use 1,878.4 1,923.1 2.4 10.9 9.7Credit cards 663.9 743.7 12.0 4.7 4.5Purchase of consumer durable goods 37.0 31.2 -15.6 11.8 11.4

Purchase of securities 2,896.6 2,425.6 -16.3 14.9 11.6Purchase of transport vehicles2 3,167.3 3,550.9 12.1 4.3 4.0Community, social and personal services 795.3 773.8 -2.7 15.6 13.5

1 Includes Islamic banks.2 Includes purchase of passenger cars.

Note: Total may not add up due to rounding.

RM10.2 billion to account for 10.6% of SME loans (end-2004: 12%). Improvements in the asset quality of SMEloans were noted in sectors similar to those of the overallbusiness sector, with NPLs of SMEs in the manufacturingsector recording the largest decline. The NPLs of SME in themanufacturing sector improved by 12.7% to account for11.6% of SME loans to this sector. This was partly attributedto improvements in credit analysis, credit assessment toolsand methodologies of banking institutions and enhancedaccess to current customer information.

[Please refer to the section on "Exposure to theHousehold Sector" for the analysis on the bankingsector’s exposure to the household sector].

With sustainable growth in economic performanceenvisaged in 2006, coupled with the continuousenhancements in the risk management infrastructure andpractices of banking institutions, the declining trend in NPLsin the banking system is expected to continue in 2006.

Exposure to the Household SectorAmidst uncertainties prevailing in the global environment,the level of consumer confidence remained highthroughout the year. Private consumption was strongwith continued high income levels, stable labour marketconditions, improvements in business conditions andproductivity gains. Borrowings by households continuedto remain strong as reflected by the increase in the ratioof household debts from the banking sector to GDP to61.5% as at end-2005, as compared to 45.3% in 2000.The debt service ratio of consumers also increased from29.9% in 2000 to 38.8% in 2005. Nevertheless, thehouseholds’ level of indebtedness as measured by theaverage debt-to-disposable income ratio remained atmanageable levels that commensurate with the capacityof the sector.

Demand for financing remained strong in 2005, reflectedby an 18% increase in loan applications received from thesector. Loans approved grew by 12% to RM97.2 billion,


143

The Banking System

whilst loan disbursements recorded an increase of 11.4%to RM145.2 billion. As a result, outstanding householdloans expanded by 15.1% to RM304.4 billion, accountingfor 54.5% of outstanding loans in the banking system asat end-2005. Lending activities within this sector wereconcentrated in mortgage financing, purchase ofpassenger cars and credit cards.

The demand for loans for the purchase of residentialproperties moderated in 2005, driven mainly by lowerdemand for the purchase of medium to lower-endproperties, with loan approvals for the purchase ofresidential properties rising by 2.5% to RM36.6 billion.However, reflecting the continued high level ofdisbursements in 2005, outstanding loans to this sectorgrew by 12.5% (end-2004: 14.2%). The NPLs in thissector grew by 18.2%, to account for 9.4% of loans tothis sector (end-2004: 8.9%). The average lending ratescharged by the commercial banks for these loans remainedcompetitive, at between 2.69% to 3.15% per annum.

The aggressive promotional activities by car dealers andmanufacturers and the launching of attractive new modelsat competitive prices continued to boost consumerdemand for motor vehicles during the year. Loanapplications to finance the purchase of passenger carsincreased by 34.4% to RM54.5 billion, while approvalsgrew by 26.1% to RM38.3 billion during the year. Hence,outstanding loans to this sector recorded a strong increaseof 19.9% to RM86.2 billion as at end-2005. In terms ofasset quality, vis-à-vis the increase in loans, the growth ofNPLs to this sector moderated, to account for 4% of loansto this sector (end-2004: 4.3%).

A total of 2.6 million new credit cards were issued in2005, bringing the total number of credit cards incirculation to approximately 8 million with approvedlimits of RM57.1 billion. Promotions to purchaseconsumer goods using credit cards, coupled with thecompetitive annual fee promotion contributed towardsthe stronger growth in credit cards during the year.Credit limits for new credit cards increased by 7.3% toRM12.6 billion, whilst the utilisation of credit card

facilities remained strong with total disbursementsexpanding by 17.6% to RM42.7 billion. Nevertheless,the outstanding balance of credit cards remained asmall proportion of outstanding loans of the bankingsystem. While the outstanding loans for credit cardshave increased from the previous year, the amount ofrevolving balance has remained relatively constantvis-à-vis 2004, accounting for about 40% of theoutstanding credit card loans, indicating that 60% ofcard users have been servicing their credit card loansin full. The credit card NPLs accounted for 4.5% oftotal credit card loans and 1.4% of total NPLs in thebanking system as at end-2005.

While enhancements in risk management infrastructureand capabilities of banking institutions have strengthenedtheir capacity to manage risk emanating from theirexposure to the household sector, there are emergingconcerns on the ability of the household sector inmanaging their indebtedness. Hence, Bank NegaraMalaysia has undertaken a series of pre-emptive measuresto ensure sustainability of the household sector as follows:

• Conduct concerted efforts to educate consumerson financial management to enable them tomake informed decisions and to managefinancial risks in a proactive and constructivemanner. This is part of the comprehensiveconsumer education programme initiated in2003; and

• Establish a Credit Counseling and DebtManagement Agency (CCDMA) to provideassistance in the form of professional advisoryand debt management services to individualsfacing debt problems that involve multiplefinancial institutions under the supervision ofBank Negara Malaysia. The CCDMA is expectedto commence operations by 1 April 2006.

At the supervisory level, Bank Negara Malaysia has alsoundertaken measures to ensure that the bankinginstitutions’ exposure to the household sector does not poseundue risk to the stability of the financial sector, as follows:

• Increase the risk-weightage for mortgage NPLsfrom 50% to 100% for capital adequacypurposes; and

• Conduct thematic examinations on individualbanking institutions, focusing on the adequacyand robustness of their risk managementpractices on lending to the household sector.

Liquidity ManagementThe banking system continued to operate within anenvironment of high liquidity in 2005. This was mainlyattributed to the sustained large current account

The households’ level ofindebtedness as measured bythe average debt-to-disposable income ratioremained at manageablelevels that commensurate withthe capacity of the sector.


144

surplus, foreign direct investment throughout the yearand portfolio inflows resulting in further increase in theinternational reserves from RM253.5 billion as atend-2004 to RM266.4 billion as at end-2005. Toabsorb the excess liquidity, Bank Negara Malaysiacontinued to undertake active liquidity managementthrough its money market operations in the form ofdirect borrowings, repos and issuance of Bank NegaraBills and Negotiable Notes. For the first 11 months of2005, the weighted average overnight interbank ratestabilised at 2.70% while the weighted average one-week interbank rate fluctuated within a tight rangefrom 2.71% to 2.74% per annum. Arising from theincrease in the overnight policy rate by 30 basis pointsto 3.0% at end-November 2005, the weightedaverage overnight and one-week interbank rates werehigher at 3.0% and 3.04% per annum respectively asat end-2005. Total outstanding money marketoperations by Bank Negara Malaysia in the form of netdirect borrowings, repos and issuance of Bank NegaraMalaysia papers was RM119.9 billion at the end of2005, as compared to RM142.6 billion as at end-2004.

Throughout the year 2005, the banking system, as awhole, projected sufficient liquidity to meet anyunexpected withdrawals for a period of up to onemonth. As at end-2005, the cumulative liquidity surplusof the banking system was projected at RM67.4 billionto meet estimated liquidity demands of up to one weekand a surplus of RM80.7 billion to meet demands of upto one month. As a group, commercial banks, merchantbanks and Islamic banks projected large surpluses in theone-month bucket amounting to 13.1%, 41.6% and21.2% of their total deposit base respectively. On anindividual basis, all banking institutions have projectedsurpluses, well above the regulatory requirement in theone-week and one-month buckets.

Interest Rate RiskThe banking system’s exposure to interest rate risk(inclusive of price risk of Islamic exposures) is assessedusing the duration-weighted net position (DWP)approach. The DWP approach estimates the potentialimpact on economic value of a banking institution for a100 basis point shift in interest rates. However, theexisting DWP approach adopted by Bank NegaraMalaysia does not analyse separately the exposuresarising from Islamic portfolio whereby the potentialeconomic value impact could be mitigated by themudharabah-based liabilities.

The banking system’s DWP increased by 10.57% toRM4.2 billion as at end-December 2005, or 5.1% ifexpressed as a percentage of capital base of the bankingsystem. During the year, total RM denominated interestsensitive assets grew by 9% from end-2004 with growthconcentrated in the one to three months maturity tenurelargely as a result of increased interbank lending, and inthe seven to 10 years maturity tenure due to the rise infixed rate hire purchase loans. The increase in RM

2.5

2.6

2.7

2.8

2.9

3.0

3.1

Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec0

2040

6080

100120140160

RM billion % per annum

Bank Negara Malaysia's total money market operations

Weighted average overnight money interbank rate (RHS)

Weighted average 1-week interbank rate (RHS)

Graph 5.3 Liquidity in the Banking System1 in 2005


Table 5.6Banking System: Liquidity Projection as at31 December 2005

Cumulative Buffer asmismatch % of total

(RM billion) deposits

1 wk. 1 mth. 1 wk. 1 mth.

Commercial banks1 51.7 66.6 10.2 13.1

Merchant banks 8.0 7.3 45.6 41.6

Islamic banks 7.7 6.7 24.1 21.2

Banking system 67.4 80.7 12.1 14.5

1 Includes finance companies.Note: Total may not add up due to rounding.

Table 5.7Banking System: Impact of 1% Rise in Interest Rateon Capital Strength

Duration-weighted net position

Impact onAs a risk weighted

RM million percentage of capital ratiocapital base (%) (percentage

point)

As at end-

2004 2005 2004 2005 2004 2005

Commercial banks1 -3,399 -3,690 -4.8 -4.8 -1.0 -1.1

Merchant banks -366 -472 -7.3 -9.6 -3.9 -8.3

Banking system2 -3,764 -4,162 -5.0 -5.1 -1.1 -1.2

1 Includes finance companies.2 Excludes Islamic banks but includes price risk of Islamic type exposures.Note: Total may not add up due to rounding.


145

The Banking System

denominated interest sensitive liabilities was lower at 8%,mainly due to the issuance of debt papers and Cagamasfunding that had remaining maturities of one to threemonths and four to seven years.

A majority of the banking system’s interest rate risk wasconcentrated in the three to five and five to 10 yearsmaturity buckets, which together accounted for 70% oftotal net DWP as at end-December 2005. This wasprimarily attributed to the increase in fixed rate loanswith remaining maturities of more than five to 10 yearsof 24% or RM9.1 billion. The increase was due to theexpansion of hire purchase portfolio among bankinginstitutions that have relatively lower credit exposure tothe retail segment in 2005. As the variable rate hirepurchase financing has only been recently introduced,fixed rate hire purchase continue to be the predominanttype of financing registering an increase RM21.5 billionto RM95.5 billion as at end-2005.

Despite the increase in fixed rate loans during 2005, part ofthe economic value impact arising from Islamic fixed rateloans which rose by RM9.2 billion to RM41 billion duringthe year, would have been absorbed by the mudharabah-based liabilities which amounted to RM20.7 billion as atend-2005, should the loss-absorbing nature of suchliabilities be reflected by the DWP approach. Over the longterm, the use of Islamic variable rate financing whichaccounted for 13.5% of total Islamic loans as at end-2005would also mitigate risk arising from the fixed rate productstypical of Islamic financing.

As a group, the DWP of commercial banks recorded anincrease of 8.6% to RM3.7 billion as at end-December

2005, due to higher fixed rate loans with remainingmaturity of more than five to 10 years mainly in theform of motor vehicle financing. Merchant banks alsorecorded an increase in their DWP from RM0.4 billion toRM0.5 billion as at end-December 2005 as a result ofexpansion in their holdings of debt securities withremaining maturities of more than seven years andtaking on net long interest rate forwards, forward rateagreements and futures positions in the more than fiveyear maturity tenure.

The impact of the higher holdings of private debtsecurities was also reflected in the increase in thebanking system’s interest rate risk by 37.4% toRM2 billion or 2.45% of capital base as at end-December 2005, as measured under the Market RiskCapital Adequacy framework which was introduced byBank Negara Malaysia in September 2004.

Up to 5 >5-10 >10-15 >15-20 > 20

Commercial banks2

Merchant banks

1 Excludes Islamic banks but includes price risk of Islamic type exposures.2 Includes finance companies.

Duration-weighted net position as % of capital base

No. of banking institutions

Graph 5.4Banking System1 : Distribution by Duration Weighted Net Position as a Percentage of Capital Base as at 31 December 2005

02468

1012141618

> 6 - 12mths

> 2 - 3yrs

> 3 - 5yrs

> 5 - 10yrs

> 10 - 15yrs

> 15 yrs

-60

-40

-20

0

20

40

60

Tenure range

Commercial banks2

Merchant banks

Banking system

1 Excludes Islamic banks but includes price risk of Islamic type exposures.2 Includes finance companies.

Mismatches (RM billion)

Graph 5.5 Banking System1: Net Interest Rate Position Mismatches as at 31 December 2005

< 1mth

> 1 - 3mths

> 3 - 6mths

> 1 - 2yrs

Table 5.8Banking System: Impact of Trading BookInterest Rate Risk on Capital Strength as at31 December 2005

RM millions Total interest rate

Interest rate riskrisk/Capital base

(%)

2004 2005 2004 2005

Commercial banks1 906 1132 1.3 1.5

Merchant banks 522 830 10.9 16.8

Banking system2 1,428 1,962 1.9 2.5

1 Includes finance companies.2 Excludes Islamic banks but includes price risk of Islamic type exposures.Note: Total may not add up due to rounding.


146

Equity RiskEquity exposure continues to pose minimal risk to thebanking system. Total equity holdings by bankinginstitutions remained relatively unchanged at RM3 billionas at end-2005 as compared to RM3.1 billion as atend-2004. This represented only 0.3% of the bankingsystem’s total assets as at end-2005. The lack ofmovement in total equity holdings reflected fewerrestructuring exercises that were completed by bankinginstitutions, as well as the more modest performance ofthe stock market during the year.

The holdings of quoted shares by the banking systemrecorded an increase of 3.5% during 2005, despite thedeclining trend for the major part of the year. Quotedshares held by the banking system registered a decline of18.2% in the first three quarters of the year, to RM1.4 billionas at end-September 2005, reflecting cautious sentimentsin the stock market, influenced by underperformance ofmajor counters in the KLSE and concerns overunfavourable external factors such as rising oil prices,which triggered the selling down of shares. However, thedecline in holdings of quoted shares by the banking systemwas mitigated by several conversions of loans into quotedshares through restructuring activities. Consequently, therewas an increase in the holdings of quoted shares in thefourth quarter of 2005 by 26.6% to RM1.8 billion as atend-2005.

Investments in unquoted shares by the banking systemrecorded an overall decline of 11%, from RM1.3 billionas at end-2004 to RM1.2 billion as at end-2005. Thiswas largely attributed to the decline in the holding ofunquoted shares amongst commercial banks, by 12.2%,from RM1.2 billion as at end-2004 to RM1.1 billion as atend-2005, as a result of several share redemptionactivities by corporate borrowers that had beenpreviously involved in debt restructuring.

Only the merchant banks as a group recorded anincrease in equity holding of 9.1%, mainly from quotedshares received from loan equity conversions. As aresult, the ratio of quoted shares to capital base rosefrom 6.4% as at end-2004 to 7.1% as at end-2005. Themajority of banking institutions maintained an equityrisk exposure of less than 2% of their capital base as atend-2005.

Reflective of the lower volatility of the Kuala LumpurComposite Index (KLCI) in 2005, the potential maximumloss in equity value for the banking system based on a10-day volatility of the KLCI as at end-2005 was lowerat 4.5% or 0.1% of capital base, compared to 7.7% or0.2% of capital base as at end-2004.

Graph 5.6 Banking System1: Composition of Equity Investments

Loan conversion61.8%

Unquoted shares38.7%

Debt satisfaction5.1%

Underwriting2.7%

Quoted shares61.3%

Market purchase30.4%

As at 31 December 2005

Unquoted shares42.3%

Loan conversion60.1%

Underwriting2.3%

Quoted shares57.7%

Marketpurchase35.1%

Debt satisfaction2.5%

As at 31 December 2004


Table 5.9Banking System: Equity Exposure

Equity1 holdings Equity1 / Potential

(RM million) Capital base (%)equity1 loss/

Capital base (%)

As at end-

2004 2005 2004 2005 2004 2005

Commercial banks2 1,409.3 1,449.5 1.9 1.9 0.1 0.1

Merchant banks 320.8 351.2 6.4 7.1 0.5 0.3

Islamic banks 34.8 26.5 1.8 0.8 0.1 0.0

Banking system 1,764.8 1,827.2 2.2 2.2 0.2 0.1

1 Amount of investment in quoted shares.2 Includes finance companies.

0-<2 2-<4 4-<8 8-<13 13-<20 >20

Equity as % of capital base

1 Includes finance companies.

Graph 5.7 Banking System: Distribution by Equity as a Percentage of Capital Base as at 31 December 2005

No. of banking institutions

Commercial banks1

Merchant banks

Islamic banks

0

5

10

15

20

25


147

The Banking System

Foreign Exchange RiskThe exposure of the banking system to foreignexchange risk remained manageable in 2005 with thenet open foreign currency positions (NOP) trendingdownwards, particularly in the second half of the year.Foreign currency liabilities, mainly in the form offoreign currency interbank borrowings, increasedduring the year as banking institutions undertookforward exchange arbitrage activities in the currencyswap market. The NOP declined from RM3 billion toRM0.8 billion during the year, with the mostsubstantial reduction of RM2.9 billion recorded inNovember. As a percentage of the banking system’scapital base, the NOP contracted from 3.7% in 2004to 1% in 2005.

Total foreign currency assets of the banking system,mostly in the form of interbank foreign currencyplacements, was high in the first half of 2005, with theoutstanding amount equivalent to RM61 billion as at30 June 2005. This was mainly as a result of continuousrepatriation of export earnings, sustained foreign directinvestment and significant inflows of portfolioinvestment. The rise in the interbank foreign currencyplacements that reached the maximum outstandingamount of RM43.1 billion at end-May was also attributedto the increase of RM3.7 billion in foreign currencydeposits accepted by the banking institutions as domesticinvestors took the opportunity of investing in non-ringgitassets following the liberalisation of the foreign exchangerules in April 2005. During the second half of the year,the trend in the inflows of the short-term funds reversed.This reflected the decline in the foreign currency interbankplacements by RM2.7 billion and subsequently the fall intotal foreign currency assets by RM3 billion.

Total foreign currency liabilities that remained relativelystable in the first half of the year, trended upwards in thesecond half of 2005 due mainly to the increase in foreigncurrency interbank borrowings by banking institutions.Although US dollar interest rates rose steadily during thesecond half of 2005, banking institutions were stillborrowing foreign currency in the interbank money market as they entered into swap transactions to hedge

their own arbitrage activities in anticipation of thestrengthening of ringgit which was reflected in theforward discount. The expansion in foreign currencyliabilities of the banking system was also attributed to theincrease in foreign currency intra-group placements byselected foreign banking institutions in view of therelatively low exposure of foreign currency risk of theMalaysian subsidiaries. As a result, the net foreign currencyasset position that reached its peak of RM19.7 billion in Mayturned into a net foreign currency liabilities position ofRM12.9 billion at the end of 2005.

Table 5.10Banking System: Foreign Currency Exposure

NOP NOP/Capital base(RM million) (%)

As at end-

2004 2005 2004 2005

Commercial banks 2,904 571 4.2 0.8

Merchant banks 48 88 1.0 1.8

Islamic banks 54 125 2.8 2.2

Banking system 3,006 784 3.7 1.0

J F M A M J J A S O N D 0.000.501.001.502.002.503.003.504.004.50

-25

-35

-15

-5

5

15

25

RM billion % per annum

2005

Net open foreign currency position

Net foreign currency swap purchased

Net foreign currency assets (including value spot and tomorrow)

Net outright forward foreign currency purchased

US T-bill secondary market rate (RHS)

3-month weighted average interbank money market rates (RHS)

Graph 5.8 Banking System1: Components of Foreign Currency Exposure


2

0

4

6

8

10

12

14

<-10 -10-<-2 -2-<2 2-<5 5-<10 >10

Commercial banks

Merchant banks

Islamic banks

No. of banking Institutions

Graph 5.9 Banking System: Distribution of Net Open Foreign Currency Position as at 31 December 2005

NOP as % of capital base


148

In the foreign currency forward market, the forwardpremiums in the USD/RM rate narrowed considerablyand turned into a deep forward discount of 55 basispoints reflective of the interest rate differentialsincreasingly in favour of the US dollar. Nevertheless,there was still strong demand from customers to sellforeign currency forward contracts especially in Julyand August which eased off subsequently followingthe shift to a new exchange rate regime. As a result,banking institutions’ foreign currency forwardcontracts purchased mainly from domestic non-bankentities rose from RM36.1 billion as at end-January toRM42.9 billion as at end-August 2005. To manage theforeign currency forward contracts purchased, bankinginstitutions undertook foreign currency swaptransactions which resulted in the increase in foreigncurrency swap payable by 39.8% to RM72.7 billion inJuly 2005.

Capital StrengthCapitalisation in the banking system was sustained atstrong levels throughout the year. This developmentwas underpinned by continued capital managementactivities by the banking institutions to lower the costof capital and maximise value to shareholders. Thisincluded higher dividend payments and share buybacksas well as issuance of tier-2 capital and hybrid capitalinstruments. The strong capital position enabled thebanking institutions to absorb the effects of capital-related measures introduced during the year whichwere aimed at further enhancing the risk-sensitivity ofthe capital framework. Following this, the riskweighted capital ratio (RWCR) remained comfortablyabove 13% during the year. The RWCR was 13.1% asat end-2005, whilst the core capital ratio stood at10.2%. At the micro level, the impact of the inclusionof market risk factor in the computation of risk-adjusted capital on merchant banks was relativelysubstantial, resulting in a 5.4 percentage points declinein the RWCR to 17.5%.

The capital base grew by RM2.3 billion largely on accountof higher tier-2 capital which accounted for 83% of thegrowth in total capital. Nonetheless, tier-1 capitalremained as the major component, accounting for 70.6%of total capital. The increase in tier-1 capital during theyear mainly emanated from the inclusion of RM2.5 billionof audited profits and the exercise of ESOS totalingRM0.2 billion. In regard to tier-2 capital, there were sevenissuances of subordinated debts totaling RM3.9 billion, ofwhich RM2.2 billion was denominated in USD, henceenabling the issuers not only to benefit from the relativelylower US interest rates but also to enhance their presencein the international capital and debt markets.

Risk-weighted assets recorded a double-digit growthof 12.4% during the year. This expansion wasbrought about by a combination of factors, namelyexpansion in lending activities, particularly in the SMEand consumer segments, the inclusion of market riskin the capital adequacy framework and higher capitalcharge on mortgage NPLs. (Please refer to the sectionon Lending Activity for details on the performance offund-based operations of the banking system). Theincrease in risk-weight for mortgage NPLs to 100%since March 2005 only resulted in a marginal declineof 0.1 percentage point in the RWCR. Theimplementation of a market risk frameworkbeginning April 2005, however, resulted in a largerdecline of 0.8 percentage point in the RWCR. Withthe inclusion of market risk in the risk-adjustedcapital framework, the level of capital positions ofbanking institutions has now become more reflectiveof the various risks facing the banking institutionsinstead of merely credit risk.

Table 5.11Banking System: Constituents of Capital

As at end- Annual

2004 2005 change

RM million RM million (%)

Tier-1 capital 64,920.4 65,685.0 764.6 1.2Tier-2 capital 23,611.6 27,338.6 3,727.0 15.8

Total capital 88,532.0 93,023.5 4,491.6 5.1

Less:Investment in

subsidiaries andholdingsof other bankinginstitutions’capital 7,294.7 9,526.6 2,231.9 30.6

Capital base 81,237.3 83,496.9 2,259.6 2.8

Risk assets:0% 210,391.3 210,324.5 -66.8 0.010% 14,669.8 8,226.9 -6,442.9 -43.920% 120,316.9 102,207.7 -18,109.2 -15.150% 136,487.1 145,916.2 9,429.2 6.9100% 471,839.2 503,180.5 31,341.4 6.6

Total risk-weightedassets 565,613.1 635,610.9 69,997.8 12.4

Risk-weightedcapital ratio (%)

Banking system 14.4 13.1 -1.3

Commercial banks1 14.1 12.9 -1.2Merchant banks 22.9 17.5 -5.4Islamic banks 12.3 14.2 1.9

Note: Total may not add up due to rounding.1 Includes finance companies.


149

The Banking System

By asset category, growth in the 50% risk-weight categorywas consistent with the continued expansion in mortgagefinancing, whilst the increase in assets in the 100%risk-weight category was attributable to other lendingactivities of the banking system and the re-categorisation

Malaysia’s Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) Programme

OverviewMalaysia’s Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) regulatory regime under the Anti-Money Laundering Act 2001 (AMLA) continues to evolve in order to keep pace with new global trends andinternationally accepted standards, that is, the Financial Action Task Force on Money Laundering’s (FATF) 40+9Recommendations. As with other jurisdictions, Malaysia’s efforts were expanded during the year by extending theAMLA regulatory net to non-financial businesses and professions, strengthening the AML/CFT legislative frameworkand ensuring proper implementation of measures to counter money laundering and the financing of terrorism.

Malaysia, as the lead shepherd for money laundering in the Association of Southeast Asian Nations (ASEAN), hastaken efforts to enhance the skills and knowledge of personnel involved in the fight against money laundering andterrorism financing both at the national and regional level. Various training workshops were organised/co-organisedby Bank Negara Malaysia and the Southeast Asia Regional Centre for Counter Terrorism (SEARCCT). These trainingworkshops were participated by regulatory and law enforcement agencies. Besides training workshops, regulardialogues and awareness programmes were conducted for new as well as existing AMLA reporting institutions inMalaysia. The face-to-face interactions have gained the willing commitment, compliance and co-operation of thereporting institutions in playing their critical role in implementing the national AML/CFT measures.

The National Co-ordination Committee to Counter Money Laundering (NCC) that consists of 13 Ministries andGovernment agencies continues to play its role in mobilising and garnering the co-operative efforts from therelevant domestic agencies. Among others, the NCC established the AMLA Investigation Reference Guide and isnow in the process of establishing the Financial Investigators Accreditation Programme. The Ministry of ForeignAffairs, which is a member of the NCC, has forwarded the AMLA Information Booklet to Malaysian missionsabroad to apprise these missions of the efforts taken by Malaysia to enhance its AML/CFT regime.

During the year, the first offender under the AMLA, a snatch thief, was successfully convicted after he pleadedguilty to five counts of money laundering charges amounting to RM83,216. He was sentenced to three yearsimprisonment on each of the five charges. Another six persons are also being prosecuted for money launderingoffences involving a total of 193 charges and amounting to RM71.3 million.

As the fight against money laundering and terrorism financing requires global collaborative efforts, Malaysiaparticipates actively in global AML/CFT initiatives. At the international front, Malaysia achieved the distinction ofbeing selected at the 8th Asia/Pacific Group on Money Laundering (APG) Annual Meeting as the representative forthe South East Asia region in the APG Steering Group (for a period from July 2005-July 2006). The APG SteeringGroup was established at the APG Annual Meeting in September 2003. The membership includes a representativefrom each of the five broad geographical areas within the APG, namely North Asia, Pacific Islands, South Asia, SouthEast Asia and ‘Others’. The purpose of the APG Steering Group is to provide the APG Co-chairs and APG memberswith strategic advice on the structure, functioning and support for the APG. Among the roles played by themembers of the Steering Group is to provide advice on issues of strategic importance, obtain feedback from sub-regional members on key issues and influence the APG members to participate in the APG activities.

Enhancing AML/CFT RegimeNew AMLA Reporting InstitutionsUnder the AMLA, a reporting institution is required to file a Suspicious Transaction Report (STR) directly to BankNegara Malaysia if there are reasons to suspect any transaction involving the proceeds of any unlawful activitiesthat are listed in the Second Schedule to the AMLA. Since the enforcement of the AMLA on 15 January 2002,

of mortgage non-performing loans. Assets in the 10%and 20% risk-weight categories, however, declined partlydue to the maturity of Cagamas debt securities held by thebanking institutions, and outstanding claims on OECD andnon-OECD banks, respectively.


150

the AMLA reporting institutions include financial institutions from the conventional, Islamic and offshoresectors and non-financial businesses and professions such as lawyers, accountants, company secretaries as wellas the only licensed casino in Malaysia.

During 2005, the AMLA reporting obligations were invoked on licensed gaming outlets, Bank PertanianMalaysia and notaries public with effect from 31 March 2005 and on offshore trading agents and listingsponsors with effect from 20 October 2005. Notaries public are required to report to Bank Negara Malaysia anysuspicious transaction in the course of carrying out the following activities for their clients:

(i) buying and selling of immovable property;(ii) managing of client’s money, securities or other property;(iii) managing of accounts including savings and securities accounts;(iv) organising of contributions for the creation, operation or management of companies; or(v) creating, operating or managing of legal entities or arrangements and buying and selling of business

entities.

Increase Reporting ObligationsBank Negara Malaysia adopts an incremental approach in invoking the AMLA provisions on the reportinginstitutions. This approach ensures that sufficient time is given to the reporting institutions to put in place aneffective and efficient AML/CFT system before the rest of the reporting obligations are invoked on them. In thisregard, the statutory requirement to report suspicious transactions was initially invoked on Pos Malaysia Berhadwith effect from 15 January 2003 and on stock brokers and futures brokers with effect from 31 March 2004.Subsequently, the remaining reporting obligations under Part IV of the AMLA were invoked on Pos MalaysiaBerhad with effect from 31 March 2005 and on the stock brokers and futures brokers with effect from 20October 2005. These remaining reporting obligations include, among others, retention of records for a minimumperiod of six years, conducting customer due diligence as well as establishing internal reporting and complianceprogramme that are designed to safeguard the institutions from being used as conduits by criminals.

Increase Predicate OffencesIn 2005, the number of money laundering predicate offences in the Second Schedule to the AMLA wasincreased from 168 to 185 serious offences from 27 pieces of legislation. The new predicate offences are fromthe Customs Act 1967, Islamic Banking Act 1983, Payment Systems Act 2003, Takaful Act 1984, FuturesIndustry Act 1993, Securities Commission Act 1993 and Securities Industry Act 1983.

Compliance MonitoringGiven the diversity in the types of AMLA reporting institutions and the large number of non-financialbusinesses and professions, Bank Negara Malaysia has established appropriate mechanism to effectivelymonitor the reporting institutions’ compliance with the AMLA reporting obligations and the relevant AML/CFTguidelines. Compliance monitoring may be by way of completing Bank Negara Malaysia’s self-assessmentquestionnaires by the reporting institutions or AML/CFT focused internal audit.

In line with the non-integrated approach, the relevant functional supervisory authority conducts AMLAcompliance examinations on the reporting institutions under their purview. The AML/CFT examinations are carriedout as part of the functional supervisory authority’s overall examination on the financial institutions concerned. Forthis purpose, a comprehensive AMLA supervisory framework providing the banking supervisors with adocumented set of uniform processes was formulated and established to guide them in their examination offinancial institutions’ AML/CFT measures. The core areas of AML/CFT examination encompass the following:

i) AML/CFT infrastructure;ii) institution’s compliance with internal AML/CFT policies and procedures;iii) identification of account holders;iv) monitoring of transactions;


151

The Banking System

v) record-keeping;vi) detection and reporting of unusual and suspicious transactions;vii) training and awareness programmes for employees;viii) internal audit of the AML/CFT initiatives; andix) roles and responsibilities of the AML compliance officer.

The AML/CFT examination reports are forwarded to the Financial Intelligence Unit (FIU) and the findings areuploaded into the FIU’s compliance database to ensure continuous monitoring of the reporting institutions’compliance with the AMLA requirements. For reporting institutions that are from unregulated industries andfrom industries where the regulatory authorities are not empowered to conduct examinations, Bank NegaraMalaysia will supervise these institutions for AMLA compliance.

Financial IntelligenceSince May 2004, Bank Negara Malaysia has implemented the Financial Intelligence System (FINS) that enables thereporting institutions to submit STRs through a secure web in an efficient and secure on-line environment. BankNegara Malaysia is in the process of enhancing the FINS with more powerful and advanced intelligence analyticalsoftware. Phase II of the FINS will also incorporate i-2 tools that will assist Bank Negara Malaysia’s analysts inestablishing financial links among STRs. Based on the analysis of STRs, Bank Negara Malaysia is able to providefinancial intelligence to the relevant law enforcement agencies. The financial intelligence provided has enabled thelaw enforcement agencies to effectively conduct financial investigation on the perpetrators and to establish theunderlying predicate offences as well as money laundering offences. Hence, Bank Negara Malaysia will enhancethe effectiveness of its financial analysts by leveraging on information technology to better detect criminalactivities and to enable timely dissemination of financial intelligence to law enforcement agencies.

Capacity BuildingAMLA Awareness ProgrammeIn 2005, Bank Negara Malaysia continued its nationwide awareness programme to ensure that the reportinginstitutions effectively implement the AML/CFT measures. A series of briefing sessions were held for variouscategories of the reporting institutions, particularly for the new reporting institutions as well as their respectiveregulatory and supervisory authorities in order to apprise them of their obligations under the AMLA.

In July 2005, a total of 10 nationwide AMLA briefing sessions were conducted for banking institutions and licensedgaming outlets, namely the number forecast companies. The briefing sessions for banking institutions wereorganised by the Institute of Bankers Malaysia (IBBM) while for licensed gaming outlets, they were conducted incollaboration with the Betting Control Unit, Ministry of Finance. The main focus of the AMLA briefing sessions forbanking institutions is on ‘Know Your Customer (KYC) Policy’ and on the importance of conducting customer duediligence when establishing business relations while the sessions for gaming outlets were on the submission of STRs.

During the year, Bank Negara Malaysia was also invited by the Malaysian Association of Company Secretaries toconduct briefing sessions on AML/CFT for its members. In total, three sessions were conducted in Sabah andone in Johor Bahru. As the number of company secretaries is large and their trade associations are fragmented,these briefing sessions have proven to be an effective outreach to the industry to ensure that their membersfully understand their roles in preventing and detecting criminal activities.

Dialogue SessionsBank Negara Malaysia continues to conduct regular dialogue sessions with the reporting institutions. Thesedialogue sessions were effective in updating the reporting institutions on the latest AML/CFT measures and togather feedback on the effectiveness of the AML/CFT measures. The dialogue sessions also provide a platformfor the reporting institutions to raise their concerns and exchange ideas on the best practices to implement theAML/CFT measures effectively. With better understanding and co-operation from the reporting institutions,Malaysia’s AML/CFT regime will be more effective and efficient.


152

Compliance Officer Networking Group (CONG)The banking institutions have established the Compliance Officer Networking Group (CONG), which is aninformal consultative forum to discuss and share AML/CFT issues and concerns. Since its establishment in2003, the banking institutions have benefited from the consultative deliberations at the meetings of thecompliance officers from the CONG. Members of the CONG participate in creating industry standards, suggestbest practices, reinforce the necessity of compliance and co-operation with the authorities and amongstthemselves in order to minimise the potential of being exploited by money launderers and terrorist financiers.

The insurance sector also plays an important role in the AML/CFT regime. The inclusion of investment productswith the usual portfolio of insurance policies increases the potential for the insurance sector to be exploited asmoney laundering conduits. As a result, the respective insurance associations are following the example of thebanking sector in setting up their own CONG. The General Insurance Association of Malaysia (PIAM), the LifeInsurance Association of Malaysia (LIAM), the Insurance Brokers Association of Malaysia and the MalaysianTakaful Association have proposed that separate CONGs be established for the general insurers, life insurers,insurance brokers and takaful operators respectively as issues raised may be different for different types ofinsurance businesses. PIAM has established a CONG for general insurers in 2005 while LIAM has established aCONG for life insurers in January 2006. The remaining insurance associations will establish their CONGs in duecourse.

Computer-Based Training CentreBank Negara Malaysia has collaborated with the United Nations Office on Drugs and Crime (UNODC) toestablish an AML Computer-Based Training Centre (CBTC) for the relevant agencies in Malaysia. The CBTC waslaunched at the FIU in Bank Negara Malaysia on 30 May 2005. The UNODC’s interactive AML computer-basedtraining programme consists of 13 modules on legal, regulatory and law enforcement AML measures.Participants are assessed through a series of quizzes, pre-tests and post-tests to determine their knowledge onAML/CFT measures. This e-learning training initiative helps to enhance the knowledge of personnel from thelaw enforcement agencies and ensure greater outreach to relevant sectors involved in the fight against moneylaundering and financing of terrorism. As at 31 December 2005, a total of 48 officials from various NCCagencies have signed up for the AML Computer-Based Training programme and 22 have completed thetraining, while the rest are at various stages of completion.

World Bank E-Learning AML/CFT ProgrammeApart from the UNODC computer-based training programme, the World Bank has also developed an e-learningAML/CFT programme, which is currently accessible to seven countries, namely Malaysia, Thailand, Vietnam,Indonesia, the Philippines, Cambodia and Laos PDR. The e-learning programme consists of seven modulescovering the following topics that are related to AML/CFT:

Module 1 - Effects on Economic Development and International Standards;Module 2 - Legal Requirements to meet International Standards;Module 3 - (a) Regulatory and Institutional Requirements;

(b) Compliance Requirements for Financial Institutions;Module 4 - Building an Effective Financial Intelligence Unit;Module 5 - Domestic (inter-agency) and International Co-operation;Module 6 - Combating the Financing of Terrorism; andModule 7 - Investigating Money Laundering and Terrorist Financing.

The World Bank allows countries to customise the e-learning programme to their domestic AML/CFT regime.As such, Bank Negara Malaysia is currently customising the modules by including the Malaysian AML/CFTlaws and measures. Upon completion of the customisation, the Bahasa Melayu version will also bedeveloped. The World Bank e-learning programme will be accessible to the government and private sectorsin the following format:


153

The Banking System

i) hardcopy;ii) CD-ROM; oriii) on-line learning management system.

The flexibility given by the World Bank also allows the government and private sector’s training institutions tomodify the modules to suit their training requirements.

Training InitiativesTo stay ahead of money launderers who are increasingly creative in structuring their activities in order to avoiddetection by law enforcement officers, Bank Negara Malaysia continues to upgrade the expertise of lawenforcement personnel through formal workshops and seminars. The training workshops and seminars wereconducted by both internal and external resource persons and experts.

During the year, Bank Negara Malaysia has organised/co-organised and participated in the following training initiatives:

i) The AMLA Advance Net Worth Analysis Workshop, Port Dickson, 20-24 June 2005;ii) Financial Intelligence Training, Kuala Lumpur, 5-9 September 2005;iii) Terrorism Financing Typologies Workshop, Kuala Lumpur, 14-17 November 2005; andiv) AML Seminar and Workshop, Labuan, 23-24 November 2005.

Financial Investigators Accreditation ProgrammeAt the 19th NCC Meeting on 9 November 2004, members agreed to develop the Accreditation of FinancialInvestigators Programme for AMLA investigators. The objective of the Accreditation Programme is to developfinancial investigators with the relevant skills in conducting financial investigations. The proposed accreditedtraining programme consists of the following nine modules:

i) UNODC Anti-Money Laundering Computer-Based Training;ii) Legal Aspects on Financial Investigation under the AMLA;iii) AMLA Investigation: Process & Procedure;iv) Basic Net Worth Analysis Workshop;v) Advance Net Worth Analysis Workshop;vi) Forensic Accounting;vii) Introduction to Computer Forensics;viii) Attachments with commercial banks & insurance companies; andix) Training on Visual Investigative Analysis Software

It is anticipated that the first batch of accredited financial investigators will graduate by the end of 2006.

Challenges AheadThe year ahead will be very challenging for Malaysia as it is scheduled for a second round of Mutual Evaluationjointly by the APG and the Offshore Group of Banking Supervisors (OGBS) in early 2007. The OGBS willevaluate the AML/CFT regime of the offshore sector in the Labuan International Offshore Financial Centre. TheAPG evaluation team will assess the effectiveness of Malaysia’s AML/CFT system and its compliance with theFATF’s 40+9 Recommendations based on the revised 2004 Methodology for Assessment. To carry out thismassive and important exercise, various working groups have been established under the NCC to focus on allthe 250 assessment criteria. Malaysia’s current AML/CFT measures, laws, regulations, guidelines and frameworkare being reviewed to identify gaps and to formulate rectification measures.

Going forward, Bank Negara Malaysia will continue to be vigilant and respond to evolving AML/CFT threats aswell as AML/CFT standards and trends by fine-tuning its legal and regulatory measures, including the invocationof the AMLA reporting obligations on other categories of financial and non-financial businesses andprofessions as recommended by the FATF.


The Islamic Financial System

Management of the Islamic Banking System White Box:Maximising the Potential of Islamic Banking Business White Box:The International Centre for Education in Islamic FinancePerformance of the Islamic Banking SystemIslamic Interbank Market

156-165159-161

163-164

165-170170-172

156

MANAGEMENT OF THE ISLAMIC BANKING SYSTEM

The Islamic financial system in Malaysia showedsignificant progress in an increasingly liberalised andcompetitive environment in line with the increasedintegration of the Malaysian Islamic financial system intothe global Islamic financial landscape. The liberalisationof the Islamic banking market saw the opening inAugust 2005, of the first foreign Islamic bank licensedunder the Islamic Banking Act 1983 (IBA). Following theliberalisation of the foreign exchange administrationrules in 2004, greater market depth was demonstratedin the Islamic financial market in 2005 as further ringgit-denominated Shariah-compliant financial instrumentswere raised in the domestic bond market by foreignentities. This not only boosted confidence in thedomestic capital market but contributed tostrengthening the depth and breath of the market.

The institutional capacity and capability of the Islamicbanking players as well as the financial infrastructureand regulatory framework were further strengthenedto achieve the objectives as embodied in the secondphase of the Financial Sector Masterplan.Strengthening the corporate governance and riskmanagement system of the Islamic banking institutionsremained as the core agenda throughout the year inpursuit of an Islamic financial industry that is robust,stable and with a global outlook in facing the risingchallenges in the overall banking and financialenvironment. Islamic subsidiaries of some domesticbanking groups have commenced operations tocapitalise on the full extent of operational flexibilityaccorded by the Islamic banking licence. The


International Centre for Education in Islamic Finance(INCEIF) will be in operation in the second quarter of2006 to offer professional certification andpostgraduate programmes as part of the efforts tobuild the necessary talents and skills in Islamic finance.These developments are among important buildingblocks in the effort to position Malaysia as a premierinternational Islamic financial centre.

Strengthening the corporategovernance and riskmanagement system of theIslamic banking institutionsremained as the core agendathroughout the year.

In conjunction with the 30th Board of GovernorsAnnual General Meeting of the Islamic DevelopmentBank held in Malaysia, a seminar on the 10-YearMaster Plan for Islamic Financial Services Industry tochart the roadmap for the Islamic financial servicesindustry worldwide was held on 22 June 2005. Itprovided a platform to deliberate and provide thefoundations for the development of a master plan thatwould outline the blueprint and strategic direction fora sustained development of the global Islamic financialservices industry.

In terms of financial performance, the Islamic bankingindustry as a whole showed commendable results in2005, with profitability and assets surpassing for the

Conventional banking 88.7%



Graph 6.1 Market Share of Assets, Deposits and Financing as at end-2005

FinancingAssets

Islamic banking 12.1%


Deposits


C06 Islamic Financial pg156-172 3/14/06, 9:15 PM156

157


The IS structure allows thedomestic banking groups tomaximise the full potentialaccorded by the universalnature of Islamic bankinglicence under the IBA.

In contrast to the Islamic window structure, whereIslamic banking operations reside within theconventional banking entity, the incorporation of ISalso provides the opportunity to potential institutionalinvestors, both domestic and foreign, to participate inthe Islamic financial activities through direct equityparticipation. The liberalised shareholding policy inthe IS, whereby the equity of the IS can be owned upto 49% by foreign institutional investors, will increasethe potential for building strategic partnerships toacquire new expertise, tap the best internationaltalents from a broad range of fields and develop newvalue-added activities that would enhancecompetitiveness and stimulate greater innovation inthe Islamic banking industry. In addition, it willsupport the capital expansion exercise for the IS,increase the potential to tap regional andinternational business opportunities as well asenhance the global integration of the domesticIslamic banking industry.

While the IS structure allows the leveraging of certainfunctions of the group, institutions subscribing to theIS structure are encouraged to invest in dedicatedinternal risk management system as part of themeasures to strengthen the financial resilience of theseinstitutions in line with the prudential regulatory andsupervisory standards that have and will be issued bythe Islamic Financial Services Board (IFSB). In February2006, the IFSB issued two standards, namely theCapital Adequacy Standard (CAS) and the GuidingPrinciples of Risk Management (Guiding Principles) forinstitutions offering Islamic financial services. The CASprovides guidance on the requirements for minimumcapital adequacy to cover for credit, market andoperational risks of the Islamic banking institutionsthat is equivalent to the Basel II Capital Frameworkadopted by the conventional banking institutions. Asignificant differentiation in the CAS as opposed toBasel II is in the computation of RWCR. In Islamicbanking, given that the risks on asset financed byprofit-sharing investment account (PSIA) holders donot represent risks to the capital of Islamic bankinginstitutions, the CAS allowed the risk-weighted assets

first time the RM1 billion and RM100 billion thresholdsrespectively. Assets increased to RM111.8 billion,registering a strong growth of 17.7% and accountingfor 11.3% of the total assets of the entire bankingsystem. The market shares of Islamic deposits andoutstanding financing also increased to 11.7% and12.1% of the industry’s total respectively. Totaloutstanding financing grew by 16.5%, attributed by thegrowth in new financing approved and disbursed of55.1% and 19.4% respectively, while net non-performing financing ratio declined further to 4.8% atthe end of the year. The Islamic banking sectorremained well-capitalised with the risk-weighted capitalratio (RWCR) sustained above 12% throughout the year.

Strengthening Financial InfrastructureFollowing the issuance of three new Islamic bankinglicences under the IBA to foreign Islamic financialinstitutions, the first foreign Islamic bank commencedoperations in August 2005 while the other two foreignIslamic banks would commence operations later in2006. The expertise brought in by the foreign Islamicbanks ranging from retail banking to the moresophisticated investment banking, wealth and fundmanagement, real estate development and venturecapital business would further enhance thecompetitiveness of the domestic Islamic bankingindustry, its global linkages and Malaysia’s position asan international Islamic financial centre. On the otherhand, it would entail new regulatory and supervisorychallenges to Bank Negara Malaysia in view of thedifferent business models adopted by these banks.

In tandem with the progressive liberalisation of the Islamicbanking industry, strategic initiatives were undertaken tofurther strengthen the institutional capacity and financialresilience of the domestic Islamic banking institutions. Inthis regard, Bank Negara Malaysia has approved to date,the transformation of the "Islamic window" institutionalstructure of seven domestic banking groups into Islamicsubsidiaries (IS) licensed under the IBA within theirrespective banking groups to carry out Islamic bankingbusiness. Three IS commenced operations in 2005 whilefour others would commence operations in 2006. The ISstructure allows the domestic banking groups to maximisethe full potential accorded by the universal nature ofIslamic banking licence under the IBA which provides widerstrategic focus for Islamic banking institutions tostrengthen their competitiveness through diverse andinnovative product offerings. These range from retailbanking products to the higher end corporate finance andinvestment banking products that include private wealthand fund management as well as private equity and realestate investments.


158

(RWA) that are funded by the PSIA holders to bededucted from the total risk-weighted assets in thecalculation of RWCR.

The Guiding Principles provides specific guidance inestablishing and implementing effective riskmanagement practices to cater for the specificities ofthe Islamic financial institutions. The GuidingPrinciples set out 15 principles in managing sixcategories of risk associated with the specific featuresof Islamic contracts, namely, credit, equityinvestment, market, liquidity, rate of return andoperational risks.

The CAS and the Guiding Principles are the first twointernational standards that govern the prudentialregulatory and supervisory framework for Islamicbanking institutions issued by the IFSB. Thus, BankNegara Malaysia will collaborate with the Islamicbanking institutions to ensure a smooth andsuccessful implementation of both standards.

In November 2005, Bank Negara Malaysia introducedadditional measures to further strengthen the riskmanagement of the conventional banking institutionsoperating under the "Islamic window" institutionalstructure. These measures include separatecompliance on the single customer limit for financingfacilities based on the capital funds of the Islamicbanking portfolio; separate compliance on the newliquidity framework and statutory reserve requirementfor the Islamic banking portfolio; and apportionmentof overhead costs and other expenditure incurred inmanaging the Islamic banking portfolio. These newmeasures are in addition to the current requirementto observe a separate compliance with the minimumRWCR framework for the Islamic banking portfolio inthe conventional banking institutions.

Improvements were also made to the Guidelines onFinancial Reporting for Licensed Islamic Banks (GP8-i)in June 2005 to incorporate new requirements onaccounting policy for securities, in particular, theclassification and measurement of financial securitiesunder the fair value accounting. The revised GP8-irequires the Islamic banks to classify their securitiesunder the categories of "Held for trading" (HFT),"Available for sale" (AFS) and "Held-to-maturity"(HTM). Islamic banks are required to measuresecurities classified under the HFT and AFS based oncurrent market price or "mark-to-market" valuationtechnique following their intention to trade furtherthese financial securities in the secondary market.Securities under the category of HTM are measuredbased on amortised cost given the intention to holdthese securities as long-term investment. The GP8-ialso specified the rules on reclassification of securitiesfrom one category to another to instil discipline inensuring that consistent accounting policy is adoptedon the classification and measurement of financialsecurities.

Other improvements made to the GP8-i were therequirements for the submission and publication ofannual and interim financial reports andenhancement of disclosure of the profit equalisationreserve and unrealized gains or losses on AFSsecurities to reflect the apportionment between thedepositors and the Islamic banks. The revised GP8-iwill further enhance the transparency, comparabilityand timeliness of information on the financialcondition of the Islamic banks to the variousstakeholders.

In 2005, several new Islamic financial products wereintroduced that include residential mortgage-backedsecurities, commodity-based financing as well as

Calculation of RWCR

RWCR =

ELIGIBLE CAPITAL

TOTAL RWA(Credit Risk + Market Risk) +Operational Risk Weighted

LESS

RWA FUNDEDBY PSIA

(Credit Risk + Market Risk)


159


investment and equity-linked products based onmurabahah, musyarakah and mudharabah. Thecommodity-murabahah, among others, is a newfeature in the Malaysian Islamic banking industryalthough it has been used extensively in the MiddleEast. It involves a parallel back-to-back arrangementbetween a financial institution and its customer tobuy and sell certain specified commodities, such asaluminium, steel, copper and nickel which are listedon the major commodity exchanges, on a cost plusprofit basis. It is structured such that a commodity isbeing exchanged on spot basis and the settlementarrangement will be structured in a manner to meetthe various requirements. In a deposit takingarrangement, the first sale from bank to customer willbe settled with cash (deposit amount) while thesecond sale from customer to bank will be ondeferred terms at a pre-determined maturity date.Similarly, in a financing arrangement, the first salefrom customer to bank will be settled with cash(disbursement amount) while the second sale frombank to customer will be on deferred terms atsettlement date. The parallel back-to-backtransactions involving the commodities takes placesimultaneously and therefore, does not expose theparties to the price risk associated with the underlyingcommodity.

The submission of proposals for the introduction ofnew Islamic financial products to Bank NegaraMalaysia has been successfully automated followingthe implementation of the Product Approval andRepository System (PARS) in February 2006 toexpedite the processing of new products for approvaland provide for a repository of Islamic bankingproducts. The new secured online application system

will streamline the submission of new productapplications from Islamic financial institutions andsimplify the process for users by providing them,among others, the ability to submit data on newproduct application; review the application history;update existing approved products; and interact withexternal parties in seeking feedback on the submittedproducts.

In the area of liquidity management, Bank NegaraMalaysia has introduced a new Islamic monetaryinstrument, namely, Bank Negara Malaysia SukukIjarah. The Bank Negara Malaysia Sukuk Ijarah wasissued in February 2006 through a special purposevehicle, BNM Sukuk Berhad with an issue size ofRM400 million. The proceeds were used to purchaseBank Negara Malaysia's assets which were thenleased back to the Bank for rental paymentconsideration and to be distributed to investors asreturns on a semi-annual basis. Upon the maturity ofthe sukuk, which would coincide with the end of thelease tenure, BNM Sukuk Berhad will resell the assetsto Bank Negara Malaysia at a pre-determined price.The Bank Negara Malaysia Sukuk Ijarah will be issuedon a regular basis with subsequent issues rangingfrom RM100 million to RM200 million. The BankNegara Malaysia Sukuk Ijarah will add to the diversityof liquidity instruments used by Bank Negara Malaysiain managing liquidity in the Islamic money market aswell as to serve as a benchmark for other short tomedium-term Islamic bonds.

Strengthening Shariah FrameworkBank Negara Malaysia continued to monitor theimplementation of the Shariah governanceframework following the issuance of the Guidelines

Maximising the Potential of Islamic Banking Business

The Islamic Banking Act 1983 (IBA) accords a universal banking stature to the Iicensed Islamic banks. Under theIBA, the Islamic banks are allowed to conduct the full spectrum of banking business in line with Shariahprinciples, ranging from the retail-based commercial banking business to the more sophisticated investmentbanking business that includes, among others, corporate finance, private equity and wealth managementactivities. Up till the present, the banking business activities conducted by the Islamic banks in Malaysia havelargely been based on the traditional banking business model. Similar scenario also exists in the Islamic bankingactivities conducted by the conventional banking institutions participating in the Islamic Banking Scheme.Approximately 70% of the financing extended by the Islamic Banking Institutions (IBIs) are sales and lease-based modes of financing which are mainly directed to the retail sector to finance the purchase of residentialproperty and passenger cars.

The universal nature of Islamic banking business, particularly in the field of investment banking, has yet to befully exploited. While the ratio of fee-based income from investment banking-related activities to the total


160

income of IBIs has been increasing over the recent years, fee-based income still constitute a small portion ofthe total income of the IBIs. In the Islamic capital market, significant potential still remains to be tapped in theorigination of Islamic bonds.

As competition intensifies in the retail banking market following the progressive liberalisation of the financialsector, IBIs need to take strategic moves towards enhancing their capacity and capabilities to expand thetraditional scope of banking business and tap the full potential that a universal Islamic banking licence offers.This includes venturing into new growth areas such as private equity investments, real estate investments,private banking, and fund and wealth management business. Such a move would diversify the sources ofearnings for IBIs, enhance returns to shareholders and depositors as well as strengthen the capacity to sustainstrong financial performance.

In addition, the Islamic banking licence allows IBIs to diversify the sources of funding from the traditionaldeposit products to take full advantage of the profit-sharing investment accounts (PSIA). PSIA provides theopportunity to customise the risk and reward profiles of the financing and investment activities on the asset

2000 2001 2002 2003 2004 20050

1

2

3

4

5

6

7

8

%

9

Islamic banking Conventional banking

Graph 1Ratio of Fee-based Income to Total Income

0

2

4

6

8

10

12

14

16

Graph 2Participation by Islamic Banking Institutions in Origination of Islamic Bonds

RM billion (nominal)

2000 2001 2002 2003 20052004

Total Islamic bonds issued

Islamic bonds lead arranged by Islamic banking institutions


161


on the Governance of Shariah Committee for theIslamic Financial Institutions (GPS1) which came intoeffect on 1 April 2005. Following the Guidelines, thenumber of Shariah advisers in the Shariah committeesof Islamic banking institutions and takaful companieshas increased significantly, and would serve as a baseto enlarge the number of competent Shariah expertsin the country. Although a majority of the Shariahadvisers are academicians in the field of FiqhMuamalat, the committee also includes formerjudges, legal practitioners and economists. It isexpected that, with a combination of their diversebackground and expertise, Shariah deliberations notonly be thorough but also add value to the furtherdevelopment of the industry.

In terms of Shariah supervision, the Bank continuedto assess the compliance of Islamic financialinstitutions with the Shariah principles andgovernance process. The Bank also evaluates theeffectiveness of Shariah committees in providingproper advice and validating the Shariah compatibilityof the daily operational matters, such as observingthe adequacy of firewalls to ensure no co-minglingbetween the Islamic and conventional funds in theIslamic window operations. Similarly, the internalauditors are also required to consciously play theirrole in ensuring that Islamic banking institutionscomply with the Shariah principles by formulating acomprehensive audit programme for Shariahcompliance and equipping themselves with therequired knowledge in performing their duty.

In developing and promoting Shariah dynamism andconvergence on the international front, Bank NegaraMalaysia undertook two important initiatives in 2005.The first initiative is the Shariah Scholars Dialogueheld from 22 to 23 June 2005 in Kuala Lumpur. Themain objective of the Dialogue is to promoteconvergence and harmonisation of Shariahinterpretations and appreciation among the Shariahscholars in the development of Islamic banking andfinance at the global front. The Dialogue gatheredmore than 40 eminent Shariah scholars from severalcountries including Saudi Arabia, Tunisia, Iran,Bahrain, Pakistan, Bangladesh, Indonesia and BruneiDarussalam. The Dialogue has provided a goodnetworking platform to bridge the gap amongstShariah scholars in terms of fostering understandingand appreciation of Shariah implementation invarious jurisdictions and to facilitate the integrationof the domestic Islamic financial system with theglobal Islamic financial system.

The second initiative undertaken by Bank NegaraMalaysia is the establishment of the RM200 million Fundfor Shariah Scholars in Islamic Finance. The Shariah Fundwill provide the resources to finance Shariah researchactivities, scholarships for Shariah studies as well asorganising the annual international Shariah scholars’dialogue. The Shariah Fund will facilitate the creation anddevelopment of competent Shariah scholars equippedwith sound knowledge and expertise in both Islamic lawsand Fiqh Muamalat to deal with the ever-changing anddynamism of the Islamic financial industry.

side in accordance with the distinct investment preferences and risk appetite of the PSIA holders on theliabilities side. Under the Capital Adequacy Standard issued by the Islamic Financial Services Board (IFSB), therisk-weighted assets funded by the PSIA would not attract a capital charge, thereby providing an addedadvantage to the IBIs.

By exploring beyond the traditional sectors, the IBIs would also enrich the diversity of new asset classes forIslamic investment and further enhance the depth of the Islamic financial markets. This would not onlyincrease the efficiency of the financial intermediation process in the Islamic financial system but would alsoenhance Malaysia’s position as an attractive international hub for Islamic finance.

Under the Financial Sector Masterplan, the Islamic financial infrastructure has been progressively developed tobuild the capacity of IBIs to capitalise on the universal nature of Islamic banking business. These, amongothers, include the transformation of Islamic windows into dedicated Islamic subsidiaries, the licensing offoreign Islamic banking players with distinct capabilities in Islamic investment banking activities and thedivestment of up to 49% equity interest in IBIs to strategic institutional domestic and foreign investors. IBIs arethus able to leverage on this progressive liberalisation policy to forge strategic alliances as well as tap newexpertise and growth opportunities within the domestic environment and abroad to maximise the potential ofIslamic banking business.


162

During the year, the Shariah Advisory Council (SAC)of Bank Negara Malaysia deliberated on a number ofissues pertaining to Islamic finance and among themain decisions made by the SAC are as follows:

a) Permissibility of Forward ForeignExchange MechanismThe SAC approved a mechanism for forwardforeign exchange transaction based on abinding unilateral promise that does nottantamount to a contract before thesettlement date. In the event of default of thebinding promise, the compensation charge isallowed to be imposed on the defaulter.

b) Application of Compensation Charges forLate Payment of Judgment DebtThe Court may grant compensation chargesfor late payment of judgment debt in Islamicfinance cases based on the average Islamicmoney market rate or 8% per annum,whichever is lower and shall not becompounded.

c) Review the Application of Qardh Hasan inIslamic Banking TransactionsAs banking businesses involve mainlycommercial deals with the purpose of earningprofit, the principle of qardh hasan is notappropriate to be applied as a main contractfor financing. Qardh hasan is more suitable forcharity purposes as it is a benevolent loancontract with the possibility of the principalamount being waived. As an alternative, theprinciple of qardh (interest-free loan) may beused as a secondary or complementarycontract wherever necessary.

d) Application of Kafalah Contract forGuarantee Scheme in Islamic BankingThe SAC approved the Islamic guaranteescheme based on the kafalah contract forcredit enhancement of the small and mediumenterprises (SME). Originally, kafalah isregarded as tabarru’ contract in which theguarantee is provided based on the spirit ofbrotherhood without any consideration.However, current banking and financialtransactions have made guarantee as acommercial contract with the charging of fees.The charging of fee for kafalah is allowedbased on the necessity (hajah) for SME toobtain financing.

Strengthening Legal FrameworkIn a heightened competitive environment in theIslamic banking and finance industry, it is imperativethat specific attention be given towards harmonisinglaws and regulations to give full effect to Shariahrequirements given the differences between theprinciples of Shariah and the conventional legalsystem. In December 2005, the Attorney General’sChambers launched the Shariah Community, a smartnetworking platform with the main objective ofaddressing the Shariah issues and challenges in thecontext of Malaysian regulatory framework andlegislation. Islamic finance and takaful have beenidentified as two of the areas being studied incollaboration with Bank Negara Malaysia.

As part of the measures to be continuously consistentwith Shariah, to remove impediments on Shariahcompliant product innovation and diversification, andto encourage participation in Shariah compliantinstruments, the Hire Purchase Act 1967 is beingreviewed to cover Islamic hire purchase whilst otherrelevant legislation including the National Land Code,Companies Act 1965, Civil Law Act 1956 andContracts Act 1950 are being studied to cater for theongoing developments of Islamic banking andfinance. This is in addition to the ongoing review ofthe Islamic banking and takaful legislation by BankNegara Malaysia. To further promote the taxneutrality policy, recent amendments to the StampAct 1949, which took effect in October 2005,included a new provision which accords instrumentsfor the purchase of goods within the meaning of theHire Purchase Act 1967 under the concept of bai’bithaman ajil, the same stamp duty as conventionalinstruments of the same nature.

In response to the continuous rapid expansion of theIslamic financial industry that has correspondinglyincreased demand for Islamic financial instruments,the Government Investment Act 1983 was amendedin June 2005 to allow the Government to issue awider range of Islamic securities. The amendedlegislation, renamed as the Government Funding Act1983, accorded greater flexibility for the Governmentto source funds from the capital market through theissuance of lease-based and asset-based Islamicfinancial instruments. Apart from the traditionalGovernment Investment Issues, the Governmentinitiated the issuance of Islamic Treasury Bills, a short-term Islamic securities with a maturity tenor of lessthan one year based on the sell and buy back of assettransactions.


163


Enhancing Intellectual Capital DevelopmentA significant milestone that took place during theyear has been in the area of promotion human capitaldevelopment with the establishment of theInternational Centre for Education in Islamic Finance(INCEIF) that will commence operations in 2006. Theestablishment of INCEIF serves as a catalyst increating a large pool of world-class experts and highcalibre professionals in Islamic banking and finance,to meet the talent requirements of the industry bothdomestically and internationally.

The International Centre for Education in Islamic Finance

Building skills talent is one of the key pre-requisites in supporting the progressive developments of Islamicfinance. Human intellectual capital is a critical asset that is much needed to drive innovation and sustain marketcompetitiveness to meet challenges in the Islamic financial industry. With the rapid growth of the Islamicfinancial system, Bank Negara Malaysia has taken a strategic move to establish an international education centrein Islamic finance to produce the needed pool of professionals and specialists in Islamic finance for the domesticand global markets. The establishment of the International Centre for Education in Islamic Finance (INCEIF) willpromote greater linkages between the domestic and international Islamic financial system and make Malaysia asa leading centre of education in Islamic finance.

The establishment of INCEIF was announced by the Prime Minister of Malaysia at the 3rd ASEAN Business andInvestment Summit in December 2005. Extensive pre-operating work is underway for INCEIF to commenceoperations in the second quarter of 2006. Bank Negara Malaysia has set up an endowment fund of RM500million to support this initiative.

INCEIF is to be a leading international centre for educational excellence in Islamic finance with the objectives of:

• facilitating the coordination, planning and implementation of human capital initiatives for the globalIslamic financial industry;

• developing superior talents for the global Islamic financial system;• offering internationally recognised professional certification and postgraduate programmes; and• supplying talented researchers and educators in Islamic finance.

ProgrammesINCEIF programmes are designed to provide the latest onsite and online teaching techniques with unique valueelements. INCEIF will also form strategic alliances with renowned local and international institutions of higherlearning to provide joint education programme through visiting professor and scholar-in-residence schemes.

INCEIF programmes are categorised into three main areas:1. Professional certification programme

INCEIF will award professional certification, namely, Certified Islamic Finance Professional to qualified Islamicfinance practitioners. The certification programme, which will commence in June 2006, consists of three parts:

• Part I: Building knowledgeCandidates will acquire the necessary knowledge in Islamic finance from theory and ethics to wealthplanning and management. Validations are done through examinations, written case studies and projectpapers before candidates are conferred as Associate Members.

The establishment of INCEIFserves as a catalyst in creating alarge pool of world-class expertsand high calibre professionals inIslamic banking and finance, tomeet the talent requirements ofthe industry both domesticallyand internationally.


164

• Part II: Building skillsCandidates will obtain the required skills in handling operational issues and Islamic financialtransactions such as structuring corporate financing and issuing Islamic securities. Candidates have theoption of specialising in specific areas of Islamic banking and/or takaful. To be conferred as ProficientMembers, candidates have to pass examinations, undertake project papers, develop new products andprepare transactional documentations.

• Part III: Building competency and experienceThis final part is designed to provide articleship programmes where various activities will be designed toprovide candidates with practical experience in the Islamic financial services industry. These include amentor-mentee programme at pre-approved participating Islamic financial institutions and running asimulation bank via financial laboratory. Candidates will have to go through validation processes such assolving problems, restructuring exercises, simulation and management games, product conversionexercises, Shariah and audit compliance, and interviews in order to be conferred as Practising Members.

2. Postgraduate programmesINCEIF will embark on its own Masters and Ph.D. programmes to produce graduates with strongfoundation in Islamic finance, coupled with strong research and development capabilities. The Mastersprogramme of INCEIF will be on a highly specialised field of Islamic finance such as Islamic WealthManagement. Candidates will also participate in internship programmes. The programme will commencelatest by end 2006.

3. Research and publication programmesINCEIF will set up a world-class resource centre and will intensively engage in research and developmentprojects in Islamic finance as well as publication of books, journals and working paper series. The certificationand postgraduate programmes will facilitate and enhance this programme by supplying the relevant researchmaterials and publications for academic references. INCEIF Educational Colloquium to be held in April 2006will also serve as a platform for INCEIF to assess research materials relevant for its research programmes.INCEIF will also develop a comprehensive domestic and international financial database.

GovernanceINCEIF will be headed by a Chief Executive Officer who reports to the Board of Directors (BOD). The INCEIFGoverning Council, comprising prominent local and international personalities, has been established to advisethe BOD on INCEIF strategic directions and provide visionary global insights on the learning needs of theIslamic financial services industry that will enhance the prominence of INCEIF. The Professional DevelopmentPanel has also been set up as the highest authority in academic matters that is responsible for reviewing andapproving the certification and postgraduate module programmes and to ensure INCEIF offers the highestquality of module content and standards for all its programmes.

The establishment of INCEIF completes the talent development infrastructure in Malaysia’s Islamic financialindustry. The industry-owned Islamic Banking and Finance Institute of Malaysia (IBFIM) and the SecuritiesIndustry Development Centre (SIDC) focus their training programmes to meet the industry needs at thetechnical level whilst INCEIF will provide intermediate and advanced knowledge and skills in Islamic finance.The International Centre for Leadership in Finance (ICLIF) provides leadership programmes to top managementthat include top management of Islamic financial institutions. This allows Malaysia to offer a full range ofIslamic finance talent development programme for the global needs of the Islamic financial services industry.

INCEIF reflects Malaysia’s continuous effort and commitment towards development of a progressive Islamicfinancial industry by developing and enhancing human intellectual capital in Islamic finance. It is envisagedthat the establishment of INCEIF would contribute towards supporting the growth and development of theglobal Islamic financial system.


165


Consumer EducationDuring the year, concerted efforts continued to beaccorded to further strengthen the consumer educationand awareness in Islamic banking and finance. BankNegara Malaysia participated actively in the IslamicBanking and Takaful Roadshow 2005 (IBTR) organised bythe Association of Islamic Banking Institutions Malaysia(AIBIM). Bank Negara Malaysia participated in six IBTRs,namely, in Shah Alam, Ipoh, Alor Setar, Johor Bahru,Putrajaya and Pulau Pinang, which managed to gather anaverage of 20,000 visitors per each IBTR. Bank NegaraMalaysia also participated in the exhibition on Islamicbanking and finance at the OIC Trade Exhibitionorganised by the Malaysian External Trade DevelopmentCorporation (MATRADE) which was held from 20 to 24June 2005 and an exhibition in conjunction with theInvestors Conference from 22 to 23 June 2005. For thesecond consecutive year, Bank Negara Malaysiaparticipated in the Malaysia International Halal Showcase,organised by the Islamic Da’awah Foundation, which washeld from 28 to 31 July 2005.

Moving ForwardWith the development of a comprehensive Islamic financialsystem that is increasingly becoming more liberalised andintegrated with the international financial system, Malaysiais well positioned to develop as an international Islamicfinancial centre. To meet the rising challenges, the focuswill be to strengthen the innovativeness andcompetitiveness of the Islamic financial services industry inMalaysia, underpinned by high calibre human talents,world-class infrastructure and best international standards.Malaysia is set to serve as an important gateway forinstitutional and high-networth investors to tap investmentopportunities in this rapidly growing region.

services market, and takaful and retakaful activities. Tocomplement these initiatives are efforts targeted atmaking Malaysia a centre of excellence in Islamicbanking and finance education, training, consultancyand research. This is in view that talent and productinnovation are key factors in sustaining the globaldevelopment in Islamic finance. In addition, it isenvisaged that the domestic Islamic bankinginstitutions will continue to expand overseas tobecome regional Islamic financial players with thelong-term objective of becoming global players. Thepolicy direction will be to enhance the resilience,efficiency and capacity of the domestic Islamic financialinstitutions and the Islamic financial infrastructure withthe aim of intensifying the robustness and stability ofthe Islamic financial system.

PERFORMANCE OF THE ISLAMIC BANKING SYSTEM

The Islamic banking system continued to show strongperformance in 2005, with higher profitability andpositive trends in all key financial soundness indicators.At the same time, the level of capitalisation in theIslamic banking system was further strengthenedthrough new capital injections, enabling the industry toexpand with vigour and able to withstand unexpectedfuture shocks. The main highlights of the performanceof the Islamic banking system were:

• Profitability was higher, contributing to improvedreturns on assets and equity;

• Financing activities were active with higherdemand from households for the purchase ofresidential properties and passenger cars;

• Non-performing financing ratio continued to trenddownwards, improving further the asset quality;

• Liquidity remained ample with financing todeposits ratio at around 80%;

• Rates of return on mudharabah generalinvestment deposits was marginally lower; and

• High capital adequacy ratios due to strongcapitalisation level.

ProfitabilityThere was further improvement in the profit before taxand zakat recorded by the Islamic banking sector due tohigher income and lower provisions for non-performingfinancing, despite increases in overhead and staff costs. Incalendar year 2005, the Islamic banking sector recorded anincrease of RM712.5 million or 28.7% in net income(2004: RM307 million or 14.1%), while other incomeincreased by RM47.4 million or 12.9% (2004: RM88million or 11.8%). At the same time, overheads rose byRM259.3 million or 61.5% (2004: RM37 million or 9.6%),

With the development of acomprehensive Islamic financialsystem that is increasinglybecoming more liberalised andintegrated with theinternational financial system,Malaysia is well positioned todevelop as an internationalIslamic financial centre.Initiatives are being directed at enhancing Malaysia’sstrength in the origination, issuance and trading ofIslamic capital market and treasury instruments, Islamicfund and wealth management, offshore Islamic financial


166

while staff cost rose by RM164.8 million or 61.7% (2004:RM38 million or 16.6%). After allocating financing lossand other provisions of RM0.9 billion (2004: RM1.2billion), the Islamic banking sector recorded profit beforetax and zakat of RM1.6 billion for the calendar year 2005(RM988.1 million in 2004). The better profitability hasincreased the return on assets and return on equity to1.5% and 21% (2004: 1.1% and 15.7%) respectively,despite the increase in asset size and capital funds.

AssetsDuring the year, the total assets of the Islamic bankingsector increased significantly by RM16.8 billion or 17.7%to RM111.8 billion with more than half of the increaseattributable to a 16.5% (RM9.5 billion) growth in totalfinancing. As at end-2005, total outstanding financingamounted to RM67.4 billion (2004: RM57.8 billion) or60.2% of the total Islamic banking assets. Investment insecurities increased by 28.4% (RM4.6 billion) during theyear to account for RM20.8 billion or 18.6% of the totalassets. At the same time, deposits placed with otherinstitutions also rose by 26.9% (RM4.3 billion), toaccount for another RM20.4 billion or 18.2% of the totalIslamic banking assets. In terms of market share, thelargest portion of Islamic banking assets remained withthe commercial banks in the Islamic Banking Scheme (IBS)with a share of 53.4%, followed by the Islamic banks(38.8%) and the IBS discount houses (5.3%). In terms ofthe growth in assets, Islamic banks recorded the highestgrowth of 74.7% arising from the transformation ofthree "Islamic windows" into Islamic banks, followed byIBS commercial banks (10.7%) and IBS discount houses(0.5%).

Financing ActivitiesDuring the year, there was a higher number andamount of financing applications received by the Islamicbanking institutions. In tandem with the increase infinancing approvals of 55.1%, financing disbursementsincreased by 19.4%. Financing repayments alsorecorded an increase of 25.3% as the overall economiccondition improves.

Arising from the active financing activities, totalfinancing expanded by 16.5% or RM9.5 billion in2005, (19% or RM9.2 billion in 2004). Supported bythe strong consumer spending, consumer financing

Table 6.1Islamic Banking System: Income and Expenditure

For thecalendar year

2004 2005p

RM million %

Income1 net ofincome-in-suspense 4,298.6 5,220.2 921.6 21.4

(Income-in-suspense) 306.2 234.5 -71.7 -23.4

Less: Expense1 1,813.9 2,023.0 209.1 11.5

Net income 2,484.7 3,197.2 712.5 28.7

Add: Other income 368.1 415.5 47.4 12.9

Less: Staff cost 267.0 431.8 164.8 61.7Overheads 421.5 680.8 259.3 61.5

Profit before provisions 2,164.3 2,500.1 335.8 15.5

Less: Financing loss & otherprovisions 1,176.2 945.3 -230.9 -19.6

Pre-tax profit 988.1 1,554.8 566.7 57.4

Return on assets (%) 1.1 1.5Return on equity (%) 15.7 21.0

1 From financing activities and securities

p Preliminary

Annual change

Table 6.2Islamic Banking System:Sources and Uses of Funds

Annual change As at end-

2004 2005p 2005p

RM million

SourcesCapital and reserves 1,137.4 2,615.2 10,051.7Deposits 16,907.1 11,047.9 83,874.8Funds from other financial

institutions -2,902.9 429.5 4,459.1Other liabilities 2,542.4 2,697.0 13,437.9

Total 17,684.0 16,789.6 111,823.5

UsesCash 15.9 58.6 329.2Reserve with

Bank Negara Malaysia -158.3 567.5 1,925.9Deposits with other financial

institutions 7,239.7 4,314.8 20,374.9Financing 9,227.5 9,523.2 67,364.6Securities -1,776.2 4,600.7 20,800.9Other assets 3,135.4 -2,275.2 1,028.0

p Preliminary

Table 6.3Islamic Banking System: Financing Activities

For the yearAnnual change2004 2005p

(%)RM million

Financing approvals 17,273.0 26,789.2 55.1Financing disbursements 41,088.6 49,058.7 19.4Financing repayments 33,679.0 42,207.5 25.3

As at end-

Annual change2004 2005p(%)

RM million

Outstanding financing 57,841.3 67,364.6 16.5

p Preliminary


167


continued to account for the largest component(36.2%) of financing extended by the Islamic bankinginstitutions, mainly for the purchase of passenger cars,while the broad property sector recorded the secondlargest component of financing, comprising 34% ofthe total financing, extended mainly to the residentialproperty sub-sector. In 2005, financing for thepurchase of passenger cars constituted 29.9% of thetotal financing, while financing for the purchase ofresidential properties constituted 23.8%. The higherhousehold demand was as the result of attractive andcompetitive financing packages offered by the Islamicbanking institutions. Under the business sector,financing extended to the manufacturing sectoraccounted for 11.2% of the total financing as at

end-2005 (end-2004: 10.6%). In terms of financingconcept, financing based on the bai’ bithaman ajilconcept remained dominant, constituting 40.7% of thetotal financing, albeit at a lower percentage comparedwith last year (49.9%). In contrast, financing based onijarah increased to 31.6% of the total financing (2004:24%) following the increase of RM5.8 billion inpassenger car financing.

The Islamic banking sector continued to support theexpansion of small and medium enterprises (SME). In2005, financing approvals and disbursements to SMEincreased by 32.7% and 19.7% respectively. Totalfinancing to the SME provided by the Islamic bankinginstitutions increased by 7.7% to reach RM8.6 billion as atend-2005 (end-2004: RM8 billion) to account for 33.6%of the total Islamic business financing as at end-2005.

Asset QualityThe asset quality of the Islamic banking sector improvedfurther during the year. The gross and net non-performing financing (NPF) ratios as at end-2005 stoodat 7.7% (2004: 8.1%) and 4.8% (2004: 5.2%)respectively based on a 6-month classification. The netNPF ratio of the Islamic banking institutions sustainedwithin the range of 4.7% to 5.3% throughout the year.Financing loss coverage remained high at 58.7% of thetotal NPF as at end-2005 (2004: 61.6%). In terms ofabsolute amount, financing loss coverage increased toRM3.5 billion as at end-2005 from RM3.1 billion as atend-2004. The general and specific provisions set asideby the Islamic banking institutions increased by 16.7%and 27% respectively during the year, while income-in-suspense decreased by 11.1%. The general provision for

Table 6.4Islamic Banking System: Direction of Financing

Annual change As at end-

2005p2004 2005p

RM million

Agriculture, hunting,forestry and fishing 466.9 40.8 2,369.3

Manufacturing 1,725.8 1,406.9 7,519.5Mining and quarrying 13.1 28.3 104.9Electricity, gas and water supply 470.3 -300.2 419.1

Wholesale and retail trade,restaurants and hotels 1,273.9 317.1 3,388.0

Wholesale trade 1,141.3 148.9 2,392.2Retail trade 126.5 167.1 905.0Restaurants and hotels 6.1 1.1 90.8

Broad property sector 1,926.2 512.4 22,923.1Real estate 94.5 66.3 972.7Construction 597.4 -199.3 3,331.6Purchase of residential

property 1,047.0 581.7 15,974.7Purchase of

non-residential property 187.3 63.6 2,644.1

Transport, storage andcommunication 152.2 111.0 1,287.5

Finance, insurance and businessservices 172.0 22.0 1,999.0

Financial services -37.8 178.7 1,376.3Insurance -0.4 -1.7 1.4Business services 210.2 -154.9 621.3

Consumption credit 3,458.9 7,255.1 24,376.1Personal uses 811.3 1,289.9 3,738.2Credit cards 155.8 155.1 467.1Purchase of consumer

durables -10.5 -5.6 38.0Purchase of passenger cars 2,502.3 5,815.8 20,132.8

Purchase of securities -43.0 42.4 920.3Purchase of transport vehicles -525.2 25.1 706.6Community, social and personal

services 115.2 216.7 635.2Others 22.0 -154.4 716.0

p Preliminary

Graph 6.2 Islamic Banking System: Major Financing Concepts as at end-2005

Murabahah 6.9%

Other Islamic concepts 19.6%

Bai' Bithaman Ajil 40.7%Mudharabah

& Musyarakah 0.3%

Istisna' 0.9%

Ijarah 31.6%


168

the Islamic banking sector remained at 2.2% of thetotal net financing, reflecting the prudent stanceadopted by the Islamic banking institutions.

The broad property sector continued to account for thelargest share of NPF, at 60.6% (2004: 66.7%). The highNPF in the broad property sector was recorded in theresidential property, which increased by RM383.9 million(21.4%). The NPF level of the residential property

Table 6.5Islamic Banking System: Non-performing Financing and Financing Loss Provisions

As at end-

2004 2005p

Classification Classification

3-month 6-month 3-month 6-month

RM million

Islamic banking systemTotal financing 57,841.3 67,364.6General provisions 1,236.5 1,236.1 858.9 1,443.0 1,443.4 1,053.0Income-in-suspense 640.5 661.2 633.8 569.5 582.6 554.6Specific provisions 1,183.2 1,239.4 1,170.6 1,502.5 1,547.2 1,461.6Non-performing financing 4,968.2 6,313.4 4,710.5 5,991.8 6,653.1 5,167.3

Net NPF ratio (%)2 5.6 7.9 5.2 6.0 6.9 4.8Total provisions/NPF (%) 61.6 49.7 56.5 58.7 53.7 59.4

Islamic banksTotal financing 11,423.1 20,627.1General provisions 163.4 163.4 163.4 353.0 353.0 353.0Income-in-suspense 204.1 215.3 204.1 278.7 291.8 276.3Specific provisions 468.1 501.7 468.1 626.8 661.5 621.6Non-performing financing 1,668.7 2,152.7 1,668.7 2,399.6 2,957.1 2,320.5


Commercial banks3

Total financing 38,802.1 45,398.5General provisions 930.6 930.2 553.0 1,056.8 1,057.2 666.8Income-in-suspense 328.3 330.4 321.6 260.2 260.2 247.7Specific provisions 558.0 565.6 545.4 797.0 803.5 761.3Non-performing financing 2,800.1 3,411.7 2,542.4 3,422.0 3,445.6 2,676.6


Finance companies3

Total financing 6,823.4 1,070.9General provisions 129.6 129.6 129.6 26.8 26.8 26.8Income-in-suspense 100.5 107.9 100.5 22.7 22.7 22.7Specific provisions 138.6 153.6 138.6 49.2 52.7 49.2Non-performing financing 389.6 639.2 389.6 122.9 203.1 122.9


Merchant banks3

Total financing 792.7 268.1General provisions 12.9 12.9 12.9 6.4 6.4 6.4Income-in-suspense 7.6 7.6 7.6 7.9 7.9 7.9Specific provisions 18.5 18.5 18.5 29.5 29.5 29.5Non-performing financing 109.8 109.8 109.8 47.3 47.3 47.3


1 Financing classified as NPF based on individual banking institution’s NPF classification policy i.e. 3-month or 6-month classification2 Net NPF ratio = (NPF less IIS less SP) / (Gross financing less IIS less SP) x 100%3 Refers to Islamic banking portfolio of conventional banking institutions participating in Islamic Banking Scheme and represents a subset of the figures reported under

the total banking system for commercial banks, merchant banks and finance companies

p Preliminary

Actual1 Actual1

increased from 36% as at end-2004 to 36.3% as atend-2005. Apart from the broad property sector,there was also an increase of RM258.1 million in NPFin financing for the purchase of transport vehicles.

LiquidityThere was ample liquidity in the Islamic bankingsystem throughout 2005. Total deposits recorded asignificant growth of 15.1% or RM11 billion to reach


169


RM83.9 billion as at end-2005. The IBS commercialbanks contributed the major share (51%) of the totaldeposits in the Islamic banking sector (2004: 54.6%),followed by the Islamic banks of 42.5% (2004: 28.5%).Among the Islamic banking players, the Islamic banksrecorded the highest growth rate in deposits of 71.7%mainly due to the transformation of three "Islamicwindows" into Islamic banks, followed by the IBS ofcommercial banks which recorded a growth of 7.5%.

Investment deposits (general and specific) continued tocapture a major portion of the Islamic banking deposits,contributing 53.2% (2004: 57.6%) of the Islamic

Graph 6.3Islamic Banking System: Net Non-Performing Financing Ratio1

%

18

16

14

12

10

8

6

4

2

02000 2001 2002 2003 2005p2004

Islamic banking system Islamic banks

Commercial banks Finance companies

Merchant banks

1 Based on actual classification

p Preliminary

By Institution By Type

Graph 6.4Islamic Banking System: Deposits by Institution and Type as at end-2005

Finance companies

0.8%

Merchant banks 0.9% Discount houses

4.8%

Others 1.8%

Savings deposits 11.3%

NIDs 16.2%

Demand deposits 17.6%

Specificinvestment

deposits10.5%

General investment

deposits42.6% Commercial

banks 51.0%

Islamic banks 42.5%

banking deposits. However, investment deposits onlygrew by 6.2%, while savings and demand depositsgrew by 12.7% and 14.5% respectively mainly due tothe increase in the retail customer base in Islamicbanking. In terms of the maturity profile of generalinvestment deposits, 96.2% continued to beconcentrated at the shorter end of the yield curve,mainly in the one to three-month maturity tenure as theincremental return between the shorter and longerplacement tenures continued to remain small. Theaverage rates for deposits remained stable in 2005.

Financing to deposits (FD) ratio of the Islamic bankinginstitutions showed a favourable trend. The FD ratioincreased from 79.4% as at end-2004 to 80.3% as atend-2005 due to higher percentage increase in the totalfinancing base (16.5%) compared to deposits (15.1%)during the period.

Rates of ReturnThe rates of return distributed to the various tenures of themudharabah general investment deposits (GID) by the Islamicbanking institutions continued to decline in 2005. Theaverage rate of return of 1-month ranged from 2.40% to2.63% (2004: 2.63% to 2.87%) and 3-month GID rangedfrom 2.57% to 2.76% (2004: 2.73% to 2.93%) respectively.The declining trend in the rates of return was attributed to themarginal increase in the average monthly net distributableincome, which was not proportionate to a higher growth inthe average monthly GID. During the year, the averagemonthly net distributable income grew by RM30 million thatcontributed to a marginal increase of 0.01 times of profitpayable to outstanding GID across all tenures. However, thecorresponding outstanding monthly average of GID increasedby 13.6% or RM34.5 billion in 2005.


170

During the year, the Islamic banking institutionsallocated an additional RM12.4 million from the grossincome to the profit equalisation reserve (PER) account.As at end-2005, the outstanding PER stood at RM481.1million as compared with RM468.7 million in 2004. Theincrease in PER provides the additional buffer for Islamicbanking institutions to sustain competitive rate of returnand smoothen the potential negative impact whileoperating in an increasing interest rate environment inthe dual banking system.

Capital StrengthThe Islamic banking sector remained well capitalisedthus enabling the sector to sustain the RWCR and corecapital ratio above 12% and 10% respectivelythroughout the year. The total capital base of theIslamic banking institutions increased from RM7.9billion as at end-2004 to RM10.2 billion as at end-2005, mainly due to new capital brought in with thesetting up of three new Islamic subsidiaries and a newforeign Islamic bank, as well as new capital injectionsand audited profits. Total risk-weighted assets of theIslamic banking system grew by 16.2% or RM10.1billion in the past 12 months. The growth wasapparent in the 0% and 100% risk categories (RM1billion and RM8.5 billion respectively). As at end-2005,the Islamic banking system recorded a strong RWCR of14.1% and core capital ratio of 11.3%.

The RWCR of the Islamic banks and IBS commercialbanks stood at 14.3% and 14.2% respectively. TheRWCR of the IBS merchant banks increased from 14.8%to 22.2% mainly due to the increase in the capital baseand decrease in the risk-weighted assets. The RWCR ofthe IBS finance companies was 10.2% with the capitalbase declining significantly by 82.1% or RM700.9million to RM152.9 million as at end-2005 mainly due

to the rationalisation of capital arising from the mergingof operations of four IBS finance companies into theirIBS commercial banks within the same group. The risk-weighted assets of IBS finance companies alsodecreased by 80.5% or RM6.2 billion.

ISLAMIC INTERBANK MARKET

The value of trading in Islamic interbank marketdeclined by 36.6% during the year with the decrease inmudharabah interbank investment transactions, whichconstituted more than 70% of the total turnovervolume in the Islamic interbank market. The decline inmudharabah transactions was also attributed to thestable liquidity condition coupled with the loweraverage rate of return offered in the mudharabahinterbank investment transactions. In addition, theincreased issuance of Government Investment Issues(GII), Islamic Treasury Bills (ITB) and Bank NegaraNegotiable Notes (BNNN) also influenced the turnovervolume of the mudharabah interbank investmentsfollowing the relatively active trading in the Governmentand Bank Negara Malaysia Islamic securities. Theincreased supply of the Shariah compliant securities inthe Islamic money market has contributed towardsstrengthening the Islamic interbank market position inmeeting the increasing market demand for liquid Islamicfinancial assets.

12-month

9-month

6-month

3-month

1-month

J

3.5

2.5

3.0

2.0F M

2005

A M J J A S O N D

Graph 6.5Islamic Banking System:Average Rates of Return to General Investment Deposits in 2005

%

Table 6.6Islamic Banking System: Constituents of Capital

As at end-

2004 2005p

RM million (%)

Tier-1 capital 6,618.1 8,207.5 1,589.4 24.0Tier-2 capital 1,324.8 2,012.7 687.9 51.9

Total capital 7,942.9 10,220.2 2,277.3 28.7

Less:Investment in subsidiaries 12.8 13.5 0.7 5.5

Capital base 7,930.0 10,196.5 2,266.5 28.6Risk assets:

0% 22,349.5 23,396.6 1,047.1 4.710% 825.3 1,419.9 594.6 72.120% 7,422.9 6,258.4 -1,164.5 -15.750% 14,706.2 13,588.0 -1,118.2 -7.6100% 47,234.5 55,707.0 8,472.5 17.9

Total risk-weighted assets 62,239.0 72,314.0 10,075.0 16.2Risk-weighted capital ratio (%)Islamic banking system 12.7 14.1

Islamic banks 12.4 14.3Commercial banks 13.1 14.2Finance companies 11.1 10.2Merchant banks 14.8 22.2

p Preliminary

Annual change


171


In 2005, the Government of Malaysia issued additionalIslamic securities amounting to RM2 billion, consistingof GII and ITB of RM1 billion each. Similarly, BankNegara Malaysia also increased the issuance of BNNN byRM2 billion during the same period. Overall, theincrease in the issuance of Government and BankNegara Malaysia Islamic securities by RM4 billion or26.5% during the year has not only stabilised theliquidity condition in the Islamic interbank market butalso improved the supply of class one Shariah compliantliquefiable assets in the secondary market. In the case ofGII, the new issuance of a 10-year maturity tenure haseffectively lengthened the benchmark yield curve ofIslamic securities.

During the year, the total amount of liquidity surplusabsorbed through the conduct of wadiah interbankacceptance mechanism has reduced as a consequence of

the increase in the issuance of Islamic securities. The dailyaverage outstanding amount of liquidity absorbed underthis mechanism decreased by 15% from RM3 billion in2004 to RM2.6 billion in 2005. The stable liquidity positionin the Islamic interbank market has led to a steadyturnover volume of an average of RM21 billion monthly aswell as stabilised the rate of return in the mudharabahinterbank investment transactions, which registered anaverage indicative overnight rate of return of 2.6%.

During the year, the trading of Islamic money marketpapers recorded moderate growth in terms of turnovervolume and largely centred on the Islamic securities issuedby the Government and Bank Negara Malaysia. Thetrading of the Islamic Accepted Bills (AB-i) in the secondarymarket continued to be captive as the issuers prefer tohold the short-term paper until maturity due to therelatively attractive earnings offered by this paper. Similarly,the trading of Negotiable Islamic Debt Certificate (NIDC-i)also recorded moderate growth of 4.9% correspondingwith the increase in the creation of this instrument in the

Table 6.7Islamic Interbank Market: Turnover Volume


RM billion %

Total 562.5 356.5 -206.0 -36.6

Mudharabah InterbankInvestment* 485.7 254.7 -231.0 -47.6

Financial Instruments 76.8 101.8 25.0 32.6Islamic Accepted Bills* 10.3 9.4 -0.9 -8.7Negotiable Islamic

Debt Certificate* 8.2 8.6 0.4 4.9Bank Negara Negotiable

Notes 21.2 36.1 14.9 70.3Islamic Treasury Bills 1.2 4.5 3.3 275.0Government Investment

Issues 35.9 43.2 7.3 20.3

* Volume transacted through brokersp Preliminary

Table 6.8Outstanding Islamic Securities


RM billion %

Total 106.8 131.3 24.5 22.9

Government Securities 15.1 19.1 4.0 26.5Government Investment Issues 9.1 10.1 1.0 11.0Islamic Treasury Bills 1.0 2.0 1.0 100.0Bank Negara Negotiable Notes 5.0 7.0 2.0 40.0

Private Debt Securities 91.7 112.2 20.5 22.3Khazanah bonds 9.0 10.0 1.0 11.1Corporate bonds 66.0 75.4 9.4 14.2Commercial papers 3.6 4.4 0.8 22.2Medium-term notes 10.0 16.7 6.7 67.0Cagamas bonds 2.5 2.5 0.0 0.0Asset backed securities 0.6 3.2 2.6 433.3

p Preliminary0

10

20

30

40

50

60

RM billion

Graph 6.6Mudharabah Interbank Investment - Turnover Volume

Jan-

03

Mar

-03

May

-03

Jul-0

3

Sep-

03

Nov

-03

Jan-

04

Mar

-04

May

-04

Jul-0

4

Sep-

04

Nov

-04

Jan-

05

Mar

-05

May

-05

Jul-0

5

Sep-

05

Nov

-05

Graph 6.7 Mudharabah Interbank Investment - Share of Turnover Volume

% share

0

20

40

60

80

100

2003 20052004

OthersOvernight

69.1 73.6 70.6

30.9 26.4 29.4


172

primary market. In 2005, NIDC-i issues increased toRM13.6 billion or 51.1% compared with RM9 billion in2004. In terms of maturity tenure, more than 45% orRM6.1 billion of NIDC-i is of the maturity of more thanone year.

The improvement in the supply of short-term Islamicgovernment securities through BNNN and ITB hascontributed to a higher trading volume of theseinstruments in the secondary market. During the year,the turnover volume of BNNN and ITB grew substantiallyby RM14.9 billion and RM3.3 billion or an increase of70.3% and 275% respectively as compared with 2004.In terms of GII, trading in the longer term governmentsecurities recorded a growth of 20.3% or RM7.3 billionas compared with 2004. The availability of a continuousand an enlarged supply of these instruments withvarying maturity tenure has effectively widened therange of tradable Islamic instruments in the Islamicinterbank market.

In terms of total outstanding securities, the Islamic bondmarket continued to chart a positive growth of 22.9% orRM24.5 billion. The outstanding Islamic private debt

securities amounted to RM112.2 billion as at end of 2005accounted for 40% of the total outstanding private debtsecurities in the debt market. Corporations have activelysourced funding under the Islamic principles to lock theirfunding cost through the issuance of longer term Islamicprivate debt securities with the anticipation of a possibleincrease in interest rate in the later part of the year. Anencouraging development in the Malaysian Islamic bondmarket, following the liberalisation of the foreignexchange administration rules, was the issuance of aRM700 million ringgit-denominated Islamic debtsecurities by an international multilateral developmentfinancial institution.

In the mortgage securities segment, Cagamas MBSBerhad issued the inaugural Islamic residential mortgage-backed securities (IRMBS) represented by receivables ofthe Islamic house financing provided by the Governmentof Malaysia. The RM2.05 billion IRMBS issue is with amaturity tenure ranging from 3 to 15 years andstructured based on the concept of musyarakah. Thislandmark issuance, which was oversubscribed by 5.4times, has attracted wide participation from the domesticas well as the regional investors.


Development FinancialInstitutions

OverviewPolicies and DevelopmentsPerformance of Development Financial Institutions

174174-177177-187

174

Development Financial Institutions

OVERVIEW

The year 2005 marked a significant milestone in efforts tofurther strengthen the development financial institutions(DFIs) which are regulated under the DevelopmentFinancial Institutions Act (DFIA) 2002. The rationalisationexercise involving four DFIs, was completed during theyear, and resulted in the establishment of the BankPerusahaan Kecil & Sederhana Malaysia Berhad (SMEBank) and the merger of the Export-Import Bank ofMalaysia Berhad and Malaysia Export Credit InsuranceBerhad (MECIB). Meanwhile, Bank Pembangunan danInfrastruktur Malaysia Berhad was restructured andrenamed Bank Pembangunan Malaysia Berhad to reflectits new focus. The rationalisation exercise was animportant initiative to realign the activities of the DFIstowards enhancing their strategic and business focus. Inaddition, progress was also achieved in efforts tostrengthen the capacity and capability of the DFIs, as wellas to enhance the prudential framework aimed atstrengthening the operations of the DFIs. All theseinitiatives have contributed to the improved performanceof the DFIs in carrying out their mandated roles.

During the year, the DFIs continued to record strongfinancing activities to the identified priority and strategicsectors. Loans outstanding of these DFIs as a groupincreased by 25.8%, supported by higher deposits(7.3%). Improvements were also recorded in the non-performing loan ratio and profitability indicators. Movingforward, the performance of the DFIs is expected toimprove further, as they expand the range of productsand enhance the quality and delivery of products andservices, coupled with improvements in human resource,processes and systems in the DFIs.

capability, as well as enhancing the prudential frameworkto further strengthen the operations of the DFIs. Thesewere complemented by continuous surveillance andsupervision of the DFIs to ensure that they remain focusedon their mandated roles and that their activities are carriedout in a prudent, effective and efficient manner.

Strengthening Capacity and Capability of DFIs

• Realignment of roles and functionsThe rationalisation of Bank Pembangunan danInfrastruktur Malaysia Berhad, Bank Industri &Teknologi Malaysia Berhad (Bank Industri), Export-Import Bank of Malaysia Berhad and MECIB wascompleted in the fourth quarter of 2005. Therationalisation, which involved changes to theinstitutional structure and functions of these DFIs,was aimed at enhancing their strategic focus in therespective mandated roles so that these DFIs couldefficiently and effectively meet the financial and non-financial needs of the targeted sectors.

The restructuring of Bank Pembangunan danInfrastruktur Malaysia Berhad and Bank Industriresulted in the establishment of SME Bank, whichassumed the entity of Bank Industri, while BankPembangunan dan Infrastruktur Malaysia Berhad wasrenamed Bank Pembangunan Malaysia Berhad (BankPembangunan) to reflect its new focus. The exerciseinvolved the transfer of small and medium enterprise(SME) loans of Bank Pembangunan dan InfrastrukturMalaysia Berhad to the SME Bank, while themaritime and technology-related loans of the formerBank Industri were transferred to BankPembangunan. Under this new institutionalarrangement, the SME Bank becomes a wholly-owned subsidiary of Bank Pembangunan, with apaid-up capital of RM1 billion. Both BankPembangunan and the SME Bank commencedoperation on 3 October 2005.

In addition to promoting the development of theinfrastructure projects, Bank Pembangunan is alsoentrusted to promote the development of themaritime sector, as well as the capital-intensive andhigh technology industries. In financing these sectors,Bank Pembangunan not only provides directfinancing, but also arranges for syndicated loans andoffer credit enhancement facilities such as bankguarantees and standby revolving credit to facilitategreater access to financing for the targeted sectors.

Policy efforts in 2005 for the DFIsector focused on strengtheningthe DFIs’ capacity and capability,as well as enhancing theprudential framework to furtherstrengthen the operations of theDFIs.

POLICIES AND DEVELOPMENTS

Policy efforts in 2005 for the DFI sector focused on twobroad areas, namely, strengthening the DFIs’ capacity and

C07 Dev. Financial pg174-188 3/14/06, 9:15 PM174

175


The SME Bank is a development bank dedicatedtowards nurturing and promoting the developmentof SMEs. The SME Bank complements the bankingsector in providing financing to the SMEs, especiallyto those that lack track record and collateral, as wellas start-ups. In addition to the normal financialproducts such as working capital financing and termloans, the SME Bank would be developing newinnovative products to meet the requirements ofstart-ups and SMEs in new growth areas, includingthose in professional services, export-orientedactivities and franchise businesses. Anotherimportant focus of the SME Bank is to provide abroad range of advisory services and businessdevelopment support to SMEs, including financialmanagement, business diagnosis and marketingsupport. To support the expansion of businessactivities of the Bank Pembangunan Group, includingthe SME Bank, a total of RM7 billion would be raisedfrom the capital market.

The other part of the rationalisation exercise involvedthe merger of the Export-Import Bank of MalaysiaBerhad (EXIM Bank) and MECIB. The merged entity,EXIM Bank, is placed directly under the ownership ofthe Ministry of Finance. The merger led to a creationof a larger entity with bigger financial resources tofocus on promoting exports of Malaysian goods andservices, as well as in providing overseas projectsfinancing to Malaysian companies venturing abroad.In addition, it promotes greater synergy andeconomies of scale, while reducing potentialduplication of resources, skills and expertise. Theplacement of the EXIM Bank directly under theMinistry of Finance would enable the bank tocapitalise on its near sovereign status in gainingbetter credit rating recognition, and higheracceptance from the foreign counter parties onguarantees and insurance coverage issued by thebank. This would provide EXIM Bank with morealternative and competitive sources of funding tosupport its business operations, thus allowing it tobetter serve its customers and exporters withcompetitively priced products and services.

In addition to providing an array of financingproducts, guarantee facilities and insurance productsto promote Malaysia’s external trade, EXIM Bank willfurther strengthen its financial support for Malaysiancompanies to undertake overseas projects. Tofacilitate this, as announced in the Budget 2006,Bank Negara Malaysia is establishing a RM1 billionfund at EXIM Bank to assist Malaysian companieswhich have secured or are bidding for contracts to

have greater access to financing to undertake theirprojects abroad. In addition, as part of theGovernment’s efforts to enhance SMEs’ access tofinancing, the EXIM Bank launched two newproducts, namely, the Multi-Currency Trade Financeand Indirect Exporter Financing Scheme, in January2006. With these products, SMEs can obtain greateraccess to financing at attractive costs with nocollateral requirement to finance their exportactivities to the non-traditional markets, especially tothe member countries of the Organisation of IslamicConference.

• Strengthening of Bank Pertanian MalaysiaEfforts have been initiated to strengthen the role ofBank Pertanian Malaysia (Bank Pertanian) in enhancingaccess to financing for the agriculture sector and agro-based industries. Towards this end, the financialcapacity and institutional structure of Bank Pertanianwill be strengthened, while its scope of activities willbe widened to include a broader range of financialand non-financial products and services. This initiativeis envisaged to increase the effectiveness of BankPertanian in meeting the needs of the entire valuechain of agriculture activities, while continuing tofacilitate the achievement of the socio-economicdevelopment objectives of the Government.

• Enhancing Advisory Capabilities of DFIs for SMEsThe project to enhance the capabilities of DFIs inproviding consultancy and advisory services to theSMEs, which involved the Japan InternationalCooperation Agency, Bank Negara Malaysia andselected DFIs, was completed in November 2005.Following this, a customised action plan wasformulated for the SME Bank, Bank Pertanian andEXIM Bank, which identifies the types of advisoryservices to be provided by each of these DFIs, as wellas outline the strategies to improve their operationalinfrastructure and develop human resource capabilityto better provide advisory services. Among theconsultancy and advisory services identified includecustomer counselling, basic problem identification andmanagement diagnosis for SMEs, as well as theprovision of business matching services for the SMEs.The action plans also include strategies for the DFIs toestablish collaborative and strategic alliance with therelevant Government SME agencies to leverage on theexpertise and facilities of these agencies, particularly inthe provision of technical support. The collaborationand network established between the DFIs and theGovernment SME agencies would facilitate the SMEsto have better access to advisory services in a morestructured and well-coordinated manner.


176

Enhancing Prudential Framework for DFIs

• Guidelines on the Governance of ShariahCommitteeBank Negara Malaysia issued the Guidelines on theGovernance of Shariah Committee to the DFIs underthe purview of DFIA on 31 May 2005, to rationalise andstreamline the functions, as well as duties of the ShariahCommittees of the DFIs. The guidelines set out therules, regulations and procedures of establishing aShariah Committee, define the role and responsibilitiesof the Committee, as well as ensure that theCommittee is competent and effective in performing itsduties and responsibilities. Among the duties of theCommittee are to advise the Board of Directors of theDFIs on Shariah matters involved in their businessoperations, as well as other related responsibilitiessimilar to the Shariah Committees in other Islamicfinancial institutions. The guidelines also define therelationship and working arrangement between theShariah Committee of the DFIs and the ShariahAdvisory Council of Bank Negara Malaysia. The ShariahCommittees of DFIs must comprise a minimum of threemembers, and prior approval of Bank Negara Malaysianeeds to be obtained for the appointment andreappointment of a Shariah Committee member.

• Circular on Takaful Protection for IslamicFinancingThis circular, which was issued on 27 May 2005,requires DFIs to provide Takaful protection for theirIslamic financing products. This is in line with theBank’s efforts to strengthen the Islamic bankingoperations and to streamline practices adopted byother financial institutions in the industry. The DFIswhich provide Islamic financing are required to offerTakaful plans to their customers in offeringprotection for Islamic financing that needscoverage. Conventional insurance coverage wouldonly be allowed as an alternative in the event that aTakaful plan is not available in the market, or isrejected by customers. In such incidents, theconventional insurance coverage should be offeredseparately and not as part of the Islamic financingpackage.

• Issuance of Guidelines and Circulars to BankPertanian MalaysiaFollowing the placement of Bank Pertanian underthe purview of Bank Negara Malaysia, a number ofexisting prudential measures issued to theregulated DFIs were also extended forimplementation by Bank Pertanian. This is tostrengthen its financial and operational soundness,

as well as to ensure that it performs the mandateto promote the development of the agriculturesector in an effective and efficient manner.

Monitoring and Supervision of DFIsIn ensuring that the operations of DFIs are carried out ina prudent, effective and efficient manner to meet theirmandated roles, supervisory activities by the Bank in2005 were focused on enhancing the standard ofcorporate governance, risk management andoperational efficiency of the DFIs.

• Strengthening Corporate GovernanceIn strengthening corporate governance, the qualityand proactiveness of the board’s oversight as well aseffectiveness of leadership of the DFIs, in terms ofproviding strategic direction and contributiontowards the overall management of the DFIs wereassessed. In this context, the roles and functionsperformed by the board of directors towardsenhancing the DFIs’ capacity, capabilities andcompetitiveness were rigorously evaluated.

In the course of on-site examinations, interviews withmembers of the board were conducted to betterassess the level of participation and contribution of thedirectors in managing the institutions. The interviewsalso provided an avenue for supervisors to discusssupervisory concerns and measures, whilst keepingabreast with issues confronting the DFIs. Theseinteractions have translated into more activeparticipation among the board and seniormanagement of the DFIs in driving the performance ofthe institutions, including managing the stakeholders’expectations, as well as improving their oversightfunction. The board and senior management werealso encouraged to identify and develop clear keyperformance indicators to gauge the efficiency andeffectiveness of the DFIs in performing their mandatedroles. These indicators are to enable the DFIs toevaluate their performance and hence, continuallystrive to better meet the increasing demand andchallenges of the targeted sectors.

• Enhancing Risk Management and OperationalEfficiencySupervisory activities were also directed at ensuringthat the risk management practices of DFIscommensurate with the magnitude and complexityof the risks assumed. In this regard, emphasis wasplaced on assessing the effectiveness of assetmanagement and internal control, as well as theadequacy of infrastructure and managementinformation systems to support their business


177


operations. During the year, the quality of customerservices was also assessed to ensure that the DFIs areable to effectively meet the needs of their identifiedstrategic sectors. It was noted that the DFIs havemade improvements in areas such as enhancementof policies and operational procedures; putting inplace adequate human resource capabilities;establishing clear lines of responsibilities andmanagement structures, as well as strengthening ofthe internal audit function. In addition, loan deliverysystems and delivery channels had also improved.

PERFORMANCE OF DEVELOPMENT FINANCIALINSTITUTIONS

The performance of the DFIs remained favourable, withhigher growth in deposits and strong increase in thefinancing activities to support the strategic sectors ofthe economy. Among the strategic sectors whichreceived financing from the DFIs were the infrastructure,manufacturing, agriculture, maritime and export sectors,as well as capital-intensive and high technologyindustries, and Bumiputera entrepreneurs.

Financing activities of the DFIscontinued to support thestrategic sectors of theeconomy.

Financing ActivitiesTotal loans outstanding of the 13 DFIs expanded by25.8% to RM47.5 billion as at end-2005 (end-2004:RM37.7 billion) to account for 47.4% of total assets ofthe DFIs as at end-2005. The strong increase was drivenlargely by the growth in financing for consumptioncredit extended by Bank Kerjasama Rakyat MalaysiaBerhad (Bank Rakyat) and loans extended by BankPembangunan for infrastructure projects. Lending forconsumption credit rose strongly by 42.2% to accountfor 29.6% of the total loans outstanding of the DFIs.Loans extended to the construction, utilities, andtransport and communication sectors as a groupincreased by 31.1%, representing 27.8% of total loans.Favourable growth was also recorded in financing to themanufacturing and agriculture sectors, with total loansextended to these two sectors as a group accounting for16.5% of DFIs’ total loans outstanding. Meanwhile, theextension of guarantee and credit insurance facilitiesrose by 12.4% to RM4.8 billion as at end-2005 (end-2004: RM4.3 billion), due largely to higher guaranteesprovided by the Credit Guarantee Corporation MalaysiaBerhad (CGC).

The six DFIs under the purview of Bank Negara Malaysiarecorded strong growth in loans outstanding of RM9.9billion or 29.6% to RM43.4 billion as at end-2005 (end-2004: RM33.5 billion). The increase in financingemanated primarily from retail financing provided byBank Rakyat which grew by 36% and financing of theinfrastructure projects by Bank Pembangunan(+34.1%). Similarly, lending activities of Bank SimpananNasional (BSN) and EXIM Bank also recorded stronggrowth of 30.9% and 25.6% respectively. However,

Table 7.1Development Financial Institutions1: Sources andUses of Funds

Annual Change As at end-

2004 2005 2005

RM million

Sources:Shareholders’ funds 1,119.7 2,072.6 12,616.4

Paid-up capital 670.0 701.1 8,563.4Reserves 451.7 396.8 2,448.1Retained earnings -2.0 974.7 1,604.9

Deposits accepted 7,474.7 3,658.6 53,536.6

Borrowings 2,154.1 2,250.7 20,981.6Government 1,319.9 1,821.3 14,871.4Multilateral / International agencies 885.7 602.5 4,646.7Others -51.5 -173.1 1,463.5

Others 1,611.0 712.6 13,009.8

Total 12,359.5 8,694.5 100,144.4

Uses:

Deposits placed 2,663.3 -4,796.9 14,111.1

Investments 4,327.5 4,174.3 29,731.3of which:

Government securities -321.5 2,148.5 4,777.8Shares 1,477.9 1,535.2 9,791.2

Quoted 1,168.2 1,564.6 7,933.7Unquoted 309.7 -29.4 1,857.5

Loans and advances 5,392.3 9,731.3 47,478.4

Fixed assets 350.2 169.2 4,226.9

Others -373.8 -583.4 4,596.7

Total 12,359.5 8,694.5 100,144.4

Contingencies:

Guarantee 287.4 455.1 4,404.1

Export credit insurance 185.3 71.8 380.4

Total 472.7 526.9 4,784.5

1 Refers to Bank Pembangunan Malaysia Berhad, Bank Perusahaan Kecil & SederhanaMalaysia Berhad (SME Bank), Bank Kerjasama Rakyat Malaysia Berhad, BankSimpanan Nasional, Export-Import Bank of Malaysia Berhad, Bank PertanianMalaysia, Malaysian Industrial Development Finance Berhad, Credit GuaranteeCorporation Malaysia Berhad, Lembaga Tabung Haji, Sabah Development BankBerhad, Sabah Credit Corporation, Borneo Development Corporation (Sabah)Sendirian Berhad and Borneo Development Corporation (Sarawak) SendirianBerhad.Prior to 1 October 2005, data include Bank Industri & Teknologi Malaysia Berhadand Malaysia Export Credit Insurance Berhad and exclude SME Bank.


178

Bank Pertanian registered a moderate loan growth of2.8%, while the SME Bank, which began operation inOctober 2005, approved RM333.8 million to 202 SMEsbetween October and December 2005. The underwritingactivities of EXIM Bank, including credit insurance andguarantee facilities from the former MECIB, increased by18.1% (2004: 25.2%). Higher financing activities by theDFIs were reflected in high approvals and disbursements.Total loans approved by the six DFIs amounted to RM16.1billion (2004: RM19 billion) while total loans disbursedwere significantly higher at RM17.8 billion, comparedwith RM10.9 billion in 2004.

Total gross NPLs of the 13 DFIs as a group declined byRM49.3 million to RM5.2 billion as at end-2005. As aresult of the larger loan base, the gross NPL ratioimproved to 11.4% as at end-2005 (end-2004: 14.7%).For the six DFIs under the purview of Bank NegaraMalaysia, the gross and net NPL ratios improved to10.3% and 4.4% respectively (end-2004: 13.2% and5.5% respectively).

Sources of FundingTotal deposits mobilised by the deposit-taking DFIsincreased by 7.3% to RM53.5 billion as at end-2005(end-2004: RM49.9 billion), to account for 53.5% ofthe total resources of the DFIs. During the year, savingsby individuals increased by 4.1% to RM25.5 billion (end-2004: RM24.5 billion), accounting for 47.6% of totaldeposits mobilised. Deposits from individuals weremainly mobilised by Lembaga Tabung Haji and BSN.Meanwhile, deposits mobilised from private businessenterprises and the Government (including its relatedagencies), grew strongly by 16.9%, increasing theirshare to 46.7% of total deposits of the DFIs. In additionto deposits, other sources of funds were shareholders’funds which increased by RM2.1 billion as well as higherborrowings, mainly from the Government (RM1.8billion).

Bank Pembangunan Malaysia BerhadIn 2005, financing activities of Bank Pembangunancontinued to remain strong, especially lending for theinfrastructure projects. Formerly known as BankPembangunan dan Infrastruktur Malaysia Berhad, thebank evolved following a rationalisation exerciseinvolving a number of DFIs in September 2005. Therationalisation resulted in a structural change in thebank’s loan portfolio. In addition to providing financingfor infrastructure projects, the bank was entrusted with

Table 7.2Development Financial Institutions1: Direction ofLending

Annual Change As at end-

2004 20052005

RM million

Agriculture, forestryand fishery 387.4 96.2 3,357.6

Mining and quarrying -8.4 -10.2 56.6Manufacturing 174.2 332.4 4,458.6Electricity, gas and water

supply 611.8 1,024.1 2,253.0Import and export,

wholesale and retail trade,restaurants and hotels 448.4 -55.5 643.3

Broad property sector 1,708.1 1,578.2 11,662.9Construction 177.2 933.9 5,120.5Purchase of residential

property 1,150.2 1,397.0 5,475.1Purchase of non-

residential property 22.8 -34.3 429.6Real estate 357.9 -718.4 637.7

Transport, storage andcommunication 231.5 1,179.3 5,844.5

Finance, insurance andbusiness services -710.5 -173.5 810.7

Consumption credit 1,830.0 4,172.5 14,069.0Others 719.8 1,587.8 4,322.2

Total 5,392.3 9,731.3 47,478.4

1 Refers to Bank Pembangunan Malaysia Berhad, Bank Perusahaan Kecil & SederhanaMalaysia Berhad (SME Bank), Bank Kerjasama Rakyat Malaysia Berhad, BankSimpanan Nasional, Export-Import Bank of Malaysia Berhad, Bank PertanianMalaysia, Malaysian Industrial Development Finance Berhad, Credit GuaranteeCorporation Malaysia Berhad, Lembaga Tabung Haji, Sabah Development BankBerhad, Sabah Credit Corporation, Borneo Development Corporation (Sabah)Sendirian Berhad and Borneo Development Corporation (Sarawak) SendirianBerhad.Prior to 1 October 2005, data include Bank Industri & Teknologi Malaysia Berhadand exclude SME Bank.

Table 7.3Development Financial Institutions1: Non-performing Loans and Loan Loss Provisions

As at end-

2004 2005

RM million

General provisions 735.7 948.6

Interest-in-suspense 1,362.1 1,367.8

Specific provisions 2,095.0 2,085.8

Non-performing loans 5,229.6 5,180.3

Percent (%)

Gross NPL ratio2 14.7 11.4

Net NPL ratio3 5.5 4.1

Total provisions/NPL 80.2 85.0

1 Refers to Bank Pembangunan Malaysia Berhad, Bank Perusahaan Kecil &Sederhana Malaysia Berhad (SME Bank), Bank Kerjasama Rakyat Malaysia Berhad,Bank Simpanan Nasional, Export-Import Bank of Malaysia Berhad, Bank PertanianMalaysia, Malaysian Industrial Development Finance Berhad, Sabah DevelopmentBank Berhad and Sabah Credit Corporation.Prior to 1 October 2005, data include Bank Industri & Teknologi Malaysia Berhadand exclude SME Bank.

2 Gross NPL ratio = (NPL / Gross loans*) X 100%.3 Net NPL ratio = (NPL less IIS less SP) / (Gross loans* less IIS less SP) X 100%.* Excluding loans provided by Credit Guarantee Corporation Malaysia Berhad,

Lembaga Tabung Haji, Borneo Development Corporation (Sabah) SendirianBerhad, Borneo Development Corporation (Sarawak) Sendirian Berhad and loansunder ECR scheme.


179


additional roles of providing medium- to long-termfinancing to the maritime sector, as well as capital-intensive and high technology-based industries in themanufacturing and other selected sectors. The loanportfolios in maritime and high technology industries ofthe former Bank Industri were absorbed by BankPembangunan. Effective 1 October 2005, the bank’sSME loan portfolio was transferred to its newly formedsubsidiary, SME Bank.

The bank’s total loans outstanding increased strongly by22.7% to RM14.2 billion as at end-2005 (end-2004:RM11.6 billion), led by the strong growth of 34.1%(2004: 15.3%) or RM3.4 billion in lending to theinfrastructure sector. Both Government-identified andprivate sector projects increased markedly by 29.2%and 47.1% respectively, with the former accounting for70% of the total loans outstanding for theinfrastructure sector. The bulk of the increase ininfrastructure loans was channelled to the utilities sector(RM1 billion), transport and communication sector(RM908 million) and construction sector (RM802million). Loans for infrastructure projects amounting toRM4.7 billion were disbursed (2004: RM1.9 billion).However, total loans approved to the sector declined toRM1.9 billion, compared with RM7.4 billion in 2004.

The bank’s lending to its new targeted sectors, namelythe high technology and maritime sectors totaledRM868.3 million as at end-2005. Financing to themaritime sector, which comprised shipbuilding, shipyardand marine-related industries, constituted 78.6% of thetotal loans outstanding to the two sectors. During theperiod between October to December 2005, the bank

approved a total of RM31.9 million loans to the twosectors while total loans disbursed amounted toRM107.4 million.

Bank Pembangunan’s gross NPLs declined to RM433.4million as at end-2005, due mainly to the transfer of theSME loan portfolio to the SME Bank. As a result, thegross NPL ratio improved from 7.9% to 3%, while thenet NPL ratio improved to 0.8% (2004: 2.7%).

Following the rationalisation exercise, BankPembangunan’s total investments increased to RM2.6billion, accounting for 13.7% of total assets. During theyear, the investment portfolio grew markedly by 95.9%(RM1.3 billion) attributed primarily to the acquisition ofshares in a subsidiary of the former Bank Industri andinvestment holdings in the SME Bank. Meanwhile, totaldeposits placed with financial institutions declined byRM2.1 billion due mainly to the utilisation of funds forloan disbursements as well as a transfer of funds to theSME Bank.

The major source of funding for Bank Pembangunanwas borrowings from the Government and multilateralinternational agencies, which amounted to RM8.8billion as at end-2005, forming the largest component(57.2%) of its total liabilities. During the year, totalborrowings rose by 11% (RM875.9 million) reflectingadditional funds received from Government agencies.However, this was partially offset by the transfer ofborrowings to the SME Bank. In 2005, totalshareholders’ funds grew markedly by RM869.2 millionto RM3.8 billion as at end-2005 (end-2004: RM2.9billion), contributed mainly by the share swap with SMEBank (RM328.7 million) as well as capital injection bythe Government (RM200 million).

Bank Perusahaan Kecil & Sederhana MalaysiaBerhadSME Bank started operations on 3 October 2005,following the rationalisation of Bank Pembangunandan Infrastruktur Malaysia Berhad and Bank Industri.The bank is a subsidiary of Bank Pembangunan andhas 15 branches to serve the entrepreneurialcommunity in the country.

Reflecting the Government’s commitment to supportSMEs, the SME Bank commenced operations with apaid-up capital of RM1 billion. The loan portfolio ofSME Bank comprised of all SME loans transferred fromBank Pembangunan and the former Bank Industri. As atend-2005, total assets of the SME Bank amounted toRM4.9 billion, of which 43.5% were loans and 22%were deposit placements.

Graph 7.1 Bank Pembangunan Malaysia Berhad:Direction of Lending as at 31 December 2005

Others9.2%

Maritime4.8%

Manufacturing2.0%

Utilities15.7%

Construction30.3%

Transport & communication

38.0%


180

During the initial three months of its operations, thebank approved a total of 202 loan accountsamounting to RM333.8 million, of which RM311.2million (or 93.2% of total loans approved) wasextended to Bumiputera SMEs (193 loan accounts).Loan approvals were mainly granted to SMEs in themanufacturing, construction and business servicessectors. Meanwhile, RM319.7 million of loans weredisbursed to 563 loan accounts over the same period,mainly to SMEs in the manufacturing, generalcommerce, and transport and communication sectors.In December 2005, the bank launched a new productcalled SME professional, whereby financing is given toprofessionals involved in the services industry such ashealth care, accounting, consultancy and architecture.

The bank’s total loans outstanding declined by RM43.8million to RM2.1 billion as at end-2005, due to loanswrite-off amounting to RM147.7 million. Excluding thewrite-off, loans outstanding increased by RM191.5million, channeled mainly to the manufacturing,general commerce, and transport and communicationsas well as construction sectors. As at end-2005, loansto the manufacturing sector accounted for 43.5% oftotal loans outstanding. Meanwhile, loans outstandingto Bumiputera SMEs declined by RM6 million toRM1.7 billion as at end-December 2005, representing79.4% of total loans.

As at end-2005, SME Bank managed 23 Governmentfunds with loans outstanding amounting to RM1.1billion or 50.3% of total loans outstanding. Duringthe three month period, loan approvals anddisbursements under the funds amounted to

RM827.4 million and RM1.4 billion respectively,mainly through the New Entrepreneurs Fund 2 andFund for Small and Medium Industries 2.

Export-Import Bank of Malaysia BerhadIn tandem with the continued expansion of Malaysia'sexternal trade sector, financing activities of the EXIMBank were higher in 2005. The bank’s total loansoutstanding expanded strongly by 25.6% to RM2.8billion as at end-2005 (2004: 15.3%), reflectingmainly increased in loans under the Government-funded Export Credit Refinancing (ECR) scheme.

Loans outstanding under the ECR scheme, which wasextended mainly to the palm oil, rubber and chemicalindustries, expanded markedly by 27.7% (2004:4.7%) to RM1.5 billion as at end-2005. The strongdemand for financing under the scheme was duelargely to the continuous nationwide promotion byECR participating banks and EXIM Bank, as well asanticipation of higher interest rates in the market.Concomitantly, loans disbursed under the schemeincreased by 7.7% (2004: 2.3%).

Loans outstanding under the export financing andoverseas project financing also expanded stronglyduring the year, by 38.1% and 20.3% respectively.Consistent with the bank's role to facilitate thediversification of Malaysia’s export markets, about58.7% of total overseas project financing and 38% ofexport financing were channelled to non-traditionalmarkets. Nearly one-half of the total overseas projectfinancing were channelled to projects in South-EastAsia, followed by Africa (22.4%) and East Asia (12.7%).

Graph 7.2 Bank Perusahaan Kecil & Sederhana Malaysia Berhad: Direction of Lending as at 31 December 2005

General commerce 16.5%

Transport & communication

13.4%

Broad property sector 8.4%

Manufacturing 43.5%

Business services 1.3%

Others 16.9%

Graph 7.3Export-Import Bank of Malaysia Berhad:Credit Facilities as at 31 December 2005

ECR scheme 53.1%

Overseas project financing 37.7%

Export financing 9.2%


181


The gross NPL amount, excluding loans provided underthe ECR scheme, increased to RM361.6 million in 2005(2004: RM306.8 million). However, due to larger loanbase, the gross NPL ratio improved to 27.2% comparedwith 28.5% as at end-2004. Overseas project financingaccounted for 97.1% of the NPLs.

Following a rationalisation exercise, effective 1 October2005, EXIM Bank merged with MECIB with the mergedentity retaining EXIM Bank’s name and all operations ofMECIB was absorbed by EXIM Bank. Total exposure ofthe bank arising from its guarantee and export creditinsurance business recorded an increase of 18.1%during the year (2004: 25.2%) to RM993.9 million as atend-2005. Export credit insurance facilities expanded by23.3% or RM71.8 million during the year to RM380.5million, while guarantee business increased by 15% orRM80.2 million to RM613.5 million. Medium- and long-term coverage continued to account for the majorportion of the total exposure with 53.8% (RM534.5million) and the balance 46.2% (RM459.4 million)constituted of short-term coverage.

Reflecting the bank’s efforts to promote thediversification of Malaysia’s export markets, 45.5% ofthe total exposure were to countries categorised as non-traditional markets. In terms of distribution by region,East Asia was the largest region accounting for 25.7%of total exposure, followed by South-East Asia (22.8%),North America (12.7%), Western Europe (10.8%) andMiddle-East (10.5%).

Following the merger, EXIM Bank’s shareholders’ fundsincreased to RM481.4 million due largely to the increasein paid-up capital of the merged entity to RM380.5

million. During the year, the bank’s outstandingborrowing from the Government which was utilisedsolely for the ECR scheme, remained unchanged whileborrowings from international agencies increased byRM191 million to RM691 million as at end-2005.Deposit placements which accounted for 25.1% of thebank’s total assets, however, declined by 19.9% orRM254.7 million during the year to RM1 billion as atend-2005 (end-2004: RM1.3 billion).

Bank Kerjasama Rakyat Malaysia BerhadThe total assets of Bank Rakyat increased by 13.2% toRM25.3 billion as at end-2005 (end-2004: RM22.3billion), contributed mainly by strong growth infinancing. The share of total financing outstanding tototal assets increased to 66.6% as at end-2005, from55.4% as at end-2004. The growth in financing waspartially offset by the reduction in both depositplacements and investment in securities. Depositsplaced with the financial institutions declined by RM1.2billion to RM2.8 billion, while holdings in investmentsecurities declined by RM348 million to RM5 billion as atend-2005. As a result, the proportion of these assetcomponents to total assets declined to 31% as at end-2005 from 42% the year before.

Total financing outstanding increased strongly by 36%to RM16.8 billion as at end-2005 (end-2004: RM12.4billion) with the increase attributed mainly to the strongincrease in consumption credit, especially for personalloans, which grew by 36.3% to RM10.5 billion. Inaddition, financing for the purchase of houses andvehicles was also strong, increasing by 40.7% and 70.7%to RM3.7 billion and RM1.1 billion respectively. Of thetotal financing outstanding, 62.3% was extended for

Graph 7.4Export-Import Bank of Malaysia Berhad:Contingent Liabilities as at 31 December 2005

Short-term guarantee 9.0%

Medium-and long-term insurance

1.1%

Short-term insurance 37.2%

Medium-and long-term guarantee

52.7%

Graph 7.5Bank Kerjasama Rakyat Malaysia Berhad: Direction of Financing as at 31 December 2005

Others 1.7%

Manufacturing 0.6%

Agriculture 0.4%

Share financing 0.5%

General commerce 3.3%

Property 24.5%

Consumption credit 62.3%

Purchase of motor vehicles 6.7%


182

consumption credit, followed by the property sector(24.6%), and purchase of vehicles (6.7%). While BankRakyat’s lending to its members increased by RM2 billionto RM11.7 billion at the end of the year, its proportion tototal financing outstanding declined from 78.2% to69.3%, following higher lending to non-members whichincreased markedly by RM2.5 billion (2004: RM0.4 billion)to RM5.2 billion. The bank’s strong financing activities in2005 were reflected in higher financing approvals anddisbursements, which amounted to RM8.2 billion andRM9.2 billion respectively. Mainly as the result of itsenlarged loan base, the gross non-performing financing(NPF) ratio improved to 6.8% from 8.8%, while the netNPF ratio improved to 2.9% from 4.2%.

Deposits mobilised by Bank Rakyat increased by 14.2%or RM2.4 billion to RM19.5 billion as at-end 2005, duemainly to the relatively attractive returns offered by thebank. The increase in deposits reflected higherplacements by business enterprises, which increased byRM1.2 billion to RM12.7 billion, to account for 65% oftotal deposits as at end-2005. Deposits mobilised fromindividuals increased by RM0.3 billion to RM2.5 billion.

The bank’s shareholders’ funds increased to RM3.7billion as at end-2005 (end-2004: RM3.5 billion) mainlyfrom higher profits. The bank recorded profits beforetax and zakat of RM535.5 million compared withRM460 million in 2004. During the year, the bank’spaid-up capital increased by RM3.7 million toRM1,951.9 million, reflecting subscriptions by newmembers. The paid-up capital of the bank has reachedclose to RM2 billion since September 2004 following anupward trend in applications for membership andadditional shares. As at end-2005, Bank Rakyat’sindividual membership stood at 693,963 (end-2004:714,743) while the membership of cooperatives was1,207 (end-2004: 1,172).

Bank Simpanan NasionalBSN, or National Savings Bank, continued to recordstrong growth in deposits mobilised and retail loansduring the year. BSN operations, as at end-2005, weresupported by 390 branches and 616 ATMs located inboth the urban and rural areas. To further improve itsservices, BSN joined Malaysian Electronic PaymentSystem (MEPS) in December 2005, which enable itscustomers to access ATMs that support MEPS service.

Total deposits mobilised by BSN increased by 19.1% toRM13.1 billion at end-2005 (end-2004: RM11 billion),due mainly to placements by the Government. Depositsof private business enterprises increased by RM1 billionduring the year, but there were net withdrawals by

Government-controlled companies amounting to RM0.4billion. As a result, total deposits of business enterprisesincreased by RM0.6 billion or 28.3% to RM2.6 billion asat end-2005, to account for 20% of total deposits (end-2004: 18.5%). Deposits of individuals increasedmarginally by 1.2% to RM8 billion as at end-2005 toaccount for 60.8% of total deposits (end-2004: 71.6%).Fixed deposits accounted for 52.1% of total depositsaccepted, while savings deposits comprised 40.1%, andthe remaining was general investment deposits.

In terms of uses of funds, 56.6% were invested insecurities, which increased by 37.8% to RM8.6 billion asat end-2005. In particular, the holdings of Governmentpapers increased by RM1.6 billion. Loans and financingaccounted for 27.5% of total assets.

Financing activities of BSN remained strong in 2005, andinitiatives to introduce Islamic products were successful asIslamic financing rose significantly by RM628.1 million toRM782.8 million as at end-2005. Higher loans wereapproved and disbursed, amounting to RM2.2 billion andRM1.6 billion respectively (2004: RM1.4 billion andRM1.3 billion respectively). Total financing outstandingincreased strongly by RM1 billion or 30.9% to RM4.2billion as at end-2005, due mainly to the significantgrowth in personal loans (RM0.9 billion) as a result ofattractive low interest rate package. In addition, therewas also a marked increase in financing for the purchaseof residential houses of RM315.7 million to RM1.5 billionas at end-2005. The micro credit scheme, which waslaunched in June 2003, was suspended in December2004. A total of RM723.1 million was disbursed to88,774 applicants. Following the suspension of thescheme, efforts were focused on improving repayment

Graph 7.6Bank Simpanan Nasional:Total Deposits Accepted as at 31 December 2005

Government agencies 17.0%

Business enterprises 19.9%

Financial institutions 1.2%

Others 1.1%

Individuals 60.8%


183


and recovery, and as a result the outstanding micro creditloan outstanding declined to RM517.1 million as at end-2005 (end-2004: RM610.7 million).

Gross NPLs increased by RM176.1 million to RM626million as at end-2005, attributed mainly to theincrease in the NPL of housing loans, micro credit andcredit card loans. As a result, the gross NPL ratiodeteriorated from 14.1% at end-2004 to 15% at end-2005. However, on a net basis, the NPL ratio improvedto 6.7% from 7.7%, due mainly to higher provisioningfor micro credit.

Bank Pertanian MalaysiaBank Pertanian Malaysia or Agriculture Bank of Malaysiacontinued to support the agriculture activities byproviding financing to the entire value chain of theagriculture sector. In addition to the oil palm industry,Bank Pertanian continued to extend financing to newareas, such as support services and agro-basedprocessing industries. The increase in loans extended tothese industries was, however, largely offset by thedecline in loans to paddy, forestry and livestock sectors.As a result, total loans outstanding increased at amoderate rate of 2.8% (2004: 14.8%) to RM3.2 billionas at end-2005. During the year, RM716.8 million weredisbursed, mainly for agricultural support services(RM296.7 million) and oil palm (RM186.4 million).

Small farmers continued to be the largest group ofborrowers, accounting for 98.7% of total number ofborrowers, with total loans outstanding of RM1.7billion. During the year, Bank Pertanian approvedloans totalling RM865.5 million to 37,182 loanaccounts, mainly to small farmers (99.6% of totalnumber of borrowers).

Bank Pertanian discontinued the micro credit schemein December 2004 as the allocation had been fullyutilised. Since the launch of the micro credit scheme inJune 2003, Bank Pertanian received a total of 32,173applications and approved 17,603 applications with avalue of RM202.1 million. A total of RM200 million hadbeen disbursed under the scheme, with borrowersmainly involved in trading and marketing of agriculturalproducts. As at end-2005, total loans outstanding ofmicro credit scheme stood at RM75.7 million (end-2004:RM117 million).

Gross NPLs declined by RM86.9 million to RM1.2 billionas at end-December 2005, which resulted in a lowergross NPL ratio of 36.5% (end-2004: 40.3%). Similarly,net NPL ratio improved to 18.7% (end-2004: 22.8%).

In terms of total assets, loans remained the largestcomponent, accounting for 51.5% of total assets,followed by investments which formed 27.2% (RM1.7billion) of total assets. The investments were mainly inpromissory notes/commercial papers (51.6%), privatedebt securities (37.5%) and unit trusts (28.7%).

Total deposits outstanding declined by RM521.1 millionor 12.7% (2004: 8.8%) to RM3.6 billion as at end-2005, mainly due to net withdrawal by businessenterprises. Nevertheless, deposits, which weremobilised through its network of 172 branch offices and5,634 mobile units nationwide, remained the largestsources of funds for Bank Pertanian, accounting for58.5% of total resources. To further enhance servicesoffered to its customers, Bank Pertanian became amember of MEPS in July 2005, thus enabling itsdepositors to access ATMs that support MEPS services.

Borrowings from the Government amounted to RM1.7billion as at end-December 2005 (27.6% of totalresources) mainly to support the various Governmentfinancing schemes. Bank Pertanian managed 10 fundswith loans outstanding amounting to RM176 million or5.6% of the total loans outstanding as at end-December 2005.

Malaysian Industrial Development Finance BerhadThe Malaysian Industrial Development Finance Berhad(MIDF) sustained its lending activities in 2005, with totalloans approved and disbursed increasing by 14.3% toRM532 million (2004: RM466.1 million) and 1.4% toRM306.3 million (2004: RM302 million) respectively. In orderto enhance its services, MIDF planned to introduce two newsupplementary products, namely, the Revolving Credit andContract Financing for working capital purposes in 2006, tobetter meet its customers’ financing requirements.

Graph 7.7Bank Pertanian Malaysia:Direction of Lending as at 31 December 2005

Fishery9.8%

Forestry2.6%

Tobacco 2.1%

Rubber1.3%

Others36.1%

Oil palm22.2%

Livestock12.4%

Food crops 13.5%


184

Total loans outstanding declined slightly by 1.3% toRM1.1 billion as at end-2005, as the increase in loansdisbursed was offset by repayments. Loans to themanufacturing sector remained the largest share(79.5%) of MIDF’s total loan portfolio. Among themanufacturing activities benefiting from loans by MIDFwere the fabricated metal products and machineryindustry (18.4% of total manufacturing financing),followed by the wood product industry (15.6%), basiciron and steel and non-ferrous product industry (9.8%),and transport equipment industry (8.5%). In terms ofborrower, the SMEs remained the main beneficiaries,with its share of total loans outstanding increasingfurther to 66.4%, compared with 57.8% in 2004.

Meanwhile, as an institution that manages the Governmentspecial funds, total outstanding funds managed by MIDFincreased by 12.1% to RM442 million as at end-2005 (end-2004: RM394.1 million). SMEs were the major recipients offinancing from these funds, which include the Soft Loan forSME Fund, Fund for SMI 2 and the Japan Bank forInternational Cooperation Fund for SMIs.

Based on a 3-month classification, NPLs improvedsignificantly in 2005. Gross NPLs, which comprisedmainly NPLs to the manufacturing sector, declined toRM245.9 million (2004: RM362 million) with gross NPLratio improving to 21.8% (2004: 31.7%). On a netbasis, the NPL ratio declined to 9.3% (2004: 12.4%).

Shareholders’ funds and borrowings remained the majorsources of funds to support activities of MIDF. Duringthe year, despite a slight decline in the shareholders’funds to RM1.4 billion due to dividend payout, itremained the largest funding source to account for

Graph 7.8Malaysian Industrial Development Finance Berhad:Direction of Lending as at 31 December 2005

Fabricated metalproducts

& machinery18.4%

Electrical & electronic products

5.2%

Non-manufacturing20.5%

Food, beverages & tobacco

8.5%

Others27.7%

Wood products 15.6%

Plastic products7.7%

Basic iron & steel and non-ferrous products

9.8%

Non-metallic mineralproducts

7.1%

Manufacturing 79.5%

48.7% of MIDF’s total resources. Borrowingscontributed to another RM1.2 billion or 40.3% ofMIDF’s total resources. These included borrowings fromthe Government of RM561.6 million for lending tosupport socio-economic development and RM415million funds raised from the capital market for use incorporate lending activities.

Credit Guarantee Corporation Malaysia BerhadThe Credit Guarantee Corporation Malaysia Berhad (CGC)continued to assist and facilitate SMEs in gaining betteraccess to financing through the provision of guaranteesand advisory support services. As part of these efforts,CGC launched the Islamic Direct Access GuaranteeScheme (DAGS-i) in December 2005, aimed at meetingthe needs of SMEs which utilised Islamic financing to fundtheir activities. During 2005, total guarantees outstandingexpanded by 11.8% to RM3.7 billion as at end-2005(end-2004: RM3.3 billion), mainly attributed to the growthin the major guarantee schemes, namely, the Direct AccessGuarantee Scheme (DAGS), the New Principal GuaranteeScheme and the Flexi Guarantee Scheme. During the year,total guarantees provided under these schemes increasedby 23.8%, constituting a combined share of 86.1% oftotal guarantees outstanding.

Reflecting continuous efforts in supporting the smallerSMEs, loans of less than RM250,000 was the largestcomponent of loans to have benefited from the guaranteeschemes of the CGC, accounting for 81% of the totalnumber of loans guaranteed as at end-2005 (end-2004:77.7%). In terms of value guaranteed, loans of betweenRM500,000 to RM1 million accounted for 29.3% of thetotal guarantees outstanding, followed by those of aboveRM1 million (25.7%), and between RM250,000 to


185


2005 (end-2004: RM12.1 billion), reflecting to someextent the increase of 174,002 or 3.6% in the numberof depositors to five million. LTH has announced a 2005bonus payout of 4.5% to the depositors (2004: 4.3%).

Total investments increased by 9.8% or RM994 million toRM11.1 billion as at end-2005 (end-2004: RM10.2 billion),to remain as the largest asset component of 76.2% oftotal assets. The increase was due mainly to the sustainedgrowth of 25.2% in share investments, which amountedto RM6.8 billion as at end-2005. As a proportion to totalinvestments, share investments continued to account forthe largest share of 61% (2004: 53.5%). The other maininvestment components were investment in subsidiaries inthe form of financing and placement of deposits withfinancial institutions, each accounted for 14.4% of totalinvestments during the year.

Sabah Development Bank BerhadLending activities of Sabah Development Bank Berhad(SDB) increased further, with loans outstandinggrowing by 13% to RM1.6 billion as at end-2005 (end-2004: RM1.5 billion) to account for 73.9% of totalassets. The increase was mainly attributed to stronggrowth in loans extended to the construction andmanufacturing sectors. In terms of composition, 36%of total loans outstanding was extended for real estatefinancing, while 10.4% and 9.7% were to theconstruction and manufacturing sectors, respectively.During the year, total loans approved and disbursedrose further to RM606.9 million and RM496.5 millionrespectively (2004: RM381.5 million and RM314.3million respectively).

While gross NPLs increased to RM525.5 million (2004:RM517.5 million), the gross NPL ratio declined to 32.1%

Graph 7.9Credit Guarantee Corporation Malaysia Berhad:Guarantee by Sector as at 31 December 2005

General business75%

Agriculture1.2%

Manufacturing23.7%

Others0.1%

Graph 7.10Lembaga Tabung Haji:Investments as at 31 December 2005

Other investment1.7%

Deposits placed14.4%

Shares61%

Government debtsecurities

0.1%

Private corporatedebt securities

8.4%

Investment insubsidiary and

associates14.4%

RM500,000 (24.4%). During the year, loans extended toSMEs involved in the general business sector received threequarters of CGC’s total guarantee coverage, while 23.7%of the guarantee coverage was for loans extended to themanufacturing sector. In 2005, total claims paid by CGCto the banking institutions increased by 19.1% toRM147.3 million (2004: RM123.7 million).

CGC continued to rely on its shareholders’ funds(RM2.2 billion) and borrowings from the Governmentand its shareholder (RM1.9 billion), which togetheraccounted for 88.3% of the total sources of funds tosupport its guarantee issuance and lending activities.In line with the Government’s focus to promote thedevelopment of SMEs, Bank Negara Malaysia, as thelargest shareholder of CGC, initiated efforts toenhance the capacity and capability of CGC to enablethe institution to better serve the needs of SMEs.Towards this end, the scope of activities of CGC hasbeen widened to not only providing credit guarateefacilities, but also to offer a broader range ofproducts and services, including equity financing andother ancillary supports such as business developmentand financial advisory services, as well as creditinformation services. To meet its new expanded role,the Board of CGC has been broadened to includemembers with experience in business and finance,while efforts are being taken to strengthen theresources of CGC.

Lembaga Tabung HajiThe performance of Lembaga Tabung Haji (LTH) orPilgrims Fund Board remained favourable in 2005, asdeposit mobilisation and investment activities continuedto expand further. Total deposits mobilised by LTH roseby 10.2% or RM1.2 billion to RM13.3 billion as at end-


186

(2004: 35.7%), as a result of a larger loan base. Amajor share of the NPLs (72.3%) were loans extendedto the manufacturing and real estate sectors. On a netbasis, the net NPL ratio was at 3.2% (2004:1.5%).

Borrowings from financial institutions as well as depositsfrom the Government and Government-controlledbusiness enterprises continued to be the main sourcesof funds for SDB. Together these contributed to RM1.2billion or 53.4% of the total resources (2004: RM 1.1billion or 56.2%).

Sabah Credit CorporationLending activities of Sabah Credit Corporation (SCC)expanded by 5% in 2005 (2004: 9.1%), with loansoutstanding increasing to RM725.1 million as at end-2005 (end-2004: RM690.3 million) to account for 93.2%of total assets. During the year, total loans approved anddisbursed increased further, amounting to RM235.8million and RM235.4 million respectively (2004: RM209.7million and RM209.2 million respectively).

Outstanding loans for consumption credit grew by15.3% in 2005 (2004: 28.3%), to account for 51.7% ofSCC’s total loan portfolio. Of this, the bulk wasextended as executive loans/personal loans (76.6%),while the remaining was for hire purchase financing.Meanwhile, the outstanding housing loans, whichaccounted for 37.6% of the total loan portfolioremained unchanged.

Gross NPLs increased to RM116.8 million with a higherratio of 16.1% in 2005 (2004: RM92.6 million and13.4%), attributed mainly to the non-performinghousing loans. On a net basis, the NPL ratio was at12.1% (2004: 5.2%). During the year, SCC continued

to source its funding through borrowings from the StateGovernment (RM343.8 million) and banking institutions(RM265 million) to support its activities. These fundingsaccounted for a combined share of 78.2% of its totalsources of funds.

Borneo Development Corporation (Sabah)Sendirian BerhadIn 2005, property development activities of BorneoDevelopment Corporation (Sabah) Sendirian Berhad(BDC Sabah) remained slow, as reflected in thedecline of property development expenditure andprogress billings which amounted to RM15.9 millionas at end-2005 (end-2004: RM32.4 million).

Meanwhile, end-financing for the purchase of housesdeveloped by BDC Sabah declined further, asrepayment of housing loans continued to offset newlending activity. During the year, the bulk of NPLsconsisting of loans to business enterprises for thepurchase of non-residential properties was writtenoff. As a result, gross NPLs declined significantly toRM0.5 million and accounted for 8.3% of total loansas at end-2005 (end-2004: RM2.8 million or 31.6%).With loan repayments by individual borrowers andwriting-off of non-performing commercial propertyloans, total loans outstanding declined to RM5.7million as at end-2005 (end-2004: RM9 million).

As a result, the total assets of BDC Sabah declined by16.9% to RM96.1 million as at end-2005 (end-2004:RM115.7 million). In terms of sources of funds, BDCSabah continued to rely on borrowings from financialinstitutions which amounted to RM37.8 million (2004:RM59 million) or 39.3% of total resources to supportits activities.

Graph 7.11Sabah Development Bank Berhad:Direction of Lending as at 31 December 2005

Others 30.6%

Agriculture, forestry & fishery

6.6%

Real estate 36.0%

Construction 10.4%

Business services 6.7%

Manufacturing 9.7%

Graph 7.12Sabah Credit Corporation:Direction of Lending as at 31 December 2005

Others2.7%

Industrial development7.0%

Hire purchase12.1%

Executive loans39.6%

Housing37.6%

Agriculture 1.0%


187


Borneo Development Corporation (Sarawak)Sendirian BerhadProperty development and construction activitiesundertaken by Borneo Development Corporation(Sarawak) Sendirian Berhad (BDC Sarawak) expandedfurther in 2005. Stocks and work-in-progress recordedstrong increase of 22.7% (2004: 20.1%) to RM80.9million as at end-2005, to account for the largest share(69.8%) of BDC Sarawak’s total assets.

End-financing activities of BDC Sarawak, however, havebeen on a declining trend for the past decade, as propertybuyers increasingly turned to the more competitivefinancing packages offered by the banking institutions. In2005, lending by BDC Sarawak declined further with loans

outstanding amounting to RM0.7 million as at end-2005(end-2004: RM0.9 million), which comprised mainly loansextended to its staff (96.7%) for the purchase of residentialproperties. Meanwhile, total investments in subsidiary andassociate companies totalling RM5.9 million, or 5.1% oftotal assets, recorded a decline of 12.5% in 2005.

Deposits accepted from house buyers (RM61.4 million)have become the main source of funds for BDCSarawak during the year, accounting for 52.9% of totalresources (2004: 36.9%). The institution also continuedto rely on shareholders’ funds (RM37.2 million) andborrowings from financial institutions (RM6.9 million),which together represented 38.1% of total resources(2004: 51.8%), to support its operations.


Other FinancialInstitutions

Discount HousesProvident and Pension FundsVenture CapitalUnit Trust Industry

190190-191191-193193-195

190

Other Financial Institutions

Discount HousesAs part of the framework for the creation of investmentbanks, the seven discount houses currently in operationwill be rationalised and merged with stockbrokingcompanies and universal brokers to form investmentbanks. Arising from the rationalisation process, lowersources and uses of funds were recorded in 2005. Totalresources mobilised by the discount houses declined byRM5.9 billion or 18.5% (2004: +RM1.7 billion or 5.6%).This was mainly due to lower deposits, which declinedfor the first time since 1999, by RM6.2 billion or 22%on an annual basis (2004: +RM4.3 billion or 18.3%).Correspondingly, in terms of uses of funds, interbankplacements declined significantly by RM5.3 billion toRM6.7 billion (2004: +RM6.2 billion to RM12 billion).

Investments in securities were marginally lower duringthe year, declining by RM0.5 billion or 2.9% (2004: -RM4.1 billion or -17.8%). There was a notable shift in thetypes of investment undertaken by discount houses, witha marked reduction in the holdings of bankers’acceptances (BAs) and private debt securities (PDS). Thelower holdings of BAs were attributable to the loweryields on these instruments. The lower holdings of PDS

were, to some extent, the result of an adjustment ininvestment portfolios of the discount houses, as part ofthe rationalisation process. Conversely, the discounthouses increased their holdings of Government debtsecurities, by RM1.1 billion or 63.2% on an annual basis(2004: +RM0.5 billion or 35.7%), particularly in the formof Malaysian Government Securities (MGS), and to alesser extent, Government Investment Issues (GII) andTreasury Bills (TBs). In addition, investments in BNM billsand Khazanah bonds were higher in 2005. As part of theportfolio reallocation exercise, the discount houses alsoincreased their holdings of Negotiable Instruments ofDeposits (NIDs), by RM1 billion to RM1.6 billion (2004: -RM0.3 billion to RM0.6 billion).

During the year, fee-based activities of the discounthouses remained relatively stable. The industry arranged,lead-managed and co-managed the issuances of PDSworth RM3.4 billion (2004: RM3.6 billion), while the totalamount underwritten moderated to RM0.8 billion (2004:RM1.5 billion) for 31 PDS issues (2004: 32 issuances).

Provident & Pension FundsTotal resources of the provident and pension funds(PPFs) surveyed by Bank Negara Malaysia expanded by10% to RM320.6 billion in 2005. The EmployeesProvident Fund (EPF) remained the largest fund,accounting for 82.3% of the total funds of the PPFs.Accumulated contributions, which accounted for89.9% of the total resources of the PPFs, grew by10% as at end-2005 (2004: 9%). The increment,

Table 8.1Discount Houses: Sources and Uses of Funds

Annual change At

end-2004 2005 2005

RM million

Sources:Approved capital funds 264 -298 2,339Deposits 4,344 -6,191 21,903Interbank borrowings -2,944 526 1,141Others 38 48 593

Total 1,702 -5,916 25,976

Uses:Investment in securities: -4,146 -555 18,554

Government debt securities 475 1,140 2,943MGS held 572 686 2,093

Khazanah bonds -173 251 575BNM bills -365 516 516Private debt securities -3,033 -1,527 9,370Bankers acceptances 822 -1,908 2,151Negotiable instruments of

deposit -289 996 1,555Cagamas debt securities -1,093 33 1,109Others -491 -56 335

Interbank placements 6,230 -5,316 6,723Others -382 -45 699

2003 2004 2005

Number of discount houses 7 7 7

Note: Total may not add up due to rounding.

Table 8.2Provident and Pension Funds: Selected Indicators

2004 2005p

RM millionAs at endNumber of contributors (’000) 21,162 21,901

of which: EPF 10,716 11,055 : SOCSO 10,239 10,627

Accumulated contributions 262,039 288,203Assets 291,493 320,645

of which: Investments in MGS 100,318 110,947

During the yearNet new contributions 12,423 14,531

Gross contributions 26,226 28,313Withdrawals 13,803 13,783

Dividends credited 10,705 12,993Investment income 13,458 15,561

p Preliminary

Source: Employees Provident Fund, Pension Trust Fund, Social SecurityOrganisation, Armed Forces Fund, Malaysian Estates Staff ProvidentFund, Teachers Provident Fund and three other private provident andpension funds.

C08 Financial Inst. pg190-196 3/14/06, 9:16 PM190

191


which is the largest since 2000, was mainly due tothe significant increase of 17% in net newcontributions (2004: 3.4%) and 21.4% in dividendscredited (2004: 14.8%). Slightly lower withdrawalswere recorded for the year, compared with 2004.

The significant increase of 17% in net newcontributions to the PPFs came largely from highergross contributions. During the year, grosscontributions increased by 8% (2004: 8.2%),reflecting sustained growth in wages and the numberof contributors to the funds. In addition, totalwithdrawals from the PPFs declined marginally by0.1% in 2005 (2004: +12.8%). Nonetheless,withdrawals from the EPF for investment purposesincreased by 15.5%, which corresponded with highersales of unit trust funds during the year.

Given the higher investment income in 2005, the EPFwas able to declare a higher dividend rate of 5% toits contributors (2004: 4.75%), which was the highestsince 2002. Gross income from investment increasedby 11.5% to RM13.1 billion, given the higher returnsfrom investment in private debt securities (PDS) andlending activity. Returns from investment in debt andequity instruments by the EPF contributed 56.1% ofits total investment income in 2005. Notwithstandingthe lacklustre performance of Bursa Malaysia in 2005,income from equity investment registered a healthygrowth of 12.8%.

In terms of asset composition of the PPFs, allocation wasskewed towards investments which offered higherreturns. Given the relatively low interest rateenvironment, holdings of cash and near-cash interest-bearing and interest-dependent assets like deposits inbanking system and money market instruments, were

reduced. In addition, the holdings of equity-basedinvestments experienced a marginal decline to 22.3%(2004: 23.2%). Nevertheless, the share of PDS andloans increased further to 14.9% and 17.4%respectively. In 2005, PDS issuance grew significantlyand this development led to higher investment in PDSby PPFs.

Venture CapitalIn 2005, the venture capital (VC) industry in Malaysiahas progressed significantly as an alternative source offinancing to the economy, with increased total fundsavailable for disbursement and higher level ofparticipation from industry players. Total investmentsfrom both local and foreign sources, number of venturecapital fund management companies and number ofinvestee companies also grew throughout the year. Totalavailable funds for VC investments increased by 14.3% toRM2.6 billion. Both investment from domestic sourcesand investment from foreign sources recorded asignificant growth of 32.8% and 54%, respectively. Bythe end of 2005, the total number of investee companieshad increased further to 380 companies, involving a totalinvestment of RM1.4 billion. Funds invested during theyear increased by 49.2% to RM431.5 million into 101investee companies (2004: increased by 27.3% toRM289.3 million into 139 investee companies).

The Cradle Investment Program (CIP), which wasadministered and managed by the Malaysia VentureCapital Management Berhad (MAVCAP), continued toprovide pre-seed funding and entrepreneurial supportto aspiring entrepreneurs with the commitment todevelop and commercialise their ideas. As at end-2005, the amount of grants approved was RM7.5

Graph 8.1 Provident and Pension Funds: Major Asset Composition

% of total assets RM billion

MGS

Equity

Total assets (RHS)

Loans

Deposits & money market

Private debt securities

Others

31.9 31.3 34.4 34.4 34.6

10.7 12.2 14.8 16.0 17.411.4 11.5

12.5 13.5 14.925.4 26.2

25.2 23.2 22.318.0 16.0 10.7 10.3 7.9

0

20

40

60

80

100

50

100

150

200

250

300

350

2001 2002 2003 2004 2005

Table 8.3Key Statistics of Venture Capital Industry

As at end- As at end-2004 2005

Venture capital funds (RM million) 2,266.0 2,589.0

Total investment (RM million) 1,058.0 1,441.5Local sources (RM million) 887.7 1,179.3Foreign sources (RM million) 170.3 262.2

No. of venture capital companies / funds 38 48No. of venture capital fund management

companies 34 39No. of investee companies 332 380

During During2004 2005

Total investment (RM million) 289.3 431.5Local sources (RM million) 248.4 338.2Foreign sources (RM million) 40.9 93.3

No. of investee companies 139 1011Including divestment activities

Source: Securities Commission


192

million and was awarded to more than 150 recipients.As CIP investment was mainly focussed on technologyinnovations, most of the ideas funded were related tothis sector, such as software development, consumer/business products and e-services. CIP’s strategy ofpartnerships with aligned and non-aligned industrypartners, which included the various technology andinvesting community partners, allowed the program togrow as a new source of deal flow for venture capitaland private equity firms, as well as other companies.Execution via the Cradle’s Ideas Bank has strengthenednetworking between CIP’s grant recipients with theinvesting community and the media. This wasespecially important to provide publicity and awareness

of success stories which has led to more exposure forCIP’s partners.

MAVCAP, as one of the few VC companies to provide seedand early-stage financing, continued to finance companieswhile maintaining the investment focus on ICT asmandated by the Government. For the year 2005, 17 newinvestees were provided funding by MAVCAP. Most of theinvestees funded by MAVCAP were deals related to the lifesciences, biotechnology, agriculture and renewable energy.

In line with the Government’s efforts to allow the privatesector to spearhead growth, the contribution of funds forVC investments from domestic private sector entitiesrecorded another significant increase of 20% in 2005 (2004:35.1%). In 2005, funds from foreign sources recorded thehighest growth, followed by funds from banks and otherprivate sector entities. As at end-2005, the Governmentremained as the largest contributor for VC funds.

Graph 8.2 Sources of Venture Capital (% share, as at end-2005)

Government37.8%

Total: RM2,589 million

Insurancecompanies

1.8%Private individuals

5.6%

Banks14.3%

Other privatesector entities

32.1%

Foreign entities7.4%

Provident and pension funds

1.8%

Table 8.4Investment by Stages during 2005

No. of Investee Companies 101

Business Stage RM ‘000 % share

Seed capital 11,643.1 2.7Start-up capital 25,116.0 5.8Early stage 107,276.3 24.9Expansion, growth 61,569.0 14.3Bridge, mezzanine, pre-IPO 162,204.8 37.6Management buy-out 29,664.0 6.9Management buy-in 14,700.0 3.4Cashing-out (secondary purchase) 1,642.0 0.4Other types of investment 17,748.0 4.1

Total 431,563.2 100.0


As at end-2002

As at end-2003

As at end-2004

As at end-2005Other types of investment

Cashing-out (secondary purchase)

Management buy-out

Management buy-in

Bridge, mezzanine, pre-IPO

Expansion, growth

Early stage

Start-up capital

Seed capital

Graph 8.3 Outstanding Investment by Stages (% share)

Source: Securities Commission0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0


193


In terms of stages, VC investments, during the year,continued to focus on the expansion/growth, bridge/mezzanine/pre-IPO and the early stages. Theseinvestments represented more than 75% of all VCinvestments in 2005. In terms of share, investments in themore risky stages, namely the seed capital and the start-up capital stages, declined from 12.3% in 2004 to 8.5%in 2005. Investments in other stages increased slightly.

In terms of outstanding investments by stages, theexpansion/growth, bridge/mezzanine/pre-IPO and start-up capital stages were still the main business stages thatreceived the bulk of VC investments since 2003.

As in the previous year, in terms of investments bysector, the information and communicationtechnology (ICT), life sciences and manufacturingsectors continued to receive the most of thefinancing. In total, the amount of VC investment inthese three sectors constituted 85.7% of totalinvestment made in 2005 (2004: 77.3% of totalinvestment made). In terms of the outstanding sizeof funding at end-2005, the sectors which receivedmost of the VC investment were the ICT sector(49.4% of total), the life sciences sector (21.1%) andthe manufacturing sector (15.2%). The three sectorscombined, accounted for RM1.2 billion or 85% oftotal funds invested. During the year, domestic VCfunds were concentrated in the ICT (53.6%),manufacturing (17%) and life sciences (11.1%)sectors, while foreign VC funds mainly invested intothe life sciences (57.4%), ICT (34.1%) andmanufacturing (8.5%) sectors. The apparent shift ininvestment preferences as experienced in 2004continued in 2005. The bulk of the domestically-sourced VC investment was more focussed on the ICTsector, a move away from the previous focus on themanufacturing sector, while foreign VC fundscontinued to concentrate on the life sciences sector.

Growth of the VC industry has advanced significantlyto support sustainable funding for new growth areasas well as to serve as an alternative source offinancing to the economy. Nevertheless, while manyinitiatives were undertaken to develop this form ofalternative financing, areas for further improvementare still prevalent. The VC industry developmentneeds to diversify further in meeting financing needsof potential investees in the seed stages.

Unit Trust IndustryThe unit trust industry expanded further in 2005,with more new funds launched and further increasesin the number of units in circulation. The net assetvalue (NAV) of the industry continued to expand by12.7% and accounted for 14.2% of the total equitymarket capitalisation as at end-2005 (end-2004:12.1%). During the year, a total of 51 new unit trustfunds were launched (62 in 2004), bringing the totalnumber of funds to 332 as at end-2005 (end-2004:281). The sustained increase in the number of unittrusts launched reflected continued confidence in unittrusts as an investment vehicle to access a well-diversified portfolio. Gross sales of units remainedconsistently high throughout the year with anincrease of 25.3% (33.4% in 2004). Despite therelatively higher repurchases made during the year, theindustry recorded resilient annual net sales of RM14.9

Information andcommunication

technology49.4%

Life sciences21.1%

Others6.5%Manufacturing

15.2%

Education4.1%

Electricity, powergeneration, gas

and water0.1%

Transport,storage and

communication3.7%

Graph 8.4Investment made in 2005 (% share of total)

Table 8.5Outstanding VC Investment by Sectors

As at end-2005

RM ’000 % share

Information and communicationtechnology 661,189.2 45.9

Manufacturing 292,906.2 20.3Life sciences 270,574.1 18.8Education 59,325.0 4.1Electricity, power generation, gas

and water 4,740.0 0.3Wholesale, retail trade, restaurant

and hotels 12,024.0 0.8Financing, insurance, real estate

and business services 15,963.2 1.1Construction 100.0 0.0Transport, storage and communication 15,970.0 1.1Others 108,748.4 7.5

Total 1,441,540.2 100.0



194

billion or 18.2% higher than the year before (RM12.6billion or 81.9% in 2004).

Effective 1 April 2005, the threshold for investing infunds abroad by unit trust companies was increasedfrom 10% to 30% of the total NAV of all residentfunds managed by a unit trust company. As a result,more global funds were established in 2005. Out of 51new unit trust funds launched during the year, 13 ofthese funds were global funds meant for investment inforeign securities, either directly or via alliances withforeign unit trust funds.

Graph 8.6 Unit Trust Industry - Gross Sales, Repurchases and Net Sales

RM million

0

2000

4000

6000

8000

10000

12000

14000

16000 Gross sales

2002 2003 2004 2005

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Repurchases Net sales

Graph 8.7 Islamic Unit Trusts - NAV, Units in Circulation, and Number of Funds

Net asset value Units in circulation

0

2

4

6

8

10

12

14

16

18

20

2001 2002 2003 2004 20050

10

20

30

40

50

60

70

80

90

Number of fundsNet asset value (RM bil)

No. of units in circulation (bil)

Number of funds

Ongoing efforts to further stimulate the development ofthe Islamic unit trust industry brought about continuedpositive growth in terms of NAV for the industry. In2005, a total of 12 new Islamic funds were launched(15 in 2004), bringing the total number of Islamic fundsto 77. The NAV of Islamic funds, which grew by 25.5%,accounted for 8.6% of total NAV of the unit trustindustry as at end-2005 (end-2004: 7.7%).

The Government undertook further measures toaccelerate the development of a vibrant andcompetitive Real Estate Investment Trusts (REITs)industry in Malaysia. The Guidelines on REITs wererevised by the Securities Commission (SC), with theobjective of attracting new players and enhancingawareness amongst local industry players and propertyowners/developers on the benefits of establishing aREIT. As at end-2005, three REITs were successfullylisted on the Main Board of Bursa Malaysia, bringingthe total number of listed REITs to six, while one REITremained unlisted. Acceptance of REITs as anadditional instrument for investors has been favourablethus far. Total turnover for REITs listed on BursaMalaysia increased significantly to RM341.6 million forthe year (RM11.8 million in 2004).

To further develop the Malaysian unit trust industry,the Government continued to seek ways to create anenabling environment in the country to maximise thepotential for unit trusts. The SC continued to releaseguidelines for new products and revised rules for

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Graph 8.5 Unit Trust Industry - NAV, Units in Circulation and Number of Funds

Net asset value, No. of units in circulation

Number of funds

0

20

40

60

80

100

120

140

0

50

100

150

200

250

300

160 350Net asset value (RM bil)

No. of units in circulation (bil)

Number of funds


195


feeder funds, fund-of-funds and wholesale funds toencourage wider participation by both high net worthindividuals retail and institutional investors. Severalinvestment restrictions were lifted to allow greaterflexibility for unit trust fund managers to invest in avariety of instruments that would provide investorswith a wider spectrum of risk-return mandates.

The penetration level, as measured by the ratio of netasset value of the unit trust industry to equity marketcapitalisation, improved to 14% from 12% in 2004.While this ratio remained low relative to countries withmore mature financial systems, it indicated anopportunity for the unit trust industry to progress as animportant investment vehicle for Malaysian investors.


Financial Markets

OverviewMoney MarketForeign Exchange MarketEquity Market White Box:Key Capital Market Measures in 2005Bond MarketExchange-traded Derivatives Market

198-199199-201201-202202-204205-207208-212212-214

198

OverviewThe operating environment in the financial markets wasinfluenced by episodes of larger capital flows, upwardpressures on oil prices and inflation against thebackdrop of ample liquidity situation and a higherdegree of risk appetite. The relatively low yields in thebond market provided a favourable condition forfinancing activity by the corporate sector. Volatility inthe exchange rates of the major currencies, the floatingof the ringgit with reference to a basket of currenciesand expectations of interest rate hikes led to increasedhedging activity in the foreign exchange and financialfutures markets.

Financial Markets

stepped up issuances of PDS to capitalise on theflattening yield curves at the longer-end and the lowreal yields in an environment of excess liquidity amidstdemand for long-term securities. Total net PDSissuance amounting to RM19.6 billion was the highestrecorded since 2000. As at end-2005, PDS financingaccounted for 24% of total debt financing to theprivate sector, complementing the banking system inproviding long-term financing to the corporate sector.Meanwhile, total funds raised in the equity marketwere only slightly lower despite the less encouragingmarket performance during the year. A total of 79companies sought listing in Bursa Malaysia and morethan half (46 companies) of these listings were small tomedium capitalised companies which were listed onthe MESDAQ Market. The MESDAQ Market remainedan important alternative avenue for these companiesto raise equity financing.

Funds raised by the public sector declined by 40.6%due mainly to the lower issuance of governmentsecurities as the Government continued on its fiscalconsolidation phase. The Government made aninaugural issuance of a 20-year Malaysian Government

Favourable conditions in thefinancial markets contributedto active fund raising exercisesby the private sector.In 2005, net funds raised in the capital market totalledat RM41.7 billion, albeit marginally lower than theamount raised in the previous year (2004: RM42.7billion). The sustained large volume of funds raised in2005 reaffirmed the vital role played by the capitalmarket in mobilising and allocating funds on the basisof market-based competitive financing. Of significance,net funds raised by the private sector accounted for alarger share of 62.1% of total funds raised (2004:37.5%), attributed to the higher financing needs on theback of the strengthening of private sector activityduring the year.

The private debt securities (PDS) market experiencedactive fund raising activity during the year. Corporations

Graph 9.1 Net Funds Raised in the Capital Market by the Public and the Private Sectors

RM billion

2001 2002 2003 2004 2005

Public Sector Private Sector

0

10

20

30

40

50

60

Table 9.1Funds Raised in the Capital Market

2004 2005p

RM million

By Public SectorGovernment Securities (gross) 43,173 28,276

Less Redemptions 18,200 15,800Less Government holdings 0 0

Equals Net Federal receipts 24,973 12,476

Khazanah Bonds (net) -1,198 833Government Investment Issues (net) 1,423 1,000Malaysia Savings Bond/Merdeka

Savings Bond (net) 1,474 1,516

Net Funds Raised by Public Sector 26,671 15,825

By Private SectorShares 6,475 6,315

Debt securitiesIssuance (gross) 36,340 38,196

Less Redemptions 26,814 18,617

Equals Net Issues 9,526 19,579

Net Funds Raised by Private Sector 16,001 25,894

Total Net Funds Raised 42,672 41,719

Short-term papers and notes (net)1 -3,208 1,579

Total 39,465 43,297

1 Refers to Commercial Papers and Cagamas Notes.p Preliminary

C09 Financial Markets pg198-214 3/14/06, 9:17 PM198

199

Financial Markets

Securities (MGS) and a 7-year Government InvestmentIssues, with the purpose of lengthening the benchmarkyield curve for the conventional and Islamic debtmarkets.

The Kuala Lumpur interbank foreign exchange marketrecorded a significant rise in both spot and swaptransactions on the back of increased hedging activityfor trade and investment purposes, following the largevolatility in the exchange rates of the major currencies.In addition, sizeable movements of short-termspeculative flows and the depegging of the ringgit alsocontributed to higher market activity.

Activity in the money market was marginally lower.The smaller volume of interbank deposits offset themodest growth recorded in the money market papers.Trading in money market papers centred on the MGS,with significant increases in the repo transactionsfollowing the introduction of Institutional SecuritiesCustodian Programme (ISCAP) and the introduction ofa securities lending facility for principal dealers by theBank to improve the repo market.

On Bursa Malaysia Derivatives, although tradingactivity was concentrated on Crude Palm Oil (CPO)futures and KLCI futures (92.3% of total trade), theinterest rates-related 3-month KLIBOR Futures and the3-year MGS Futures recorded higher volume. Openinterests of these financial futures rose in the fourthquarter, reflecting the increased participation byfinancial institutions in taking hedging positionsagainst anticipated interest rate hikes. Meanwhile,trading activity of CPO futures declined due mainly tothe reduced volatility in CPO prices.

On the developmental front, the Bank and the relevantauthorities took further measures to enhance theinfrastructure and the efficiency of the financialmarkets. Specific measures were also implemented todevelop the Islamic financial markets. Measuresintroduced, among others, were aimed at promotingliquidity in the bond market, liberalising rules onforeign exchange transactions, broadening riskmanagement tools, facilitating the introduction of newproducts and enhancing the information disseminationsystem. Details are contained in the box Key CapitalMarket Measures in 2005.

Money MarketActivity in the money market was marginally lower in2005. The trading volume of interbank deposits wassmaller compared to 2004, while the trading volume inmoney market papers recorded a modest growth.

Table 9.2Money Market1

2004 2005

Volume Annual Volume Annual(RM change (RM change

billion) (%) billion) (%)

Total money markettransactions 1,665.9 3.0 1,622.0 -2.6

Interbank deposits 1,057.5 -2.5 887.6 -16.1

Money market papers 608.4 14.3 734.5 20.7Repurchase Agreements 118.6 170.8 264.4 122.9Malaysian Government

Securities (MGS) 193.3 -16.5 179.4 -7.2Malaysian Treasury Bills 17.1 72.1 12.9 -24.6Bank Negara Bills 74.1 18.5 72.8 -1.8Cagamas Bonds 38.6 50.7 16.3 -57.9Cagamas Notes 4.4 -72.8 0.0 -100.0Bankers

Acceptance (BAs) 48.0 28.6 44.2 -8.0Negotiable Instrument of

Deposits (NIDs) 36.3 -15.8 39.0 7.5Government Investment

Issues 35.9 4.0 43.2 20.5Khazanah Bonds 17.6 -6.3 20.0 13.6Malaysian Islamic

Treasury Bills 1.2 n.a. 4.5 265.6Islamic Cagamas Bonds 2.1 2,397.6 1.8 -14.1Bank Negara Negotiable

Notes 21.2 137.6 36.1 70.5

1 All data are sourced from the Fully Automated System for Issuing/Tendering(FAST), except for BAs and NIDs which are sourced from money marketbrokers.

0.48.8

0.2

20052004

7.2

69.1

18.9

4.3

68.3

18.54.2

Overnight

Weekend

1-week

1 to 3-month

6, 12m, Others

0102030405060708090

100

Graph 9.2Interbank Deposits

%

Share of Total Volume Traded

At RM887.6 billion, the volume of interbank deposittransactions was lower in 2005 (2004: RM1,057.5billion). The bulk of trading continued to beconcentrated in the shorter-end of the market with theovernight and weekend tenures continued to be activelyused for settlement and liquidity purposes. The lowerinterbank deposit transactions reflected, to some extent,the slight reduction in liquidity in the interbank depositmarket following the outflow of short-term speculative


200

foreign funds and also market preference to trade inmoney market papers.

In terms of trading in money market papers, the volumeof transactions increased to RM734.5 billion in 2005(2004: RM608.4 billion). There was a significant increasein repo transactions during the year, as reflected by theincreased activity in the repo market for MalaysianGovernment Securities (MGS). The increased utilisation ofrepos, following the introduction of ISCAP (InstitutionalSecurities Custodian Programme), and the introduction ofa securities lending facility for principal dealers in 2005,had a significant impact on the trading volume of MGS inthe repo market. The introduction of ISCAP facilitated therelease of captive holdings of MGS by institutionalinvestors, while the securities lending facility createdmore market-making activity, including the use of therepo market to cover short selling positions.

Overall trading volume in the outright purchase and saleof instruments was lower compared to 2004, mainly onaccount of the lower outright transactions of MGS,amounting to RM179.4 billion in 2005 (2004: RM193.3billion). This was an outcome of the lower net issuanceof MGS by the Government during the year, which atRM12.5 billion, were only half as much as in the

previous year (RM25 billion in 2004). In addition,outright transactions in the MGS market were alsoinfluenced by expectations on the direction of interestrates. In the final quarter of the year, demand wasaffected by uncertainty over the supply of MGS. Whilenon-resident activity in the trading of MGS increasedduring the year, their activity had minimal impact on thevolume of transactions and yields of MGS, as demandfor MGS by domestic investors remained strong. Thiswas particularly evident in the fourth quarter, whenstrong demand by domestic investors mitigated MGSprices from correcting sharply following sales by non-resident investors.

During the year, demand for long-term Islamic bonds inthe outright market continued to increase. This wasclearly evident in the higher trading volume of theGovernment Investment Issues (GII) and KhazanahBonds, which increased to RM43.2 billion and RM20.0billion respectively (2004: RM35.9 billion and RM17.6billion respectively). In 2005, a new profit-based GII,with a maturity of 10 years, was introduced as anadditional instrument to the existing discount-based GII.

Graph 9.3 Money Market Instruments

0%

20%

40%

60%

80%

100%

2004 2005

BA NIDs MGSKhazanah MTB BNBCagamas Bonds Repo Cagamas Notes GII Islamic Cagamas Papers

19.5

6.315.7

31.8

6.07.9

5.95.9

36.0

2.214.8

24.4

5.36.0

Share of Total Volume Traded

0

5

10

15

20

25

30

35

0

5

10

15

20

25

30

35

(RM billion)

Jan-

04

Feb-

04

Mar

-04

Apr

-04

May

-04

Jun-

04

Jul-0

4

Aug

-04

Sep-

04

Oct

-04

Nov

-04

Dec

-04

Jan-

05

Feb-

05

Mar

-05

Apr

-05

May

-05

Jun-

05

Jul-0

5

Aug

-05

Sep-

05

Oct

-05

Nov

-05

Dec

-05

Graph 9.4 Volume of Traded MGS

Jan-

04

Feb-

04

Mar

-04

Apr

-04

May

-04

Jun-

04

Jul-0

4

Aug

-04

Sep-

04

Oct

-04

Nov

-04

Dec

-04

Jan-

05

Feb-

05

Mar

-05

Apr

-05

May

-05

Jun-

05

Jul-0

5

Aug

-05

Sep-

05

Oct

-05

Nov

-05

Dec

-05

Graph 9.5 Yields of Long-term Money Market Instruments

%

3-y MGS 3-y GII

OPR 5-y MGS

2.5

3.0

3.5

4.0

4.5

Jan-

04

Feb-

04

Mar

-04

Apr

-04

May

-04

Jun-

04

Jul-0

4

Aug

-04

Sep-

04

Oct

-04

Nov

-04

Dec

-04

Jan-

05

Feb-

05

Mar

-05

Apr

-05

May

-05

Jun-

05

Jul-0

5

Aug

-05

Sep-

05

Oct

-05

Nov

-05

Dec

-05

1.51.71.92.12.32.52.72.93.13.3

Graph 9.6 Yields on Short-term Money Market Papers & Deposits

%

1m 6-m MTB

on 6-m BNB

3-m MTB


201

Financial Markets

The issuance of the profit-based GII was aimed atmeeting the growing demand for Shariah-compliantsecurities.

In terms of Cagamas bonds and notes, includingIslamic Cagamas papers, the trading volume was lowerat RM18.1 billion (2004: RM45.1 billion) due mainly tothe lower issuances of RM2.5 billion during the year(2004: RM9.3 billion).

Trading in money market papers with maturities of lessthan 1-year was mixed. During the year, higher depositsin the banking system spurred the banking institutionsto increase the creation and trading of NIDs. On theother hand, the trading volume of the MalaysianTreasury Bills was lower given the smaller total issuanceand low yields. The trading volume of Bank Negara Billswas only marginally lower in 2005, amounting toRM72.8 billion (2004: RM74.1 billion), reflecting thestronger demand by non-resident investors.

In contrast, the trading volume of both Bank NegaraNegotiable Notes (BNNN) and Malaysian IslamicTreasury Bills (MITB) were higher at RM36.1 billion andRM4.5 billion respectively (2004: RM21.2 billion andRM1.2 billion respectively). This development reflected,to some extent, the increased supply of theseinstruments amid growing demand from moneymarket players for liquid Shariah-compliant assets, aswell as, from the significant amount of non-residenttrading activity.

Foreign Exchange MarketIn the Kuala Lumpur interbank foreign exchangemarket, the average daily volume of interbank foreignexchange transactions (spot and swap) increased by40% in 2005. Spot transactions rose 45%, whileswaps registered an increase of 36%. The rise in thevolume of transactions was due largely to increasedhedging activity for trade and investment purposes,arising from the volatility in the exchange rates of themajor currencies during the year. Market participantsalso sought to actively manage their exposure tocurrency risk, both prior to, and after the move from afixed exchange rate to a managed float of the ringgitagainst a basket of currencies. The Kuala Lumpurforeign exchange market also experienced largerportfolio flows during the year, which contributed tothe higher market activity. This increase in volume wasmore significant in the period after the shift inexchange rate regime on 21 July 2005. Consequently,the volume of transactions was higher in the secondhalf of the year and accounted for 57% of totaltransactions during the year.

By composition, the Kuala Lumpur foreign exchangemarket comprised mainly of transactions involving theringgit, yen, euro, Singapore dollar and pound sterlingagainst the US dollar. The US dollar continued to be thecurrency of choice in the settlement of trade and capitalaccount transactions and thus, the domination oftransactions in the US dollar against the ringgit. The shareof US dollar - ringgit transactions in total foreign exchangetransactions increased further, by 66% in 2005 comparedto 2004. As a result, the share of US dollar - ringgittransactions continued to trend upwards, and in 2005accounted for 93.3% of the total transactions at the KualaLumpur foreign exchange market. Following the

0

1,400

1,200

1,000

800

600

400

200

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

RM billion RM billion

Graph 9.7 Volume of Interbank Transactions in the Kuala Lumpur Foreign Exchange Market

0

1,400

1,200

1,000

800

600

400

200

Spot Swap Total

Note: Data from 2002 onwards is based on the new Ringgit Operations Monitoring System (ROMS), whereas observations for previous years are based on transactions of the eight Authorised Dealers.

Graph 9.8Transactions in the Kuala Lumpur Foreign Exchange Market by Currency

2005(RM650.1 billion)

USD/RM

2004 (RM464.7 billion)

USD/SGD

USD/YEN

USD/EURO

USD/STG

Others

78.5%

2.6%

8.4%

4.2%

6.3%

0.03% 93.3%

1.7%

0.8%3.6%

0.6%

0.01%


202

Table 9.4Bursa Malaysia: Selected Indicators

2004 2005

Price Indices:Composite 907.43 899.79EMAS 214.26 203.85Second Board 110.87 80.44MESDAQ 122.84 87.09

Total Turnover:Volume (billion units) 108.0 102.3Value (RM billion) 216.7 177.1

Average Daily Turnover:Volume (million units) 435.5 414.3Value (RM million) 873.7 716.9

Market Capitalisation (RM billion) 722.0 695.3Market Capitalisation / GDP (%) 160.6 140.6

Total Number of Listed Companies: 963 1,021Main Board 622 646Second Board 278 268MESDAQ 63 107

Market Liquidity:Turnover Value / Average Market

Capitalisation (%) 31.9 25.2Turnover Volume / Number of Listed

Securities (%) 36.4 31.4

Market Concentration:*10 Most Highly Capitalised Stocks / MarketCapitalisation (%) 34.4 36.1

Average Paid-Up Capital ofStockbroking Firms (RM million) 167.0 152.5

* Based on market transactions only.

Source: Bursa Malaysia

Table 9.3Bursa Malaysia: Performance of Sectoral Indices

2004 2005

Annual change (%)

Kuala Lumpur Composite Index 14.3 -0.8EMAS 9.6 -4.9Second Board - 21.2 -27.4MESDAQ Composite Index -19.3 -29.1

Plantation 9.4 15.8Industrial 10.9 3.8Trading/Services 14.3 -1.7Finance 15.3 -3.5Consumer products 7.3 -5.0Shariah 8.9 -5.0Industrial products 4.6 -12.3Mining 6.7 -12.8Construction - 8.9 -25.9Properties - 4.5 -26.8Technology -28.5 -37.8


unpegging of the ringgit exchange rate, the share ofUS dollar - ringgit transactions in total transactionsrose, from 91.8% over the 1 January – 21 July 2005period to 94.8% over the 22 July – 31 Decemberperiod. Conversely, the share of transactionsinvolving the other currency pairs decreased. Theshare of transactions involving the yen and eurodecreased from 8.4% and 4.2% in 2004 to 3.6% and1.7%, respectively in 2005. Similarly, there was adecrease in transactions involving the Singaporedollar and pound sterling, from 2.6% and 6.3% oftotal transactions in 2004 to 0.8% and 0.6% in2005, respectively.

Equity MarketThroughout 2005, the equity market was affected byconcerns over the implications of global developments,primarily high oil prices, on domestic inflation andgrowth prospects. The year began on an optimisticnote with the benchmark Kuala Lumpur CompositeIndex (KLCI) hitting a four and a half year high of930.6 points on 11 January. Thereafter, developmentssuch as continued escalation of oil prices, increasingglobal interest rates, and their consequent impact onthe economy, adversely affected market sentiments. Inaddition, several domestic corporate developments inparticular below market expected earnings,contributed negatively to the performance of the KLCIduring the year. Nevertheless, Bursa Malaysia remainedan important avenue for financing as the number ofnew companies seeking listing continued to increase.

Graph 9.9 Kuala Lumpur Composite Index (KLCI), Second Board Index, MESDAQ Market Composite Index (MCI) and Bursa Malaysia's Trading Volume

Index (Jan 2004=100) Trading volume (billion units)

KLCI Second Board Index

MCI Trading volume


40

60

80

100

120

140

160

0

5

10

15

20

25

30

Jan-

04Fe

b-04

Mar

-04

Apr

-04

May

-04

Jun-

04Ju

l-04

Aug

-04

Sep-

04O

ct-0

4N

ov-0

4D

ec-0

4Ja

n-05

Feb-

05M

ar-0

5A

pr-0

5M

ay-0

5Ju

n-05

Jul-0

5A

ug-0

5Se

p-05

Oct

-05

Nov

-05

Dec

-05

The performance of the KLCI in 2005 lagged that of othermajor global and regional indices. The KLCI ended lower at899.79 points or weaker by 0.8%, compared to 2004’sperformance. Market capitalisation declined by 3.7% to

C09 Financial Markets pg198-214 4/14/06, 15:14202

203

Financial Markets

RM695.27 billion. Market activity was lower, with theannual market turnover at 102.3 billion units, which werevalued at RM177.1 billion (2004: 108 billion units; RM216.7billion). Market liquidity, in terms of average daily turnover,fell to 414 million units (2004: 435 million units).

To a large extent, the weaker financial performance ofpublic listed companies (PLCs) affected market sentiment.

Graph 9.10Performance of Selected Stock Markets Indices(% change from end-2004 to end-2005)


-0.8

-0.6

1.4

4.5

6.7

6.8

54.0

13.6

16.2

-10 0 10 20 30 40 50 60

US Nasdaq

Hong Kong HSI

TaiwanTWSE

Thailand SET

Singapore STI

Indonesia JCI

Korea KOSPI

(%)Malaysia KLCI

US DJIA

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

Graph 9.11: Performance of the Kuala Lumpur Composite Index in 2005

Concerns over:> Expectations of rising global oil prices and inflation resulting from Hurricane Katrina disaster> Further expectation of US interest rate hike> Poor domestic corporate results

Following the impact of HurricaneKatrina and Rita, there were increasedconcerns over further rise in:> global oil prices> US interest rate> inflation

30 NovBank Negara Malaysiaannounced an increasein OPR of 30bpsto 3.00%.

3 AugKLCI recorded

its highest pointat 952.59

External uncertainties:> US weaker economic outlook> Rising oil prices

> Further increase in oil prices above USD50/barrel> Rising concerns on inflation> Liquidation of foreign funds.

800

820

840

860

880

900

920

940

960

KLCI

30 Sep2006 Budget - Favourable capital market measures announced. Among others are:1. Promoting M&A activities through: > Exemption of stamp duty and real property gain tax. > Elevation of Section 132G of the Companies Act, 1965 for companies undertaking M&A activities.2. Promoting REITs through tax deductions on legal, valuation and consultancy expenses.

> Decline in global oil price.> Adoption of managed

float regime for Ringgit.> Positive expectations on

restructuring of GLCs.

Concerns over rising oil prices, further

hikes in US interest rates and its

implications on global economy.

31 MayLowest point

of the year for the KLCI at

860.73

Improved market sentiments following Government's announcement to probe allegations of share manipulation activities

Based on a sample of 351 listed non-financial corporations(representing close to 84.4% of Bursa Malaysia’s totalmarket capitalisation), the performance of Malaysian PLCsdeteriorated in 2005. A drop of 10.5% in cumulative netprofit was recorded in the first three quarters of 2005,compared with the same period in 2004. Annualisedreturn-on-equity for the sample also declined to 8.3% in thethird quarter of 2005 (3Q 2004: 9.7%) mainly due to a dropin the operating profit margin to 11.8% (3Q 2004: 13.4%).Weaker corporate earnings were particularly evident in theconstruction, properties, manufacturing and agriculturesectors. Slower global demand for electrical and electronicsproducts, and increased competition contributedsignificantly to the lower figures reported.

A marginal deterioration in debt servicing capacitywas observed. Interest coverage ratio as at thirdquarter of 2005 was 3.93 times (2004: 4.69 times).Debt-to-equity ratio for the same period droppedslightly to 0.60 times (2004: 0.63 times), mainlyreflecting the corporate sector’s move to retire olddebts and lock-in new rates with new debt financing.Therefore, the indebtedness level of the corporatesector remained sustainable as the debt-to-equityratio for the third quarter of 2005 was slightly betterthan the average ratio of 0.61 after the Crisis.


204

In terms of total number of new listings, Malaysia’s equitymarket remained an important source of capital forMalaysia’s corporate sector in 2005. Bursa Malaysiaattracted 79 Initial Public Offerings (IPOs), which was thehighest number of listings since 1998. New listings on the

622 16 15 16

14

22

7

22 26 17

2031 46

Main Board

20052004200320022001

No.of Companies

Graph 9.12 Bursa Malaysia: Number of New Listings

MESDAQ Market

Second Board

622 16 15 16

14

2222 26 17

2031 46

0

1020

3040

5060

70

80

90

Total:20

Total:51Total:58

Total:72Total:79


7

Bond Market

RM million

Graph 9.13 Funds Raised by the Private Sector in the Capital Market

Equity Market

2001 2002 2003 2004 2005-

10,000

20,00030,000

40,00050,000

60,00070,000Despite its lacklustre

performance, Bursa Malaysiaremained an important sourceof equity financing for theMalaysian corporate sector,especially the small andmedium-sized companies. 79companies sought listing inMalaysia’s equity market,which was the highest numbersince 1998.Main Board remained strong with an annual increase of6.7% (2004: -6.7%), while new listings on the SecondBoard declined by 34.6% (2004: +18.2%). Over the years, ahigher number of small and medium capitalised companiessought financing from Bursa Malaysia. In 2005, slightly morethan one-third of the total IPOs was made by companiesfrom the technology sector. The MESDAQ Market remainedeffective as a platform for high growth potential companiesto seek financing and new investors. IPOs in the trading/services and industrial products sectors accounted for22.8% and 24.1% of new shares listed in 2005,respectively. While the IPOs comprised mainly small and

medium capitalised companies, seven large companies andfunds sought listing on Bursa Malaysia. As at end-2005, thetotal number of listed companies on Bursa Malaysia was1,021 (2004: 963).

Although the total number of IPOs increased in 2005 on anannual basis, total funds raised through the equity marketdropped marginally by 3.1% to RM6.3 billion, compared toRM6.5 billion in 2004. As in past years, the bulk of thesefunds were raised through IPOs which amounted to RM5.3billion, while rights issues amounted to RM1 billion (2004:RM4 billion and RM1.5 billion respectively). Most of the IPOswere oversubscribed, indicating continued strong investorinterest in new listings. 39.5% of the funds raised throughIPOs were by the industrial products sector. The propertyand finance sectors garnered 24.7% and 20.6% of thefunds raised, respectively. Net funds raised in the equitymarket constituted about 24.4% of the total net fundsraised by the private sector in the capital market in 2005(2004: 40.5%).

In line with the continued efforts to enhance productdiversification and innovation in the Malaysian financialsystem, the year 2005 witnessed a further broadening ofthe Malaysian equity market in terms of new products.Following the success of Real Estate Investment Trusts (REITs)in other regional countries and the Government's efforts toaccelerate the development of such investment vehicles, theGuidelines on REITs were released in January 2005. In 2005,three REITs were listed on Bursa Malaysia. With the releaseof the Guidelines on Exchange-traded Funds (ETF) in June,the first ETF, the ABF Malaysian Bond Index Fund, was listedon Bursa Malaysia in July 2005.

In 2005, the introduction of new initiatives and measures forthe equity market were directed at further enhancingmarket efficiency, liquidity and integrity. A summary of themeasures introduced during the year is contained in thewhite box on Key Capital Market Measures in 2005.


205

Financial Markets

Key Capital Market Measures in 2005

Capital market measures introduced in 2005 focused on further strengthening the capital market by enhancingliquidity, efficiency, risk management, integrity, as well as promoting and accelerating the growth of the Islamiccapital market. Key measures introduced in 2005 are summarised, as follows:

Enhancing Liquidity in the Ringgit Bond Market• On 7 January, the Bank introduced several measures to further enhance the efficiency of the domestic bond

market by increasing liquidity in the bond market and improving the price discovery process. The measureswere:i. Repurchase agreements (repo) would be actively used as a monetary instrument to manage

liquidity in the banking system.ii. Through the Institutional Securities Custodian Programme (ISCAP), the Bank would borrow

securities, mainly Malaysian Government Securities (MGS) from major institutional investors, for its repooperations.

iii. Securities lending facility for principal dealers (PDs) was enhanced to facilitate the market-makingactivities.

• On 31 March, the ringgit-denominated bonds issued by Multilateral Development Banks (MDBs)and Multilateral Financial Institutions (MFIs) were included as eligible securities to be transactedunder repo operations with the Bank.

Enhancement of Risk Management Tools in the Bond Market• With the liberalisation of foreign exchange administration regulations announced by the Bank on 1 April,

residents and non-residents were allowed to enter into hedging arrangements with licensedonshore banks for committed inflows and outflows of funds.

• On 7 October, the Bank issued the Guidelines on Regulated Short-Selling of Securities. The regulatedshort-selling framework for MGS in the wholesale market was accorded to PDs, interbank participants anduniversal brokers.

Removal of Restrictions on the Utilisation of Proceeds from Bond Issuance• With effect from 28 March, the National Bond Market Committee’s Negative List was repealed, and

restrictions imposed on the utilisation of proceeds derived from bond issues were removed. Nevertheless,the restrictions imposed by the Exchange Control Guidelines on Private Debt Securities for Lead Arrangersremained.

Infrastructure Development and Better Information System for the Bond Market• On 4 July, the Bank introduced a new version of the Fully Automated System for Issuing/Tendering

(FAST). The new version was developed as a web-based application that is available to both FAST membersand the public. The new version provided better controls as well as greater flexibility in performing primarymarket activities.

• Since 25 July, information on indicative yields to maturity of government securities (conventionaland Islamic) was published daily to provide market participants with information on the market value ofgovernment securities.

• On 5 December, the Securities Commission (SC) allowed a wider group of investors to access theInformation Memoranda and Trust Deeds of ringgit-denominated bond issues database, whichwould assist investors in making informed investment decisions. Previously, the database was only availableto primary subscribers of bonds.

Promoting the Development of Real Estate Investment Trusts (REITs)• On 3 January, the SC released Guidelines on REITs in an effort to accelerate capital market growth and

establish a vibrant and competitive REIT industry in Malaysia. Key features included the relaxation ofrestrictions on REITs for the following transactions:


206

– Borrowings limits;– Acquisition of leasehold properties; and– Acquisitions of real estates that are encumbered by financial charges.

• In order to promote the development of REITs or Property Trust Funds (PTFs), REITs or PTFs approved by theSC were given the following tax treatment:– Chargeable income distributed to unit holders was exempted from income tax; and– The accumulated income that has been taxed and subsequently distributed was eligible for tax credit by

unit holders.

Promote the Growth of the Islamic Capital Market• On 21 November, the SC issued Guidelines for Islamic REITs to further facilitate the development of a

new Islamic capital market product and thus, made Malaysia the first jurisdiction in the global Islamicfinancial sector to issue such guidelines. These guidelines were expected to serve as a global benchmark forthe development of Islamic REITs.

• A new profit-based Government Investment Issues (GII) was introduced as an additional instrument tothe existing discounted-based GII. The profit-based GII would be issued at par via the Islamic concept of BaiBithamin Ajil and would be characterised by the element of profit, payable every half-yearly until itsmaturity. This instrument was poised to be the new benchmark for the issuance of long-term Islamic bondsand consequently, promote market liquidity.

Enhancing Liquidity in Exchange-traded Products• On 28 June, the SC released guidelines to facilitate the introduction of Exchange Traded Funds (ETF),

which are open-ended investment funds that track specific indices, in an effort to create greater liquiditywithin the equity market.

• On 28 October, the SC issued enhanced Guidelines to facilitate issuance of structured warrantsaimed at developing the equity derivatives market, building greater market liquidity and safeguardingmarket integrity. In addition, the SC also allowed the introduction of Bull Equity Linked Structures (BullELS), an investment-yielding instrument linked to designated shares, which provides investors with returnsdepending on the closing price of the underlying shares on maturity.

Promoting Quality of MESDAQ Companies• To promote the quality and investibility of MESDAQ companies, new MESDAQ Market guidelines on

entry requirements were released on 29 November. These guidelines focused on ensuring companiesseeking listing are of high quality companies, encouraging efficient and effective price-discovery process,enhancing the method of securities distribution and improving corporate governance.

Liberalisation of Central Depository System (CDS) Accounts Requirements• Effective 21 October, the SC announced the liberalisation of CDS accounts requirements to allow a

wider group of individuals to hold securities on behalf of others.

Providing Greater Flexibilities for Merged Stockbrokers• Stockbroking companies which completed 1+1 mergers were permitted to undertake additional

activities of business, as follows:– Allowed to undertake a full range of corporate advisory services, subject to certain criteria, such as

shareholders’ funds of at least RM100 million;– Permitted to operate futures broking activities within the stockbroking entity; and– Allowed to do unrestricted branching from 2006 onwards.

Enhancing Investor Protection• On 15 March, the SC introduced compliance guidelines for fund managers to further strengthen the level

of investor protection, which required fund managers to adhere to best practices for the following operations:


207

Financial Markets

– Trading and portfolio management;– Meeting ‘know your clients’ obligations;– Proper execution of the roles and responsibilities of the Board of Directors and Compliance Officers;– Safeguarding of clients’ assets; and– Compliance with the Anti-Money Laundering Act 2001.

Further Liberalisation in the Capital Market• On 15 September, the SC introduced several measures to facilitate the diversification of investments by

domestic investors and further enhance the efficiency of the Malaysian capital market. These measuresinclude:i. The framework on investments in foreign securities was revised to allow investors to invest in

foreign securities listed on recognised foreign exchanges;ii. Regulations on secondary market trading of non-ringgit bonds were liberalised to allow ‘sophisticated

investors’ (i.e. commercial banks, merchant banks, Islamic banks, universal brokers or consolidatedbrokers) to execute secondary trades of non-ringgit bonds without seeking approval from theSC;

iii. The framework for primary offerings of non-ringgit bonds were revised to give flexibility for theissuance of foreign currency-denominated bonds to ‘sophisticated investors’; and

iv. The offering of foreign shares in Malaysia was permitted subject to the SC’s approval.The above measures complemented the liberalisation of foreign exchange administration rules by the Bankon 1 April.

Improving Efficiency through Electronic Means• On 17 February, the SC launched the Electronic Licensing Application System (ELA) to facilitate online

submission and retrieval of information between SC and market participants. This effort was followed bythe rollout of the Continuing Professional Education (CPE) Tracker System on 25 February.

• On 28 April, the SC released guidelines of electronic contract note in an effort to provide value-addedservices to investors.

Facilitating Corporate Sector Development• To further facilitate faster execution of corporate proposals that require SC’s approval (such as share

buybacks, mergers and executions, etc.), prospectuses received by the SC will be reviewed on a post-vetting basis beginning 3 October. Hence, companies would be able to issue a prospectus within twoweeks upon lodgement with the SC. In addition, to reduce the time to market, companies involved intakeovers would be required to issue offer documents containing detailed conditions within 21 days fromthe date of takeover notice, compared to 35 days previously.

• To encourage public listed companies to expand and compete globally, exemptions were given forstamp duty and real property gains tax on merger and acquisitions (M&As) undertaken bycompanies listed on Bursa Malaysia. This exemption was given to M&As approved by the SC from 1October 2005 to 31 December 2007. Such M&As must be completed not later than 31 December 2008.

Providing a Facilitative Framework for Approval of Negotiable Instruments of Deposit• The SC issued Practice Note 3 to the Private Debt Securities (PDS) Guidelines and Practice Note 3 to the

Islamic Securities (IS) Guidelines on 6 April and 12 December respectively, to provide a more facilitativeframework for the approval of negotiable instruments of deposit (NIDs) and Islamic NIDs withtenures of more than five years. The PDS Guidelines and IS Guidelines would no longer govern the approvalprocess for NIDs and Islamic NIDs issuances by licensed institutions or Islamic banks. The new frameworkwould facilitate a faster approval process.


208

Bond MarketThe bond market continued to be an importantsource of funds, mobilising total net funds of RM35.4billion for the year 2005 (2004: RM36.2 billion). As aresult, the size of the ringgit bond market registereda 9.5% growth, with the total bonds outstandingreaching RM397.6 billion (80.4% of GDP) as at end-2005. Of significance, the net private debt securities(PDS) issuance of RM19.6 billion in 2005 was thehighest since 2000, and thus contributed to a largershare of 55.3% of total net funds raised (2004:26.3%).

The fiscal consolidation by the Federal Governmentresulted in a lower net funds raised, totalling RM13.5billion (2004: RM26.4 billion). The FederalGovernment issued and reopened a total of 13Malaysian Government Securities (MGS) and twoGovernment Investment Issues (GIIs). The auctioning

of the Government securities were carefully plannedto ensure a smooth functioning of the market as wellas to minimise the financing costs to theGovernment. During the year, the Government madean inaugural issuance of a 20-year MGS, continuingits efforts to lengthen the benchmark yield curve.Similarly, the maturity for GII was also lengthenedfrom 7-year to 10-year for building the Islamicbenchmark yield curve, a critical component for thedevelopment of the Islamic bond market. In addition,the Government introduced a new profit-based GII,based on the bai’ bithaman ajil concept, as anadditional instrument to the existing discounted-based GII. The new GIIs are poised to be the newbenchmark for the issuance of long-term Islamicbonds and consequently, will promote marketliquidity for Islamic papers. Meanwhile, the Bankcontinued to issue Merdeka Savings Bond (MSB) on aquarterly basis, providing additional investmentinstruments for senior citizens, retired MalaysianArmed Forces personnel and Malaysian citizens whohave retired on medical grounds. Inclusive of theissuance of Khazanah bonds, the public sector raisednet funds of RM15.8 billion (2004: RM 26.7 billion).

Fund raising activity by theprivate sector in the bondmarket increased, encouragedby prevailing low yields.

Table 9.5Funds Raised in the Bond Market

2004 2005p

RM million

By Public SectorGovernment Securities (gross) 43,173 28,276

Less Redemptions 18,200 15,800

Equals Net Federal Receipts 24,973 12,476

Government Investment Issues (net) 1,423 1,000Khazanah Bonds (net) -1,198 833Malaysia Savings Bond (net) 1,474 1,516

Net Funds Raised 26,671 15,825

By Private SectorPrivate Debt Securities (gross) 36,340 38,196

Straight Bonds 4,313 3,869Bonds with Warrants 60 0Convertible Bonds 4,301 3,745Islamic Bonds 9,104 9,537Asset Backed Securities 2,958 6,210Medium Term Notes 7,315 12,296Cagamas Bonds 8,290 2,540

Less Redemptions 26,814 18,617Private Debt Securities 19,648 13,432Cagamas Bonds 7,166 5,185

Net Funds Raised 9,526 19,579

Net Funds Raised in the Bond Market 36,197 35,404

Private Debt Securities, (excludingCagamas) gross 28,050 35,656

Net Funds Raised in the Bond Market,excluding Cagamas 8,402 22,224

Net Issues Short Term Securities,Commercial Papers1 -3,208 1,579

Total 32,990 36,9821 Refers to Cagamas Notes and Commercial Papers.p Preliminary

% of GDP

Public sector

Private sector

Public sector over GDP

Private sector over GDP

Ringgit Bonds over GDP

Graph 9.14 Total Bonds Outstanding

RM billion

149125117 191

179

153161

188207

3935

35 3839

4248 42 45 42

0

50100150200

250300350

400450

2001 2002 2003 2004 200520

30

40

50

60

70

80

9083 8177

83 80

175

In the private sector, corporations stepped up issuancesof PDS to capitalise on the flattening and declining yieldcurves at the longer-end in an environment of ample


209

Financial Markets

liquidity and strong demand for long-term securities byinvestors. The strengthening of the private sector-ledeconomic growth contributed to the expansion of thePDS market. As at end-2005, the PDS market accountedfor 24% of total debt financing to the private sector,complementing the banking system in providingcorporations with opportunity to structure their balancesheet in line with their business requirements.

Issuances of PDS were made by 95 corporations. In total,these companies raised gross funds of RM35.7 billion(2004: RM28 billion), while Cagamas Berhad raised thebalance of RM2.5 billion (2004: RM8.3 billion).Consistent with the trend in 2004, the issuances of PDSwere mainly to finance new business activity, whichaccounted for 49.5% of total issuances, followed byrefinancing of existing debt. Meanwhile, bonds issued byCagamas Berhad were reduced significantly due to theample liquidity in the banking system. After netting outredemptions during the year, net funds raised by theprivate sector amounted to RM19.6 billion, the highest

amount recorded since 2000. Excluding Cagamas bonds,net PDS issuance totalled RM22.2 billion, the highestamount ever recorded by the PDS market.

Corporations in the finance, real estate and business servicessector were the main issuers, followed by companies in theutilities and construction sectors, accounting for 36.8%,19.6% and 17.8% of the total PDS issued respectively. Thehigher issuance in the finance and business services sectorpartly reflected the new issuance of asset-backed (ABS)securities originated by financial institutions and residentialmortgage-backed securities issued by Cagamas MBSBerhad. In the utility and construction sectors, major issuerswere the companies involved in the water projects andindependent power producers, which continued to tap thecapital market to finance their long-term financing needs.

During the year, the maturity profile of the PDS marketlengthened further with the issuance of bonds with a 33-year tenure, by a company involved in infrastructureprojects. The tenure of the PDS issuances in 2005 alsoshifted above 10 years, reflecting the issuers’ decision tolock-in the prevailing low yields and hedge possible futureinterest rates rise. The issuers were mainly companiesinvolved in power production and infrastructure projects,which have long gestation periods and would thereforebenefit from long-term financing that matches theirprojected cashflow. The percentage of short to medium-term securities with tenure between one to five yearsdeclined to 34.5%, compared to 45.6% in 2004.Meanwhile, Cagamas MBS extended its Islamic ResidentialMortgage Backed Securities (RMBS) to 20 years, therebylengthening the benchmark curve for the ABS asset classand allowing market participants to price bonds withequivalent tenures.

In terms of the types of instruments, Islamic securities(including Islamic Medium Term Notes) remained the most

2004 2005

1 Excluding Cagamas

Graph 9.15 Utilisation of Bond Proceeds1

26.5

11.3

7.0

8.8

46.5

28.2

5.8

2.8

13.7

49.5

0

% of total

10 20 30 40 50 60

Refinancing

Restructuring

Mergersand acquisitions

Others

New activities

Table 9.6New Issues of Private Debt Securities by Sector1

Sector2004 2005p

RM million % share RM million % share

Agriculture, forestry and fishing 0.0 0.0 892.8 2.5Mining and quarrying 0.0 0.0 630.0 1.8Manufacturing 3,264.5 11.6 2,796.3 7.8Construction 8,844.9 31.5 6,356.1 17.8Electricity, gas and water supply 7,840.2 28.0 6,976.2 19.6Transport, storage and communication 796.0 2.8 2,623.3 7.4Financing, insurance, real estate and business services 4,767.8 17.0 13,122.7 36.8Government and others 1,315.4 4.7 1,126.7 3.2Wholesale and retail trade, restaurants and hotels 1,221.1 4.4 1,132.0 3.2

Total 28,049.9 100.0 35,656.1 100.0

1 Excluding Cagamas.

p Preliminary


210

favoured form of debt securities financing, and accountedfor slightly more than half of total PDS issued. Theimplementation of tax incentives for Islamic products as wellas measures taken since 2004 to develop a more innovativeand sophisticated Islamic capital market resulted in higherissuance of Islamic products during the year. Anencouraging development was the issuance of Islamic debtsecurities backed by future property tax assessmentcollections by a local authority. The bond was issued basedon the mudharabah (profit-sharing) concept, which was notwidely used previously. The issuance promoted the scopeand depth of the Islamic bond market. Meanwhile,Cagamas MBS Berhad issued the inaugural issuance ofIslamic RMBS during the year.

In an environment of continued excess liquidity in thefinancial system, bonds issued by Cagamas Berhad declined,with 12 issuances of debt securities (including two re-opening exercise) amounting to RM2.5 billion (2004: 18issues totaling to RM9.3 billion). Out of these 12 issues,seven were issued in the form of fixed rate bonds while theremaining as Islamic securities. The Cagamas Islamicsecurities, which were previously known as SanadatCagamas, are now renamed as Cagamas BAIS (bai’bithaman ajil Islamic Securities).

In the securitisation market, Cagamas MBS Berhad issuedtwo issues of RMBS backed by the Government’s staffhousing loans in August and December. The first issueinvolved RM2.05 billion of Islamic RMBS based onmusyarakah principle while the second issue involved

Graph 9.16 PDS Issues by Tenure (excluding Cagamas)

2005

15.1 - 20 yrs2.4%

20.1 yrs andabove2.2%

2004

10.1 - 15 yrs8.5%

20.1 yrs andabove3.0%

5.1 - 10 yrs42.9%

1 - 5 yrs45.6%

1 - 5 yrs34.5%

5.1 - 10 yrs35.9%

10.1 - 15 yrs25.1%

Graph 9.17 PDS Issues by Type of Instrument (excluding Cagamas)

ConventionalMTN9.2%

Asset BackedBond

17.4%

IslamicMTN

23.0%

ABS MTN 2.3%

Straight Bonds10.8%

ConvertibleBonds10.5%

Islamic Bonds26.7%

[Conventional: 0.7%] [Islamic: 1.6%]

[Conventional: 10%] [Islamic: 7.4%]

Graph 9.18ABS Outstanding: Types of Underlying Assets (As at end-December 2005)

Private debtsecurities

3.8%

Hire purchasereceivables

7.6%

Credit card/chargecard

0.2%

Other receivables

19.1% Loans24.0%

Property and mortgagereceivables45.3%


211

Financial Markets

RM2.06 billion of conventional RMBS. The Islamicmusyarakah principle bond was the world’s first ratedIslamic RMBS. In addition, six new ABS (including ABSMTN) were issued during the year backed by underlyingassets such as hire-purchase receivables, land and otherreceivables. In total, the new issues of ABS securitiesamounted to RM7 billion and accounted for 19.6% oftotal gross PDS issued in 2005.

Rating activity during the year remained robust with 156new long-term PDS issues valued at RM42.3 billionbeing rated by both the Rating Agency Malaysia (RAM)and Malaysian Rating Corporation Berhad (MARC). Thelong-term issues accounted for 79% of the total grossvalue rated. In terms of rating classes, most of the PDSwere classified in the AAA, AA and A categories.Throughout the year, 330 rating reviews on existinglong-term debt securities were conducted by bothagencies, where 276 issues were reaffirmed, 31upgraded and 23 downgraded. In comparison with theprevious year, the proportion of upgrades increasedfrom 7.2% to 9.5% of total reviews, while thepercentage of downgrades was also higher at 7% oftotal reviews, against 3% in the previous year.

The ringgit bond yield curves flattened significantlyduring the first three quarters of the year, reflecting asimilar phenomenon of flattening yield curvesexperienced globally. During this period, while theshort-end of the MGS yield curve held relatively firm,the 10-year MGS yield declined by 78 basis points,driven by the ample liquidity situation coupled with ahigh demand for bonds amidst lower MGS issuances.The declining yields were also a result of the increasing

amount of foreign capital flows into ringgit assets asinvestors sought higher returns. Conditions in thesecondary market were also influenced by concerns overthe impact of rising oil prices on the inflation andeconomic outlook. The yield curves remained stableafter the removal of the ringgit peg in July, as demandfor long-term bond continued to be high and themarket proved resilient to capital outflows.

By early September, the short-end of the yield curverose, indicating that the market had begun to price-inthe prospects of possible higher interest rates, followingsigns of improved economic activity and higher inflationrate. Nevertheless, investors took a cautious stance intrading, after taking into account the possible changesin domestic interest rates, as well as the magnitude ofthe MGS issuances for the quarter. The MGS yieldsfirmed up across the different tenures by the end of theyear, following the 30 basis points rise in the overnightpolicy rate on 30 November. For the year as a whole,the short-end 1-year MGS yields rose by 106 basispoints, while the 10-year MGS yields declined by 50basis points. These developments resulted in theflattening of the yield curve during the year.Meanwhile, spreads on corporate bonds remainedstable, which suggested that there was little change inmarket participants’ perception of corporate credit risks.

Trading in the ringgit bond market averaged RM1.4billion daily, and amounted to RM355.7 billion for theyear (2004: RM355.9 billion), with trading of MGSaccounting for 50.4% of total trade. Trading activity incorporate bonds increased to 26.6% of total(2004:18.1%) as investors searched for higher yields fromthe PDS market. Trading activity in Cagamas papers fellsignificantly following the lower issuance of Cagamaspapers during the year. Liquidity, as measured by the ratioof trading volume to total outstanding bonds, was

Graph 9.19 Rating Distributions of Outstanding PDS (As at end-December 2005)

%

% of total value

% of total issues

Source: RAM and MARC

0

5101520

2530354045

AAA AA A BBB BB B C D

1 2 3 4 5 6 7 8 9 10

Graph 9.20 MGS Benchmark Yields

%

Years to Maturity

Dec-05Mar-05 Jun-05 Sep-05

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Dec-05 3-yr: 3.518 5-yr: 3.725 10-yr: 4.238

June-05 3-yr: 3.168 5-yr: 3.403 10-yr: 4.250


212

highest for GII and Khazanah bonds, at 4.28 times and1.84 times, respectively. Liquidity for corporate bonds,however, was the lowest at 0.5 times the outstandingamount.

The introduction of ISCAP (Institutional SecuritiesCustodian Programme), which involved the active use ofrepo in monetary operations, combined with the MGSlending facility provided by the Bank to the principaldealers since the beginning of the year, helpedimproved the performance of the repo marketsignificantly. Repo transactions increased by 88.2% toRM347.8 billion (2004: RM184.8 billion), with 76% ofthe total focused in the MGS market.

On the international front, credit spreads on Malaysia’ssovereign bonds narrowed in the first three quarters,following higher demand for Asian dollar credits aseconomic fundamentals improved and investors seeking

Graph 9.21 Turnover of Selected Debt Securities (Jan-Dec 2005)

Total: RM355.7 billion

Khazanah bonds 5.7%

Government Investment Issues

12.1%

Listed PDS 0.1%

Cagamas bonds 5.1%

Other unlisted PDS 24.2%

ABS 2.3%

Malaysian Government Securities

50.4%

better returns. The credit spreads widened in the fourthquarter partly due to the increase in interest rates inmajor markets, as well as concerns over higherinflationary pressure following the high oil prices.

As part of the initiatives to broaden and deepen thedomestic and regional bond markets in East Asia Pacificregion, the EMEAP group launched the first regionalbond fund or Asian Bond Fund 1 (ABF1) in June 2003.Following from the success of the US dollar ABF1, theEMEAP Central Banks launched the Asian Bond Fund 2(ABF2) in December 2005, which is mandated to investin bonds denominated in local currencies of selectedmember countries namely PR China, Hong Kong China,Indonesia, Korea, Malaysia, Philippines, Singapore andThailand. The ABF2 was launched with the objective ofpromoting the domestic currency bond market andintroducing bonds of multi currencies in a basket as anew asset class for investors. The launching of theABF2 also led to the inaugural listing of the ABFMalaysian country sub-fund or ABF Malaysian BondIndex Fund on Bursa Malaysia, which comprisedinvestments in ringgit denominated Government andquasi Government securities. The listing of the ABFMalaysian Bond Index Fund (the first Exchange TradedFund in Malaysia) would add more diversity to thelistings on Bursa Malaysia and eventually greaterliquidity in the domestic bond market.

Several measures were introduced in 2005 to furtherstrengthen the bond market. The detailed bondmarket measures are explained in the box “KeyCapital Market Measures in 2005”.

Exchange-traded Derivatives MarketThe exchange-traded derivatives market in Malaysiaremained active during the year although tradingvolume declined. Turnover on Bursa Malaysia Derivativesdropped by 6.6% (2004: +32%). While the annualtrading volume decreased slightly to 2.5 million

Table 9.7Sovereign Over US Treasury Benchmark

Benchmark Dec-04 Mar-05 Jun-05 Sep-05 Dec-05

MALAYSIA 09 5-yr UST 47 65 58 45 55

MALAYSIA 11 5-yr UST 92 88 68 54 60

CHINA 11 5-yr UST 85 66 75 52 61

INDONESIA 06 2-yr UST 65 108 49 75 52

KOREA 08 2-yr UST 56 68 44 10 3

PHILIPPINES 10 5-yr UST 377 253 236 119 97

THAILAND 07 2-yr UST 54 64 64 40 65

PETRONAS 06 2-yr UST 49 45 44 37 39

Source: Bloomberg.


213

Financial Markets

Table 9.8Performance of Bursa Malaysia Derivatives Products

Share of total Turnover

volume in

2004 2005Bursa Malaysia

ProductsDerivatives (%)

Number ofAnnual Average

Number ofAnnual Average

lotschange daily

lotschange daily 2004 2005

(%) volume (%) volume

CPO Futures 1,378,334 -3.6 5,603 1,158,510 -15.9 4,709 52.3 47.1Open interest position

(as at end-year) 28,314 28,918

Palm Kernel Oil Futures 449 n.a. 2 - -100 - 0.02 -

KLCI Futures 1,088,419 228.6 4,424 1,111,575 2.1 4,519 41.3 45.2Open interest position

(as at end-year) 10,092 17,814

KLCI Options - - - - - - - -

3-month KLIBOR Futures 141,969 18.6 577 162,592 14.5 661 5.4 6.6Open interest position

(as at end-year) 27,418 37,966

3-year MGS Futures 4,327 454 18 9,753 125.4 40 0.2 0.4

5-year MGS Futures 19,494 -83.6 79 17,215 -11.7 70 0.7 0.7Open interest position

(as at end-year) - 150

10-year MGS Futures - -100 - 100 100 0.4 - -

n.a. Not available

Source: Bursa Malaysia Derivatives Berhad

contracts (2004: 2.6 million), trading performanceremained high for the third consecutive year since 2003.In terms of average daily volume, the financial futurescontracts, especially the KLCI Futures and the 3-monthKLIBOR Futures, continued to improve compared to theyear before. Though relatively small, the modest growthrecorded during the year in the financial futures marketwas largely due to increased interests by financial

institutions in taking hedging positions againstanticipated interest rate hikes.

The Crude Palm Oil (CPO) Futures market continued tobe the most active on the Bursa Malaysia Derivativesmarket in 2005, accounting for 47% of the totalvolume transacted during the year. However, the totalcontracts cleared during the year declined by 15.9% to1.16 million contracts (2004: 1.38 million contracts),representing a notional value of 28.96 million tonnes ofcrude palm oil. The decline was attributed to asignificantly reduced price range of RM252 (2004:RM621) for the benchmark 3-month CPO contract,implying a reduction in volatility in the market.Meanwhile, no contracts were traded at the Crude PalmKernel Oil (CPKO) Futures market during the year.

The 3-month CPO Futures commenced the year tradingat RM1,378 per tonne, and initially declined to thelowest daily traded price of RM1,252 per tonne on 2February. The decline in prices was caused by thebumper CPO output recorded in January. However,prices soon recovered to register the highest dailytraded price of RM1,504 per tonne on 16 March.Thereafter, prices consolidated to a tight range ofbetween RM1,380 and RM1,430 per tonne for the restof the year. The upward momentum in prices was

40,000

50,000

60,000

70,000

80,000

-

100,000

200,000

300,000

400,000

500,000

600,000

Graph 9.22 Bursa Malaysia Derivatives : Total Monthly Volume And Month-end Open Interest

Contracts Contracts

Source: Bursa Malaysia Derivatives

Volume (LHS)

Open Interest (RHS)

Jan-

04Fe

b-04

Mar

-04

Apr

-04

May

-04

Jun-

04Ju

l-04

Aug

-04

Sep-

04O

ct-0

4N

ov-0

4D

ec-0

4Ja

n-05

Feb-

05M

ar-0

5A

pr-0

5M

ay-0

5Ju

n-05

Jul-0

5A

ug-0

5Se

p-05

Oct

-05

Nov

-05

Dec

-05


214

limited by the overall strong increase in CPO production,and rising stocks in Malaysia, coupled with higherharvests of palm oil’s closest competitor, soybean, in theUS, Brazil and Argentina. On the other hand, robustexport volume, as well as market participants’favourable expectations on future demand for palm oil-based bio-diesel, established a floor on CPO prices thatcontributed to the reduced volatility in the prices of theCPO futures market during the year. The 3-month CPO

(100)

200

500

800

1,100

1,400

1,700

2,000

0

20

40

60

80

100

120

Graph 9.23 Crude Palm Oil Futures

Lots ('000) Price (RM/tonne)


Lots

Open interest

3rd month average futures prices (RHS)

20052004

Source: Bursa Malaysia Derivatives

futures ended the year at RM1,397 per tonne, whichwas 1.4% higher than the price at the start of the year.

The KLCI Futures market in 2005 recorded a smallincrease of 2.1% (2004: 229%) in trading activity, withaverage daily volume still higher than in the previousyear. The derivatives liquidity ratio, which represents theratio between the turnover value of futures against theturnover value of underlying KLCI component stocks,increased to 48.9% in 2005 (2004: 46.9%). In tandemwith the lacklustre performance of the KLCI, the growthof KLCI Futures’ volume was impinged by poorer thanexpected market sentiments, following concernsregarding the implications of high oil prices.

Activity in the financial futures market continued toshow overwhelming interest. The improvement inmarket sentiments was mainly influenced by changingexpectations on economic growth and expectationsabout domestic interest rates. Participants of thefinancial futures market were predominantly domesticinstitutions, which accounted for more than 95% oftotal trading activity. The 3-month KLIBOR Futurescontinued to record a positive growth of 14.5% (2004:18.6%). Total turnover of MGS futures increased by13.6% (2004: -80.1%). The 3-year MGS futurescontributed significantly to the higher performance andregistered an impressive growth of 125.4%, dueprimarily to the concentration of the underlying marketactivity in the shorter tenures.


The Payment andSettlement Systems

Management of the Payment SystemReducing Risks in the Payment SystemManaging Payment System Stability and ConfidenceEnhancing Competition and Increasing Payment EfficiencyMigration to Electronic PaymentsMoving FowardPerformance of the Payment Systems

216-217217

217-218218-220220-221221-223223-227

216

The Payment and Settlement Systems

MANAGEMENT OF THE PAYMENT SYSTEM

In promoting an efficient, reliable and secure paymentsystem that will contribute to financial stability and theeffective functioning of financial markets, the keypolicy thrust during 2005 remained on enhancingsafety and reducing risks in the payment system as wellas enhancing the use of electronic payments. In thisregard, the Bank continued its efforts in thedevelopment and improvement of the country’s majorpayment system infrastructure, ensuring theirrobustness and the effective mitigation of systemicrisks in the payment system.

The key policy thrust during2005 remained on enhancingsafety and reducing risks inthe payment system as well asenhancing the use ofelectronic payments.

During the year, live runs were conducted with thebanking industry to ensure the robustness of thepayment systems operated by the Bank, as well as itsbusiness continuity plans. In pre-empting systemic riskin interbank foreign exchange settlements, the Bankhad also commenced work to build a ‘payment versuspayment’ mechanism.

In the area of retail payment systems and instruments,the Bank’s focus has been to ensure sustained publicconfidence in their use to facilitate the effectivefunctioning of commerce. The Bank continuedtherefore to play its role as a catalyst in thedevelopment of the retail payment infrastructure andfacilitating industry wide collaborative efforts tostrengthen payment security standards. The Bankfacilitated the full migration of the country’s credit cardinfrastructure to Europay-MasterCard-Visa (EMV) chipstandard with the completion of the conversion toEMV-compliant terminals during the year.Consequently, Malaysia becomes the first country inthe Asia Pacific region to fully migrate to the chipenvironment, boosting the confidence of consumers,tourists and merchants in the use of payment cards inthe country.

In ensuring the safety and confidence in Internetbanking transactions provided by the banking

institutions, additional security measures are beingimplemented to combat online fraud, includingidentity theft. To pre-empt the threat of moneylaundering and terrorism financing activities conductedvia the payment system, measures to promote the useof formal remittance channels will be introduced todeter the use of informal payment systems. As such,qualified non-banking institutions would be allowed tooffer remittance services while banking institutionsmay appoint collecting agents to facilitate theirremittance transactions.

The second focus area was on enhancing competitionand improving payment efficiency. Consistent with theFinancial Sector Masterplan to increase competitionand efficiency in the payment system, the policies thatonly allow banks to offer retail payment services wereliberalised. The payment landscape continues to evolvewith the banking and non-banking institutionsintroducing new payment services that leverages onmodern technology such as the Internet, smart cardsand mobile phones. While these developmentspromote competition and efficiency, they alsointroduce new risks in the payment system. This posesnew challenges to the Bank in the oversight of thepayments systems to ensure that the prudentialguidelines will effectively address the risks and at thesame time, promote innovation while not inhibitingmarket potential.

The third focus area in 2005 was on promoting themigration to cost efficient electronic payments. Withthe migration of the automated teller machine (ATM)card to the chip infrastructure, multi-applications suchas the debit and electronic purse applications havebeen incorporated into the ATM card to facilitatepoint-of-sale transactions at merchant outlets. Debitcard transactions has increased at the rate of 24.6%per annum in the recent three years. Its totaltransaction value of RM240.1 million however, remainsinsignificant compared with credit card spending ofRM40.9 billion in 2005. Nevertheless, there issignificant growth for the debit card, particularly withthe increase in the number of terminals and merchantsthat accept the interbank e-Debit transactions and alsoadditional financial institutions participating asacquirers. Significant growth was also seen in the useof Interbank GIRO (IBG) system and Internet bankingservices. The IBG system recorded a high growth rateof 162.2% per annum while Internet bankingtransactions increased at a rate of 80.8% per annumover the past three years. Whilst there have been

C10_Payment System pg216-228 3/14/06, 9:18 PM216

217

Payment and Settlement Systems

promising growth in electronic payments, the paymentsystem in Malaysia remains predominantly paper-basedwith cheque payments still accounting for 95.1% ofthe total value of non-cash payments in 2005.

In managing the transition to a more electronic-basedpayment system, the Bank continues to work with thebanking institutions and the major retail payment systemoperator, Malaysian Electronic Payment System (1997)Sdn. Bhd. (MEPS), in developing and improving thecountry’s payment system infrastructure to provide moreefficient and timely payment services. The IBG ReviewTeam, established by the Bank, has identified a numberof focus and improvement areas where MEPS as thesystem operator, and the banks must address to makethe system more efficient. This will enable the banks todeliver a higher quality service level to their customers,with tangible benefits in terms of cost reductions andenhanced revenue and profitability. During the year, theBank has also taken several measures to facilitate theadoption of electronic payments in the Governmentsector, resolution of an industry issue on credit cardsacceptance at petrol stations and organised the country’sfirst payment system forum and exhibition. These effortswere made to promote a more widespread use ofelectronic payments to improve payment efficiency andto be able to take advantage of economies of scale.

As significant investments have been made inestablishing and enhancing the electronic deliverychannels and payment systems in the recent years, thefocus is now on increasing accessibility, improvingservice levels and promoting its active use to reapeconomies of scale benefits and realise the efficiencygains. Malaysia is still a high user of cheques and cash,and therefore the potential cost savings in moving toelectronic technology for making payments issubstantial.

REDUCING RISKS IN THE PAYMENT SYSTEM

The promotion of a secure and effective paymentsystem is recognised as one of the main pillars of theBank, alongside the maintenance of financial andmonetary stability. In this regard, the Bank has animportant responsibility in minimising systemic risks inthe payment system, particularly for the large valueinterbank payments where the impact of a failedpayment transaction can spill over to other bankinginstitutions, leading to a systemic crisis. As part of acontinuing effort in promoting effective, safe andefficient payment systems, the Bank is implementing a"payment versus payment" (PvP) infrastructure forsettling interbank foreign exchange transactions.

Foreign Exchange Settlement RiskThe PvP mechanism will be established jointly with the HongKong Monetary Authority, to facilitate simultaneoussettlement of interbank US dollar and ringgit foreignexchange transactions during the Malaysian business hours.Under this mechanism, the ringgit part of the transactionwould be settled through the RENTAS while the US dollarpart would be settled simultaneously through the USDCHATS system in Hong Kong China. The PvP mechanismwould enable financial institutions to reduce the settlementrisks associated with foreign exchange transactions.

MANAGING PAYMENT SYSTEM STABILITY ANDCONFIDENCE

During 2005, the Bank as the operator of the RENTASand SPICK systems, continued to ensure that its DisasterRecovery Planning (DRP) arrangements with its

The Bank has an importantresponsibility in minimisingsystemic risks in the paymentsystem, particularly for thelarge value interbankpayments.

Measures were taken to ensurethe continued reliability of themajor payment systems and tosustain public confidence andtrust in the paymentinstruments.member institutions are operational and effectivethrough regular live runs. In its oversight role, theBank supervises and monitors major paymentoperators and designated payment instrumentissuers to ensure that they continue to operate in asound manner. The off-site monitoring is alsocomplemented with on-site examinations to identifygaps that need to be addressed to ensuresustainability of operations. The Bank had alsocontinued its role as a facilitator in coordinatingindustry efforts to enhance the retail paymentinfrastructure and also address common securitythreats on an industry-wide basis. These measureswere taken to ensure the continued reliability of themajor payment systems and to sustain publicconfidence and trust in the payment instruments.


218

Disaster Recovery PlanningThe Bank manages the risks of the RENTAS system,benchmarked against the Bank for InternationalSettlements’ internationally accepted Core Principlesfor Systemically Important Payment Systems, whichprovides the minimum standards which covers thelegal, financial and operational risks as well asefficiency, access criteria and governance. In thisregard, the Bank has continuously enhanced itsoperations and practices to meet the standards, one ofwhich is ensuring business continuity. In ensuringpayment system stability and uninterrupted availabilityof the payment systems, the Bank operates throughcontingency procedures at its disaster recovery centre(DRC). Scheduled monthly live runs are conductedfrom the DRC for both the RENTAS and SPICK systems.The Bank also monitors the contingency systems of itsmember institutions and encourages them to reviewand strengthen their arrangements to ensure that theirrespective off-site DRC for critical systems are readilyavailable and operational. Member institutions arerequired to conduct quarterly testing of their respectiveDRCs. In addition, an industry-wide live run betweenthe member institutions’ DRCs and the Bank’s DRCwas successfully conducted in June 2005.

Incident Response Plan and Internet BankingSecurity RequirementThe establishment of the Internet Banking Task Force(IBTF) by the Bank in October 2004 has led to thesuccessful formulation of an Incident Response Plan (IRP)and the revision of the ‘Minimum Guidelines on theProvision of Internet Banking Services by LicensedBanking Institutions’. The members of IBTF are from theBank, 15 banking institutions, the MalaysianCommunications and Multimedia Commission, theNational ICT Security and Emergency Response Centre,Polis Diraja Malaysia and TMNet Sdn. Bhd. Theestablishment of IBTF was in response to the need to pre-empt the threat of Internet banking fraud, particularly onunauthorised fund transfers perpetrated via phishingscams. The IRP which was implemented on 1 September2005, provides a structured and effective process flow forthe banking institutions and relevant authorities torespond to a critical incident promptly. It also facilitatesthe sharing of information on Internet banking fraudrelated incidences.

Recognising the significance of preserving consumerconfidence in using Internet banking services, which isone of the critical factors in encouraging the use ofelectronic channels and payments, the Bank will issue arevised ‘Minimum Guidelines on the Provision ofInternet Banking Services by Licensed Banking

Institutions’ in 2006. The main feature of the revision isto introduce new authentication requirements, togetherwith greater consumer education and protectionmeasures. This includes the requirement for a two-factor authentication for risky transactions and puttingin place an identity theft detection mechanism.

Completion of the Chip Migration EffortThe migration exercise for the ATM and credit cardinfrastructure led by the Bank together with the bankingindustry was completed in July 2004 and December2005, respectively. In implementing a nation-widemigration exercise, cooperation of the relevantstakeholders and industry incentive mechanisms havebeen important in ensuring a coordinated and timelycompletion of the exercise.

In the EMV chip migration exercise for credit cards, thebanking industry implemented a domestic liability shiftpolicy on 1 January 2005 and disabled the acceptance ofdomestic magnetic stripe transactions on 3 May 2005. Inthe liability shift policy, an institution that is not EMV chipcompliant would bear the liability of any fraudulenttransaction. Following rising credit card fraud incidences atunattended ‘self-service petrol pumps’, the disablement ofthe acceptance of magnetic stripe transactions wasimplemented on 31 December 2004. To avoid fraudattempts using magnetic stripe cards, the bankinginstitutions ceased to accept ‘fallback’ transactions (usingthe magnetic stripe data during instances when a chip isdefective) for domestic credit card transactions with effectfrom 31 December 2005. These measures have effectivelyreduced counterfeit card fraud using information obtainedfrom magnetic stripe credit cards.

To complement the chip migration exercise and promotea safer credit card environment, credit card institutionswere also required to ensure that credit cardinformation transmitted over telecommunication linesare encrypted to prevent information theft via ‘wire-tapping’. As at end-2005, almost all acquiring financialinstitutions have implemented the line encryptionrequirement.

ENHANCING COMPETITION AND INCREASINGPAYMENT EFFICIENCY

The Bank continues to collaborate with the bankingindustry to improve the operational efficiency,functionalities and service standards in the retail andwholesale payment and settlement systems.Infrastructure enhancements in the RENTAS and SPICKsystems continued to focus on improving marketefficiency and operational cost savings. During the year,


219


several new participants joined the RENTAS and the IBGsystems, which contribute to wider accessibility andeconomies of scale benefits. Policy changes have beenmade to further liberalise the payment industry, leadingto the greater participation of non-banking institutions.The Bank continued to facilitate the collaboration of thelocal ATM network operator with its foreign counterpartsin facilitating cross-border ATM and payment services.

Remittance Services and Electronic Money PoliciesThe Bank is pursuing a two-pronged approach to improvethe remittance services in the country, which involvesbroadening the access to formal remittance channels andencouraging banking institutions to make theirremittance services more accessible, convenient andcheaper. Towards achieving this, the Bank has liberalisedits policy to allow qualified non-banking institutions toprovide remittance services and banking institutions toappoint collecting agents to receive funds from theremitters in facilitating their remittance transactions.

Apart from the liberalised environment for remittanceservices, the Bank has also permitted more non-bankissuers to enter the electronic money market. Thisaugurs well with the developments in smart card andmobile telecommunication technologies and the risinginterest of non-banks in offering electronic moneyproducts. These developments would see greatermigration to electronic payments and contributetowards reducing the cost of doing business in Malaysia.

Interbank GIRO SystemThe IBG system, which is operated by MEPS, facilitatesbulk credit transfers of up to RM100,000 pertransaction. An IBG Review Team was formed inNovember 2004 by the Bank, with representatives fromthe Bank, banking institutions and relevant Governmentagencies tasked to review the IBG services to identifykey challenges and issues that should be resolved inorder to meet the users’ requirements and increase itsusage. The team was dissolved in August 2005 after

completing its tasks. Measures recommended by theteam includes standardising the crediting period andpayment references, introducing convenient accesspoints such as ATMs to conduct IBG transactions,improving the account validation procedures and toconduct a concerted awareness and promotioncampaign. MEPS, the owner of the system, jointly withthe banking institutions, will implement these measuresas well as formulate specific strategies and roadmap tofurther spur the growth in IBG usage.

Regional ATM Link-upMEPS established a regional link in July 2005 with PTArtajasa Pembayaran Elektronis (Artajasa), itscounterpart in Indonesia, to facilitate cross-border ATMcash withdrawals in Malaysia and Indonesia. The facilityallows customers of MEPS’ member banks to withdrawrupiah using their ATM cards at Artajasa member banks’ATMs in Indonesia. Similarly, customers of Artajasamember banks are able to withdraw cash in ringgit fromATMs in the MEPS’ network. As at end-2005, theregional link involved six Indonesian banking institutionswith over 300 ATMs in Indonesia and four Malaysianbanking institutions with over 2000 ATMs in Malaysia.The remaining banking institutions and developmentfinancial institutions in Malaysia are expected toparticipate in the regional link on a staggered basis in2006. MEPS will also establish a regional ATM link withthe Network for Electronic Transfers (Singapore) Pte. Ltd.in 2006 to facilitate cross-border ATM cash withdrawalsbetween Malaysia and Singapore. The ATM link-up willalso pave the way for future services such as cross-border funds transfers via the ATM networks.

Cheque TruncationThe SPICK cheque clearing system remains the largestretail payment system in the country. Infrastructureimprovements continued to focus on improving marketefficiency and operational cost savings throughautomation and straight-through processes. Recognisingthe strong inertia in cheque usage, the Bank will beimplementing a cheque truncation system (CTS) aimedat reducing transportation and labour costs associatedwith the physical handling of cheques in the clearingprocess. The CTS will leverage on the current imaginginfrastructure already in place and will provideopportunities for banking institutions to rationalise theirback office operations to reap cost savings in furtherautomating their cheque processing operations.

Scripless Trading of Commercial Papers in RENTASRENTAS, the wholesale payment system for real-timefunds and scripless securities, continues to function as thebackbone of the country’s payment system infrastructure.

The Bank continues tocollaborate with the bankingindustry to improve theoperational efficiency,functionalities and servicestandards in the retail andwholesale payment andsettlement systems.


220

In enhancing the efficiency of financial markettransactions, work has continued to prepare for scriplesscommercial papers (CPs) to be traded and settled inRENTAS. Inclusion of CPs into RENTAS will enable tradingand settlement of scripless CPs to be conducted real-timeon a delivery versus payment basis, thereby improvingefficiency and eliminating settlement risks.

New Members in RENTAS and Interbank GIROSystemsIn line with the Bank’s revised access policy, three moremajor financial market participants were admitted intothe RENTAS in 2005 increasing its membership numberto 56. The new members are Bank Simpanan Nasional,Bank Kerjasama Rakyat Malaysia Berhad and KumpulanWang Simpanan Pekerja. As for the IBG system, threelocally incorporated foreign banks and one developmentfinancial institution became IBG members during theyear, increasing the number of IBG participants to 16.However, the participation in the IBG system still lagsbehind the cheque system, which is participated by 30commercial banks. With a larger number ofparticipating banking institutions and correspondingly awider coverage of users, economies of scale would berealised much sooner resulting in the lowering of thecost of production of payment services. In this regard,the Bank continues to encourage an open access policyto payment systems to facilitate a more comprehensiveparticipation by banking institutions.

MIGRATION TO ELECTRONIC PAYMENTS

Improvements in technology, automation and straight-through processes have enabled the cost of electronicprocessing of transactions to decline relative to paper-basedprocessing. Electronic payments which have a lower variablecost component compared to paper-based payments, willexperience a declining unit cost as the number oftransactions increases. In promoting a country-wide

understanding the various hindrances and challenges inadopting electronic payments. Such inputs are relevant forthe Bank’s formulation of policies and initiatives to promotethe wider use of electronic payments.

Government’s Adoption of Electronic PaymentsThe Government’s adoption of electronic paymentswould accelerate the adoption of electronic payments inthe country. In recent years, the Government sector hadintroduced various electronic delivery channels tofacilitate convenient access for the public to transactwith the Government. In addition, efforts are beingmade to accept payment cards at most Governmentpayment counters to facilitate consumer convenienceand improvement in payment efficiency. These measureswould pave the way for the adoption of electronicpayments on a national scale, given that mostindividuals and businesses have payment transactionswith the Government. In this regard, the Governmenthas announced its acceptance of payment cards in the2006 Budget. The Bank had engaged the credit cardindustry to review the current interchange arrangementsto facilitate the acceptance of credit cards in theGovernment sector.

Financial Process Exchange (FPX)The FPX Steering Committee has facilitated theadoption of a holistic and pragmatic approach in thelong-term strategy for the FPX. MEPS, as the operator ofthe system, has conducted several merchant seminars inbuilding the awareness on the FPX and itsfunctionalities. Efforts were also made by MEPS and thebanking industry to understand and cater for the needsof the merchants, apart from revising the pricing of theFPX services to increase the adoption of the FPX.Initiatives are being made to develop related softwaresolutions that would facilitate smaller merchants to beintegrated into the FPX payment solution at lower costs.

Identifying and Understanding Large Issuers ofChequesIn September 2005, the Bank had undertaken a study togather profiles of cheque users in Malaysia, whichincludes identifying reasons for the issuance of largevalue cheques. Discussions with several high issuers ofcheque revealed that the main reasons for the issuance oflarge value cheques were due to its wide acceptance,convenience and a relatively cheaper paymentinstrument. In ag4ition, several inherent limitations in theelectronic payment systems currently offered havehindered the adoption of electronic payment services,such as the absence of payment reference andnotification, lack of account validation procedures, highercharges imposed for electronic payments, payment limits

Electronic payments whichhave a lower variable costcomponent compared topaper based payments, willexperience a declining unitcost as the number oftransactions increases.

migration to electronic payments, the Bank has continued toplay its role as a catalyst in addressing industry issues andfacilitating industry forum. This includes identifying and

C10_Payment System pg216-228 4/14/06, 13:31220

221


imposed on electronic payments via the ATM andInternet banking facilities, limited participation of bankinginstitutions compared to the cheque system and limitedinfrastructure to facilitate the accessibility of electronicpayment services. While electronic payments have beenmade available in the marketplace, additional measuresand initiatives needs to be undertaken to address theseissues to make electronic payments more prevalent.

Development of the Domestic Debit Card (e-Debit)With the adoption of the chip infrastructure in ATMcards, multi-applications on the same card have beenmade possible. The domestic debit and MEPS Cashelectronic purse applications are installed in the chipbased ATM card or Bankcard, allowing the cardholdersto purchase goods and services at merchant outlets. Thedebit application or e-Debit allows the cardholders tocharge their purchases directly to their savings orcurrent accounts while the electronic purse facilitatesmicro-payment by deducting the electronic money thathas been loaded onto the card. Efforts are being madeby the industry to promote the usage of the domesticdebit cards. As at end December 2005, about 25,600card acceptance devices have been deployed by theacquirers to accept interbank e-Debit transactions. Moree-Debit terminals are expected to be deployed with theincrease in the number of acquiring banks in 2006. Inaddition, in promoting the usage of the e-Debitapplication in the Bankcard, a financial institution hasoffered a ‘cash back’ facility at its merchant outlets. The‘cash back’ facility allows the cardholder to withdrawcash at the merchant, whilst making payment forpurchases using the e-Debit application.

National Payment Advisory Council (NPAC)In December 2005, the Bank held its yearly NPACmeeting. The meeting which was chaired by theGovernor, was attended by representatives fromfinancial institution associations, industry associations,related Government agencies, the domestic automatedclearing house and two foreign central bank members.The annual forum provides a platform for issues relatingto payment systems to be raised and deliberated. Themeeting provides the Bank with useful inputs forconsideration in its policy making and developmentalefforts, which includes the recent initiatives to set upthe PvP mechanism to minimise settlement risk offoreign exchange transactions and the review of theregulatory framework for remittance business.

In line with the promotion of migration to electronicpayments, the NPAC meeting deliberated on issuesrelating to the Bank’s role in payment systemdevelopment, measures to reduce large value cheques

issued, and strategies to promote the domestic debitcards to be widely used in the country. The NPACagreed that the Bank’s role as an overseer and anoperator of payment systems should be clearlysegregated within the Bank, and its operational role incheque clearing and settlement is still necessary at thisstage of development of the financial sector. To reducethe number of high value cheques issued, it was agreedthat high issuers of large value cheques should beidentified and efforts made to encourage them to useelectronic payments. The domestic debit card schemehas significant potential to be more widely used. Moreconcerted efforts are being taken by MEPS and itsmember institutions to increase the deployment ofpoint-of-sale terminals and to promote its use amongstthe debit cardholders.

Payment Systems Forum & ExhibitionThe Bank organised the country’s first Payment SystemsForum & Exhibition in November 2005. The forumprovided a platform for the relevant stakeholders includingrepresentatives from financial institutions, payment serviceproviders, Government agencies, corporations and industryassociations to discuss issues and challenges in migratingthe country to electronic payments. In conjunction with theforum, an exhibition was held to increase public awarenessof the various payment channels available and to exhibitpayment products and innovation.

The inaugural event brought together some 290participants comprising users and key players in theprivate and public sectors. Twenty five speakers andpayment system experts from a range of countriesshared their experiences, perspectives, as well as issuesfaced in their migration to electronic payments. Themigration to cost efficient electronic payments isregarded as a national agenda with 2010 beingsuggested as a target date for the full implementationof a national electronic payment roadmap. This wouldrequire an intensive engagement exercise with thevarious stakeholders in addressing a broad range ofissues such as promoting public awareness andconfidence in electronic payments, identifying andresolving current hindrances in electronic paymentusage, improving electronic payment services,establishing payment standards, and providingconsumers with incentives to adopt the more costefficient payment methods.

MOVING FORWARD

In shaping the payment landscape, the Bank will continueto play its role as a driver in leading the country toward theadoption of more cost efficient payment systems and


222

instruments. In continuing to provide an enablingenvironment for the adoption of electronic payments, theBank’s initiatives and policies for 2006 would focus onenhancing the current electronic payment services,promoting competition, transparency and fullerparticipation in the electronic payment systems, andremaining vigilant on any new payment fraud trends.

Following the more liberalised environment forremittance and electronic money, a comprehensiveregulatory and supervisory framework for remittanceservices and electronic money issuance by non-bankinginstitutions will be introduced to put in place prudentialand governance standards for these services. Inaddition, measures will be introduced to increase theawareness of the readily available remittance productsand services with the aim of enhancing the use andaccessibility to formal remittance channels and toprevent the potential for any money laundering andother illegal activities. In addition, the Bank will workjointly with regional Central Banks to harmonisepayment rules between jurisdictions to facilitate moreefficient cross border payments.

To further improve electronic payment services, the Bankwill also be reviewing payment rules and governance ofthe major electronic payment systems to ensure that aminimum service level is uniformly practised. Paymentservices, such as the provision of payment referencesthat accompany payments, should be offered by allbanking institutions to provide the public with a uniformand reliable service. The Bank will also promotetransparency in the service levels of the differentpayment systems, and the pricing of payment services.With increased transparency, users and merchantswould be made aware of the cost of the differentpayment instruments and service level, to help promotegreater competition leading to more cost effective andefficient payment services.

The Bank will also continue its effort to encourage thefull participation of banking institutions in electronicpayment systems similar to the level of participation inthe cheque clearing system. To encourage the use ofelectronic payments on an industry-wide basis, thepayment service has to have a wide reach in terms ofparticipating banking institutions and a widespreadnetwork of access points for the users to conductpayment transactions conveniently. In line with thedevelopmental efforts taken to improve the electronicpayments infrastructure, concerted efforts will also betaken to reduce the use of cheques. The Bank will beworking with targeted industries to facilitate theirmigration to electronic payments.

In addition, the safety of banking and payment servicesoffered over the Internet and mobile channels will bestrengthened to ensure that proper securityarrangements and consumer education initiatives areimplemented to assure the safety of these services. In itseffort to continuously enhance the consumers’confidence in using electronic payments, the Bank willmonitor the security environment of the variouspayment channels and issue or enhance its guidelineson fraud management when the need arises to mitigateany developing trend of payment fraud.

Direct Pricing of Payment ServicesInternational studies that have been done have foundthat paper-based instruments are more costly to operatethan electronic payments. Debit cards in particular, areless costly compared to credit card payments and cashwithdrawals. It was also found that cash distribution tothe public was largely financed through substantial crosssubsidies from revenue generated from electronicpayment services.

The key driver for consumers in some countries thathave successfully migrated to electronic payments hasbeen through the implementation of transparent cost-based pricing of payment transactions. Prices givesignals that help consumers choose the more costefficient payment services. The income from paymentservices earned by banking institutions in thesecountries are largely from fees charged rather than fromcross-subsidisation of services. By adopting cost-basedpricing strategies, banking institutions in these countrieswere able to reduce their total production cost forpayment services and correspondingly increase theiroverall profitability, by channelling demand towards lesscostly payment services. The on-going automation ofthe payment system has resulted in less frequenttraditional bank counter transactions, thus allowingbanking institutions to focus increasingly on highervalue services and relationship management.

In general, the prices of payment transactions inMalaysia does not reflect the cost of production of therespective payment services, and therefore does notprovide the right price signals for consumers to utilisethe more cost efficient payment services. Payments viacheques, for example, are inefficient as it incurs a largevariable cost component contributed by labour costsfrom the physical handling of cheques, transportationand the costs for paper and printing of cheques. Inaddition to cost savings, electronic payments alsoprovide benefits to consumers and merchants withshorter crediting period and certainty of paymentcompared to cheque payments. Merchants receiving


223


electronic payments would be able to improve theiroperational efficiency by reducing the customers’payment at the cashiers and also their cash holding,thereby minimising the risk of robbery and losses frompilferage. To move towards direct pricing of paymenttransactions, consumers should first be provided withan alternative electronic payment method that isaffordable and comparable in terms of convenienceand involvement of participants as in the chequesystem. This would encourage consumers to use therelatively low cost electronic payment method whencheques are priced higher to reflect their trueprocessing cost.

PERFORMANCE OF THE PAYMENT SYSTEMS

OverviewNotwithstanding the payment infrastructuredevelopments and enhancements made in the recentyears, Malaysia remains a high user of cash andcheques with its currency-in-circulation (CIC)accounting for 6.1% of GDP and cheques accountingfor 95.1% of the non-cash payment value in 2005.

In terms of the major electronic payment modes, theusage of IBG and credit cards has been increasing. Theshare in value of non-cash payment over the past threeyears has increased at an average rate of 69.16% and11.58% for IBG and credit cards respectively. Together,they account for 4.7% of total non-cash paymentvalue in 2005. In terms of other payment cards, theuse of charge cards is declining with its share of non-cash payment volume falling from 1.85% in 2002 to0.81% in 2005, while the debit card has yet to makeany significant impact with its share of the non-cashpayment value and volume at 0.02% and 0.25%respectively. Electronic purse remains a popular micro-payment instrument in the transportation sector withan increase in its non-cash payment volume from18.57% in 2002 to 47.5% in 2005. As the electronicpurse is used mainly for small value payments, itaccounted for only 0.07% of the non-cash paymentvalue in 2005.

In terms of the CIC over GDP ratio, which is a proxy toestimate the use of cash, Malaysia’s ratio of 6.1% ismuch higher than the average ratio of 3.2% in 2004

Table 10.1

Non-Cash Retail Payments in MalaysiaValue (%)

2002 2003 2004 2005

Cheques 97.38 96.97 96.32 95.06

Interbank GIRO (credit transfer) 0.38 0.57 1.00 1.84

Credit cards 2.06 2.26 2.48 2.86

Charge cards 0.15 0.15 0.14 0.15

Debit cards 0.01 0.01 0.01 0.02

E-purse - Toll payments 0.02 0.04 0.05 0.07

E-purse - Retail 0.00* 0.00* 0.00* 0.00*

Note: * negligible

Table 10.2

Non-Cash Retail Payments in MalaysiaVolume (%)

2002 2003 2004 2005

Cheques 47.74 35.89 30.53 26.05

Interbank GIRO (credit transfer) 0.15 0.24 0.57 1.35

Credit cards 31.44 26.90 25.09 24.04

Charge cards 1.85 1.37 1.00 0.81

Debit cards 0.25 0.22 0.21 0.25

E-purse - Toll payments 18.57 35.38 42.59 47.50

E-purse - Retail 0.00* 0.00* 0.01 0.00*

Note: * negligible


224

0

5

10

15

20

2001 2002 2003 2004 20050.0

0.5

1.0

1.5

2.0

Graph 10.1RENTAS - IFTS Turnover

Volume (million)

IFTS Volume IFTS Value

Value (RM trillion)

2001 2002 2003 2004 20050.00.2

0.40.60.8

1.01.2

1.41.61.8

020

406080

100120

140160180

Graph 10.2 RENTAS - SSTS Turnover

Volume ('000) Value (RM trillion)

SSTS Volume SSTS Value

Table 10.3

Benchmarking with Other Countries

2004

Netherlands Norway Sweden Average(16.3m) (4.6m) (9.0m)

Currency-in-circulation/GDP 2.11 2.7 4.7 3.2 6.1

Number of cheques transactions perinhabitant (credit transfer) 0.0 0.3 0.22 0.2 7.6

Number of Giro transactions perinhabitant (credit transfer) 77.5 95.5 51.4 74.8 0.4

Number of point-of-sale terminals perthousand inhabitants 12 21 14 16 3

Number of ATMs per million inhabitants 484 473 315 424 223

Note: 1 Figure as at 20012 Figure as at 2002

Source:CPSS-Red Book Statistical Update December 2005, Norges Bank Annual Report on Payment Systems 2004 and Bank Negara Malaysia

2005Malaysia(26.38m)

Countries(population)

for the Netherlands, Norway and Sweden, which arehigh users of electronic payments. The average numbersof Giro and cheque transactions per inhabitant in 2004in the three selected European countries were 74.8 and0.2, respectively, while Malaysia recorded an inverseratio of 0.4 and 7.6 respectively in 2005.

While Malaysia has progressively introduced electronicpayment systems to facilitate the migration toelectronic payments, further measures need to beimplemented to increase the accessibility to thesepayment services such as a wider deployment point-of-sale terminals for payment cards and enabling its ATMsfor interbank funds transfer services. The averagenumber of point-of-sale terminals per thousandinhabitants recorded in the selected Europeancountries in 2004 was 16, compared with only three inMalaysia in 2005. In terms of ATMs, the averagenumber of ATMs in the selected European countriesper million inhabitants was 424 in 2004, compared toMalaysia’s 223 ATMs in 2005.

Payment Systems and Instruments, and DeliveryChannels

RENTASThe value and volume of RENTAS transaction has beenincreasing over the past five years. In 2005, theRENTAS system settled 2.05 million transactionsamounting to RM19.3 trillion, an increase of 6.8% and8.1 % in terms of volume and value of transactionsrespectively. The Interbank Funds Transfer System (IFTS)recorded an increase of 5.4% and 6.4%, in terms ofvolume and value respectively, while transactionsthrough the Scripless Securities Trading System (SSTS)increased by 27.6% and 29.5% respectively.

In line with the Bank’s revised access policy, majorfinancial market participants admitted into the RENTASin 2005 were Bank Simpanan Nasional, Bank Kerjasama


225


170

174

178

182

186

2002 2003 2004 20051.00

1.05

1.10

1.15

1.20

1.25

Volume (million) Value (RM trillion)

Graph 10.3 Volume and Value of Cheque Transactions

Volume Value

Rakyat Malaysia Berhad and Kumpulan Wang SimpananPekerja. As at December 2005, there are 56 RENTASmembers, comprising Bank Negara Malaysia, 23commercial banks, six Islamic banks, ten merchantbanks, seven discount houses, two developmentfinancial institutions, two finance companies, threeuniversal brokers, Cagamas Berhad and KumpulanWang Simpanan Pekerja.

Sistem Penjelasan Imej Cek Kebangsaan (SPICK)Cheques remain the most widely used non-cashpayment instrument accounting for 95.1% of the non-cash payment value in 2005, and has recorded increasesin volume and value since 2002. Volume of chequesprocessed through the SPICK cheque clearing centresincreased marginally by 0.4% from 183.8 millioncheques valued at RM 1.227 trillion in 2004 to 184.4million cheques valued at RM1.235 trillion in 2005. Thisreflects the widespread cheque usage is in theMalaysian economy.

Interbank GIRO System (IBG)Since its implementation, IBG continues to record anincrease in transactions from 124,000 transactionsvalued at RM1.08 billion in 2001 to 10.4 milliontransactions valued at RM26.3 billion in 2005. Increasein IBG transactions is attributed mainly to therecruitment of corporate users by banking institutionsand the increase in the Government’s payment viaelectronic channels. Nevertheless, the IBG transactionswhich accounts for 1.9% of the cheque payment valuein 2005, needs to increase much more significantly tobe a major retail payment system.

Financial Process Exchange (FPX)Since the pilot launch of the FPX in October 2004, morebanking institutions and merchants have joined thesystem, bringing the total number of participants to sixand 16, respectively. Two more banking institutions andseveral merchants are in the final stages of preparation tolink to the FPX and are planning to come onboard by thefirst quarter of 2006. As at the end of 2005, the FPXrecorded a total of 686 transactions amounting toRM16.8 million since its debut in 2004. Paymenttransactions made via the FPX are mainly for businesses,which are termed as B2B transactions, and fromconsumers to businesses or C2B transactions for onlinepurchases. The introduction of FPX brings about greaterconvenience and efficiency as it enables both individualsand corporate users to make payments electronicallyfrom the banking institution of their choice. To optimisethe potential of the system, wider participation is neededto have an enlarged community of online participants.

Payment CardsCredit cards remain the most popular payment card inMalaysia with transaction value of RM40.9 billion in2005 and had recorded an average annual growth intransaction volume and value of 13.3% and 17.4% perannum respectively during the recent three years. Whilethe credit card offers a revolving credit line to thecardholders, on average about 60% of the total value ofcredit card transactions are repaid in full, indicating thata majority of the cardholders are using the cards as aconvenient means in making payment. With thegrowing popularity of credit cards, the number ofcharge cards in circulation had declined at an averagerate of 10.9% and its transaction volume has fallen at arate of 5.8% over the same period. For debit cards, ithas a sizeable card base of 14.3 million, comprisingmainly the e-Debit application that has beenincorporated into 12 million chip ATM cards and 2.3million international brand debit cards. Although debitcard transactions had increased at an annual rate of24.6% and 49.8% per annum in terms of volume and

2001 2002 2003 2004 20050

5

10

15

20

25

30

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Graph 10.4Volume and Value of IBG Transactions

Volume (million) Value (RM billion)

Volume Value


226

value, it remains insignificant compared to credit cards.The two main electronic purse schemes are the MEPSCash scheme, a contact electronic purse which is usedin the retail sector and the Touch ‘n Go scheme, acontactless electronic purse which is used in thetransportation sector. As in most countries’ experience,electronic purse usage in the retail sector has been lowwhile it represents a popular payment instrument in thetransportation sector.

Mobile Banking and Payment ServicesBroader usage of mobile phones has encouraged theacceptance and growth of the mobile banking andmobile payment services in the country. Currently, fivebanking institutions offer banking services using ShortMessaging Services (SMS) via mobile phones, where therange of services include own account funds transfer,bill and loan payments, mobile prepaid airtime reloadand balance inquiries. In facilitating mobile payments,banking institutions are partnering with third partyservice providers to allow subscribers to purchase goodsand services or make payments using their mobilephones by either charging the amount to their creditcards, or debiting their savings or current accounts. Atotal of 391,773 transactions were conducted duringthe year with an aggregate value of RM4.4 million,mainly for bill payments and own account fundstransfer transactions. The number of mobile bankingsubscribers has more than quadrupled to 127,566 as atthe end of 2005 as compared to 25,734 as at the endof 2004. This was contributed by the new mobilebanking or payment offerings during the year, apartfrom the large number of mobile phone users of 19.5million as at the end of 2005.

Internet BankingInternet banking services provided by 14 bankinginstitutions continue to provide convenience and low-cost accessibility to banking services especially in making

funds transfer, bill and loan payments, reloading mobileprepaid airtime and account balance and other inquiries.New services available through this channel includeonline share application service for initial public offeringon Bursa Malaysia. The Internet banking channel isbecoming increasingly more popular and its subscribershave doubled in the recent two years, with a total of 2.6million subscribers or 70.4% of the Internet subscribers inthe country as at December 2005. In addition, the annualvalue of online banking transactions has also grown by69.6% from RM11 billion in 2004 to RM18.6 billion in2005. The growth is largely contributed by the rise inusing the channel for third party and own account fundstransfers and payment of credit card balances.

Shared ATM ServicesAs at end-2005 there were 5,871 ATMs in Malaysia, ofwhich, 5,490 ATMs belonging to 12 domestic banks

Table 10.4

Payment Card Transactions

2003 2004 2005

Number of Value Volume Number of Value Volume Number of Value Volumecards (RM mil) (mil) cards (RM mil) (mil) cards (RM mil) (mil)

Credit cards 5.10 29,359.9 146.3 6.58 34,874.3 164.5 7.84 40,892.5 184.5

Charge cards 0.31 1,895.7 7.5 0.28 2,037.6 6.6 0.24 2,074.8 6.2

Debit cards 3.15 87.4 1.2 7.71 143.1 1.4 14.321 240.1 1.9

Electronic purse -toll 2.98 566.3 192.4 4.23 733.7 279.3 5.66 972.1 364.5

Electronic purse -retail 10.47 0.1 0.02 21.13 0.3 0.09 30.27 0.10 0.02

1 Figure includes Bank Simpanan Nasional

2002 2003 2004 2005

4.2%7.0% 7.8% 9.8%

62.4%

39.6%

61.2%

70.4%

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

No. of Internet banking subscribers (mil)

No. of Internet subscribers (mil)

Penetration of IB subs. to population (%)

Penetration of IB subs. to Internet subs. (%)

Graph 10.5 Internet Banking Growth and Penetration

No. of subscribers (million) %


227


and three development financial institutions are inter-connected via the MEPS’ ATM switch. As at end 2005,approximately 15.1 million chip based ATM cardsissued by the participating member banks in theshared ATM network. The network facilitatesinfrastructure cost savings for individual financialinstitutions while providing consumers with wideraccess to ATM services through an expanded pool ofATMs. ATM services provide a number of otherfunctionalities such as balance inquiry, intra-bankfunds transfer, bills payment, shares application andreloading of electronic purse applications. However,

cash dispensing remains the most popular transactionamounting to RM156.5 billion or 99.8% of thefinancial transactions conducted at ATMs in 2005.MEPS and the financial institutions are planning tointroduce interbank funds transfer and other paymentfunctionalities such as reloading of prepaid mobilephones in the near future. Meanwhile, the regionalcross-border link between MEPS and Artajasa inIndonesia recorded a total transaction volume andvalue of 376 and RM0.13 million respectively in the sixmonths of operations in 2005.


External Relations

Economic Surveillance Multilateral RelationsFinancial Services NegotiationsIslamic BankingCombating Money Laundering and Terrorism FinancingEconomic and Financial Co-operation White Box:Key International Events Hosted by Bank Negara Malaysia in 2005

230230-231231-233

233233-235235-238238-240

230

In 2005, Bank Negara Malaysia continued to strengthenits external relations, both at the international andregional levels to foster closer financial co-operation. Atthe regional level, while economic surveillance processesremained an integral element of the internationalagenda, significant steps were taken to enhanceeconomic and financial co-operation. These efforts werefocused at strengthening institutional and infrastructuredevelopment, and capacity building in Islamic financialservices, bond market and financing arrangements.Initiatives were also taken to enhance bilateral relationsand combating of money laundering and terrorismfinancing. Enhancing regional co-operation in these areasform the foundations for realising the potential thatgreater regional economic and financial integrationwould bring to the region. At the multilateral front, callswere made for the International Monetary Fund (IMF)and the World Bank (WB) to address the leadership issueand governance structure, and the need for quota reviewthat adequately reflects the economic contribution andvoice of the Asian countries in the international financialsystem.

Economic SurveillanceBank Negara Malaysia participated actively in theeconomic surveillance processes of various multilateraland regional fora during the year. At the multilateralfora, surveillance issues were deliberated at themeetings of the IMF, WB and the Bank for InternationalSettlements (BIS). Policy deliberations were focused onthe role of respective regions in ensuring orderlyresolution of global imbalances and in managing thepotential risks of high oil prices. It was recognised thatall member countries were collectively responsible toensure a stable and more balanced global economicgrowth. The IMF and the WB would play crucial roles inenhancing the coherence and consistency of theinternational monetary, financial, and trading systems,and in fostering international co-operation to addresseconomic challenges.

At the regional level, the Bank also participated invarious initiatives to develop effective regionalsurveillance capabilities that complemented thoseundertaken by the international financial institutions.Economic surveillance undertaken at the regional levelincluded those covered by the Executives’ Meeting ofthe East Asia-Pacific Central Banks (EMEAP), South-EastAsian Central Banks (SEACEN), the Association ofSoutheast Asian Nations (ASEAN), ASEAN plus thePeople’s Republic of China (PR China), Japan and Korea

(ASEAN+3), and the Asia-Pacific Economic Co-operation(APEC). Among these initiatives included theenhancement and integration of the ASEAN+3 economicsurveillance mechanism into the Chiang Mai Initiative(CMI) framework. This would enable early detection ofirregularities and swift remedial policy actions, and tofacilitate the activation of bilateral swap arrangements(BSAs) under the CMI, while at the same time avoidingthe emergence of any moral hazard issues.

Another area of priority is the monitoring of cross-border flows. Through the SEACEN Expert Group (SEG)on Capital Flows, the Bank participated in the exchangeof information on capital flows among the SEACENmembers. During the Fifth Meeting of SEG on CapitalFlows that was held in March 2005 in Kuala Lumpur, adiscussion was held on the development of a regionalearly warning system model for capital flow reversals,with the aim of adopting the model as an additionaltool for data analysis work by the SEACEN Centre. Theestablishment of an early warning system in 2006would further augment the monitoring activities, whichwould lay a key step forward in better assessment ofregional capital flows developments.

Through the EMEAP and the SEACEN fora, the Bankcontinued its active participation to discuss economicsurveillance issues, initiatives for capacity building andtraining of central bankers. High on the agenda was theframework for financial stability, in light of the volatileand large capital flows, financial liberalisation andincreasing integration with global markets. Anotherpriority area was the development of the financialsector, notably the implementation and impact of thenew Basel II capital adequacy framework. This neededto be reinforced with the strengthening of the capacitiesof both the central banks and commercial banks inorder to effectively implement Basel II. In light of this,the SEACEN Centre would have an important role inproviding training to facilitate the implementation ofBasel II.

Multilateral RelationsDuring the year, Bank Negara Malaysia continued topress forward the need for the IMF and the WB toreflect their representation of all member countries.Among the issues reiterated by Malaysia at theSeptember 2005 IMF/WB Annual Meetings included theneed for greater voice and participation of emergingand developing countries at the IMF and the WB,commensurate with their relative strength in the

External Relations

C11 Ext. Relations pg230-241 3/14/06, 9:18 PM230

231

External Relations

changing global economy. Malaysia highlighted that theemphasis of the IMF and the WB to focus on reforms atthe country and regional levels must also beaccompanied by reforms on the international front.Consequently, the ability to provide leadershipadequately, balancing the interest of the developed anddeveloping countries on the global stage woulddetermine the effectiveness and relevance of theinternational financial institutions. At the same time, theIMF surveillance efforts should also include initiativesthat will enhance the institutional capacity ofdeveloping economies in managing risks andvulnerabilities while sustaining their own capacity tosupport growth and development. The importance forenhancement of development partnership and financingto achieve the Millenium Development Goals (MDGs)was further emphasised.

Toward this end, Malaysia, as a contributor to the IMF’sPoverty Reduction and Growth Facility Trust, supportedthe proposals needed to launch the Multilateral DebtRelief Initiative (MDRI) and the Exogenous Shocks Facilityof the IMF. The objective of the MDRI is to assist in debtrelief for qualified low-income members of the IMFthereby assisting them in reaching the MDGs, while theExogenous Shocks Facility would allow the IMF to providetimely financial assistance to low-income members thathave been adversely affected by exogenous shocks.

Malaysia continues to maintain its net creditor status inthe IMF. During the year, Malaysia continued to beincluded in the IMF’s Financial Transaction Plan (FTP) forthe quarterly period up to February 2006. Under theFTP, selected IMF members (47 to date) with strongbalance of payments and reserve positions may becalled upon to provide foreign exchange resources tosupport the IMF’s financial operations. Malaysia resumedthe IMF’s FTP status since September 2002, after aperiod from 1997.

In November, the IMF’s Article IV Mission visitedMalaysia to discuss and assess Malaysia’smacroeconomic performance and policy issues for 2005and outlook for 2006. Their assessment was thatMalaysia’s resilience to shocks has continued to improve.Reference was made to the pragmatic approachadopted by the Malaysian authorities in macroeconomicpolicymaking and the steady progress in theimplementation of structural reforms.

During the year, the Bank also participated actively inmeetings organised by the BIS. Key issues discussed atthe meetings included the design and operation ofmonetary policy decision-making, central bank co-

operation in the Asia-Pacific region, supervision offinancial activities, issues relating to the globalimbalances and sharp increases in oil prices, andimplications of household indebtedness. During theyear, the Bank purchased 220 shares out of 35,933additional shares offered for sale in January 2005 by theBIS to existing shareholders. With the subscription, theBank’s shareholding in the BIS increased to 3,220 sharesto account for 0.6% of the increased BIS capital.

Bank Negara Malaysia also progressed forward itscollaboration with the Islamic Development Bank (IDB)under the ambit of the Memorandum of Understanding(MoU) signed between Malaysia and IDB in June 2004.Two High-Level Meetings were held during the year todeliberate on areas of co-operation under the MoU. Theareas of co-operation included strengthening intra-tradeand development of Information CommunicationTechnology (ICT) among the Organisation of IslamicConference (OIC) member countries. New areas of co-operation continued to be explored by the variousworking groups and task forces established under theambit of the MoU. Significant progress have beenachieved, with the signing of a Reinsurance FacilityAgreement in June 2005 between the IslamicCorporation for the Insurance of Investment and ExportCredit (ICIEC) and Malaysia Export Credit InsuranceBerhad (MECIB), aimed at promoting and facilitatingmore trade and investment among OIC membercountries. In addition, the Malaysian IndustrialDevelopment Authority (MIDA) signed an MoU with theICIEC in September 2005 to cooperate in developingprogrammes for promoting investment opportunities inOIC member countries.

Bank Negara Malaysia is also a member of the IDB1440H Vision Commission. The role of the Commissionis to transform the IDB into a premier and proactivedevelopment bank with wide knowledge andcompetencies in all its core areas, and to be responsiveto the diverse needs of people in the member and non-member countries. The Commission has scheduled tolaunch the IDB 1440H Vision document in KualaLumpur on 23 March 2006.

Financial Services Negotiations

World Trade OrganisationBank Negara Malaysia played an active role in theservices negotiations at the World Trade Organisation(WTO) and is the lead agency undertaking negotiationson trade in financial services. At the Sixth WTOMinisterial Conference (6th MC) held on 13-18December 2005 in Hong Kong, it declared the


232

establishment of procedures to conclude negotiationsunder the Doha Development Agenda in 2006. Amongothers, these procedures covered the details tocomplete negotiations in agriculture, industrial goodsand services. This included securing a final date of 2013for the elimination of all export subsidies in agriculture,with flexibility for longer timeframe for developingcountries, and providing duty- and quota-free access forgoods exported by 32 least-developed countries.

On services negotiations, including financial services, the6th MC agreed that WTO member countries wouldsubmit their final commitments on further marketopening by 31 October 2006. It was agreed that membercountries would strive to achieve a progressively higherlevel of liberalisation of trade in services, with appropriateflexibility for developing countries, taking into accountfactors including the size of their respective economies;level of readiness for liberalisation; and the need tobalance it with their domestic considerations.

The procedures and timelines agreed to by the 6th MCwere expected to intensify negotiations to furtherliberalise trade in services at the WTO. This was in

keeping with the WTO’s objective to ensure that tradeflows continued to take place smoothly, predictablyand as freely as possible. In line with the commitmentto gradually liberalise the financial services sector, BankNegara Malaysia undertook measures1 to accordgreater flexibility for locally-incorporated foreign banksto establish additional branches, and allow higherforeign shareholdings in takaful operators, investmentbanks and Islamic banks. These measures areconsistent with the overall objective of the FinancialSector Masterplan (FSMP), which is to create aneffective, efficient and dynamic financial sector thatsupports the diversified requirements of the economy.

Regional and Bilateral Free Trade AgreementsThe third round of financial services negotiations under theASEAN Framework Agreement on Services (AFAS)concluded with the signing of the ‘Protocol to Implement

1 Further details on these measures can be referred to in Chapter 5: The BankingSystem and Chapter 6: The Islamic Financial System.

Graph 11.1Foreign Participation in the Malaysian Commercial Banking Sector

No. of commercial banks %

Total no. of commercial banks (including the six Islamic banks)

No. of fully foreign-owned commercial banks(including one fully foreign-owned Islamic bank)

No. of domestically-owned commercial banks with foreign interest

Average foreign share (%) of equity acrossdomestically-owned commercial banks withforeign interest

Foreign share (%) of total commercial bank assets (comprising share of fully foreign-owned commercial banks and other foreigners via equity participation in domestically-owned commercial banks)

0

5

10

15

20

25

30

35

0

5

10

15

20

25

30

35

40

2001 2002 2003 2004 2005

Year

Total no. of insurers

No. of foreign-owned insurers

Foreign share (%) of general insurance premiums (comprising share of foreigners via equity participation in foreign-owned and domestically-owned insurers)

Foreign share (%) of life insurance premiums (comprising share of foreigners via equity participation in foreign-owned and domestically-owned insurers)

Graph 11.2Foreign Participation in the Malaysian Insurance Industry

No. of insurers %

0

10

20

30

40

50

60

70

0

10

20

30

40

50

60

70

80

90

2001 2002 2003 2004 2005

Year


233

External Relations

the Third Package of Commitments on Financial ServicesLiberalisation’ by the ASEAN Finance Ministers at theirmeeting on 6 April 2005 in Vientiane, Laos. The Protocolput into effect the liberalisation commitments made byASEAN Member Countries under the third round ofnegotiations, which started in 2002. The commitmentswent beyond those made by the Member Countries at theWTO under the General Agreement on Trade in Services(GATS), also known as ‘GATS-plus commitments’. Malaysiaundertook a GATS-plus commitment in the area ofinvestment advisory services. A fourth round ofnegotiations on financial services was also launched by theASEAN Finance Ministers at their meeting on 6 April 2005.The round is expected to be concluded within three years.

Bank Negara Malaysia also participated in ongoing servicesnegotiations, among others, under the ASEAN-China FreeTrade Agreement (FTA), the Malaysia-Australia FTA and theMalaysia-New Zealand FTA. Malaysia’s first bilateral FTAwas signed with Japan on 13 December 2005, officiallyknown as the ‘Japan – Malaysia Economic PartnershipAgreement’. The FTA was comprehensive in nature,encompassing measures on liberalisation, co-operation andtrade facilitation in the areas of goods, services andinvestment. Malaysia and Japan agreed to establish a‘Working Group on Financial Services’ under the FTA. TheWorking Group will provide a forum for the financialregulatory authorities in both countries to exchange viewson issues of mutual interest related to financial services.

Islamic BankingAs a founding member and the host for the IslamicFinancial Services Board (IFSB), Bank Negara Malaysiacontinued to participate actively in the IFSB as a memberof the IFSB Council and its Technical Committee. Duringthe year, the IFSB issued two prudential standards forIslamic financial institutions, namely the GuidingPrinciples of Risk Management and Capital AdequacyStandard. The Guiding Principles of Risk Managementcomplemented the current risk management principlesissued by the Basel Committee on Banking Supervisionand other international standard setting bodies, byproviding a set of guidelines for establishing andimplementing effective risk management practices in theIslamic financial institutions. The Capital AdequacyStandard addressed the specific approaches in identifyingand measuring risk of Shariah compliant products andservices offered by the Islamic financial institutions thatwere not specifically addressed by Basel II. The twostandards are to be implemented with effect from 2007.

In 2005, the Council of the IFSB approved the exposuredraft on the Corporate Governance Standard andinitiated the preparation of two new standards on

transparency and market discipline, and the supervisoryreview process. In addition, the IFSB launched a projectto develop a prudential database of Islamic financialservices statistics and a study on financial instrumentsfor monetary management, and facilitating andregulating Islamic money market.

During the year, the IFSB admitted the MonetaryAuthority of Singapore as a full member and the BanqueDu Liban as an associate member. As at end-2005, thetotal number of IFSB membership increased to 84members (16 full members, seven associate members and61 observer members) from 65 members as at end-2004.

Combating Money Laundering and TerrorismFinancingIn recent years, the international community has mademuch progress in establishing mechanisms for anextensive range of international co-operation incombating money laundering and terrorism financing.Countries around the world responded to the UnitedNations Convention on the Suppression of the Financingof Terrorism and the nine special recommendations onterrorist financing issued by the Financial Action TaskForce on Money Laundering (FATF). All countrieswelcomed the positive incentives for theimplementation of FATF’s recommendations and AML/CFT2 systems for the benefit of their societies,businesses and financial sectors.

ASEANMalaysia actively participated in the yearly ASEANSenior Officials Meeting on Transnational Crime(SOMTC). At the 5th ASEAN SOMTC & Consultationswith Australia, China, Japan, India, Korea and theUnited States, ASEAN member countries agreed toprioritise on four areas of transnational crime, namelyterrorism, illicit drug trafficking, trafficking in personsand money laundering. As the “lead shepherd” formoney laundering, Malaysia offered to host study visitsto the Financial Intelligence Unit (FIU) in Bank NegaraMalaysia and the Basic and Advanced Net WorthAnalysis Workshops for ASEAN members under theASEAN+3 initiatives.

Asia/Pacific Group on Money LaunderingMalaysia has been a member of the Asia/Pacific Groupon Money Laundering (APG) since 2000. At the EighthAPG Annual Meeting in July 2005, Malaysia wasnominated as the representative for the South EastAsia region in the APG Steering Group for the periodof one year from July 2005. As a member of the APG

2 ‘AML/CFT’ refers to ‘Anti-Money Laundering and Counter Financing of Terrorism’.


234

Steering Group, Malaysia has participated in thedeliberations on the structure, functioning and supportfor the APG. Malaysia supported Myanmar’smembership in the APG as this was in line with theAPG’s mandate as a platform for practical andtechnical co-operation that was to be free frompolitical considerations.

Malaysia also participated in the APG programme toreview its domestic non-profit organisations (NPO)sector and associated regulations. The NPO review wasessential to identify weaknesses that increase thepotential for NPOs to be exploited as moneylaundering conduits. The review would enable risk-based measures to be formulated and established todeter and detect any exploitation of the NPOs asconduits for illegal activities. Bank Negara Malaysia isconducting this review in collaboration with theRegistrar of Societies and the Companies Commissionof Malaysia.

Malaysia supported the APG’s application to the FATFfor associate membership as this would enhance theopportunity for practical co-operation with the FATF onareas such as research on money laundering trends,technical assistance, and implementation guidance atthe international level.

The Egmont Group of Financial Intelligence Units(Egmont Group)Bank Negara Malaysia had been a member of theEgmont Group since July 2003. The Egmont Group isan informal organisation established to stimulateinternational co-operation through informationexchange, training and sharing of expertise. Theexchange of information to and from the other 100FIUs worldwide was done through the Egmont SecureWeb. Any information provided may not be sharedwith a third party nor be used in an administrative,investigative, prosecutorial, or judicial purpose withoutprior consent of the disclosing FIU.

Cross-Border Co-operation on Exchange ofInformationPursuant to Section 10 of the Anti-Money Laundering Act2001 (AMLA), Bank Negara Malaysia is permitted tocommunicate any information to a correspondingauthority of a foreign State if an arrangement existedbetween Malaysia and that foreign State. Bank NegaraMalaysia signed an MoU for the exchange of financialintelligence with the Anti-Money Laundering Office ofThailand in April 2005. The MoU will facilitate co-operation for both parties to gather and analyseinformation on financial transactions suspected of being

related to money laundering, terrorism financing or otherserious crimes to assist in the investigation andprosecution of persons suspected of those crimes. Todate, Bank Negara Malaysia has concluded similar MoUswith the FIUs of Australia, Indonesia and the Philippines.Bank Negara Malaysia has finalised the negotiation on asimilar MoU with the People’s Bank of China and willsign the MoU in 2006. Currently, Bank Negara Malaysiais at various stages of negotiations with other foreigncounterparts to execute similar MoUs.

Participation in AML/CFT Mutual EvaluationAs part of our participation in AML/CFT initiatives,Malaysia provided a legal expert for the APG’s mutualevaluation on Brunei in January/February 2005 and afinancial expert in the joint FATF/APG mutual evaluationon the United States in December 2005/January 2006.Such mutual evaluation assesses the effectiveness of acountry’s AML/CFT system and its compliance withinternational AML/CFT standards. Due recognition wasgiven where standards are met and where weaknessesare identified, appropriate recommendations are madewith a view to rectification and improvement.

Technical AssistanceMalaysia’s approach in implementing the national AML/CFT regime that took into account domestic environmentis looked upon as a model for neighbouring countries.Bank Negara Malaysia provided technical assistance tothe Lao PDR on the establishment of AML/CFT policy andprocedures for two state-owned commercial banks inFebruary 2006 under the sponsorship of the AsianDevelopment Bank. This technical assistance was similarto the assistance provided in 2004 to the National Bankof Cambodia. Bank Negara Malaysia shared itsexperience in the establishment of an FIU at theInternational Seminar on Money Laundering in

The Bank continued toenhance the AML/CFT regimeby strengthening internationalcollaborative efforts throughentering into MoUs withforeign counterparts forinformation exchange,participating in technicalassistance programmes andplaying an active role ininternational fora.


235

External Relations

Islamabad, Pakistan in March 2005 and at the IMFWorkshop in Singapore in November 2005. Malaysia alsoprovided technical expertise at the WB’s ‘Train theTrainers’ Workshop in Bangkok in May 2005 and at theAML/CFT Symposium in China in September 2005.

Capacity BuildingAs domestic financial systems become internationallyintegrated with more extensive international networks, itrequires a more sophisticated approach to conductsurveillance on financial transactions and detecting anypotential illicit financier. It is also important to develop theexpertise of personnel involved in investigating moneylaundering and terrorism financing so as to effectivelydeal with changes occurring in the internationalenvironment. In this regard, Malaysia would continue toenhance its AML/CFT regime to ensure that it remainseffective in detecting and deterring criminal activities.

Economic and Financial Co-operationThe collaborative efforts on regional financial co-operation in the area of short-term liquidity supportin the region and in the further development ofregional bond markets gained significant strides in2005. The Bank participated in various fora to furtherpromote regional economic and financial co-operation, as well as collaborated in the formulationof general agreements on issues of common interestto the region.

The Chiang Mai Initiative (CMI) which comprises twocomponents, namely the ASEAN Swap Arrangement(ASA) among the ASEAN countries and a network ofbilateral swap arrangements (BSAs) among the ASEAN+3countries moved forward in arrangements to enhancethe effectiveness of the CMI to address short-termregional liquidity difficulties and to complement theexisting international financial facilities. The measuresincluded the doubling of the size of the ASA to USD2billion at the prevailing proportions of contributions bymember countries. The decision reflected the strongmotivation of ASEAN countries to further enhanceregional self-help arrangements and signaled the movetowards greater financing co-operation to address theincreased risks of large speculative global capital flows.Consequently, Malaysia’s financial commitment doubledto USD300 million (see Table 11.1). The new MoU on theexpanded ASA came into force on 17 November 2005.

In May 2005, the ASEAN+3 Finance Ministers agreedon a set of specific measures to raise the level ofeffectiveness of the BSA network. These compriseinitiatives to integrate and enhance the ASEAN+3economic surveillance into the CMI; clearly-define the

swap activation process and adopt a more effectivecollective decision-making mechanism; increase thesize of bilateral swaps significantly; and improve themechanism for speedy drawdowns. The Bankremained actively engaged in the Working Group onthe Review of the CMI whose proposals wereendorsed by the Finance Ministers. Malaysia and PRChina, were also appointed as the lead countries ofthe joint study on the possible routes and progressivesteps in multilaterising the CMI towards a moreeffective pooling and utilisation of liquidity supportamong member countries.

The further strengthening ofregional financial cooperationwas reflected in the expansionof the ASEAN SwapArrangement, efforts toenhance the effectiveness ofthe network of bilateral swaparrangements under theChiang Mai Initiative, and anacceleration in thedevelopment of the AsianBond Market Initiative andthe Asian Bond Fund.

Table 11.1ASEAN Countries’ Commitments under theexpanded ASEAN Swap Arrangement (ASA)

New Commitments

Countrieswith increase of ASA % of total size of

size to USD2 billion ASA

(USD million)

Brunei 300 15.0Indonesia 300 15.0Malaysia 300 15.0Philippines 300 15.0Singapore 300 15.0Thailand 300 15.0Cambodia 30 1.5Lao PDR 10 0.5Myanmar 40 2.0Vietnam 120 6.0

Total 2,000 100.0

Under the CMI, Malaysia has entered into three BSAagreements, namely with Japan, Korea and PRChina. In October 2005, Malaysia’s BSA agreementwith Korea was renewed for another three yearsupon its expiry. Consonant with decisions made in


236

May 2005 by the ASEAN+3 Finance Ministers,bilateral negotiations between Malaysia and Korearesulted in agreement on increasing the swap size ofthe BSA from USD1 billion to USD1.5 billion. Inaddition, the initial drawdown that could be madewithout being subject to the IMF conditionality wasincreased from 10% to 20% of the swap size. In thecase of the BSA agreement between Malaysia andPR China, the Bank had entered into negotiationswith the People’s Bank of China on renewing theagreement. The new agreement is expected to comeinto effect in 2006. Collectively, as at end-2005, theBSA network which comprised 16 agreements

to four working groups in May 2005, focusing respectivelyon creating new securitised debt instruments, creditguarantees and investment mechanisms, foreign exchangetransactions and settlement issues, and rating systems. Atthe same time, to facilitate more effective coordination forthe Focal Group on ABMI, an Ad-hoc Support Team and aTechnical Assistance Coordination Team were establishedin accordance with the ABMI Roadmap endorsed by theASEAN+3 Finance Ministers in May 2005.

Achievements of the working groups in 2005 included,amongst others, the completion of studies on thesetting up of a credit guarantee and investment

Malaysia* Indonesia Philippines People's Republicof China

KoreaSingapore Thailand

Korea

Japan

People’sRepublicof China

Bilateral Swap Arrangement Agreements under the Chiang Mai Initiativeas at end-2005

Dates indicate when the agreements have been signed and the maximum drawing amount for each agreement is indicated in parentheses.

1 A one-way swap arrangement where the requesting country under the agreement can request the swap-providing country to enter into a swap transaction.2 A two-way swap arrangement where either party could request the other party to enter into a swap transaction under the agreement. * Malaysia's three BSAs are of a three-year tenure.

Agreements signed between the Plus Three countries (People's Republic of China, Japan and Korea) and ASEAN countries.

Agreements signed among the Plus Three countries.

5 October 20041

(USD1 billion)

14 October 20052

(USD1.5 billion)

9 October 20021

(USD1.5 billion)Under negotiation forrenewal

17 October 20052

(USD1.5 billion)

27 August 20041

(USD3 billion)

7 March 20052

(USD3 billion)

12 December 20052

(USD1 billion)

6 December 20011

(USD2 billion)Under negotiation for renewal

28 March 20022

(USD3 billion)

27 May 20052

(USD4 billion)

27 May 20052

(USD3 billion)

4 July 20011

(USD2 billion)31 August 20051

(USD6 billion)

29 August 20031

(USD1 billion)

24 December 20032

(USD1 billion)

17 October 20051

(USD2 billion)

8 November 20052

(USD3 billion from Japan)USD1 billion from Singapore)

3 The six working groups formed were on ‘New Securitised Debt Instruments’,‘Credit Guarantee and Investment Mechanisms’, ‘Foreign Exchange Transactionsand Settlement Issues’, ‘Issuance of Bonds Denominated in Local Currencies byMultilateral Development Banks, Foreign Government Agencies, and AsianMultinational Corporations’, ‘Rating Systems and Dissemination of Information onAsian Bond Markets’, and ‘Technical Assistance Co-ordination’.

among eight ASEAN+3 countries, totalled USD58.5billion, an increase from USD36.5 billion at end-2004.

On the cooperative efforts to further develop the regionalbond markets, advancements in promoting greater andmore efficient financial intermediation were mirrored in thenew initiatives to accelerate capital market developmentwithin the Asian Bond Market Initiative (ABMI) under theASEAN+3 forum and the Asian Bond Fund (ABF) under theEMEAP. Under the Asian Bond Market Initiative (ABMI), theASEAN+3 member countries continued to make significantadvancements in contributing to the development ofdeeper and more liquid bond markets. At the workinggroup level, to enhance efficiency, the initial six workinggroups3 that were established in 2003 were re-organised

mechanism to support issuances of bonds in the region,treatment of withholding tax and possible issuance ofregional multi-currency bonds. Under the WorkingGroup on Foreign Exchange Transactions and SettlementIssues, chaired by the Bank, two studies werecompleted, namely on impediments to cross-borderinvestments and issuance in Asian countries, and on thepossibility of setting up a regional settlement linkage toaddress gaps within the current settlementarrangements for bonds amongst member countries.Following the completion of the former, member


237

External Relations

countries agreed to provide the minimum relevantinformation on the rules and regulations involving cross-border bond investments and issuance. Informationprovided by member countries would be regularlyupdated on the Asian Bonds Online website4 . Withregards to the latter study, member countries haveagreed to undertake the second phase of the study in2006, focusing on reductions of various risks, inparticular foreign exchange settlement risks in cross-border payment and settlement systems.

Meanwhile, concrete achievements by individualASEAN+3 member countries included local-currencybond issuances by the multilateral development banksin Malaysia, Thailand, China and the Philippines, andthe introduction of new instruments such as thesecuritizing of student loans in Korea.

In complementing the ABMI, the EMEAP Group moved toimplement the second phase of the Asian Bond Fund (ABF2)initiative, which encompassed public participation in thefund. The ABF2 consists of nine funds, eight of which aresingle market local currency funds investing in sovereign andquasi-sovereign bonds issued in China, Hong Kong,Indonesia, Korea, Malaysia, the Philippines, Singapore andThailand respectively, while the Pan-Asian Bond Index Fund(PAIF) is a single bond fund investing in a composite ofsovereign and quasi-sovereign bonds issued in the localcurrencies of all the eight EMEAP economies. The PAIF,which was listed in July 2005 in Hong Kong, has grown by10.2% since its listing to USD1.1 billion as at end-2005. In2005, three of the eight single market funds weresuccessfully listed on their respective stock exchanges.These comprised the ABF Hong Kong Bond Index Fund,ABF Malaysia Bond Index Fund, and ABF Singapore BondIndex Fund, which were listed in June, July and August,respectively.

The listing of the ABF Malaysia Bond Index Fund, the firstExchange Traded Fund (ETF) in Malaysia, added to thediversity of listings on the Malaysian Stock Exchange andalso paved the way for the increased introduction of othermore innovative products. The listing of the ETF also raisedawareness and generated interest among domestic andinternational investors in the Malaysian bond market, thuscontributing towards the development of a deeper andbroader bond market in Malaysia. Since its launch, the lowcost ETF achieved 27% growth as at end-2005.

During the year, Bank Negara Malaysia continued topromote the Bilateral Payments Arrangement (BPA) as partof Malaysia’s efforts to enhance its trade co-operation withnon-traditional markets. Bank Negara Malaysia, as theimplementing agency for the Palm Oil Credit and Payments

Arrangement (POCPA) scheme continued to collaboratewith the Government to finance Malaysian palm oil exportsto markets with potential growth in their demand andusage for oils consumption. Moving forward, Bank NegaraMalaysia will continue to enhance the effectiveness of theBPA scheme and also explore the possibilities of expandingthe number of countries, particularly to OIC membercountries. Currently, Bank Negara Malaysia had signed theBPA with 24 countries, of which nine are OIC membercountries, while five out of the 10 countries benefiting fromthe POCPA scheme are OIC member countries.

4 www.asianbondsonline.adb.org

Regional membersspearheaded new initiatives totransform the SEACEN Centreinto an institution of regionalexcellence and choice oftraining by central bankers inthis region.Bank Negara Malaysia continued to accord a highpriority to regional co-operation in human capitalmanagement to strengthen domestic capacities inthe financial sector and macroeconomicmanagement. In this regard, Bank Negara Malaysiastrongly supported the training activities of theSEACEN Research and Training Centre, focusing ontopics relating to core central banking functions,especially in banking supervision, financial sectorreform and formulation of monetary policy. Duringthe year, the SEACEN Centre extended its training to22 non-members while continuing to providetraining to its members which expanded to 14, withthe admission of the Bank of Papua New Guinea inJune 2005. In conducting its training activities, theCentre collaborated with international traininginstitutes, including the Toronto InternationalLeadership Centre, the IMF Institute, the FinancialStability Institute, the WB Institute and the ADBInstitute. At the same time, collaboration was alsoestablished with central banks from developedcountries, such as, the Federal Reserve System of theUnited States and the Bank of Japan. In 2005, forthe first time, the Centre collaborated with the APECBusiness Advisory Council, the Asian Bankers’Association and the Pacific Economic Co-operationCouncil to conduct the public-private Dialogue on‘Cross-Border Implementation of Basel II andEmerging Regulatory Banking Supervisory Issues’.


238

This collaboration would be enhanced to bring inthe business perspective into the training conductedby the Centre.

Given the challenges facing the Centre in performing itsfunctions in the dynamic global environment, regionalmembers spearheaded new initiatives to transform theSEACEN Centre into an institution of regional excellenceand choice of training by central bankers in this region.As a result, a broad strategic direction to guide theCentre in conducting its training and research activitieswas formalised in 2005. The strategic direction ontraining involved developing training modules andleveraging on technology, establishing strategicpartnerships as well as strengthening the existingcollaboration with internationally reputable traininginstitutions to design and develop high quality trainingprogrammes. As a start, a flagship course would bedeveloped for different levels of central bank staff andwith different degrees of depth and complexities. This

would enable member central banks to select trainingactivities according to their needs. With regard to thestrategic direction on research, the Centre wouldenhance its research activities, in particular on issues ofregional importance to central banks, which wererelevant to and supported the training activities.

As part of the Bank’s continued efforts to contribute tothe region’s capacity building for long-term growth, theBank organised training and attachment programmes, aswell as extended assistance in the form of study visits andbriefings to share its experience with others. Under theMalaysian Technical Co-operation Programme (MTCP),the Bank offered places to foreign participants in twoannual programmes, namely the Central Banking Course(since 1984) and the Banking Supervision FoundationCourse (since 2002). To date, the Bank received a total of253 foreign participants since the inception of thecourses. In 2005, a total of 19 officials from 14 countriesparticipated in the training programmes.

Key International Events Hosted by Bank Negara Malaysia in 2005

JUNE 2005

22nd

Seminar on 10-Year Master Plan for Islamic Financial Services Industry

The IDB and the IFSB, in association with Bank Negara Malaysia, jointly organised the Seminar on 10-Year MasterPlan for Islamic Financial Services Industry. It was held in conjunction with the 30th AnnuaI Meeting of the IDBBoard of Governors. The objective of the seminar was to discuss key issues and considerations in the formulationof a master plan for the progressive and structured development of Islamic banking and finance. The master planwould define the blueprint and provide a common vision and template, as well as the implementation steps forcountries in charting the future of the Islamic financial services industry. The seminar attracted more than 700delegates comprising regulators, supervisors, market players and corporate figures from around the world.

22nd-23rd

Investors Conference on ‘Malaysia: An Investment Destination’

The Conference was held in conjunction with the 30th Annual Meeting of the IDB Board of Governors. Highlightingboth conventional and Islamic investment opportunities in Malaysia in an environment of rapidly changing financiallandscape, financial liberalisation and economic transformation, the Conference received an overwhelming response,with participants from 100 global institutions from 30 countries. At the close of the conference, two indices, namely,the Citigroup Malaysian Government Securities Index and the Dow Jones-RHB Islamic Malaysia Index were launched,marking another milestone in the development of the Malaysian capital market.

22nd-23rd

Shariah Scholars Dialogue

A closed session dialogue was organised by Bank Negara Malaysia to discuss the need to foster theunderstanding among Shariah scholars on Islamic finance. The dialogue was attended by more than 40 Shariahscholars, including prominent scholars from Saudi Arabia, Tunisia, Iran, Bahrain, Pakistan, Bangladesh,


239

External Relations

Indonesia, Brunei and Malaysia. Recognising the vital role of the Shariah scholars in the development of aprogressive Islamic banking and finance sector and in facilitating its integration with the global market place, aRM200 million endowment fund was established by Bank Negara Malaysia to provide the funding needs forresearch and development, and human capital development in the areas of Shariah and fiqh muamalat.

24th

Seminar on ‘Derivatives in Islamic Finance’

Bank Negara Malaysia and the Financial Market Association of Malaysia co-hosted a Seminar on ‘Derivatives inIslamic Finance’ as part of on-going efforts to accelerate the growth of Islamic financial markets by strengtheningthe linkages of their components. This necessitated the development of a wider range of Islamic financialinstruments including a tool for hedging or managing risk.

The Seminar was attended by participants from both local and foreign institutions who explored new ideas onmanaging risks from the Islamic perspective with special focus on the opportunities and challenges faced inimplementing Shariah compliance risk-mitigating techniques such as Islamic Profit Rate Swap and Islamic ForeignExchange Forward Contract. The Seminar would spur the need for greater collaborative efforts among regulators,Shariah scholars, Islamic financial engineers, researchers and practitioners to convert conceptual ideas into riskmitigation techniques and products to pave the way for a more vibrant and dynamic Islamic Financial system.

JULY 2005

13th-15th

The Euro Conference

The Euro Conference was jointly organised by the Bank and the European Commission. The high-levelconference, themed ‘Expanding ASEAN-EU Economic Links – The Role of the Euro’, aimed to exploreissues in further strengthening ASEAN-EU economic relations against the backdrop of the increasing roleof the euro in the international financial system. The Conference provided a platform for an exchange ofviews on financial market developments and prospects in ASEAN and the EU, economic and financialintegration, and the opportunities for increased trade and investment linkages between the two regionalgroupings.

Overall, the discussions at the Conference underscored that the bilateral spirit of cooperation between ASEANand the EU was intact and growing but that there was a need to strengthen cooperation with each other sothat both the regional groupings can reinforce the positive partnership to perpetuate continued sharedprosperity. It was recognised that the future of ASEAN-EU relations would be dependent on the changingstrategic landscape amidst globalisation, ASEAN’s and the EU’s desire to play a greater role in the globaleconomy and international affairs, the EU’s ability in managing its enlargement process, and ASEAN’scommitment to forge greater regional integration.

NOVEMBER 2005

21st-23rd

Regional Conference on Investment Climate and Competitiveness in East Asia

The Regional Conference on Investment Climate and Competitiveness in East Asia was jointly organised by theEconomic Planning Unit of Malaysia, the WB and Bank Negara Malaysia in Kuala Lumpur. The objective of theConference was to provide a platform for international experts, private sector representatives, and policymakers from the East Asian region to share experiences in designing and implementing policies to create agood investment climate that would lead to better economic and social outcomes through improvements inproductivity and competitiveness, resulting in higher growth and greater wealth creation.


240

The Conference, which attracted senior officials and private sector participants from 10 countries, namelyBrunei, Cambodia, China, Indonesia, Laos PDR, Malaysia, Mongolia, Philippines, Thailand and Vietnam,discussed the following:

• Various forms of investment climate constraints. These included uncertainties in government policies,inadequate infrastructure, poor governance, insufficient human capital, overly restrictive regulatoryframework and inadequate access to finance;

• Effects of investment climate constraints on firm performance;• Programmes and polices to address the constraints to enhance firm productivity; and• Some lessons from benchmark countries.

The Conference created greater awareness among participating countries on new pressures and challengesfrom the rapidly changing economic and financial environment and various approaches that could be taken toattract investment and enhance the growth potential.

DECEMBER 2005

14th-16th

Third International Forum on Financial Consumer Protection and Education

The Third International Forum on Financial Consumer Protection and Education hosted by Bank NegaraMalaysia was themed ‘Fostering Greater Consumer Protection and Education’. The Forum provided a platformfor financial regulators worldwide to discuss emerging issues relating to consumer protection and education aswell as to share knowledge and experiences in these areas.

Some 60 participants from 30 countries, comprising senior officials from regulatory authorities attended theForum. The Forum examined approaches to promoting fair market practices and equitable treatment ofconsumers as well as effective product disclosure and transparency standards. The Forum also saw anexchange of views on measuring effectiveness of these approaches and on the future or direction of financialconsumer protection and education. Significant progress was made in fostering closer working relationshipsamong regulators and laying the groundwork for the development of best practice standards on consumerprotection and education issues.


Organisation andHuman Resource

Organisational DevelopmentRisk Management in Bank Negara MalaysiaOrganisation Structure

242-246247-248

249

242

ORGANISATIONAL DEVELOPMENT

OverviewDuring the year 2005, the Bank made further progressin its efforts to enhance organisational capabilities andcapacity to achieve higher levels of efficiency andeffectiveness in performing its roles. Initiatives totransform the Bank into a knowledge-basedorganisation, which gained momentum in 2004, werecontinued in 2005, with more deliberate and focussedprogrammes and interventions in the areas of humancapital management, training and learning, informationand communications technology, knowledgemanagement, workplace and space management,information security, and corporate governance.

Throughout 2005, the organisational developmentinitiatives in the Bank gave emphasis on two priorityareas:

• Developing a more performance driven and strategy-focussed organisation; and

• Supporting the development of knowledge workersand inculcating a performance-differentiated workculture

The first priority highlights the Bank’s intent to focus onperformance and results. At the strategic level, the Bank’sperformance matrix defines four important elements,namely desired outcomes, stakeholder orientation,process efficiency, and capability development, all ofwhich are dimensions of performance critical to achievingthe Bank’s mandate. Like most other central banks ofemerging market economies, the Bank’s core mandate isto promote and ensure the nation’s monetary andfinancial stability, in order to support growth. Thismandate however is performed in the broader context ofthe Bank’s roles as a regulator, supervisor, environmentalshaper, driver of change, and as an operator of systemsand establishments specially created to meet the needs ofthe economy.

The Bank’s leadership guided the organisation’s strategicorientation by conducting a series of programmesduring the year, aimed at establishing greater clarity andshared vision among all internal stakeholders about thedesired outcomes of the Bank. Efforts were also directedtoward translating strategies into operations, aligningthe organisation, making strategy everybody’s job, andmaking strategy formulation and execution acontinuous process in the Bank.

Organisation and Human Resource

The second priority reflects the challenges faced byorganisations in a knowledge economy, namely how toattract, develop, retain and motivate knowledgeworkers, to drive organisational performance. In 2005,the Bank intensified its efforts in winning the‘competition for talent’ by modernising and enhancingits policies and practices in talent management,encompassing major reviews and reengineering ofprocesses in talent demand, talent supply, andperformance management. The Bank’s emphasis on aperformance-differentiated culture had led to majorchanges in the practices to link staff performance moredirectly to organisational performance objectives, and toreward and recognition. During 2005, the managementdemonstrated its commitment towards higherperformance standards through more stringentevaluation and assessment for decisions relating torewards management, which include promotion, jobupgrading, salary increment and bonus payment.

The Bank also continued the implementation andenforcement of the policy of continuous, self-directedlearning to further nurture and encourage “engagedlearners” who are good at linking their learningobjectives to performance objectives. Initiatives on newlearning pedagogies and support systems introducedsince 2003 to accommodate different preferences andneeds of adult learners, helped develop an enablingenvironment for continuous, life-long learning culture.The Bank’s ICT systems continued to be state-of-the-industry, with more investments made during the year tomeet knowledge workers’ demand for more bandwidth,internet protocol (IP) enabled solutions, wirelesstechnology and mobile telephony. These ICTenhancements gave staff better level of connectivity andgreater flexibility in communicating and making quickerdecisions, all of which are expected to promote greatercollaboration, easier access to information, knowledgesharing, and networking among stakeholders.

Further enhancement in knowledge managementpractices also supported the needs of knowledgeworkers in the Bank. The successful completion of theBank’s corporate taxonomy project during the year wasfollowed by a committed work to develop the Bank’sknowledge hub, a system that allows easy and fastaccess to the Bank’s strategic knowledge assetsrepository. The year saw marked increase in theutilisation of knowledge management center facilitiesand services. Better knowledge management practicescould contribute to performance enhancement

C12 Organisation & HR pg242-251 3/14/06, 9:19 PM242

243


initiatives by facilitating knowledge acquisition,knowledge reuse, knowledge sharing and knowledgecreation, by reducing time-to-competence, byenhancing decision cycle and by facilitating acollaborative work environment.

The new office design which was introduced in 2004,proved popular among the knowledge workers, partlybecause of some features that met their preferred workenvironment, thus enhancing their performance. Theinformation security policies and procedures, whichwere implemented during the year, provided furtherenablers to create an environment where staff sharedknowledge and information with confidence. Corporategovernance initiatives during the year gave moreemphasis on further refinement to existing performancereporting and monitoring practices, which led tosignificant changes in the operating departments’orientation towards accountability, ownership of resultsand outcomes, and greater alignment of departmentalperformance objectives to Bank’s strategic objectives.

Strategic Management Process and CapabilitiesThe Bank had adopted the discipline of the BalancedScorecard in 2004 as one of the means to enhance itsstrategic performance management practices. In 2005more programmes were implemented to further harnessthe Bank’s strategic management capabilities, bytargeting senior management staff particularlydepartment directors and deputy directors. The topleadership had conducted sessions with these targetgroups, and engaged them in high level strategicconversations to help establish greater clarity, alignmentand consensus on the departmental strategic objectives,focus and tasks in the context of the Bank’sorganisational goals. This had also created greaterawareness of interdependencies and opportunities formore cross-functional collaboration.

The programmes implemented in relation to strategicmanagement capabilities and processes include thearticulation of more specific strategic results and relatedstrategies and initiatives, development of performanceindicators and establishing a more systematic processfor reviewing organisational strategies and performance.Information about organisation strategy andperformance that takes into account differentdimensions of performance provided insights into thetype of internal capacities and capabilities needed bythe Bank to enhance performance. A dedicated unit –the Strategic Management Office - had been set up toenhance the strategic management capability of theBank, and assist the Bank in its journey to become amore strategy-focussed organisation.

Human Capital ManagementThe year 2005 saw focussed reassessments andimprovements of key human capital managementprocesses, encompassing major areas including talentdemand, talent supply, performance management, staffdevelopment, and rewards management. During theyear, a new Human Capital Management Committeewas established to replace the previous HumanResource Administration Policy Group, consistent withthe Bank’s commitment to alleviate human capitalmanagement issues to the highest level possible, and topromote widespread and effective inclusion andparticipation of senior line staff in the human capitalmanagement processes. The Committee oversaw theprocess to realign talent needs definition of the Bank toits strategic objectives and core processes, which led tothe development and adoption of a new competencymodel and roles profiling of departmental directors inthe Bank.

This was followed by a major exercise to conduct acomprehensive assessment of the current group ofdepartmental directors against their newly designedjobs. A parallel exercise was conducted to identify andmeasure the development needs of 70 senior managersin the Bank under the Bank’s succession managementplan, using a comprehensive assessment centerapproach.

The Human Resource Management Departmentunderwent a major transformation programme duringthe year, focussing on structural redesign, capacityenhancement and enhancement of selected core talentmanagement processes. New talents were brought in tostrengthen the department’s performance andeffectiveness. Other important milestones achievedduring the year included: the adoption of a frameworkfor the creation of technical specialist laddering in theBank to attract and retain the right talents in theoperational areas that impact the Bank’s differentiatingcapabilities, and the adoption of a more reliable set oftools and methodologies to assess and identify thecritical talent needs of the Bank. During the year, theBank sourced high caliber talents for developmentprogrammes under its scholarship scheme by goingdirect to premier learning institutions in the country.

Total staff strength at the end of 2005 remainedrelatively unchanged at 2,345. During the year 48 staff(2%) resigned while another 15 retired. Over a period offive years (2000 - 2005), the Bank’s talent grew by 25%from 1,876 to 2,345 staff - to lend support to theBank’s increasing range of responsibilities. During thesefive years, there was a marked increase in recruitment at


244

the executive level (graduate degree holders; at 235 or25.6% increase), and increase in recruitment andpromotions at middle management levels (123 or 45%increase). Non-executive staff represented about 32% oftotal staff population. The staff profile of the Bank hadshifted towards higher proportion of middlemanagement staff and reducing percentage of non-executive staff. Staff demographics also changed, with63% of the staff population now below 40 years old,with a more diverse academic and professionalbackground and experience.

Occupational safety and health continued to be anotherarea of focus during 2005. The Bank gave emphasis inpromoting healthy living among staff, by increasing thelevel of awareness on personal health and well-being,through a series of educational programmes conductedby health and medical professionals. These efforts couldencourage more balanced lifestyles for the staff in thelong-run, thus contributing to staff performance.

Training and Learning ManagementThe Bank strengthened its capacity to provide theservices of a Corporate University by 2006. Internallearning consultants worked as business partners withline departments to define learning programmes thatwere more directly linked with the strategic priorities ofthe Bank as well as learning needs of the individual.Measures had been taken to formalise action learning,project-based learning and coaching, with the HumanResource Development Centre collaborating closely withthe Human Resource Management Department.

In response to the Bank’s priority of being a moreperformance driven and knowledge-enabledorganisation, internal capabilities in fields such ashuman performance improvement (HPI), evaluation oflearning effectiveness and instructional design wereenhanced. The deployment of the LearningManagement System (LMS) and online learningsolutions for management and financial courses wereadditional milestones in the transformation towards aCorporate University. Strategic alliances with world-renowned training providers such as Centre for CreativeLeadership (CCL) and Toronto Centre for Leadership(TCL) were continuously enhanced to provide highquality learning solutions from thought leaders.

As part of the Bank’s effort to develop leaders fromwithin, the first customised Leadership DevelopmentProgramme (LDP) for senior management, done incollaboration with the Centre for Creative Leadership(CCL), was successfully completed. The programme,which spanned over a period of one and a half years,

involved 70 potential leaders who were involved inhighly engaging interactions with senior managementfor purpose of strategic alignment and valuesinculcation. The 360-degree assessment feedback toolprovided greater self-awareness in leadership style andfocussed personal development plans. The programmewas designed to give opportunities for the participantsto have strategic discourse with senior management ofthe Bank on strategic leadership issues, dialogues withproven industry leaders in the area of leading andmanaging change, and renowned academics in theareas of leadership. The Bank also conducted aleadership programme on financial supervision for theBank’s supervisors in collaboration with the TorontoCentre for Leadership.

During the year 2005, the Human ResourceDevelopment Centre delivered 65 training programmescomprising of 120 sessions, with six training man-daysper-staff. Collectively, a total of 65 training programmeswere delivered, comprising 20 sessions, with theaverage training man-days per-staff registered at 6training days.

More programmes will also be offered under theMalaysia Technical Co-operation Programme (MTCP) in2006. In addition to the intermediate Central Bankingand Basic Banking Supervision courses, programmessuch as the Islamic Banking and Finance for CentralBankers, the Basic Central Banking Course, and theInsurance Regulation and Supervision courses will beintroduced to enhance the knowledge and expertise ofthe respective departments. With the introduction ofthe new courses, work is already underway to developmore structured curricula in central banking,information technology for management, andleadership. The curricula will be developed based on thecompetency requirements identified by the Bank, thusemphasising the link between learning andperformance.

Information and Communications TechnologyManagementThe Bank continues to emphasise on Information &Communication Technology (ICT) as an integral enablingcapability in creating a high performance workforce.Specifically, ICT management stresses achieving businessefficiency by ensuring timely access to the rightinformation. Towards this end, the role of ICT is beingcontinuously transformed to improve integration withbusiness processes.

In this regard, in line with the Financial SectorMasterplan (FSMP) to improve efficiency of the


245


payments infrastructure, the payment settlementgateway has been modernised. The Bank had alsoenhanced the cheque clearing system to improveunpaid item processing at commercial banks. A chequeimage exchange and truncation system is currentlyplanned for the near future.

The major challenge in 2006 will be theimplementation of Enterprise Portal, an evolutionarystep of the existing Corporate Portal. This will augmentthe Bank’s ICT infrastructure capability and furtherenhance the delivery of services to stakeholders. TheEnterprise Portal is envisioned to take the Bank to thenext phase of knowledge-based organisation (KBO)transformation via a unified and collaborativeworkplace, which integrates people, process andinformation.

Within the ambit of promoting collaboration, the Bankhad upgraded the extranet infrastructure to allowhigher flexibility in data exchange between the Bankand the financial institutions. The deployment ofmobile devices with access to e-mail has introducednew opportunities in basic remote informationaccessibility. This is an initial step to become anextended enterprise by embracing remotecollaboration to reduce time-to-decision, ultimatelyenhancing productivity and efficiency.

In line with rising expectations, the Bank is obligatedto sustain the provision of secured, resilient and qualityservices to its stakeholders. The year marked apersistent approach towards enhancing the Bank’s ICTInfrastructure & Services Management. Various internalinitiatives, in particular the Data Centre upgrade, havebeen implemented to enable more prudent ICTgovernance through continuous optimisation of roles,processes and technology environments. Areasimproved include service availability, capacity, securityand continuity management. The year ahead presentsnew challenges with the adoption of InformationTechnology Infrastructure Library (ITIL) best practicesand the development of the new offsite Data Centre,which will be maturing from design toimplementation.

Knowledge ManagementThe strategy of embedding Knowledge Management(KM) practices into the work processes continued in2005, which contributed towards the creation ofbetter enabling environment for the knowledgeworkers in the Bank. A key milestone was thesuccessful completion of the Bank’s corporatetaxonomy project. The taxonomy is the Bank’s

information classification framework that has beendeployed as a foundation to develop a knowledgerepository management system referred to as theBank’s Knowledge Hub. Supported by search enginesand information security policies, the Knowledge Hubserves to enhance knowledge visibility andaccessibility, thus facilitating further the process ofknowledge acquisition, reuse, sharing and creation.

Another encouraging trend was the increasedutilisation of the knowledge managementinfrastructure. For instance, the number of walk-inusers of the Bank’s Knowledge Management Centre(KMC), which was established in 2004, had increased92% from 8386 to 16,126. The number of subjectspecific repositories created in 2005 by the KMCincreased from 32 to 42 (25%), which is partly ameasure of the growth in the Bank’s intellectualcapital. The other notable trend was the higherutilisation of the KMC’s Library portal by 13% from31,969 to 35,990, as well as increase in user accessto online databases of 10%, from 14,010 to 15,440.

The Bank hosted a Knowledge Management Fairduring the year to help increase awareness amongststaff about new techniques and practices inknowledge management, as well as about theimportance of information security management.Learning games and exhibitions were put in place toshowcase the many knowledge managementsolutions introduced in the Bank. The fair alsobrought together some of the better-known practicesin knowledge management, such as storytelling andsocial networking through communities of practice.

The re-configuration of space within the Bank hasresulted in more open and flexible space, includingconnectivity to information systems, thus allowingstaff from different departments to meet fordiscussions and work under very efficient andconducive working conditions. This has proven to bevaluable for knowledge workers who work in turn asindividuals, as departmental teams and in cross-functional projects.

Corporate GovernanceDuring the year, the Board of Directors convened 12meetings, apart from its quarterly Board AuditCommittee Meetings. The Management Committee,being the focal point and highest managementdecision-making authority in the Bank conducted 38meetings to discuss high-level cross-functional matters.Additionally, four Reserve Management CommitteeMeetings, 11 Monetary Policy Committee Meetings,


246

four Risk Management Committee Meetings, 11Financial Stability Committee Meetings, and threePayment Policy Committee Meetings were held in 2005.

During the year, a briefing was conducted for the PrimeMinister and Minister of Finance to present the Bank’sassessment of the economy and financial sector, theimportant financial and economic issues and challengesconfronting Malaysia, and the policy recommendationsto address these issues and challenges. In response tothe needs of its other stakeholders, including thegeneral public, the business community, domestic andinternational investors and analysts, the Bank conductedroad shows and awareness sessions to present theBank’s policies as well as to provide information onbanking and insurance matters.

AwardsHeartiest congratulations from the Bank to thefollowing staff on being conferred awards by theirrespective state rulers.

As part of its internal recognition programme, the Bankhad recognised 19 staff for their excellent performance

and academic achievement under the ExcellentPerformance and Academic Achievement awards. Inaddition to individual awards, three teams were awardedwith Quality Service, Innovation and Excellent TeamPerformance Awards. The awards were presented duringthe Bank’s Annual Dinner held on 3 September 2005.

RetirementThe Board wishes to place on record its appreciation andgratitude to the 15 retirees for their dedication andcommitment while in service with the Bank. The staffwho retired from service in 2005 are listed in Table 12.1.

CondolenceThe Board extends its condolences to the family ofthe late Tan Sri Dato' Seri Dr. Mohd. Noordin bin Md.Sopiee, on his demise on 29 December 2005. The lateTan Sri Dato' Seri Dr. Mohd. Noordin bin Md. Sopieewho was the Chairman and Chief Executive Officer ofthe Institute of Strategic and International Studies(ISIS) had served as a member of the Bank NegaraMalaysia Board of Directors since 1995 and hadcontributed significantly to the Board deliberations onthe policies of the Bank.

Table 12.1List of Retirees

No Name Department/Branch

1 Rahim bin Idris Insurance Supervision

2 Indralingam a/l Subramaniam Banking Supervision 1

3 Chan Tsoon Hean Currency Management and Operation

4 Rosli bin Sulong Currency Management and Operation

5 Hasnah binti Omar Corporate Services

6 Yaakop bin Yahaya Payment Systems

7 Samsudin bin Na'Am Property and Services

8 Hasikin bin Jasman Property and Services

9 Ismail bin Hashim IT Services

10 Abdul Latif bin Adlin Governor's Office

11 Khairani bte Rejab Banking Supervision II

12 Rohana binti Yusuf Islamic Banking and Takaful

13 Helen Jeniffer Buma Bank Regulation

14 Kunchi Raman a/l C V Kluva Chary Development Finance and Entreprise

15 Mohamed Sapian bin Kamaruddin PPPM Shah Alam

No. Name Award State

1 Puan Azalina binti Omar Pingat Jasa Kebaktian (PJK) Penang

2 Encik Saari bin Rajap Pingat Jasa Kebaktian (PJK) Pahang

3 Puan Annie Tan Pingat Khidmat Cemerlang Masyarakat (PMC) Negeri Sembilan


247


RISK MANAGEMENT IN BANK NEGARA MALAYSIA

In 2005, the focus of the Risk Management Unit was onthe implementation of new methodologies andmodified approaches which were conceived in 2004.The implementation was successful and well received bythe line departments with minor operationaladjustments to ensure smooth implementation duringthe year. The partnership between the RiskManagement Unit and the line departments alsocontinued to improve which augers well in ensuring arisk culture which is consistently embedded in all aspectsof operational as well as strategic efforts.

Risk Management StructureNo changes were made to the Risk Management structureof the Bank and the Risk Management Committee, at theapex of the Bank’s risk management governance structure,continues to be the leading forum for focussed and regulardeliberation on risk issues and the main driver of riskmanagement in the Bank. The requirements for upwardreporting by line departments and the Risk ManagementUnit to the Risk Management Committee remainedunchanged so as to enable the Committee to continue toprovide direction for addressing and managing potentialrisk in the organisation.

Risk Management PracticesIn providing the risk management oversight, the RiskManagement Committee determines the standardsand requirements to ensure that appropriate strategicand operational risk management measures areembedded into all programmes, projects and policymaking. In 2005, the Committee continued assessingthe departments’ risks, controls and emerging riskissues in their business plans so as to exercise constantvigilance on the bank’s overall risk profiles. TheCommittee also deliberated with the departments ontheir policy focus, strategic direction and the optimalapproaches to address both existing and potentialrisks. To support this, the requirement continued to befor departments to make a self-assessment of the riskprofiles of their operations and assessment of theadequacy of risk management through an annualdeclaration to Management. However, the contents ofthe annual declaration carried increased focus onstrategic level risks. The Risk Management Unitprovided technical support and performed itscoordination and oversight role by assisting thedepartments in their management reporting. Emphasiswas also placed on building greater awareness on riskmanagement in the Bank through workshops toengage staff and familiarise them with the riskmanagement methodology and practices.

In 2005, the Risk Management Unit undertookindependent assessments on an on going basis tocomplement the self-assessment exercise done via theannual declaration. These assessments not only bring afresh perspective in the identification of major risks inthe departments but to also provide assurance to theRisk Management Committee that the process hadindeed been rigorous. Further, it covers risks whichmay not be apparent due to familiarity with thefunctions or operations, which is a weakness of all self-assessment approaches. In addition, the RiskManagement Unit also assessed organisational risk,that is, with emphasis on risks which span acrossfunctional lines to address issues arising frominterdependencies which could affect the achievementof the strategic aims and objectives of the Bank. Theseresults were also reported to the Risk ManagementCommittee in the course of 2005. The three-prongedapproach, that is, self-assessment, independentassessment and organisational risk serves to provide amore holistic view of risks in the Bank. This wouldserve to enhance organisational alignment for theachievement of the Bank’s strategic results.

Policy RiskThe policy-making mechanism in the Bank is designedwith the objective of achieving the desired policyoutcome. There were no significant changes to theframework to manage policy risk at the Bank. As before,this framework covers the processes for discussion anddeliberation of all issues related to policy from theconceptualisation stage through to the development andimplementation stages. The high level committees thatpreside over policy making are the ManagementCommittee, the Monetary Policy Committee and theFinancial Stability Committee. Chaired by the Governor,the common objective of these committees is to allow forand provide a platform for high-level cross-functionaldeliberation and consultation to ensure sound policydecision-making and efficacious implementation.Another component featured in the policy framework arethe Policy Working Groups, chaired by AssistantGovernors, members comprising directors of all therelevant departments, which represent the working leveldeliberations on the policy issues.

Financial RiskThe Middle Office is responsible for the management ofthe Bank’s financial risks arising from the managementof international reserves. In the course of regularoperations, the Middle Office works closely with theInternal Audit Department and the Risk ManagementUnit to ensure strict compliance with investmentguidelines, policies and operational procedures.


248

Financial risk management continues to develop in linewith developments and trends in reserve managementactivities and the domestic financial market as increasedsophistication and achievement in technology infinancial markets dictate as such. Throughout the year,initiatives were undertaken to improve methodologiesand enhance system infrastructure in order to support amore robust and comprehensive review of financialrisks. This is reinforced by increased specialisation, morefocus on key risk areas and training programmes for keypersonnel which are aimed at developing superiorunderstanding of the complexities of variousinstruments, strategies and methodologies.

Operational RiskIn managing operational risk, the essential elements ofownership of risks, self-assessment, continual review,escalation of key risk issues and accountability forcontrol improvement and issue resolution were retained.At the functional level, the Department Heads continueto have direct responsibility for ensuring that riskmanagement practices are integral to daily operationsand that all risks are appropriately addressed.Departments are thus required to conduct processanalysis and walkthroughs which are essential to reviewcore processes for operational risks arising from changesin the working environment.

Key measures to address operational risks include theInternal Audit function which plays a crucial role in themonitoring of operational risk. Further reductions inhuman intervention in processing through the use ofcomputer systems largely reduce human relatedoperational risks. However increased vigilance is nowrequired in monitoring system availability and reliability.Additionally, for increased assurance in major projects, staffof the Risk Management Unit participate in the projectteams to ensure the appropriate risks are being managed.

Through all this, the ultimate aim for risk managementremains the same, that is, to ensure that regularmonitoring takes form to enable pre-emptive and, ifnecessary, prompt corrective actions in all areas of risk.

Business Continuity ManagementThe year 2005 witnessed various Business ContinuityManagement enhancement efforts being carried out atthe Bank to ensure that the Bank’s ability to prepare,respond to and manage any crisis or unexpectedincidences effectively continues to remain sound androbust. A yearly review of the impact of any givendisruption to departments in the Bank was conductedto validate the continued effectiveness of existing crisisarrangements that are in place. Along with lessons

learnt from other Business Continuity Managementexercises, as well as the required maintenance for theBank’s back-up facility, the review contributed to theimplementation of an exercise to upgrade this alternatefacility. This was done to ensure that the facility iscontinuously updated with the required technology toguarantee its crisis-time functionality.

Within the Business Continuity framework, there are twohigh level components, the Crisis ManagementCommittee and the Crisis Management Team. The CrisisManagement Committee, which reports to the Governorand is chaired by a designated Deputy Governor,symbolises high level endorsement of the BusinessContinuity programme in the Bank. The CrisisManagement Team has membership comprising directorsfrom all identified critical departments and supportteams.

During the year, the Business Continuity Managementunit, responsible for overseeing the Business ContinuityManagement function of the Bank, and which formspart of the Risk Management Unit, drew on the RiskManagement Committee as a forum for seeking theultimate endorsement and direction for BusinessContinuity Management exercises conducted. This is inview of the parallel membership between the RiskManagement Committee and Crisis ManagementCommittee, which sits at the apex of the Bank’sBusiness Continuity Management framework.

During the year, an internal Business ContinuityManagement website was launched to promote andraise overall staff awareness on the Bank’s BusinessContinuity Management programme as well as tocommunicate a Business Continuity Management policyendorsed by Management. It is envisaged that addedknowledge on the subject matter would help promoteand strengthen the involvement of all staff in the Bank’sBusiness Continuity Management programme. Thisultimately, would then translate to the ability of all staffto spontaneously deliver prompt and appropriatecalculated responses, crucial in any crisis.

Finally, as in previous years, periodic assessments of theBank’s capability to respond to crisis were also done.This was accomplished via the mechanisms of live-runexercises, as well as the twice-yearly Crisis ManagementTeam meeting which met to discuss emerging BusinessContinuity issues, such as the haze that affected thecountry in the year. The desired cooperation betweenthe critical departments to produce an integrated andcoordinated bank-wide arrangement was tested in asimulation that was part of the same exercise.


249


Dat

o' M

ohd

Nor

bin

Mas

hor

Dr.

Ain

i bin

ti Ib

rahi

mN

g C

how

Soo

n

Abu

Has

san

Als

hari

bin

Yaha

ya

Kam

ari Z

aman

bin

Juh

ari

Dat

o' M

ohd

Razi

f bi

n A

bd. K

adir

Don

ald

Josh

ua J

agan

atha

n

Baka

rudi

n bi

n Is

hak

Mar

zuni

sham

bin

Om

ar

Sant

hini

a/p

Cha

ndra

pal

Dat

o' M

ohd

Razi

f bi

n A

bd. K

adir

Dat

uk Z

aman

i bin

Abd

ul G

hani

Che

Zak

iah

bint

i Che

Din

Chu

ng C

hee

Leon

g

Mah

di b

in M

ohd.

Arif

fin

Ram

li bi

n Sa

ad

Ahm

ad H

izza

d bi

n Ba

haru

ddin

Ahm

ad H

izza

d bi

n Ba

haru

ddin

Nor

Sha

msi

ah b

inti

Moh

d Yu

nus

Dr.

Zeti

Akh

tar

Azi

z

Hon

g Ya

ng S

ing

Mio

r M

ohd

Zain

bin

Mio

r M

ohd

Tahi

r

Lim

Lai

Hon

g

Lim

Foo

Tha

i

Dat

o' M

ohd

Nor

bin

Mas

hor

Ahm

ad b

in M

ansu

r

Teng

ku Z

aib

bin

Raja

Ahm

ad

Dat

o' M

oham

ad D

aud

bin

Hj.

Dol

Moi

n

Dat

o' O

oi S

ang

Kua

ng

Muh

amm

ad b

in Ib

rahi

m

Nor

zila

bin

ti A

bdul

Azi

z

Wan

Han

isah

bin

ti W

an Ib

rahi

m

Vaca

nt

Dr.

Sukh

dave

Sin

gh

Gop

ala

Kris

hnan

Sun

dara

m

V. V

ijaya

ledc

hum

y

Ism

ail b

in A

low

i

Abd

ul A

ziz

bin

Abd

ul M

anaf

Cha

n Ya

n K

it

Zulk

ifli b

in A

bd R

ahm

an

Inte

rnal

Aud

itH

or W

eng

Ken

g

Secr

etar

y to

the

Boa

rd

Gov

erno

r's

Off

ice

Cor

pora

te C

omm

unic

atio

ns

Bank

Reg

ulat

ion

Insu

ranc

e Re

gula

tion

Isla

mic

Ban

king

and

Tak

aful

Dev

elop

men

t Fi

nanc

e an

d En

terp

rise

Risk

Man

agem

ent

ASS

ISTA

NT

GO

VER

NO

RRE

GU

LATI

ON

DEP

UTY

GO

VER

NO

R

Bank

ing

Supe

rvis

ion

I

Bank

ing

Supe

rvis

ion

II

Insu

ranc

e Su

perv

isio

n

Info

rmat

ion

Syst

ems

Supe

rvis

ion

Paym

ent

Syst

ems

Prop

erty

and

Ser

vice

s

ASS

ISTA

NT

GO

VER

NO

RSU

PERV

ISIO

N

BO

AR

D O

F D

IREC

TOR

S

GO

VER

NO

R

Hum

an R

esou

rce

Man

agem

ent

IT S

ervi

ces

Hum

an R

esou

rce

Dev

elop

men

t C

entr

e

Stra

tegi

c M

anag

emen

t

Cor

pora

te S

ervi

ces

Secu

rity

Cur

renc

y M

anag

emen

t an

d O

pera

tion

Bran

ches

(6)

Lond

on R

ep. O

ffic

e

New

Yor

k Re

p. O

ffic

e

ASS

ISTA

NT

GO

VER

NO

RO

RGA

NIS

ATI

ON

AL

DEV

ELO

PMEN

T

DEP

UTY

GO

VER

NO

R

ASS

ISTA

NT

GO

VER

NO

RIN

VES

TMEN

T A

ND

OPE

RATI

ON

S

Inve

stm

ent

Ope

ratio

ns a

nd F

inan

cial

Mar

ket

ASS

ISTA

NT

GO

VER

NO

REC

ON

OM

ICS

Mon

etar

y A

sses

smen

t an

d St

rate

gy

Lega

l

Econ

omic

s

Inte

rnat

iona

l

Fina

nce

Fore

ign

Exch

ange

Adm

inis

trat

ion

Stat

istic

al S

ervi

ces

BA

NK

NEG

AR

A M

ALA

YSI

AB

AN

K N

EGA

RA

MA

LAY

SIA

Org

anis

atio

n S

tru

ctu

re

Spec

ial I

nves

tigat

ion

Fina

ncia

l Int

ellig

ence

Koi

d Sw

ee L

ian


Balance Sheet as at 31 December 2005

Annual Accounts

252

C13_Annual Account pg252-262 3/14/06, 9:50 PM252

253

Annual Accounts

253

CERTIFICATE OF THE AUDITOR GENERALON THE FINANCIAL STATEMENTS OF BANK NEGARA MALAYSIA

FOR THE YEAR ENDED 31 DECEMBER 2005

I have audited the financial statements of Bank Negara Malaysia for the year ended 31 December 2005. These

financial statements are the responsibility of the management. My responsibility is to express an opinion on these

financial statements based on my audit.

2. The audit has been conducted in accordance with the Audit Act 1957 and in accordance with approved auditing

standards. Those standards require the audit be planned and performed to obtain reasonable assurance whether the

financial statements are free of material misstatement. This audit includes examining, on a test basis, evidence

supporting the amounts and disclosures in the financial statements. Evaluation is also made on the accounting

principles used and the overall financial statements presentation.

3. In my opinion, the financial statements give a true and fair view of the financial position of Bank Negara Malaysia

as at 31 December 2005 and of the results of its operations for the year then ended in accordance with

approved accounting standards.

(TAN SRI DR. HADENAN BIN A. JALIL)AUDITOR GENERAL

MALAYSIA

PUTRAJAYA

15 FEBRUARY 2006


525

256

STATEMENT BY CHAIRMANAND ONE OF THE DIRECTORS

We, Zeti Akhtar Aziz and Oh Siew Nam, being the Chairman and one of the Directors of Bank Negara Malaysia, do

hereby state that in the opinion of the Board, the financial statements are drawn up so as to give a true and fair view

of the state of affairs of Bank Negara Malaysia as at 31 December 2005 and of the results of operations for the year

ended on that date.

On behalf of the Board, On behalf of the Board,

ZETI AKHTAR AZIZ OH SIEW NAM

CHAIRMAN DIRECTOR

15 FEBRUARY 2006 15 FEBRUARY 2006

KUALA LUMPUR KUALA LUMPUR


257

DECLARATION BY THE OFFICER PRIMARILY RESPONSIBLEFOR THE FINANCIAL MANAGEMENT OF BANK NEGARA MALAYSIA

I, Abdul Aziz Abdul Manaf, being the officer primarily responsible for the financial management of Bank Negara

Malaysia, do solemnly and sincerely declare that the financial statements, are to the best of my knowledge and belief,

correct and I make this solemn declaration conscientiously believing the same to be true and by virtue of the provisions

of the Statutory Declarations Act, 1960.

Subscribed and solemnly declared )

by the abovenamed at Kuala Lumpur )

this 15 February 2006. )

Before me,


258

Bank Negara MalaysiaBalance Sheet as at 31 December 2005

2005 2004

RM RMASSETS NoteGold and Foreign Exchange 3 264,421,558,175 249,704,108,859International Monetary Fund Reserve Position 1,186,337,566 3,068,374,430Holdings of Special Drawing Rights 748,345,706 765,326,109Malaysian Government Papers 4 961,013,021 221,100,747Deposits with Financial Institutions 2,878,873,387 2,887,524,750Loans and Advances 5 10,295,735,304 10,637,048,634Other Assets 6 14,940,995,292 17,570,435,602

Total Assets 295,432,858,451 284,853,919,131

LIABILITIES AND CAPITALCurrency in Circulation 34,396,746,453 32,353,945,724Deposits: Commercial Banks, Finance Companies

and Merchant Banks 140,606,624,541 124,709,136,071Federal Government 27,273,933,343 25,704,665,762Others 7 4,297,159,874 4,884,385,498

Bank Negara Papers 20,347,587,398 16,877,443,819Allocation of Special Drawing Rights 8 751,127,007 820,579,258Other Liabilities 9 29,551,916,821 27,843,305,494

Total Liabilities 257,225,095,437 233,193,461,626

Authorised Capital RM200,000,000Paid-up Capital 10 100,000,000 100,000,000General Reserve Fund 11 8,103,080,465 6,742,117,315Other Reserves 12 30,004,682,549 44,818,340,190

Total Capital 38,207,763,014 51,660,457,505

Total Liabilities and Capital 295,432,858,451 284,853,919,131

Notes on the following pages form part of these financial statements.


259

Profit and Loss Statement for the Year Ended 31 December 2005

2005 2004RM RM

NoteTotal Income 13 4,989,023,000 3,427,026,087

Less:

Recurring Expenditure 14 809,055,659 504,604,402

Development Expenditure 15 619,004,191 145,180,660

Total Expenditure 1,428,059,850 649,785,062

Net Profit 3,560,963,150 2,777,241,025

Profit and Loss Appropriation Statement for the Year Ended 31 December 2005

2005 2004RM RM

Net Profit 3,560,963,150 2,777,241,025

Transfer to Other Reserves 16 1,000,000,000 700,000,000

Transfer to General Reserve Fund 1,360,963,150 877,241,025

Amount Payable to Federal Government 1,200,000,000 1,200,000,000

3,560,963,150 2,777,241,025

Notes on the following pages form part of these financial statements.


260

Notes To The Financial Statements - 31 December 2005

1. Principal Activities of the BankThe Bank’s principal roles and responsibilities are as follows:

(a) to achieve monetary stability;

(b) to promote a stable financial system;

(c) to ensure an efficient payment system;

(d) to issue currency in Malaysia; and

(e) to act as a banker and a financial adviser to the Federal Government.

2. Accounting Policies(a) Gold, Securities and Investments

Gold, securities and investments are stated at cost and provisions have been made for diminution in value as

at 31 December 2005.

(b) Foreign Currency TranslationAssets and liabilities in foreign currencies have been revalued into ringgit at rates of exchange ruling on the

balance sheet date. Transactions in foreign currencies during the year have been translated into ringgit at

rates of exchange ruling on value dates.

The International Reserves comprising Gold and Foreign Exchange, International Monetary Fund Reserve

Position and Holdings of Special Drawing Rights at 31 December 2005 was RM266,356.2 million

equivalent to USD70,489.3 million.

(c) Repurchase and Reverse-Repurchase AgreementsThe amount borrowed under repurchase agreements is reported under 'Other Liabilities'. The amount lent

under reverse-repurchase agreements is reported under 'Other Assets'. The difference between the amount

received and amount paid under repurchase and reverse-repurchase agreements is recognised as interest

expense and interest income on a straight line basis, respectively.

3. Gold and Foreign Exchange

2005 2004RM RM

Foreign Securities 214,223,340,658 172,451,464,614

Foreign Deposits 30,954,385,954 55,869,780,871

Balances with Other Central Banks, Bank for

International Settlements (BIS) and

International Monetary Fund (IMF) 5,043,988,892 6,307,319,881

Others 14,199,842,671 15,075,543,493

264,421,558,175 249,704,108,859

4. Malaysian Government Papers

2005 2004RM RM

Malaysian Government Securities 961,013,021 221,100,747


261

5. Loans and AdvancesLoans and advances comprise mainly advances extended by the Bank to the participating institutions under

section 30(1) of the Central Bank of Malaysia Act 1958.

6. Other AssetsOther assets include investments in shares and bonds of RM14,421,797,503 acquired under section 30(1)(j) and

section 30(1)(oo)(i) of the Central Bank of Malaysia Act 1958 and RM200 million for the establishment of Fund

for Shariah Scholars in Islamic Finance.

7. Deposits - OthersA substantial part of these deposits comprises deposits from Federal Statutory Authorities.

8. Allocation of Special Drawing RightsIMF member countries are allocated Special Drawing Rights (SDR) in proportion to their subscriptions to the IMF.

The allocation represents a dormant liability of the Bank to the IMF, against which assets are received in SDR from

the IMF. The net cumulative of the allocation was RM751,127,007 equivalent to SDR139,048,000.

9. Other LiabilitiesOther liabilities include mainly placements by licensed banking institutions under repurchase agreements and

accounts payables.

10. Paid-up CapitalThe entire issued and paid-up capital of RM100 million is owned by the Government of Malaysia.

11. General Reserve Fund

2005 2004RM RM

As at 1 January 6,742,117,315 5,864,876,290

Transfer from Net Profit 1,360,963,150 877,241,025

As at 31 December 8,103,080,465 6,742,117,315

12. Other ReservesOther reserves comprise the Exchange Rate Fluctuation Reserve and the Contingency Reserve.

13. Total IncomeTotal income comprises revenue from foreign reserve management which includes interest and dividend, non-

treasury income and is stated at net of amortisation/accretion of premiums/discounts and monetary policy cost.

14. Recurring ExpenditureRecurring expenditure are expenses incurred in managing and administering the day-to-day operations of the

Bank. It includes currency and staff related cost. Currency related cost arising from the larger volume of notes

printed and coins minted contributed significantly to the increased recurring expenditure in 2005.


262260

15. Development ExpenditureDevelopment expenditure are expenses incurred mainly to finance developmental and long term projects

undertaken by the Bank in line with its strategies, principal roles and responsibilities. The higher development

expenditure in year 2005 was mainly due to initial contributions of RM250 million for the establishment of BNM

Medical Fund and RM200 million for the establishment of INCEIF Trust Fund to support the role of the

international centre for education in Islamic finance.

16. Transfer to Other ReservesThis transfer is made in accordance with Section 7(2) of Central Bank Act 1958.

17. Contingent LiabilitiesTotal contingent liabilities as at 31 December 2005 amounted to RM7,042,957,192. These comprise:

(a) an amount of RM6,977,728,936 which represents the obligation of the Bank to pay in full, in SDR or other

convertible currencies, the amount of Malaysia's quota in the IMF under the Articles of Agreement; and

(b) an amount of RM65,228,256 which represents the uncalled portion of the 3,220 units of shares held by the

Bank in BIS. The amount is based on the nominal value (SDR5,000) of the uncalled portion and SDR rate as at

the balance sheet date.

18. Income TaxThe Bank is exempted from payment of income tax and supplementary income tax as set out in the Income Tax

(Exemption) (No. 7) Order 1989.


262

Contents

1. Foreign Exchange Administration Policies P12. Funds Administered/Funded by Bank Negara Malaysia: Fund Utilisation P103. Financial Sector Masterplan P114. Licensed Banking Institutions (as at 31 December 2005) P165. Financial Institutions Offering Islamic Banking Services (as at 31 December 2005) P186. Shariah Advisory Council Members P20

Key Economic and Financial Statistics

Chapter 1: The Malaysian Economy in 2005A.1 Gross Domestic Product by Kind of Economic Activity in Constant 1987 Prices P23A.2 Growth in Manufacturing Production (2000=100) P24A.3 Production of Primary Commodities P25A.4 GNP by Demand Aggregates P26A.5 Savings-Investment Gap P27A.6 Balance of Payments P28A.7 Principal Markets for Manufactured Exports P30A.8 Principal Export Markets for Electronics P31A.9 Principal Export Markets for Electrical Products P31

A.10 Principal Export Markets for Chemicals and Chemical Products P32A.11 Principal Export Markets for Manufactures of Metal P32A.12 Principal Export Markets for Optical and Scientific Equipment P33A.13 Principal Export Markets for Petroleum Products P33A.14 Export Prices of Major Commodities P34A.15 Principal Export Markets for Palm Oil P34A.16 Principal Export Markets for Rubber P35A.17 Principal Export Markets for Saw Logs P35A.18 Principal Export Markets for Sawn Timber P36A.19 Principal Export Markets for Crude Oil P37A.20 Principal Export Markets for LNG P37A.21 External Debt and Debt Servicing P38A.22 Consumer Price Index (2000=100) Sub-groups of Food P39A.23 Producer Price Index (1989=100) P39A.24 Labour Market: Selected Indicators P40A.25 New Supply of Purpose-Built Office Space and Retail Space in Malaysia P41A.26 Average Monthly Rentals for Prime Office and Retail Space in the Klang Valley P41

Chapter 2: Monetary and Fiscal DevelopmentsA.27 Broad Money (M3) P42A.28 Money Supply: Annual Change and Growth Rates P43A.29 Interest Rates (%) P44A.30 Consolidated Public Sector Finance P45

Chapter 3: Outlook and PolicyA.31 Major Industrial Countries: Key Economic Indicators P46A.32 East Asia: Key Economic Indicators P47

Annex

Chapter 4: The Financial SystemA.33 Sources and Uses of Funds of the Financial System P48

Chapter 5: The Banking SystemA.34 Commercial Banks: Commitments and Contingencies P49A.35 Merchant Banks: Commitments and Contingencies P50A.36 Commercial Banks: Income and Expenditure P51A.37 Merchant Banks: Income and Expenditure P51A.38 Commercial Banks: Direction of Lending P52A.39 Merchant Banks: Direction of Lending P53A.40 Commercial Banks: Non-performing Loans by Sector P54A.41 Merchant Banks: Non-performing Loans by Sector P55A.42 Banking System: Selected Indicators P56A.43 Banking System: Key Data P58A.44 Housing Credit Institutions P59A.45 Outstanding Housing Loans P60A.46 Approved Housing Loans P60

Chapter 6: The Islamic Financial SystemA.47 Islamic Banking System: Key Data P61A.48 Islamic Banking System: Sources and Uses of Funds P62A.49 Islamic Banking System: Commitments and Contingencies P62A.50 Islamic Banking System: Income and Expenditure P63A.51 Islamic Banking System: Financing Activities P64A.52 Islamic Banking System: Financing to Small and Medium Enterprises P64A.53 Islamic Banking System: Direction of Financing P65A.54 Islamic Banking System: Non-performing Financing by Sector P66A.55 Islamic Banking System: Deposits by Type and Institution P67

Chapter 7: Development Financial InstitutionsA.56 Development Financial Institutions: Sources and Uses of Funds P68A.57 Development Financial Institutions under DFIA: Sources and Uses of Funds P69A.58 Development Financial Institutions: Direction of Lending P70A.59 Development Financial Institutions under DFIA: Direction of Lending P71A.60 Bank Perusahaan Kecil & Sederhana Malaysia Berhad (SME Bank) P72A.61 Export-Import Bank of Malaysia Berhad P73A.62 Bank Simpanan Nasional P74A.63 Bank Kerjasama Rakyat Malaysia Berhad P75A.64 Bank Pembangunan Malaysia Berhad P76A.65 Bank Pertanian Malaysia P77A.66 Other Development Financial Institutions: Core Activities P78A.67 Development Financial Institutions: Selected Data P79A.68a Development Financial Institutions: Government Special Funds P80A.68b Development Financial Institutions: Government Special Funds P81A.69a Development Financial Institutions: Bank Negara Malaysia Funds P82A.69b Development Financial Institutions: Bank Negara Malaysia Funds P83A.70a Development Financial Institutions: Funds from Multilateral and International Agencies P84A.70b Development Financial Institutions: Funds from Multilateral and International Agencies P85

Chapter 8: Other Financial InstitutionsA.71 Leasing Companies: Sources and Uses of Funds P86A.72 Leasing Companies: Income and Expenditure P87A.73 Leasing Companies: Financing by Sector P87A.74 Factoring Companies: Sources and Uses of Funds P88A.75 Factoring Companies: Income and Expenditure P88A.76 Factoring Companies: Financing by Sector P89

Chapter 9: Financial MarketsA.77 Capital Market Debt Securities: Amount Outstanding P90

Annex

P1

Foreign Exchange Administration Policies

Malaysia has always maintained a liberal foreign exchange administration regime. The implementation of foreign ex-change administration rules in Malaysia supports the monitoring of capital flows into and out of the country to preserve itsfinancial and economic stability.

As part of Malaysia’s continuous effort to increase efficiency and reduce cost of doing business, the foreign exchangeadministration rules have been progressively liberalised and simplified.

A. RESIDENTSTo encourage better risk management activities, promote cost competitiveness and the use of onshore serviceproviders, residentsi are given the flexibility to manage own funds onshore and offshore. Residents may enter intorisk management arrangements with licensed onshore banks (licensed commercial and Islamic banks) in Malaysia.Details are as listed below:

I Import and Export of Goods and Services

(a) Payment for Goods and Services

A resident may pay a non-resident any amount in foreign currency, other than the currency of the State of Israel,for import of goods and services.

A resident must receive payment for export of goods and services in foreign currency, other than the currency ofState of Israel, from a non-resident.

Proceeds arising from export of goods must be received and repatriated by the resident as per the sales contractwhich should not exceed six months from the date of export. Payments by a resident to another resident for goodsand services must be made in ringgit.

(b) Hedging of Payment or Receipt

A resident may hedge foreign exchange exposures arising from:

• Payments due to a non-resident for import of goods and services;

• Receipts due from a non-resident for export of goods and services; or

• Anticipation of payments or receipts for import or export of goods and services provided to a non-resident.

All hedging activities by residents may be undertaken only with licensed onshore banks or approved merchantbanks in Malaysia.

(c) Retention of Foreign Currency Proceeds

Upon receiving proceeds from export of goods and services, the resident may sell the foreign currency for ringgit oranother foreign currency or retain in foreign currency accounts maintained with licensed onshore banks or ap-proved merchant banks. There are no limits imposed on the foreign currency accounts.

(d) Reporting on Import or Export of Goods

There is no requirement to report to the Controller of Foreign Exchange (the Controller) for any import of goodsfrom non-residents.

Only resident exporters with annual gross export proceeds exceeding the equivalent of RM50 million are requiredto submit quarterly reports to the Controller.

P2

II Investments in Foreign Currency Assetsii

(a) Payment for Investment in Foreign Currency Assets

A resident, individual or company, without domestic ringgit credit facilitiesiii is free to invest in any foreigncurrency assets. These investments can be financed with:

• Any amount of foreign currency funds converted from resident’s own ringgit funds.

• Any amount of resident’s own foreign currency funds retained in accounts in Malaysia or overseas.

• Up to an aggregate equivalent to RM10 million from foreign currency credit facilities.

A resident, individual or company, with domestic ringgit credit facility may invest any amount in foreigncurrency assets using foreign currency funds maintained in Malaysia or offshore. The resident may also convertringgit funds into foreign currency up to the following limits for this purpose:

• Up to the equivalent of RM10 million in aggregate per calendar year by a company on a corporate groupbasis.

• Up to the equivalent of RM100,000 in aggregate per calendar year by an individual.

For a resident company intending to invest in foreign currency assets, shareholders’ funds of the company mustbe at least RM100,000 and must be in operation for at least one year. This is irrespective whether the companyhas or does not have domestic ringgit credit facilities.

A resident individual may also convert ringgit into foreign currency for investment in foreign currency securitiesunder the Employee Share Option/Purchase Scheme offered by overseas parent or related companies of theindividual’s employer.

In addition, a resident institutional investor may invest in foreign currency assets for resident and non-residentclients as follows:

• Unit trust management company:

(i) The full amount of net asset value (NAV) attributed to non-residents.

(ii) 30% of NAV attributed to residents.

• Asset/fund management company for:

(i) The full amount of funds placed by non-resident clients.

(ii) The full amount of funds placed by resident clients with no domestic ringgit credit facilities.

(iii) 30% of funds placed by resident clients with domestic ringgit credit facilities.

Funds from different unit trust management companies and fund managers may be pooled to benefit fromeconomies of scale when purchasing foreign currency assets.

A resident insurance company may invest in foreign currency assets up to 5% of the company’s margin ofsolvency and 30% of the NAV of investment-linked funds marketed.

A resident takaful operator may invest in foreign currency assets up to 5% of the operator’s total assets.

(b) Hedging of Investments in Foreign Currency Assets

A resident may hedge foreign exchange risks arising from payment for permitted investments and the value ofexisting foreign currency assets. Such hedging may be undertaken with licensed onshore banks or approvedmerchant banks in Malaysia.

Annex

P3

(c) Registering and Reporting of Overseas Investments in Foreign Currency Assets

All payments for overseas investments exceeding the equivalent of RM50,000 must be registered with the Controllerat least seven working days prior to making the payments.

A resident with outstanding overseas investments in excess of the equivalent of RM1 million is required to submitquarterly report on the overseas investments to the Controller.

(d) Registering and Reporting of Onshore Investment in Foreign Currency Assets

There are no requirements for registration or reports by a resident investing in foreign currency assets offered byapproved onshore entities.

III Credit Facilities Obtained by Resident

(a) Foreign Currency Credit Facilities

A resident is free to obtain trade financing facilities of any amount in foreign currency from licensed onshorebanks.

A resident company may obtain credit facilities in foreign currency up to the equivalent of RM50 million in aggre-gate on a group basis from licensed onshore banks, licensed merchant banks and non-residents.

A resident individual may also obtain credit facilities in foreign currency up to the equivalent of RM10 million inaggregate from licensed onshore banks, licensed merchant banks and non-residents.

Any amount exceeding the above permitted limits would require prior permission of the Controller. Where theaggregate amount exceeds the equivalent of RM1 million and up to the permitted limit, the resident (company orindividual) is required to register the credit facility with the Controller, prior to loan drawdown.

A resident individual or company may finance investments in foreign currency assets up to RM10 million equivalentin aggregate from foreign currency credit facilities.

There is no restriction for a resident to repay or prepay permitted credit facilities. Any prepayment exceeding theequivalent of USD10 million of the facilities should be registered with the Controller prior to effecting theprepayments.

(b) Ringgit Credit Facilities

A resident is required to seek prior permission of the Controller to obtain any amount of credit facility in ringgitfrom non-residents, including from non-resident shareholders or directors.

IV Forward Foreign Exchange Contracts

(a) Permissible Forward Foreign Exchange Contracts

A resident is free to enter into forward foreign exchange contracts with licensed onshore banks and approvedmerchant banks for the following purposes:

• Hedging for any payments or receipts for import or export of goods and services as well as income. Thecontracts may be based on firm commitment or anticipatory basis.

• Hedging for any committed capital inflows or outflows, including:

(i) Drawdown of permitted foreign currency credit facilities

(ii) Repayment of foreign currency credit facilities up to the amount repayable within 24 months

P4

(iii) Payments for permitted investment in foreign currency assets, including extension of credit facilities tonon-residents

• Hedging for existing investments in foreign currency assets

(b) Maturity Date of Contracts

The maturity date of the forward foreign exchange contract should be the expected date of receipt or payment ofthe underlying transaction. In the event the foreign currency receivables are received earlier, the resident can sellthe foreign currency receipts for ringgit on spot basis or temporarily retain the receipts in onshore foreign currencyaccount, pending maturity of the forward foreign exchange contract.

For forward sale of export proceeds, the maturity date of the forward foreign exchange contract should not belater than six months after the intended date of export.

For forward foreign exchange contract involving two foreign currencies, the use or retention of the foreigncurrency purchased by the resident must be for permitted purposes.

(c) Interest Rate Swaps

A resident with firm underlying commitment may enter into interest rate swaps with licensed onshore banks,approved merchant banks and licensed offshore banks in Labuan.

V Issuance of Ringgit Private Debt Securities

A resident company is free to issue any amount of ringgit Private Debt Securities.

Proceeds from the issuance may be used for any purpose including the purchase of foreign currency assets of notmore than RM10 million in a calendar year.

VI Foreign Currency Accounts (FCA)

A resident, individual or company, with or without any domestic credit facilities is free to open FCA to retain anyamount of foreign currency receipts, other than receipts arising from export of goods from Malaysia, with:

• licensed onshore banks;

• approved merchant banks;

• licensed offshore banks in Labuan; or

• overseas banks.

A resident exporter may open FCA with licensed onshore banks to retain any amount of foreign currency exportreceipts.

A resident individual or company may convert ringgit into foreign currency and credit into FCA onshore andoffshore. Conversions of ringgit funds must comply with requirement on investments in foreign currency assets.

A resident company maintaining FCA with licensed offshore banks in Labuan or overseas banks is required tosubmit monthly statement (Statement OA) to the Controller.

B. NON-RESIDENTSNon-residents are free to invest in Malaysia in any form. There are no restrictions on the repatriation of capital,profits and income earned from Malaysia, including salaries, wages, royalties, commissions, fees, rental, interestprofits or dividends. To complement the non-residents’ investment strategy, non-residents may obtain financingfrom licensed onshore banks both in ringgit and foreign currency and enter into foreign exchange contracts withlicensed onshore banks to actively manage currency risks arising from investments in ringgit assets. Non-residentsare also free to convert foreign currency into ringgit and vice versa. Details are as follows:

Annex

P5

I Investment in Malaysia

(a) Foreign Direct Investments

A non-resident may incorporate a company, register a branch, and/or establish sole proprietorship or partnership inMalaysia with the Companies Commission of Malaysia. Please refer to http://www.ssm.com.my/ for details.

Such businesses in Malaysia are resident entities irrespective whether the businesses are controlled by residents ornon-residents.

A non-resident is free to purchase any ringgit equity irrespective whether listed or not listed in the Malaysianexchange.

(b) Portfolio Investments

A non-resident is free to make any portfolio investments, including purchasing of any ringgit debt securities issuedby non-residents in Malaysia.

(c) Investment in Immovable Properties

A non-resident is free to purchase immovable properties (residential and commercial) in Malaysia. Suchpurchases should comply with guidelines issued by the Foreign Investment Committee (FIC). Please refer tohttp://www.epu.jpm.my/ for details.

A non-resident is free to obtain up to three loans from residents to finance the purchase of immovable propertiesin Malaysia.

A non-resident is required to obtain the prior approval of the Controller for financing the purchase of land only.

Loans by domestic financial institutions are determined by the financial institution’s own policies and the ForeignInvestment Committee (FIC) guidelines.

(d) Opening of Account in Ringgit (External Account)

External Account is a ringgit account belonging to a non-resident or where the beneficiary of the funds in theaccount is a non-resident.

A non-resident may open and maintain any number of External Accounts with any onshore financial institutions.

There is no restriction on the amount of ringgit funds that can be retained in the External Account.

Ringgit funds in an External Account can be used for the following purposes:

• Purchase of foreign currency, excluding the currency of the State of Israel.

• Purchase of ringgit assets in Malaysia.

• Payment for goods and services for own use in Malaysia.

• Payment of administrative and statutory expenses incurred in Malaysia.

• Payment under a non-financial guarantee to a resident.

• Extension of ringgit credit facilities to employees in Malaysia in accordance with the terms and conditions ofemployment.

P6

• Transfers to:

(i) Another External Account of the same account holder.

(ii) Another External Account of different account holder or Resident Account by way of:

– Automated Teller Machine transfer up to RM5,000 per person, per day, per bank for any purpose.

– Internet-bank transfers up to RM5,000 per person, per day, per bank for any purpose.

• Payment to residents for any purpose other than the following:

(i) Payment for the import of goods and services.

(ii) Extension of ringgit credit facilities to residents other than permitted by the Controller.

(iii) Settlement under financial guarantees.

(iv) Payment on behalf of a third party.

Ringgit funds in the External Account may be derived from:

• Sale of foreign currency, other than the currency of the State of Israel, for ringgit with licensed onshore banks.

• Sale of ringgit assets.

• All income derived in Malaysia including salaries, wages, royalties, commissions, fees, rental, interest, profitsor dividends.

• Proceeds from ringgit credit facilities permitted by the Controller.

• Proceeds from repayment of ringgit credit facilities permitted by the Controller.

• Transfers from:

(i) Another External Account of the same account holder.

(ii) Another External Account of different account holder or Resident Account by way of:

– Automated Teller Machine transfer up to RM5,000 per person, per day, per bank for any purpose.

– Internet-bank transfers up to RM5,000 per person, per day, per bank for any purpose.

• Deposit of ringgit notes not exceeding RM10,000 per day.

• Deposit of ringgit cheques up to RM5,000 per cheque for any purpose.

There are no restrictions on the operation of External Accounts belonging to:

• Non-residents working or studying in Malaysia (including their spouse, children and/or parents who arecurrently residing in Malaysia).

• Non-resident participants of the Malaysia My Second Home programme.

• Central banks, Embassies, Consulates, High Commissions, supranational or international organisationsrecognised by the Government of Malaysia.

Such persons or organisations can use funds in the External Accounts for all purposes, including the permissiblepurposes referred above.

Annex

P7

(e) Opening of Account in Foreign Currency

There are no restrictions on a non-resident to open and maintain any number of foreign currency accounts withlicensed onshore banks and licensed merchant banks in Malaysia. There is also no restriction on the amounts thatcan be retained in these accounts.

There are no restrictions imposed on the use of foreign currency funds in the account. Funds in such accounts maybe converted into ringgit with licensed onshore banks or may be repatriated at any time.

(f) Lending to Residents in Ringgit

A non-resident may lend in ringgit to a resident who has obtained prior permission of the Controller.

(g) Lending to Residents in Foreign Currency

A non-resident may lend in foreign currency to a resident as long as the resident’s total foreign currency creditfacilities are within permitted limits.

II Payment for Investments

A non-resident may pay in foreign currency or in ringgit from own External Account for investments in Malaysia.

III Borrowing from Residents in Ringgit

A non-resident is free to obtain ringgit credit facilities as follows:

• From licensed banking institutions in Malaysia up to an aggregate of RM10 million for use in Malaysia by thenon-resident which is not a non-resident correspondent bank or non-resident stockbroking company.

• From licensed onshore banks up to RM200 million on intra-day and overnight basis by a non-residentstockbroking company or a custodian bank. The facilities are strictly for financing funding gaps due to settle-ment timing mismatches, unforeseen or inadvertent /technical administration errors or delays due to time zonedifference in relation to settlement of trades on Bursa Malaysia (stock exchange in Malaysia).

• From resident stockbroking companies in the form of margin financing by the non-resident which is not a non-resident correspondent bank or non-resident stockbroking company.

• From resident insurers up to the value of the cash surrender value of the insurance policies purchased by thenon-resident.

• From a non-bank resident up to RM10,000.

• From residents, including financial institutions, up to three loans to finance the purchase of immovable proper-ties in Malaysia.

• From residents and non-residents through issuance of Ringgit Private Debt Securities in Malaysia by MultilateralDevelopment Banks or foreign multinational corporations.

IV Borrowing from Residents in Foreign Currency

A non-resident may obtain any amount of foreign currency credit facilities from licensed onshore banks, approvedmerchant banks and non-bank residents with no domestic ringgit credit facilities.

V Hedging of Investments

A non-resident is free to enter into a foreign exchange contract on spot or forward basis with a licensed onshorebank for the following:

P8

• To buy ringgit to make payment to a resident.

• To sell ringgit funds arising from a committed transaction in Malaysia.

The maturity date of the foreign exchange contracts should be the expected date of payments or receipts of theunderlying committed transactions.

The total amount of the foreign exchange contracts should not exceed the expected sum of payments or receiptsof the underlying committed transactions.

VI Sale of Investments

A non-resident may sell any investments in Malaysia, including securities not listed on Bursa Malaysia, to a residentor to a non-resident.

A resident may pay or settle the purchase of the ringgit assets from the non-resident seller in ringgit or in foreigncurrency.

A non-resident purchaser may also pay or settle the purchase of ringgit assets from the non-resident seller inforeign currency or ringgit from own External Account.

VII Repatriation of Funds

A non-resident is free to repatriate any amount of own funds in Malaysia any time, including capital, divestmentproceeds, profits, dividends, rental, fees and interest arising from investments in Malaysia.

C. COMPANIES ACCORDED SPECIAL STATUS

I Offshore Entities in the Labuan International Offshore Financial Centre

An offshore entity incorporated or registered under the Offshore Companies Act 1990 is declared as a non-residentfor foreign exchange administration purposes.

As a non-resident, the offshore entity is free to undertake the following:

• Obtain any amount of foreign currency credit facilities.

• Invest any amount in foreign currency assets.

• Enter into foreign exchange contracts involving foreign currencies with licensed onshore banks, approvedmerchant banks, licensed offshore banks in Labuan and any overseas counterparty.

• Buy or sell foreign currency (other than the currency of the State of Israel) against ringgit with licensed onshorebanks for permitted purposes.

• Maintain External Accounts with licensed onshore banks to facilitate the defrayment of statutory and adminis-trative expenses in Malaysia.

• Receive payments in ringgit from residents arising from fees, commissions, dividends or interest from deposit offunds with onshore financial institutions.

• Invest in ringgit assets that are transacted directly with onshore banking institutions or resident brokers for ownaccount.

In addition, an offshore insurance entity in Labuan is allowed to receive reinsurance premiums and pay claimsarising from reinsurance of domestic insurance business in ringgit.

Annex

P9

II Multimedia Super Corridor Companies

A company with Multimedia Super Corridor (MSC) status is exempted from foreign exchange administrationrequirements for transactions undertaken on own account.

III Approved Operational Headquarters

An Approved Operational Headquarter (OHQ) is subject to policies applicable to a resident. In addition, an OHQ isallowed to:

• Obtain any amount of foreign currency credit facilities from licensed onshore banks and licensed merchantbanks in Malaysia, and from any non-resident, provided the OHQ does not on-lend to, or raise the funds onbehalf of, any resident.

• Invest any amount in foreign currency assets to be funded with foreign currency funds or borrowing.

IV Regional Distribution Centres and International Procurement Centres

A Regional Distribution Centre and International Procurement Centre are also subject to policies applicable toresidents.

D. STATISTICAL REPORTINGTo assist the Controller to compile balance of payments statistics, residents transacting with non-residents or haveoverseas foreign currency assets or liabilities, are required to submit statistical forms/reports/statements to theController, where applicable. Information on the statistical requirements can be obtained from Bank NegaraMalaysia’s website, http://www.bnm.gov.my/fxadmin.

i Residents:(a) Citizens of Malaysia (excluding persons who have obtained permanent resident status of a territory outside Malaysia and are residing abroad)(b) Non-citizens who have obtained permanent resident status in Malaysia and are residing permanently in Malaysia(c) Persons, whether body corporate or unincorporated, registered or approved by any authority in Malaysia

Non-residents:(a) Persons other than residents(b) Overseas branches, overseas subsidiaries, overseas regional offices, sales offices, representatives offices of resident companies(c) Embassies, Consulates, High Commissions, supranational or international organisations recognised by the Government of Malaysia(d) Malaysian citizens who have obtained permanent resident status of a territory outside Malaysia and are residing outside Malaysia

ii Foreign currency assets include lending to non-residents, placement of deposits with licensed onshore banks, approved merchant banks or offshore banks, andforeign currency products offered by licensed onshore banks, approved merchant banks and other entities approved by the Controller

iii Domestic ringgit credit facilities means any ringgit advance, loan, trade financing, hire purchase, factoring, leasing facilities, redeemable preference shares or similarfacility in whatever name or form, other than:(a) Trade credit terms extended by a supplier for all types of goods and services(b) Forward exchange contracts entered into with authorised dealers(c) One personal housing loan and one vehicle loan obtained from residents(d) Credit card and charge card facilities(e) Inter company borrowing within a corporate group in Malaysia

P10

01-J

an-9

129

-Feb

-92

31-O

ct-9

531

-Dec

-97

04-A

ug-9

9

04-A

ug-9

903

-Apr

-00

03-A

pr-0

015

-Jul

-01

01-N

ov-0

3

01-N

ov-0

310

-Jul

-04

06-F

eb-8

818

-Jun

-90

29-O

ct-9

310

-Mar

-90

05-F

eb-9

1

01-M

ay-9

804

-Jan

-93

02-J

an-9

812

-Dec

-89

23-N

ov-9

8

03-J

ul-0

121

-May

-0110

-Feb

-00

01-N

ov-0

3

30-O

ct-9

204

-Jan

-93

15-A

pr-0

015

-Jul

-01

577

1,52

849

94,

172

1,88

6 11

764 74 54 194 25 96 99

5,42

03,

126

317 33 85

896

331

297

203 95 609 95

3,77

41,

420

344 3 49

Fun

ds

Term

inat

ed F

un

ds

Ship

Fin

anci

ng F

acili

ty

Fund

for

Foo

d Bu

mip

uter

a En

trep

rene

urs

Proj

ect

Fund

Fu

nd F

or S

mal

l and

Med

ium

Indu

strie

s 2

New

Ent

repr

eneu

rs F

und

2Re

habi

litat

ion

Fund

for

Sm

all B

usin

esse

s

Ente

rpris

e Re

habi

litat

ion

Fund

A

band

oned

Hou

sing

Pro

ject

s Fu

nd

Fund

to

Acc

eler

ate

the

Con

stru

ctio

n of

Low

-Cos

t H

ouse

sSp

ecia

l Fun

d fo

r To

uris

mIn

dust

rial A

djus

tmen

t Fu

ndSp

ecia

l Sch

eme

for

Low

and

Med

ium

C

ost

Hou

ses

Bum

iput

era

Indu

stria

l Fun

d Fu

nd f

or S

mal

l and

Med

ium

Indu

strie

sN

ew E

ntre

pren

eurs

Fun

d Re

habi

litat

ion

Fund

for

Sm

all a

nd M

ediu

m

Indu

strie

s En

trep

rene

urs

Reha

bilit

atio

n an

d

Dev

elop

men

t Fu

ndSp

ecia

l Rel

ief

Gua

rant

ee F

acili

ty7

1Th

e al

loca

tion

was

incr

ease

d fr

om R

M4,

500

mill

ion

to R

M4,

750

mill

ion

in 2

005

3 R

evol

ving

fun

ds4

Unu

tilis

ed a

lloca

tions

wer

e tr

ansf

erre

d to

Reh

abili

tatio

n Fu

nd f

or S

mal

l Bus

ines

ses

5

6 B

orro

wer

s' o

utst

andi

ng lo

an b

alan

ces

with

the

lend

ing

inst

itutio

ns

8 R

eallo

catio

n of

unu

tilis

ed R

M60

0 m

illio

n fr

om R

ehab

ilita

tion

Fund

for

Sm

all B

usin

esse

s in

to F

und

for

Smal

l and

Med

ium

Indu

strie

s 2

(RM

250

mill

ion)

and

New

Ent

repr

eneu

rs F

und

2 (R

M35

0mill

ion)

Fun

ds

Ad

min

iste

red

/Fu

nd

ed b

y B

ank

Neg

ara

Mal

aysi

a: F

un

d U

tilis

atio

n

Dat

e es

tabl

ishe

d

Fund

al

loca

tion

(RM

m)

Fund

allo

catio

n (R

M m

)

Num

ber

of a

pplic

atio

ns a

ppro

ved

Num

ber

of a

pplic

atio

ns a

ppro

ved

Am

ount

app

rove

d (R

M m

)To

tal d

isbu

rse-

men

ts a

s at

en

d-20

05(R

M m

)

Out

stan

ding

as

at

end-

20

056

(RM

m)

Tota

l dis

burs

e-m

ents

as

at

end-

2005

(RM

m)

Out

stan

ding

as

at

end-

20

056

(RM

m)

Ann

ual

chan

ge

Ann

ual

chan

ge

Tota

l as

at e

nd-

Ann

ual

chan

ge

Dat

e es

tabl

ishe

dD

ate

term

inat

ed

2004

2005

2004

2005

2004

2005

Am

ount

app

rove

d (R

M m

)

Tota

l as

at e

nd-

Ann

ual

chan

ge20

0420

05

Tota

l as

at e

nd-

Tota

l as

at e

nd-

600

3838

00

1,30

038,

829

9,61

178

296

3003

1,07

91,

181

102

344,

7501,

36,

239

9,63

13,

392

2,17

72,

3502,

32,

948

4,04

51,

097

812

2008

2335

125

500

30

060

00

0

500

00

200

30

010

00

0

1,00

00

0

100

00

1,8

503

00

1,25

030

0

3303,

4-4

5-4

5

104

00

1,00

00

0

89 9 0 16 0 12 17 029

1

204 1 0

850

346

297

203 95 585 91

3,72

61,

398

328 2 0

896

331

297

203 95 609 95

3,77

41,

420

340 3 49

764 74 54 194 25 96 99

5,42

03,

126

313 33 85

070

6 544,

377

1,96

7 8

543

1,53

544

85,

403

2,27

0 9

577

1,62

453

36,

349

2,69

8 16

Annex

P11

Financial Sector Masterplan

List of Completed and On-going Recommendations

Banking Sector

Completed recommendations

R3.4 Liberalised restrictions on salaries and staff mobility in the banking industry to enable the industry toattract the best talent and reward them accordingly.

R3.5 Uplift restrictions on employment of expatriates to attract the best international talents to meet thedemand for expertise in specific areas of banking.

R3.6 Established Board committees, namely Nominating, Remuneration and Risk Management committees tofurther enhance corporate governance standards.

R3.7 Allowed group rationalisation through cross-selling of products and consolidation of back-officeprocesses, as well as facilitate the merger of commercial banks and finance companies to further enhanceefficiency and competitiveness.

R3.9 Streamlined the regulation of discount houses and merchant banks to enhance and allow faircompetition among players.

R3.10* Established investment banks through mergers between merchant banks and stockbroking companies ordiscount houses to reduce duplication, enhance competitiveness and strengthen the potential to capitaliseon expanded business opportunity thus contributing towards the economic transformation process.

R3.12 Encouraged outsourcing of non-core functions to gain greater strategic focus and efficiency.R3.14 Encouraged the development of new delivery channels to increase the range of products and services to

further enhance competitiveness.R3.15.1 Simplified the product notification process to provide incentive for the development of new and innovativeand products, and outline a set of guidelines providing criteria for product notification and specific productR3.15.2 approval requirements.R3.16a Introduced the New Interest Rate Framework to provide banking institutions with greater flexibility, thus

promoting more efficient pricing of products.R3.18 Encouraged participation of banking institutions in areas currently served by fringe institutions to

promote a level playing field and preserve consumer protection and investors’ interests.R3.21 Implemented risk-based supervision with supervisory focus on high risk areas and greater attention on

weak institutions.R3.22a Incorporated market risk into the capital adequacy framework to introduce more risk sensitivity to the

existing regulatory capital requirements.R3.23 Developed a formal and informal enforcement action framework to ensure banking institutions take

remedial actions on weaknesses highlighted.R3.26f* Enhanced the level of corporate governance among licensed institutions by prescribing broad principles

and minimum standards as well as specific requirements to ensure safety and soundness of licensedinstitutions.

R3.27 Increased efficiency and competition in the payments system to support the needs of the economy whilemaintaining its safety and integrity.

R3.28 Allowed market forces to shape developments in the payments system to promote greater competitionand increase innovation in payments system.

R3.30* Allowed money brokers to complements its voice broking sevices by offering electronic broking system toits clients.

R3.33 Allowed banking institutions to rationalise their branch network to improve the dispersion of theirbranches in the country.

R3.37 Expanded the role of the Banking Mediation Bureau with the establishment of the Financial MediationBureau to strengthen consumer protection framework and to widen avenues for consumers to seek redress.

P12

R3.39* Established a deposit insurance system to provide a reasonable level of protection to depositors whilepromoting incentive for prudent management by banking institutions.

On-going recommendations

R3.1 Develop and disseminate industry-wide benchmarks to enable domestic banking institutions to assess their

relative performance against market leaders, identify the performance gaps and, accordingly, recognise their

comparative strengths and weaknesses to develop appropriate strategies to remain competitive.

R3.2 Increase awareness of best practice by conducting focused training and seminar series for senior

management to promote greater understanding on emerging trends and issues facing the banking industry.

R3.3 Enhance credit skills of credit officers and managers with the aim to promote sound lending decisions

and credit culture and monitor the requirement for accreditation.

R3.8 Encourage domestic banking institutions to form strategic alliances with other banking institutions and

non-banking institutions to provide consumers with greater access to world-class products and services

and towards meeting international best practice standards.

R3.13 Require management of banking institutions to accord greater attention to the development of

information and communication technology (ICT) to ensure appropriate ICT strategies as a strategic tool

towards bringing about holistic improvement within banking institutions.

R3.15 Adopt ‘what is not prohibited is allowed’ regulatory philosophy and phase out product pre-approval

requirement to encourage innovation.

R3.19 Facilitate the development of a conducive tax regime to provide incentives to encourage innovation via

greater research and development.

R3.24 Implement a transparent and clearly structured early warning system and set of prompt corrective

measures for weak banking institutions to ensure sound and stable banking system.

R3.32 Require provision of advisory services on financial planning and management to small and medium

industries and small borrowers to enable these borrowers to make informed decisions and better

understand financial planning and management.

R3.34 Development of an active and structured consumer education programme to promote greater financial

literacy and promote active consumerism.

R3.36 Encourage consumers to pursue formal administrative and legal redress to protect consumers against

unfair practices by banking institutions.

Insurance Sector


R4.1 Removed restrictions on outsourcing to enable insurers to further develop core competencies and

effective business strategies.

R4.2 Allowed eligible insurers to use the internet as a distribution channel to enhance competitiveness

and efficiency of the insurance industry.

R4.3 Promoted the growth of bancassurance as a cost-effective alternative distribution channel by

implementing a more flexible regulatory framework on remuneration structures governing

bancassurance arrangements.

R4.6 Relaxed the restrictions on employment of expatriates to accelerate the development of skills and

expertise in the industry.

R4.9* Introduced a regulatory framework for the licensing of financial advisers to promote higher

standards of financial services and enable consumers to obtain professional advice on a wider range

of financial products and services.

R4.16 Increased the statutory minimum paid-up capital of insurers to enhance their financial resilience and

ability to compete effectively in a more deregulated and liberalised market.

Annex

P13

R4.17 Strengthened ‘fit and proper’ regulations for board members and senior management of insurance

companies, including minimum qualification standards and training requirements for directors to

promote sound corporate governance.

R4.18 Established board committees with specific responsibilities and enhance disclosure standards on

compensation to directors and senior management to further strengthen governance structures and

processes and promote greater transparency.

R4.19 Raised the entry requirements for the agency force to uphold high standards of professionalism and

competencies among insurance intermediaries.

R4.20 Introduced additional compulsory exams as part of continuing education programmes for agents to

upgrade their knowledge and skills on an on-going basis.

R4.21 Further strengthen performance-based supervision to maintain stability under a more deregulated and

competitive market conditions.

R4.22 Developed an enforcement action framework to ensure timely and consistent supervisory intervention

processes to address institutional risks.

R4.25 Established the Financial Mediation Bureau to strengthen consumer protection framework and widen

avenues for consumers to seek redress.

R4.26 Introduced ‘best advice’ regulations to enhance consumer protection and professionalism in the sale of

life insurance products by insurance intermediaries.

R4.27 Strengthened regulations on unfair trade practices to ensure sound business practices and fair treatment

of consumers.

R4.29 Allowed financial and non-financial institutions to acquire interests in direct insurers to create business

synergies.


R4.5 Promote the management of pension funds by insurers to achieve the most efficient and effective

management of the pension funds.

R4.8 Allow insurers to distribute other personal financial service products to enable insurers to make more

effective use of the agency force and other distribution channels.

Islamic Banking and Takaful


R5.3 Build strong management through the establishment of board committees, benchmarking and

employment of experienced and qualified staff.

R5.5 Increased the number of Islamic banks to stimulate greater competition and accelerate international

integration by issuing Islamic banking licences to qualified domestic and foreign banking institutions.

R5.6 Increased the number of takaful operators to accelerate the expansion of the takaful industry.

R5.10 Established a comprehensive legal infrastructure for consumers to seek legal redress arising from Islamic

financial transactions.


R5.1 Develop and disseminate industry wide benchmarks to enable Islamic banking institutions to evaluate

their relative efficiency, identify the performance gaps and formulate appropriate strategies to improve

and deliver the best results.

R5.2 Enhance the level of knowledge, competency and expertise in order to increase the pool of highly

qualified and skilled/trained staff in Islamic banking and finance.

R5.11 Create a favourable tax regime in the implementation of Islamic financial contracts.

P14



R6.4 Introduced a systematic framework for sourcing funds to ensure appropriate and adequate funding for

the operations of development financial institutions (DFIs).

R6.7 Established a legislative framework to regulate and supervise DFIs to ensure that DFIs’ policies and

objectives are consistent with the national policy objectives.

R6.8 Established a single Regulatory and Supervisory Authority (RSA) to strengthen the supervision of DFIs.


R6.5 Continued Government’s support to the DFIs and enhance coordination among relevant ministries to

enable these DFIs to operate in a more focused, efficient and prudent manner in supporting their

respective targeted sectors.

Alternative Modes of Financing


R7.2 Established a RM500 million venture capital fund to increase the availability of venture capital financing

and stimulate new ventures.

R7.3 Introduced further tax incentives for the venture capital industry to promote the growth of venture capital.

R7.4 Liberalised the MESDAQ listing requirements to facilitate the exit of venture capital companies from their

investments.

R7.5 Established two Islamic venture capital funds with a combined initial fund size of RM22.1 million.


R7.13 Established a one-stop agriculture research and development centre as well as a comprehensive and

integrated information database to facilitate banking institutions in their assessment of specialised risks

involved in agriculture financing.

R7.14 Develop structured and systematic training programme for borrowers to ensure an orderly development

of the players in the agriculture sector.

R7.15 Putting in place an effective risk-distribution mechanism that will reduce risks to the financial institutions

and, at the same time, reduce borrowing costs through a guarantee and insurance protection scheme.

R7.15.2 Diversify insurance protection schemes to cater for the unique features of the various sub-sectors within

the agriculture sector.

R7.16 Provide subsidies to agriculture industry to help reduce insurance costs, especially for small scale farmers.

R7.17 Grant tax exemptions to provide greater financial assistance to the agriculture sector.

Labuan International Offshore Financial Centre


R8.3 Adopted a consultative and market driven approach to create a conducive tax and business environment

to enhance the competitiveness and attractiveness of Labuan.

R8.6 Strengthened Islamic banking and finance as well as takaful to develop Labuan with a strategic focus on

Islamic products and services.

R8.7 Enhanced Labuan International Financial Exchange (LFX) to be a one-stop financial exchange for residents

and global companies.


R8.1 Develop an active International Offshore Financial Centre (IOFC) for Malaysia to support the increasing

demands of the domestic economy and to play an important complementary role to the Malaysian

financial system.

Annex

P15

R8.2 Review existing rules and regulations to facilitate expansion in the scope of core business to facilitate new

offshore businesses and allow offshore service providers to maximise capabilities and expertise to expand

their business.

R8.4 Benchmark against the leading IOFCs in various areas of business to further improve competitiveness,

especially in terms of pricing and cost.

R8.5 Establish a well-balanced regulatory policy and supervisory framework which are in line with latest

international supervisory regime.

R8.8 Enhance the e-commerce gateway to encourage global e-commerce operators to set up domicile in

Labuan.

R8.9 Maximise potentials of Labuan IOFC by developing other complementary economic measures.

* Recommendations completed in 2005.

P16

Licensed Banking Institutions (as at 31 December 2005)

Commercial Banks

1. ABN AMRO Bank Berhad

2. Affin Bank Berhad1

3. Alliance Bank Malaysia Berhad

4. AmBank (M) Berhad2

5. Bangkok Bank Berhad

6. Bank of America Malaysia Berhad

7. Bank of China (Malaysia) Berhad

8. Bank of Tokyo-Mitsubishi (Malaysia) Berhad3

9. Bumiputra-Commerce Bank Berhad

10. Citibank Berhad

11. Deutsche Bank (Malaysia) Berhad

12. EON Bank Berhad

13. Hong Leong Bank Berhad

14. HSBC Bank Malaysia Berhad

15. J.P. Morgan Chase Bank Berhad

16. Malayan Banking Berhad

17. OCBC Bank (Malaysia) Berhad

18. Public Bank Berhad

19. RHB Bank Berhad

20. Southern Bank Berhad

21. Standard Chartered Bank Malaysia Berhad

22. The Bank of Nova Scotia Berhad

23. United Overseas Bank (Malaysia) Berhad

Islamic Banks

1. Bank Islam Malaysia Berhad

2. Bank Muamalat Malaysia Berhad

3. RHB ISLAMIC Bank Berhad

4. Commerce TIJARI Bank Berhad

5. Hong Leong Islamic Bank Berhad

6. Kuwait Finance House (Malaysia) Berhad

1 Merged with AFFIN-ACF Finance Berhad with effect from 1 June 20052 Absorbed by AmFinance Berhad and changed the name to AmBank (M) Berhad with effect from 1 June 20053 Changed the name to Bank of Tokyo-Mitsubishi UFJ (Malaysia) Berhad with effect from 1 January 2006

Annex

P17

Finance Companies

1. Bumiputra-Commerce Finance Berhad4

2. RHB Delta Finance Berhad5

3. Southern Finance Berhad6

Merchant Banks

1. Affin Merchant Bank Berhad

2. Alliance Merchant Bank Berhad

3. AmMerchant Bank Berhad

4. Aseambankers Malaysia Berhad

5. Commerce International Merchant Bankers Berhad

6. Malaysian International Merchant Bankers Berhad

7. Public Merchant Bank Berhad

8. RHB Sakura Merchant Bankers Berhad

9. Southern Investment Bank Berhad

10. Utama Merchant Bank Berhad

4 Absorbed into Bumiputra-Commerce Bank Berhad with effect from 1 January 20065 Absorbed into RHB Bank Berhad with effect from 1 January 20066 Absorbed into Southern Bank Berhad with effect from 1 January 2006

P18

Financial Institutions Offering Islamic Banking Services(as at 31 December 2005)

Islamic Banks

1. Bank Islam Malaysia Berhad

2. Bank Muamalat Malaysia Berhad

3. Commerce TIJARI Bank Berhad

4. Hong Leong Islamic Bank Berhad

5. Kuwait Finance House (Malaysia) Berhad

6. RHB ISLAMIC Bank Berhad

Participating Banks in the Islamic Banking Scheme

Commercial Banks

1. Affin Bank Berhad

2. Alliance Bank Malaysia Berhad

3. AmBank (M) Berhad

4. Citibank Berhad

5. EON Bank Berhad

6. HSBC Bank Malaysia Berhad

7. Malayan Banking Berhad

8. OCBC Bank (Malaysia) Berhad

9. Public Bank Berhad

10. Southern Bank Berhad

11. Standard Chartered Bank Malaysia Berhad

Finance Company

1. Southern Finance Berhad

Merchant Banks

1. Affin Merchant Bank Berhad

2. Alliance Merchant Bank Berhad

3. AmMerchant Bank Berhad

4. Commerce International Merchant Bankers Berhad

Annex

P19

Discount Houses

1. Abrar Discounts Berhad

2. Affin Discount Berhad

3. Amanah Short Deposits Berhad

4. CIMB Discount House Berhad

5. KAF Discounts Berhad

6. Malaysia Discount Berhad

7. Mayban Discount Berhad

Development Financial Institutions Offering Islamic Banking Services

1. Bank Kerjasama Rakyat Malaysia Berhad

2. Bank Simpanan Nasional

3. Bank Pembangunan Malaysia Berhad

4. Bank Pertanian Malaysia

5. Bank Perusahaan Kecil & Sederhana Malaysia Berhad

P20

Shariah Advisory Council Members

Chairman:Y.A.A. Datuk Sheikh Ghazali Abdul Rahman

Deputy Chairman:Dr. Mohd Daud Bakar

Members:1. S.S. Dato’ Haji Hassan Haji Ahmad

2. Y.A. Dato’ Abdul Hamid Haji Mohamad

3. Dato’ Dr. Abdul Halim Haji Ismail

4. Datuk Haji Md. Hashim Haji Yahaya

5. Datuk Dr. Abdul Monir Yaacob

6. Assoc. Prof. Dr. Abdul Halim Muhammad

7. Dr. Mohd Ali Haji Baharum

8. Dr. Mohd Parid Sheikh Ahmad

Annex

P23

2001 2002

RM million

AgricultureMining and quarryingManufacturingConstructionServices

Less: Imputed bank service chargesPlus: Import duties

GDP at purchasers' prices1

Annual change (%)

AgricultureMining and quarryingManufacturingConstructionServices

Less: Imputed bank service chargesPlus: Import duties

GDP at purchasers' prices

2003 2004 2005p 2006f

1 Numbers may not necessarily add up due to rounding p Preliminaryf Forecast


Table A.1Gross Domestic Product by Kind of Economic Activity in Constant 1987 Prices

20,13416,72071,544

7,359133,751

22,4315,282

18,551 19,06415,160 15,81063,299 66,019

7,108 7,251120,194 127,968

17,678 21,0734,594 5,384

211,227 220,422

-0.6 2.8-1.5 4.3-5.9 4.32.1 2.06.0 6.5

11.7 19.2-2.7 17.2

0.3 4.4

232,359

5.65.88.41.54.5

6.4-1.9

5.4

21,13717,37278,558

7,248142,849

23,2054,995

248,954

21,58517,50482,394

7,133152,205

23,8765,083

262,029

5.03.99.8

-1.56.8

3.4-5.4

7.1

2.10.84.9

-1.66.5

2.91.8

5.3

22,01018,37888,122

7,204161,330

24,5255,107

277,626

2.05.07.01.06.0

2.70.5

6.0

P24

Table A.2Growth in Manufacturing Production (2000=100)

2002 2003 2004 2005 200520042003

Index Annual change (%)

Export-oriented industriesElectrical machinery, apparatus,

appliances and suppliesElectronicsElectrical products

Chemicals and chemical productsPetroleum products1

Textiles, wearing apparel and footwearWood and wood productsRubber productsOff-estate processingOthers

Domestic-oriented industriesConstruction-related products

Non-metallic mineral productsBasic iron & steel and

non-ferrous metalFood productsTransport equipmentFabricated metal productsPaper productsBeveragesTobacco products

Total


1 Under the new Industrial Production Index (2000=100), LNG has been reclassified as petroleum products (previously classified as chemicals and chemical products). Consequently, petroleum products have been reclassified as export-oriented industries

12.7

14.822.60.9

17.79.5

-1.60.9

17.45.64.8

4.66.86.8

6.65.9

-3.46.32.7

22.43.9

10.9

107.9

104.4108.396.8

117.2116.085.595.7

124.2118.090.0

114.0109.8114.0

101.8118.1124.0116.6106.2110.987.9

109.1

95.7

90.988.396.099.6

105.986.894.9

105.9111.785.9

109.0102.8106.7

95.5111.5128.3109.6103.590.684.6

98.4

123.8

124.5136.0102.1134.9127.481.4

107.9134.3121.2111.4

119.9111.2111.0

111.7120.5138.5129.9110.7112.490.5

123.0

130.8

128.9143.0101.3149.7141.284.1

109.6133.8131.0107.4

123.2110.7113.2

105.8129.7150.2123.5119.0119.387.8

129.3

14.8

19.325.65.5

15.19.8

-4.812.88.12.7

23.9

5.21.3

-2.6

9.72.0

11.711.44.21.42.9

12.8

5.7

3.55.2

-0.811.010.83.41.5

-0.48.1

-3.7

2.8-0.52.0

-5.37.68.5

-4.97.56.1

-3.0

5.1

Annex

P25

11,909

890

20,649

48

698

4,676

4.2

Table A.3Production of Primary Commodities

2002 2003 2004 2005p 2001 2002 2003 2004

Volume Annual change (%)

Crude palm oil(‘000 tonnes) 11,804 13,355 8.9 0.9 12.1

Rubber1

(‘000 tonnes) 882 986 1,169Saw logs

(‘000 cu. metres) 18,923 21,532 -18.0 9.1 4.3Cocoa

(‘000 tonnes) 58 36

Crude oil (includingcondensates)(‘000 bpd) 666 738 -2.4 4.9 5.6

Natural gas

(mmscfd) 4,542 5,013 3.7 3.0 7.2Tin-in-concentrates

(‘000 tonnes) 5.0 3.4 2.7

13,976

1,124

21,509

33

762

5,196

14,961

21,334

28

727

5,800

2.8

4.7

-3.8

-0.1

-7.8

3.6

4.0

2.0

Source: Malaysian Palm Oil BoardDepartment of Statistics, MalaysiaForestry Departments (Peninsular Malaysia, Sabah & Sarawak)Malaysian Cocoa BoardPETRONASMinerals and Geoscience Department, Malaysia

2001

-4.9 0.9 10.8 18.6

-17.9 -17.4 -24.0

-21.2 -15.2 -20.3 -18.3

2005p

7.0

-0.8

-16.3

-4.9

11.3

p Preliminary1 Revised from 2000 onwards based on new compilation methodology

P26

Table A.4GNP by Demand Aggregates

2001 2002 2003 2004 2005p

at Current Prices

(RM million)

Consumption 192,909 209,022 227,279 252,088 280,468 306,179Private consumption 150,644 159,506 172,366 192,771 215,876 237,832Public consumption 42,265 49,516 54,913 59,317 64,592 68,347

Investment 83,345 83,764 87,089 91,818 98,930 107,106Private investment 34,528 29,376 29,856 38,394 43,769 49,195Public investment 48,817 54,388 57,233 53,424 55,161 57,911

Change in stocks1 -3,339 3,105 -1,814 10,009 -1,059 1,334

Exports of goods and services 389,255 415,040 447,846 544,956 609,133 682,398

Imports of goods and services 327,767 348,919 365,383 449,262 492,928 554,250

GDP at purchasers' value 334,404 362,012 395,017 449,609 494,544 542,766

Net factor payments abroad -25,623 -25,061 -22,537 -24,549 -21,470 -23,716

GNP at purchasers' value 308,781 336,951 372,480 425,060 473,074 519,050

at Constant 1987 Prices(RM million)

Consumption 125,637 132,872 143,198 156,739 169,993 180,111Private consumption 97,630 101,946 108,722 120,181 131,266 140,132Public consumption 28,007 30,926 34,476 36,558 38,727 39,979

Investment 63,050 63,249 64,960 66,996 70,175 74,339Private investment 26,120 22,181 22,270 28,015 31,047 34,145Public investment 36,930 41,068 42,690 38,981 39,128 40,194

Change in stocks1 -1,279 3,200 -1,267 5,464 -1,708 889

Exports of goods and services 227,685 237,904 251,463 292,476 316,959 345,075

Imports of goods and services 203,866 216,802 225,996 272,721 293,391 322,789

GDP at purchasers' value 211,227 220,422 232,359 248,954 262,029 277,626

Net factor payments abroad -17,642 -17,253 -15,204 -15,870 -13,999 -15,163

GNP at purchasers' value 193,585 203,169 217,155 233,084 248,030 262,462

f Forecast

1 Includes statistical discrepancy


2006f

Annex

P27

f Forecast

Table A.5Savings-Investment Gap

2001 2002 2003 2004 2005p

RM million

Public gross domestic capital formation 48,817 54,388 57,233 53,424

Public savings 35,748 49,459 60,093 73,000

Deficit/surplus -13,069 -4,929 2,860 19,576

Private gross domestic capital formation 31,189 32,481 28,042 48,403

Private savings 71,945 67,904 75,807 85,338

Deficit/surplus 40,756 35,423 47,765 36,935

Gross domestic capital formation 80,006 86,869 85,275 101,827(as % of GNP) 25.9 25.8 22.9 24.0

Gross national savings 107,693 117,363 135,900 158,338(as % of GNP) 34.9 34.8 36.5 37.3

Balance on current account 27,687 30,494 50,625 56,511(as % of GNP) 9.0 9.0 13.6 13.3

2006f

p Preliminary


57,911

82,899

24,988

50,529

114,950

64,421

108,44020.9

197,84938.1

89,40917.2

55,161

75,048

19,887

42,710

100,595

57,885

97,87120.7

175,64337.1

77,77216.4

P28

Table A.6Balance of Payments

2002

Item

RM million

Goods1

Trade account

ServicesTransportationTravelOther servicesGovernment transactions n.i.e.2

Balance on goods and services

IncomeCompensation of employeesInvestment income3

Current transfers

Balance on current account % of GNP

Capital account –

Financial accountDirect investment

AbroadIn Malaysia

Portfolio investmentOther investment

Official sectorPrivate sector

Errors and omissionsof which:

Foreign exchange revaluationgain (+) / loss (-)

Overall balance (surplus + / deficit -)

Bank Negara Malaysia international reserves, net4

RM millionUSD million equivalentReserves as months of

retained imports1 Adjusted for valuation and coverage to the balance of payments basis. Imports include military goods which are not included in trade data2

3 Include undistributed earnings of foreign direct investment companies. The counterpart of these earnings is shown asreinvested earnings under "Direct Investment" in the Financial Account

Include transactions of foreign military and diplomatic establishments

4 All assets and liabilities in foreign currencies have been revalued into ringgit at rates of exchange ruling on the balance sheet date and the gain/loss has been reflected accordingly in the Bank’s account

e Estimatef Forecastn.i.e. Not included elsewhereNote: Numbers may not necessarily add up due to rounding


2003

358,504 286,387 72,117357,430 303,090 54,340

56,536 62,532 -5,99610,847 22,419 -11,57227,049 9,947 17,10218,166 29,408 -11,242

474 758 -284

415,040 348,919 66,121

8,129 33,190 -25,061 1,653 2,832 -1,1796,476 30,358 -23,882

2,513 13,079 -10,566

425,682 395,188 30,4949.0

-11,9414,935

-7,23812,173-6,506

-10,3704,720

-15,090

-11,941

-4,362

6,627

14,191

131,39434,577

5.4

+ - Net+ - Net

397,969 300,207 97,762397,884 316,538 81,347

49,876 65,176 -15,30010,615 24,101 -13,486

22,411 10,888 11,52316,384 29,395 -13,011

466 793 -327

447,847 365,383 82,462

13,134 35,671 -22,5372,201 3,161 -960

10,933 32,510 -21,577

1,929 11,229 -9,300

462,910 412,283 50,62513.6

–

-12,146 4,194-5,2049,3984,168

-20,508-11,201-9,307

580

11,927

39,059

170,45344,856

6.6

-12,146Balance on capital and financial account

Annex

P29

376,766400,077

72,49629,80111,75429,7951,147

449,264

40,5723,760

36,812

16,333

506,169

104,47480,663

-8,780-17,783 19,398-9,675

-721

95,694

-24,549-1,142

-23,408

-14,633

56,51113.3

–

15,083 9,739-7,83317,57233,829

-28,485-1,145

-27,340

15,083

11,467

7,997

83,061

253,51366,714

7.9

RM million

2004 2005e

+ - Net+ - Net

2006f

+ - Net

481,240 463,502601,903410,476536,931480,740 492,285600,583434,010533,788

63,717 90,74880,49582,45272,20212,018 34,21517,28131,87616,169 31,152 16,29334,84214,23732,354 20,120 39,27827,94535,56223,251

426 962427777427

544,958 554,250682,398492,928609,133

16,023 45,68021,96441,93720,469 2,618 5,6545,2874,7124,229

13,405 40,02616,67737,22516,237

1,700 16,3651,34218,0941,131

562,681 616,295705,703552,960630,734

138,401108,298

-10,253-16,93418,549

-11,333-535

128,148

-23,716-367

-23,349

-15,024

89,40917.2

126,45599,778

-10,249-15,70718,117

-12,311-350

116,205

-21,470-482

-20,988

-16,963

77,77216.4

–

-41,9522,711

-12,93115,642

-11,881-32,782-11,064-21,718

-41,952

-23,000

-15,496

12,820

266,33470,483

7.8

P30

Table A.7Principal Markets for Manufactured Exports

2001 2002 2003 2004 2005p

Country

ASEANSingaporeThailandIndonesiaPhilippinesBrunei Darussalam

EU1

United KingdomGermanyNetherlands

Others

United States

Japan

Hong Kong China

Chinese Taipei

Korea

The People’s Republic of China

Australia

Canada

Middle East2

Latin American Countries

Rest of the World

Total

RMmillion share

% RMmillion share

% RMmillion share

% RMmillion share

% RMmillion share

%


72,140

40,894

52,4839,8164,9834,113

745

7,176

11,7548,355

65,830

32,413

14,327

9,767

6,692

11,266

5,862

1,977

6,885

3,436

13,827

285,316

25.3

18.43.41.81.40.3

14.3

2.92.5

23.1

4.1

11.4

5.0

3.4

2.3

3.9

2.1

0.7

2.4

1.2

4.9

100.0

26.2

18.54.11.91.40.3

12.7

2.62.3

4.1

23.9

9.4

6.3

3.7

2.6

4.6

2.0

0.7

2.0

1.0

4.9

100.0

82,481

57,36713,552

6,2914,346

925

41,077

8,1318,053

14,580

74,918

28,683

24,717

11,610

7,123

17,376

7,116

2,132

7,485

2,939

18,665

326,322

25.3

17.64.21.91.30.3

12.6

2.52.5

4.4

23.0

8.8

7.6

3.6

2.2

5.3

2.2

0.7

2.3

0.9

5.5

100.0

78,981

869

38,505

302,021

12,31955,917

7,8367,071

13,609 4.8 3.7 10,313 3.2

99,180

65,80017,500

8,9455,993

942

51,523

9,6789,248

20,138

85,484

33,341

27,482

11,766

9,178

22,134

9,531

2,754

10,565

4,154

23,357

390,449

12,459

25.4

16.94.52.31.50.2

13.2

2.52.4

5.1

21.9

8.5

7.0

3.0

2.4

5.7

2.4

0.7

2.7

1.1

6.0

100.0

3.2

25.8

17.25.02.21.20.2

12.4

2.02.3

4.9

23.3

7.4

7.0

2.4

2.2

6.0

2.5

0.6

3.0

1.1

6.3

100.0

3.211,085

12,513

14,041

5,951

1,992

72,116

28,271

19,147

11,216

7,797

5,992

3,031

14,981

5,6274,249

1 Includes the 10 new member states since 20042 Beginning 2004, Cyprus has been excluded from Middle East as it has been included under the EU countriesp Preliminary

9,992

10,591

12,901

110,946

73,87221,300

9,482

53,457

8,65221,011

31,743

30,127

10,247

9,308

25,728

2,555

4,641

27,584

429,873

13,802

5,2871,005

100,045

Annex

P31

Table A.8Principal Export Markets for Electronics

20042001 2002 2003 2005p

Country

United StatesSingapore

Chinese Taipei

Japan

Hong Kong China

Others

Total

RMmillion

% share

RMmillion

%share

RMmillion

%share

RMmillion

%share

RMmillion

%share

41,969 26.734,793 24.9 45,285 27.133,000 21.030,335 21.7 32,042 19.1

7,670 4.96,520 4.7 8,056 4.8

11,226 7.113,502 9.7 10,465 6.3

12,641 8.07,470 5.3 18,005 10.8

20,031 12.719,684 14.1 22,333 13.2

157,401 100.0139,632 100.0 167,381 100.0

7,838 5.06,012 4.3 9,002 5.4

51,912 27.533,466 17.7

6,873 3.6

11,213 5.9

Thailand 6,921 4.44,802 3.4 7,147 4.3 8,297 4.4

19,606 10.4

28,745 15.4

188,605 100.0

10,802 5.7


p Preliminary

Netherlands 7,746 4.99,199 6.6 7,056 4.2 8,079 4.3

Germany 3,804 2.43,453 2.5 4,535 2.7 5,176 2.7Korea 4,555 2.93,862 2.8 3,455 2.1 4,436 2.4

64,555 31.035,049 16.8

5,399 2.6

10,273 4.9

9,343 4.5

21,649 10.4

29,603 14.3

208,232 100.0

13,183 6.3

9,846 4.7

5,153 2.5

4,179 2.0

The People's Republic of China

Table A.9Principal Export Markets for Electrical Products

20042001 2002 2003 2005p

16,354 29.517,324 28.6 17,430 31.78,340 15.08,120 13.4 7,443 13.6

1,115 2.01,128 1.9 1,137 2.1

6,758 12.29,207 15.2 7,584 13.8

2,398 4.32,534 4.2 2,483 4.5

15,338 27.617,161 28.1 14,272 26.0

Total 55,470 100.060,675 100.0 54,897 100.0

1,430 2.61,865 3.1 1,410 2.61,643 3.01,566 2.6 1,558 2.8

2,094 3.8

18,134 26.510,552 15.4

1,420 2.1

7,602 11.1

2,534 3.7

21,170 30.9

68,446 100.0

1,820 2.72,271 3.3

2,943 4.3

19,005 25.513,091 17.6

1,827 2.5

7,542 10.1

2,987 4.0

21,998 29.5

74,547 100.0

2,188 2.92,544 3.4

3,365 4.51,770 2.9 1,580 2.9

United StatesSingapore

Australia

Japan

Hong Kong China

Others

GermanyThailand

Country RMmillion

%share

RMmillion

%share

RMmillion

%share

RMmillion

%share

RMmillion

%share


p Preliminary


P32

Table A.10Principal Export Markets for Chemicals and Chemical Products

2001 2002 2003 2004 2005p

Singapore 1,646 11.1 1,736 10.1

Hong Kong China 1,176 7.9 1,239 7.2

Japan 1,566 10.5 1,750 10.2

Korea 511 3.4 546 3.2Chinese Taipei 620 4.2 882 5.1

Thailand 1,164 7.8 1,387 8.0Indonesia 999 6.7 1,302 7.6

The People’sRepublic of China 1,533 10.3 2,294 13.3 2,930 13.8

2,158 10.2

2,105 9.9

1,771 8.4

1,549 7.3

1,531 7.2

766 3.6

960 4.5

5,513 26.1

21,200 100.0

4,019 14.5

2,581 9.3

2,983 10.7

2,339 8.4

1,847 6.7

2,232 8.0

1,174 4.2

1,337 4.8

7,184 26.0

27,767 100.0

Others 4,070 27.4 4,552 26.3

Total 14,879 100.0 17,228 100.0

Country RMmillion share

% RMmillion share

% RMmillion share

% RMmillion share

%RMmillion share

%


p Preliminary

India 376 2.5 498 2.9 858 4.0 1,089 3.9

United States 1,218 8.2 1,042 6.1 1,059 5.0 982 3.5

4,001 13.5

2,834 9.5

3,005 10.1

2,715 9.1

2,102 7.1

2,459 8.3

1,305 4.4

1,143 3.8

7,616 25.7

29,718 100.0

1,435 4.8

1,103 3.7

Table A.11Principal Export Markets for Manufactures of Metal

2001 2002 2003 2004 2005pCountry

Singapore

United States

Japan


Thailand

IndonesiaHong Kong

Australia

Others

Total


p Preliminary

24.3

476

23.2 2,134 20.12,255

9.01,015

7.4833

4.9550

6.3706

3.9442

7.4 486

8.5 594

5.5 665

5.8 504

4.1 3983.4 249

39.3 3,398

644

736

2,020501

360295

3,420

5.5

6.8

7.6

5.7

4.53.6400

3.3366

41.54,675

100.011,242

18.93,057

5.7918

6.61,070

8.31,340

7.91,269

3.75903.1505

5.8929

40.06,462

100.016,140

18.23,120

7.01,209

12.72,173

7.11,213

5.59454.9845

3.8646

6.11,045

34.75,961

100.017,157

2.8 368240 4.2

2.8

38.6

8,692 8,796100.0 100.0

RMmillion

%share

RMmillion

%share

RMmillion

%share

RMmillion

%share

RMmillion

%share

Annex

P33

2001 2002 2003 2004 2005pCountry RM

million%

shareRM

million%

shareRM

million%

shareRM

million%

shareRM

million%

share

Table A.12Principal Export Markets for Optical and Scientific Equipment


p Preliminary

United States

SingaporeJapan

Netherlands


ThailandGermanyOthers

Total

2,132

1,1101,163

415232

173437

2,140

7,802

27.3

14.214.9

5.33.0

2.25.6

27.5

100.0

1,874

1,5731,186

511199

172408

2,229

8,152

23.0

19.314.5

6.32.4

2.15.0

27.4

100.0

1,983

1,7521,380

642451

243404

2,301

9,156

21.7

19.115.1

7.04.9

2.74.4

25.1

100.0

2,428

2,2032,106

877567

295397

2,695

11,568

21.0

19.018.2

7.64.9

2.53.4

23.4

100.0

2,755

1,6731,832

852982

814508

2,902

12,318

22.4

13.614.9

6.98.0

6.64.1

23.5

100.0

Table A.13Principal Export Markets for Petroleum Products

2001 2002 2003 2004 2005pCountry RM

million%

shareRM

million%

shareRM

million%

shareRM

million%

shareRM

million%

share

Singapore 39.9

Indonesia 459

34.6 3,043 38.23,605

2.5239

19.51,836

2.9275

4.3407

5.6525

270

3.3 18811.8 1,001

5.5 260

2.4 188

11.0 412

257

27.0 2,271

276

9912,906

201

921

2,288

2.5

Japan 13.1


3.4

Australia

2.5

5.4

2.9

24.12,278

100.09,435

40.25,392

2.6351

14.21,905

7.3977

3.4459

4.8642

663 4.9

22.63,032

100.013,421

57.89,671

2.9484

10.31,729

3.4563

3.8635

2.3382

521 3.1

16.42,744

100.016,729

4.4366

United States

3.4Hong Kong China

29.8Others

Total 8,408 7,620100.0 100.0


p Preliminary

P34

Table A.14Export Prices of Major Commodities

2001 2002 2003 2004 2005p 2002 2003 2004 2005p

Annual change (%)

Palm oil (RM/tonne)

Rubber (sen/kg)

Saw logs (RM/cu. metre)

Crude oil (USD/barrel)

Sawn timber (RM/cu. metre)


p Preliminary

Liquefied natural gas (RM/tonne)

5.5

24.3

34.8

6.8

18.3

41.0

22.0

17.1

44.8

17.0

-2.9

-8.6

1,617

379

30

772

1,367

269

25

659

944

230

26

721

1,706

470

41

824

1,456

513

56

947

-14.6

9.0

-10.42.916.91,1341,102943 1,015 1,099 8.3

36.5

15.0

8.91.813.9365359315 398 428 7.7

8.9

3.40.8

20.0

13.2

13.2

7.81.5

0.82.3

14.0

0.8

1.9

2.2

1.7

19.9

100.0

0.8

9.8

4.00.7

17.9

15.4

13.6

7.82.1

0.91.6

13.3

1.1

2.5

2.1

2.0

17.6

1.2

100.0

10.9

3.60.8

13.0

19.7

15.4

9.81.1

1.02.0

11.8

1.0

2.0

1.7

2.3

17.8

1.5

100.0

1,143

37982

1,364

2,066

1,610

1,028116

100211

1,236

101

208

178

241

1,858

10,466

155

1,059

43480

1,940

1,670

1,478

847225

102177

1,449

120

270

230

218

1,909

10,857

127

1,105

430103

2,502

1,650

1,648

975185

106284

1,749

97

231

272

211

2,489

12,487

98

Table A.15Principal Export Markets for Palm Oil

20042001 2002 2003 2005p 20042001 2002 2003 2005p

('000 tonnes) % share


PakistanIndia

European Union1

NetherlandsGermany

SwedenOthers

Middle East

Australia

Japan

United States

Bangladesh

Chinese Taipei

Korea

Others

Total


p Preliminary

Country

Italy

1 Includes 10 new member states in 2004

11,788 100.0 100.013,073

2,097 17.9 21.82,867

96 0.8 0.8105228 1.9 1.7223

474 4.0 3.4438141 1.2 1.9246

298 2.5 4.1534

353 3.0 3.7485

838 7.17.1928

2,829 24.0 22.12,885

1,862 15.8 16.32,135

1,135 9.6 10.41,364149 1.3 1.4180119 1.0 1.2155114 1.0 0.8103345 2.9 2.5333

1,647 14.0 12.01,563

925 7.8 5.1664

Annex

P35

Table A.16Principal Export Markets for Rubber

('000 tonnes) % share


p Preliminary

Country20022002 20012001 20042004 2005p 20032003 2005p

1

The People'sRepublic of China 85 129 207 289 386 10.4 13.9 21.9 26.1 34.2

European Union1 318 309 306 353 320 38.7 33.3 32.3 32.0 28.3Germany 119 119 129 147 132 14.4 12.8 13.6 13.3 11.7France 31 41 40 53 46 3.8 4.4 4.2 4.8 4.1Netherlands 12 15 12 20 28 1.4 1.7 1.3 1.8 2.5Italy 30 28 29 29 24 3.7 3.1 3.0 2.6 2.1United Kingdom 25 24 22 24 21 3.0 2.5 2.4 2.2 1.9Spain 14 17 17 24 13 1.7 1.9 1.8 2.2 1.2Others 87 65 57 56 56 10.7 6.9 6.0 5.1 4.8

Middle East 95 81 84 90 75 11.5 8.7 8.9 8.1 6.6Iran 60 45 48 55 40 7.3 4.8 5.1 4.9 3.6Turkey 24 24 25 24 24 2.9 2.6 2.6 2.2 2.2Others 11 12 11 11 11 1.3 1.3 1.2 1.0 0.8

Korea 58 59 69 64 74 7.0 6.4 7.3 5.8 6.6United States 66 81 76 74 67 8.0 8.7 8.0 6.7 6.0Brazil 25 41 29 37 31 3.0 4.4 3.1 3.3 2.7Canada 16 28 14 19 17 1.9 3.0 1.5 1.7 1.5Singapore 5 9 9 22 10 0.6 1.0 0.9 2.0 0.9Others 154 191 152 157 148 18.9 20.6 16.1 14.3 13.2

Total 822 928 946 1,105 1,128 100.0 100.0 100.0 100.0 100.0

100.0

22.0

24.622.6

14.1

0.9

2.41.6

11.8

5,207

1,146

1,2781,178

736

47

12686

610

20042001 2002 2003 2005p 20042001 2002 2003 2005p

Total 4,834 5,104 5,532 100.0100.0 100.0

Table A.17Principal Export Markets for Saw Logs

('000 cubic metres) % shareCountry


p Preliminary

1,071 1,106 24.222.2 21.71,336The People's Republic of China

1,375 1,641 24.528.4 32.21,356Japan985 998 24.720.4 19.51,369India

669 651 12.513.8 12.7694Chinese Taipei

417 188 1.98.6 3.7103Hong Kong China

175 159 2.53.6 3.1140Korea29 39 1.10.6 0.860Thailand

113 322 8.62.4 6.3474Others

5,759

1,630

1,0981,448

745

23

11776

622

100.0

28.3

19.125.1

12.9

0.4

2.01.3

10.9

P36

20042001 2002 2003 2005p 20042001 2002 2003 2005pCountry

Table A.18Principal Export Markets for Sawn Timber

(‘000 cubic metres) % share

p Preliminary


Thailand 534 589 660 781 851 22.2 21.4 23.7 24.7 23.1The People’s Republic of China 151 159 193 209 614 6.3 5.8 6.9 6.6 16.7Chinese Taipei 170 187 209 227 225 7.0 6.8 7.5 7.2 6.1Netherlands 197 186 204 200 187 8.2 6.8 7.3 6.3 5.1Japan 187 194 167 172 170 7.8 7.1 6.0 5.4 4.6Singapore 185 155 165 246 160 7.7 5.6 5.9 7.8 4.3United Arab Emirates 66 64 55 79 88 2.7 2.3 2.0 2.5 2.4Korea 120 98 85 89 70 5.0 3.6 3.1 2.8 1.9Republic of Yemen 83 68 78 106 68 3.4 2.5 2.8 3.4 1.8Hong Kong China 135 149 107 81 67 5.6 5.4 3.8 2.6 1.8Australia 20 40 40 44 63 0.8 1.5 1.4 1.4 1.7Belgium 52 64 72 69 58 2.2 2.3 2.6 2.2 1.6United Kingdom 52 53 51 47 47 2.2 1.9 1.8 1.5 1.3Italy 25 37 62 40 33 1.0 1.3 2.2 1.3 0.9Others 434 710 641 776 984 17.9 25.7 23.0 24.3 26.7

Total 2,411 2,753 2,789 3,166 3,685 100.0 100.0 100.0 100.0 100.0

Annex

P37

18,686

3,024

1,051

1,316

4,345

1,548

420

205

676

682

166

3,081

888

100.0

16.2

5.6

7.0

23.3

8.3

2.2

1.1

3.6

3.6

0.9

16.5

4.8

100.0

17.3

8.0

7.1

12.5

7.2

2.4

2.3

3.4

5.2

1.8

19.0

2.6

100.0

14.6

13.2

11.4

10.4

5.9

3.0

3.7

3.2

2.5

5.0

15.2

1.3

100.0

18.6

9.7

14.5

12.3

5.0

2.7

3.2

2.4

4.7

8.7

11.2

1.4

17,913

3,097

1,440

1,271

2,248

1,290

425

412

610

937

306

3,396

468

16,192

2,358

2,131

1,838

1,687

956

485

604

511

412

822

2,462

203

15,077

2,797

1,457

2,190

1,852

753

400

487

362

704

1,332

1,690

215

20042001 2002 2003 2005p 20042001 2002 2003 2005p

Total

Country

Table A.19Principal Export Markets for Crude Oil

(‘000 tonnes) % share


p Preliminary

100.0

Thailand 18.8

Japan 4.0

Korea 7.6

Australia 20.9

Indonesia 7.9

Sri Lanka 2.0

New Zealand 1.6

Philippines 4.1

United States 1.7

Others 0.5

India 20.6

Singapore 9.0

18,223

734

1,389

3,817

1,431

358

299

743

314

92

3,7503,4181,638

1,284 6.911.210.65.62,0131,723838The People’s Republic of China 1.3240


Table A.20Principal Export Markets for LNG

2001 2002 2003 2004 2001 2002 2003 2004

(‘000 tonnes) % share

Japan

Korea

Chinese Taipei

Others

Total

p Preliminary

Country

15,423 15,007 100.0 100.0 100.0 100.017,311 20,729

United States

11,308 10,782 73.3 71.8

2,256 2,303 14.6 15.4

1,860 1,857 12.1 12.4

– 0.4

72.1

15.4

12.2

–

61.4

22.4

12.7

2.1– –65

12,491

2,658

2,108

12,724

4,643

2,623

440

– – – – 0.3 1.454 299

P38

10.512.976.6

6.31.33.0

6.4

2.0

1,8833,287

6,150

979

13,8965,1403,190

22,226

29,3096,854

12,43710,019

-7,083-3,664-7,2973,877

56,41759,53537,284

153,236

33,50023,321

186,736

28,627

3,86110,0177,976

21,854

7.514.5

100.078.0

6.70.52.9

6.9

3.2

1,1503,574

6,346

1,621

13,20911,3117,030

31,550

22,323735

10,44711,141

9,2276,295

8652,068

24,07211,926

173,419

26,954

7357,886

10,991

19,612

8.414.3

100.0 100.077.3

6.51.02.5

6.7

3.0

1,6923,430

6,297

1,174

9,7323,655

10,46523,853

23,1042,4456,942

13,717

7498,020

-3,287-3,985

52,61264,33036,283

153,225

57,60467,41524,328

149,346

32,43521,894

185,660

27,832

2,4456,942

11,393

20,780

4.40.52.5

4.6

1.5

1,7582,684

5,442

1,000

12.8

14,38311,545

100.0

1,13627,064

25,1721,015

12,64511,512

1,892120

-1,1002,872

59,95162,24434,654

156,849

76.8

43,73735,333

200,586

24,866

1,01510,713

6,947

18,675

10.4

Table A.21External Debt and Debt Servicing

20042001 2002 2003

RM million

Medium- and long-term debt:Gross borrowing

Federal GovernmentNFPEsPrivate sector

Repayment and prepaymentFederal GovernmentNFPEsPrivate sector

Net borrowingFederal GovernmentNFPEsPrivate sector

Outstanding debtFederal GovernmentNFPEsPrivate sector

Currency composition (% share)US dollarJapanese yenOthers

Short-term debt:Outstanding debt

Banking sector1

Total external debt:

Interest paymentFederal GovernmentNFPEsPrivate sector

Debt service ratio (% of exports of goods and services)

Total debtMedium- and long-term debt


Total servicing (including short-terminterest payment)of which:

Medium- and long-term debtRepayment (excluding prepayment)


Note: Numbers may not necessarily add up due to rounding

Source: Ministry of Finance and Bank Negara Malaysia

0.67.7 7.1 7.4Annual change (%)

49,14145,636 48,858 52,786Total external debt (USD million)50.156.2 55.1 47.2% GNP

8,40410,17912,147 10,541Non-bank private sector

Annex

P39

Table A.22Consumer Price Index (2000=100) Sub-groups of Food

Weights (%)

2002 2003

Annual change (%)

Food 33.8 0.7

of which:Food at Home 24.1 0.2

Rice, bread and other cereals 5.5 0.1Meat 3.4 -1.3Fish 4.9 1.0Milk and eggs 2.1 1.0Oils and fats 0.8 1.8Fruits and vegetables 5.0 0.2Sugar 0.5 -1.9Coffee and tea 0.8 0.4Other foods 1.1 0.3

Food away from home 9.7 2.0

1.3

1.60.42.41.32.24.42.50.21.60.50.7

2004

2.2

2.30.74.33.32.62.31.50.22.11.32.1

2005

3.6

3.91.58.64.54.60.04.50.31.50.83.1


2003

5.7

-0.20.97.5

11.415.7

1.41.8

6.8

0.8

0.10.90.5

2002

4.4

0.43.97.0

0.046.5-0.7-0.2

5.7

-0.3-0.32.6

-0.7

Table A.23Producer Price Index (1989=100)

Domestic Economy

of which:Food and live animals chiefly for foodBeverages and tobaccoCrude materials, inedible except fuelsMineral fuels, lubricants and

related materialsAnimal and vegetable oils and fatsChemicals and related products Manufactured goods Machinery and transport equipmentMiscellaneous manufactured articlesOther commodities and transactions

Local Production

Import


Weights(%) Annual change (%)

100.0

14.92.1

18.0

18.88.54.4

10.8

79.3

20.7

18.43.60.6

2004

8.9

3.61.66.6

22.313.24.32.5

10.3

2.0

0.10.60.2

2001

-5.0

0.41.8

-5.9

-10.6-17.6-1.1-0.5

-6.1

-0.1-0.610.3

-0.3

2005

6.8

26.0

2.2

3.81.93.0

-14.8

2.50.61.80.0

7.9

1.5

P40

Table A.24Labour Market: Selected Indicators

2001 2002 2003 2004 2005e

(number of positions/persons)

1 Refers to new vacancies reported by employers through the Electronic Labour Exchange2 Since 2004, classification of vacancies by occupational groups is based on the Malaysia Standard Classification of Occupation

(MASCO) 1998. As such, vacancies data prior to 2004 have been adjusted to best match the new classification for ease of comparison3 Refers to the placements reported by employers through the Electronic Labour Exchangee Estimates

Source: Ministry of Human Resources and Economic Planning Unit

Vacancies1

By industry:Agriculture, hunting, forestry and fishery 36,234 43,805 29,048 1,373 40,438Mining and quarrying 217 321 121 41 150Manufacturing 60,471 75,655 34,977 17,769 112,542Construction 13,834 19,001 13,818 3,505 48,524Services 20,703 24,005 18,954 18,624 63,441

Electricity, gas and water supply 171 326 499 198 859Wholesale and retail trade, hotels and restaurants 8,022 9,472 7,359 5,221 23,921Transport, storage and communication 2,749 2,378 1,459 1,046 3,892Finance, insurance, real estate and

business services 3,938 4,874 4,079 6,162 13,874Public administration, defence and

compulsory social security 5,823 6,955 5,558 1,224 2,497Community, social and personal service activities 4,773 18,398

Others not elsewhere classified – – – 8,663 39,405

Total vacancies 131,459 162,787 96,918 49,975 304,500

By occupational groups2:Legislators, senior officials and managers 1,661 1,789Professionals 5,020 8,575 5,071 5,187 17,285Technicians and associate professionals 6,848 11,725Clerical workers 8,914 9,660 7,540 11,799 15,885Service workers, shop and market sales workers 6,549 7,213 5,747 4,627 26,038Skilled agricultural and fishery workers 23,084 34,424 18,196 624 14,935Craft and related trades workers 1,134 18,793Plant and machine operators and assemblers 87,892 102,915 60,364 9,332 52,740Elementary occupations 8,763 145,310

Total vacancies 131,459 162,787 96,918 49,975 304,500

Job placements3 by industry:Agriculture, hunting, forestry and fishery 235 246 142 419 131Mining and quarrying 120 93 36 8 7Manufacturing 7,461 8,259 6,646 2,812 6,620Construction 1,560 1,664 1,451 234 590Services 8,571 9,015 7,992 1,872 5,290

Electricity, gas and water supply 99 99 113 28 51Wholesale and retail trade, hotels and restaurants 3,356 3,187 3,141 722 1,809Transport, storage and communication 825 693 545 142 379Finance, insurance, real estate and

business services 2,017 2,086 1,911 495 903Public administration, defence and

compulsory social security 2,274 2,950 2,282 141 550Community, social and personal service activities 344 1,598

Others not elsewhere classified – – – 837 4,821

Total placements 17,947 19,277 16,267 6,182 17,459

Unemployment rate(% of labour force) 3.6 3.5 3.6 3.5 3.5

Annex

P41

Year

19961997

378,186 93.9 331,747 69.2

19981,378,989 92.7 1,658,174 77.7

19991,606,986 80.3 499,085 67.4

2000768,633 82.1 97,960 75.7

2001763,926 78.6 209,870 73.9

2002 456,352 77.7 115,128 75.4

2003374,750 78.3 210,657 78.2

80.5 78.0169,548 507,637

2004 82.1248,328 79.6319,441

Table A.25New Supply of Purpose-Built Office Space and Retail Space in Malaysia

Office Space Retail Space

Squaremetres

Occupancyrate1 (%)

Occupancyrate1 (%)

Squaremetres

1

p Preliminary

Source: NAPIC, Valuation and Property Services Department

14.30.9

-6.70.02.2

Year

Table A.26Average Monthly Rentals for Prime Office and Retail Space in the Klang Valley1

Prime Office Space Prime Retail Space

RM/sq.m Annualchange (%)

Annualchange (%)

RM/sq.m

2000 48 1942001 48 21520022003

45 22645 226

2004 46 242

10.911.0

5.00.07.1

1 Refers to Kuala Lumpur and Selangor

Source: CH Williams Talhar & Wong Sdn. Bhd.

P42

Table A.27Broad Money (M3)

Annual change As at end- 20052001 2002 2003 2004

RM million

Broad money (M3)1 13,022 31,607

Currency2 -92 1,751Demand deposits 2,882 6,718Broad quasi-money 10,232 23,138

Fixed deposits -358 12,648Savings deposits 4,454 5,590NIDs 600 3,575Repos 4,186 2,507Foreign currency deposits 1,350 -1,182

Factors Affecting M3

Net claims on Government -1,542 11,538Claims on Government 4,165 -867Less: Government deposits 5,707 -12,405

Claims on private sector 20,335 27,737Loans 17,081 19,288Securities 3,255 8,449

Net external operations 6,741 1,237Bank Negara Malaysia3 7,722 7,564Banking system -980 -6,327

Other influences -12,513 -8,905

48,524

2,23311,21035,08217,065

5,6021,9658,0162,434

67,990

2,59410,08655,31124,668

6,1298,179

13,3372,998

12,9493,960

-8,989

31,28721,468

9,819

20,74827,131-6,383

-16,460

667,327

30,16696,116

541,044356,92570,53431,94163,77317,871

-12,83035,19348,023

642,369560,10682,263

236,008241,485

-5,477

-198,2211 Excludes interplacements among banking institutions2 Excludes holdings by banking system3 Includes exchange rate revaluation loss/gain

-15,9214,536

20,457

30,60239,753-9,151

81,97075,042

6,898

-28,661

2005

49,688

1,6298,650

39,4094,9491,947

12,78517,260

2,467

-5,474-2,2503,225

45,42245,004

418

16,48628,317

-11,830

-6,747

Annex

P43

2001 13,022 2.9 7,810 2.2 2,512 3.2 -115 -0.5 2,627 4.7 5,298 1.9 5,213 5.1

Table A.28Money Supply: Annual Change and Growth Rates

M3 5

M2 3

M1 1

Deposits with other

banking institutions4

Demanddeposits

Narrow quasi-money2Total Total Total Currency

RM m RM mRM mRM mRM mRM mRM m% %%%%%%

2002 31,607 6.7 21,030 5.8 8,344 10.3 1,749 7.9 6,595 11.3 12,686 4.5 10,576 9.92003 48,524 9.7 42,519 11.1 13,032 14.6 2,205 9.2 10,827 16.6 29,487 10.0 6,005 5.1

1 Currency in circulation and demand deposits of the private sector2 Comprising savings and fixed deposits, negotiable instruments of deposits (NIDs), repos and foreign currency deposits of the private sector placed with commercial banks and Islamic banks3 M1 plus narrow quasi-money4

Comprising fixed deposits and repos of the private sector placed with finance companies, merchant banks and discount houses. Also includes saving deposits with finance companies, negotiable instruments of deposits (NIDs) with finance companies and merchant banks, foreign currency deposits placed with merchant banks and call deposits with discount houses. Excludes interplacement among the banking institutions5

M2 plus deposits placed with other banking institutions

2005 49,688 15.4 1,561 5.5 72,261 -32,328 -38.78.0 17.29.68.59,75582,0152004 67,990 25.4 2,516 9.7 95,937 -40,112 -32.512.4 29.612.711.912,164108,102

8,1949,649

P44

Tab

le A

.29

Inte

rest

Rat

es (

%)

Ave

rage

rat

es a

t en

d-m

onth

in 2

005

Ave

rage

rat

es a

t en

d-ye

ar

2000

2001

2002

Jan.

Feb.

Mar

.M

ayA

pr.

Jun.

Jul.

Aug

.Se

p.O

ct.

Nov

.D

ec.

3-m

onth

inte

rban

k

Com

mer

cial

ban

ksFi

xed

depo

sit:

3-m

onth

12-m

onth

Savi

ngs

depo

sit

Base

lend

ing

rate

(BLR

)

Fina

nce

com

pani

esFi

xed

depo

sit:

3-m

onth

12-m

onth

Savi

ngs

depo

sit

Base

lend

ing

rate

(BLR

)

Trea

sury

bill

s(9

1 da

ys)

Gov

ernm

ent

secu

ritie

s(1

yea

r)G

over

nmen

t se

curit

ies

(5 y

ears

)

3.48

4.24

2.72

3.52

4.27

3.44

2.98

3.36

4.80

3.21

4.00

2.28

3.22

4.01

2.94

2.73

2.93

3.18

3.20

3.00

3.00

4.00

3.70

3.70

2.12

1.60

1.55

3.20

3.00

3.00

4.00

3.70

3.70

2.65

1.94

1.71

2.82

2.26

2.22

2.94

2.46

2.50

3.15

2003

3.00

3.70

1.86

3.00

3.68

2.18

2.77

2.93

4.28

2004

3.00

3.70

1.58

3.00

3.70

1.98

1.96

2.24

3.64

3.62

3.64

3.00

3.70

1.51

3.00

3.70

1.60

2.57

2.76

3.77

3.00

3.70

1.50

3.00

3.70

1.61

2.56

2.58

3.60

3.00

3.70

1.50

3.00

3.70

1.60

2.07

2.64

3.57

3.00

3.00

3.70

3.70

1.45

1.46

3.00

3.00

3.70

3.70

1.61

1.61

2.48

2.27

2.71

2.75

3.40

3.00

3.70

1.44

3.00

3.70

1.61

2.30

2.63

3.38

3.34

3.00

3.70

1.42

3.00

3.70

1.60

2.69

2.99

3.35

3.00

3.70

1.40

3.00

3.70

1.52

2.80

3.10

3.64

3.00

3.70

1.41

3.00

3.70

1.52

2.79

3.24

3.79

3.02

3.70

1.41

3.00

3.70

1.53

2.96

3.30

3.73

3.25

3.27

3.13

2.79

2.79

2.87

2.80

2.82

2.80

2.80

2.84

2.89

2.86

2.90

2.92

2.95

3.20

6.78

6.39

6.39

5.98

5.98

6.00

5.98

5.98

5.98

5.98

5.98

5.98

5.98

5.98

5.98

5.98

6.20

7.95

7.45

7.45

6.90

6.90

6.90

6.90

6.90

6.90

6.90

6.90

6.90

6.90

6.90

6.90

6.90

7.03

Annex

P45

116.38.7

101.6

20.8

60.6

75.316.7

56.7-31.9

32.124.6

18.54.1

96.85.6

75.4

4.4

31.4

52.718.5

69.115.7

36.832.3

-16.4-4.5

Table A.30

20032002 2004 2005e

RM billion

Revenue1

% growth

Operating expenditure % growth

Current surplus of NFPEs2

Current balance % of GDP

Net development expenditure3

% growth

Overall balance % of GDP

General government4

NFPEs


Consolidated Public Sector Finance

1 Excludes transfers within general government2 Refers to 30 NFPEs in 2004 and 2005; 34 in 20033 Adjusted for transfers and net lendings within public sector4 Comprises Federal Government, state governments, statutory bodies and local governmentse Estimatef Forecast… NegligibleNote: Numbers may not add up due to rounding

107.110.6

84.2

11.5

41.2

64.116.2

83.320.5

43.240.2

-19.2-4.9

122.65.4

108.4

6.6

63.8

78.015.8

71.025.1

31.040.0

7.01.4

2006f

134.39.6

112.5

3.7

63.8

85.615.8

71.0…

39.431.5

14.72.7

Annex

Key Economic andFinancial Statistics

P46

20042001 2002 2003 2005e 2006f

Annual change (%)

United StatesJapanEuro Area

GermanyUnited Kingdom






GermanyUnited Kingdom1

INFLATIONMajor Industrial Countries

% of labour force

UNEMPLOYMENTMajor Industrial Countries

% of GDP

CURRENT ACCOUNT BALANCEMajor Industrial Countries

FISCAL BALANCEMajor Industrial Countries

United StatesJapanGermanyUnited Kingdom

1 Based on Eurostat's harmonised index of consumer pricese Estimatef Forecast

1.91.2 1.5 3.32.70.8 1.6 4.21.80.4 0.1 2.30.71.7 0.9 2.1

-0.21.2 0.1 1.62.52.2 2.0 3.2

1.82.1 1.5 2.02.32.8 1.6 2.7

-0.3-0.7 -0.9 0.02.12.3 2.3 2.11.01.9 1.4 1.81.41.2 1.3 1.3

2.63.32.51.71.22.0

2.02.80.01.81.71.9

6.0 5.24.7 5.8 5.55.2 4.15.0 5.4 4.78.7 8.47.9 8.3 8.99.6 9.37.9 8.7 9.25.0 4.85.1 5.2 4.8

-4.7 -6.7-3.8 -4.5 -5.73.2 3.02.2 2.9 3.80.3 0.20.1 0.7 0.52.1 4.40.2 2.2 3.8

-1.5 -1.8-2.2 -1.6 -2.0

-3.4 -2.90.5 -2.4 -3.1-7.1 -6.7-6.3 -6.9 -7.0-1.8 -2.1-1.3 -1.7 -2.3-3.5 -3.50.9 -1.6 -3.0

2.63.52.81.30.91.8

2.23.4

-0.32.22.12.0

5.14.48.69.14.7

-6.43.60.34.3

-1.9

-2.6-6.9-2.1-3.2

Table A.31Major Industrial Countries: Key Economic Indicators

REAL GDPMajor Industrial Countries

Source: IMF World Economic Outlook, September 2005; OECD Economic Outlook No.78

Annex

P47

3.1

2.72.30.51.13.04.6

10.47.6

1.83.4

3.61.61.7

-0.41.42.76.16.0

3.93.6

-0.30.5

-2.61.21.86.83.5

1.2

2.1

6.12.04.3

25.710.3 15.7-2.5-0.4

2.71.2

4.24.16.1

26.19.8

12.64.5

1.8 3.4

3.22.0

10.229.210.312.85.6

5.81.9Philippines

-6.6-1.8-5.0-5.5-2.4-2.3-4.0

-3.11.6

7.2 9.94.04.16.47.35.34.55.6

-1.7

-1.10.20.3

-3.8-2.8-0.5-2.7

7.9 10.1

4.66.18.78.67.16.25.1

-2.0 -0.1

1.7-4.3-1.5-1.4-3.9

-1.7

6.99.17.04.34.01.84.45.34.4

1.3

2.7-0.2-0.4

-3.01.80.7

11.9

3.9

-3.00.1

-4.9-5.6-1.4-1.7-5.3

2.81.09.1

17.87.98.45.5

-3.3

4.78.33.8

-2.2-2.30.60.32.23.8

2.4

4.10.01.0

-1.61.41.6

11.5

4.2

1.51.76.5

16.86.18.35.4

20032001 2002 2004 2005e

Annual change (%)

The People's Republic of ChinaKoreaChinese TaipeiSingaporeHong Kong ChinaMalaysiaThailandIndonesia

KoreaChinese TaipeiSingaporeHong Kong China1

MalaysiaThailandIndonesia

CONSUMER PRICES Annual change (%)

Regional Countries

The People's Republic of ChinaKoreaChinese TaipeiSingaporeHong Kong ChinaMalaysiaThailandIndonesia

Regional Countries


Chinese TaipeiSingaporeHong Kong ChinaMalaysiaThailandIndonesiaPhilippines

Regional Countries

CURRENT ACCOUNT BALANCE % of GDP

FISCAL BALANCE2 % of GDP

1 Inflation refers to composite prices2 Refers to central government balancee Estimatesf Forecastn.a. Not available

Source: National Sources and Bank Negara Malaysia forecastIMF World Economic Outlook, September 2005

6.810.03.13.42.93.25.47.04.9

1.8

-2.5-1.2-3.3-5.30.4

-1.9-4.6

-2.8

2006f

-1.5

n.a.-1.40.4

-3.5n.a.-0.7-2.2

REAL GDP

Regional Countries

Table A.32East Asia: Key Economic Indicators

7.0 ~ 7.29.45.04.3

4.0 ~ 6.04.0 ~ 5.0

6.04.8 ~ 5.85.0 ~ 5.7

0.10.73.9Korea 1.8 0.1

1.9

5.61.54.6

22.710.2

16.5-2.50.7

3.06.8Philippines

-0.80.7The People's Republic of China3.3 ~ 3.6

3.01.7

0.5 ~ 1.52.3

3.5 ~ 4.03.5 ~ 5.07.0 ~ 9.08.0 ~ 8.5

3.0

5.16.04.41.8Philippines 4.5 5.7 ~ 6.3

P48

Table A.33Sources and Uses of Funds of the Financial System

2001 2002 2003 2004

RM million

2005p

1 Equals savings, fixed and other (NIF,LPHT,etc.) deposits + NIDs + repos.2 Includes statutory reserves of banking institutions3 Breakdown of Corporate Securities between Private Debt Securities (PDS) and Equities available from 2003p Preliminaryn.a. Not available

Sources of Funds:

Capital, reserves and profit 123,863.2 134,871.7 148,901.8 167,017.9 176,332.3

Currency 25,385.4 27,137.4 29,445.4 32,353.9 34,396.7

Demand deposits 92,129.0 87,539.5 92,117.8 124,333.4 135,944.1

Other deposits1 (of which): 508,836.0 547,135.3 617,286.6 711,307.5 786,255.2Public sector 44,971.3 44,767.7 40,563.0 38,809.9 43,593.3Other financial institutions 102,161.7 122,405.2 161,311.5 197,022.6 219,385.4Private sector 354,996.6 372,884.1 406,049.3 462,149.5 508,958.5Foreign 6,706.4 7,078.4 9,362.8 13,325.4 14,318.0

Borrowings 37,380.8 44,948.0 48,715.3 52,607.9 56,357.4

Funds from other financial institutions 68,552.4 70,836.8 87,571.5 71,717.6 84,196.2Domestic2 53,448.2 46,973.0 61,837.8 33,762.8 43,107.8Foreign 15,104.2 23,863.8 25,733.6 37,954.7 41,088.4

Insurance, provident and pension funds 251,409.8 274,384.5 305,657.0 337,937.6 374,114.0

Other liabilities 193,163.0 208,266.6 233,384.8 267,579.3 260,892.9

Total Liabilities 1,300,719.6 1,395,119.8 1,563,080.0 1,764,855.0 1,908,488.8

Uses of Funds:

Currency 5,336.7 7,369.8 5,573.8 5,058.3 5,994.0

Deposits with other financial institutions 177,102.0 187,883.0 226,303.7 247,947.3 255,982.9Domestic 156,662.9 166,670.2 211,075.6 214,355.2 229,084.0Foreign 20,439.1 21,212.7 15,228.0 33,592.0 26,898.9

Loans and advances 528,473.7 560,459.4 599,285.5 655,668.4 721,655.2Public sector 5,188.8 10,191.1 7,799.2 7,950.3 5,190.2Other financial institutions 26,110.3 23,746.4 24,295.3 24,382.2 22,965.9Private sector 494,977.2 524,393.4 564,850.9 620,712.1 690,901.8Foreign 2,197.4 2,128.5 2,340.0 2,623.8 2,597.3

Securities 336,379.3 361,113.2 409,488.6 433,071.0 468,040.8Treasury bills 4,063.5 5,680.0 3,539.4 445.2 1,698.4Commercial bills 12,222.5 13,321.8 13,468.4 8,403.7 7,337.9Malaysian Government Securities (MGS) 103,714.8 104,354.9 125,165.0 139,488.3 153,157.9Corporate3 207,130.1 226,671.9 254,197.9 271,630.7 290,781.7

Private Debt Securities (PDS) n.a. n.a. 122,237.8 130,213.0 140,755.3Equities n.a. n.a. 131,960.1 141,417.7 150,026.4

Foreign 2,720.3 3,189.7 3,429.0 4,578.6 6,663.9Others 6,528.0 7,894.9 9,688.7 8,524.5 8,401.1

Gold and forex reserves 113,542.3 127,515.1 166,139.3 249,704.1 264,421.5

Other assets 139,885.7 150,779.3 156,289.1 173,406.0 192,394.3

Total Assets 1,300,719.6 1,395,119.8 1,563,080.0 1,764,855.0 1,908,488.8

Annex

P49

Tab

le A

.34

Co

mm

erci

al B

anks

1 : C

om

mit

men

ts a

nd

Co

nti

ng

enci

es

As

at e

nd-

2001

RM

mill

ion

%sh

are

2002

RM

mill

ion

%sh

are

2003

RM

mill

ion

%sh

are

2004

RM

mill

ion

%sh

are

2005

RM

mill

ion

%sh

are

Ass

ets

sold

with

rec

ours

e an

d co

mm

itmen

ts w

ith d

raw

dow

n

Cre

dit

exte

nsio

n co

mm

itmen

ts

Dire

ct c

redi

t su

bstit

utes

Fore

ign

exch

ange

rel

ated

con

trac

ts

Inte

rest

rat

e re

late

d co

ntra

cts

Trad

e-re

late

d co

ntin

genc

ies

Tran

sact

ion-

rela

ted

cont

inge

ncie

s

Und

erw

ritin

g ob

ligat

ions

Oth

ers

Tota

l

1 In

clud

es f

inan

ce c

ompa

nies

and

Isla

mic

ban

ksN

ote:

Num

bers

may

not

nec

essa

rily

add

up d

ue t

o ro

undi

ng

21,2

84.6

5.8

25,5

19.2

5.7

26,9

16.9

5.3

26,8

23.7

4.2

24,2

65.0

3.2

169,

800.

246

.117

7,88

0.8

39.6

180,

149.

335

.820

4,29

3.3

31.6

228,

719.

430

.6

14,5

21.8

3.9

13,2

95.7

3.0

14,7

95.5

2.9

14,7

13.9

2.3

16,0

26.4

2.1

81,9

02.1

22.3

85,5

17.3

19.0

101,

477.

020

.217

5,50

4.8

27.2

161,

783.

321

.6

34,0

56.8

9.3

93,6

37.5

20.8

124,

496.

624

.716

3,10

1.1

25.2

252,

469.

933

.7

13,9

32.3

3.8

18,4

24.3

4.1

20,5

07.2

4.1

23,8

51.7

3.7

21,0

49.1

2.8

19,4

40.1

5.3

21,5

67.3

4.8

21,6

21.3

4.3

21,6

85.4

3.4

23,5

29.3

3.1

1,76

8.1

0.5

1,95

2.0

0.4

1,86

8.4

0.4

1,52

2.9

0.2

1,60

5.7

0.2

11,3

48.5

3.1

11,8

69.7

2.6

11,6

64.3

2.3

14,6

36.8

2.3

19,2

11.5

2.6

368,

054.

310

0.0

449,

663.

810

0.0

503,

496.

510

0.0

646,

133.

610

0.0

748,

659.

710

0.0

P50

Tab

le A

.35

Mer

chan

t B

anks

: Co

mm

itm

ents

an

d C

on

tin

gen

cies

As

at e

nd-

2001

RM

mill

ion

%sh

are

2002

RM

mill

ion

%sh

are

2003

RM

mill

ion

%sh

are

2004

RM

mill

ion

%sh

are

2005

RM

mill

ion

%sh

are

Ass

ets

sold

with

rec

ours

e an

d co

mm

itmen

ts w

ith d

raw

dow

n

Cre

dit

exte

nsio

n co

mm

itmen

ts

Dire

ct c

redi

t su

bstit

utes

Fore

ign

exch

ange

rel

ated

con

trac

ts

Inte

rest

rat

e re

late

d co

ntra

cts

Trad

e-re

late

d co

ntin

genc

ies

Tran

sact

ion-

rela

ted

cont

inge

ncie

s

Und

erw

ritin

g ob

ligat

ions

Oth

ers

Tota

l

1,42

5.5

2,63

9.7

1,32

5.1

1,32

0.1

39,6

58.8

0.1

790.

4

1,61

7.5

80.0

48,8

57.2

2.9

5.4

2.7

2.7

81.2 0.0

1.6

3.3

0.2

100.

0

2.2

2.7

1.3

1.9

89.7

0.0

1.0

1.2

0.1

55.4

100.

0

1.3

2.1

1.0

1.2

92.9

0.0

0.7

0.9

0.0

100.

0

1,59

5.2

2,54

5.9

1,22

6.8

1,45

9.9

115,

332.

1

0.0

818.

2

1,13

9.0

124,

172.

6

44.6

1.4

1.3

0.6

1.6

94.1 0.0

0.4

0.6

0.0

100.

0

2,49

3.7

2,38

7.6

1,12

6.2

2,87

7.6

169,

189.

1

0.0

676.

6

1,02

9.6

179,

825.

0

506.

2

1.9

2.2

1.0

3.9

87.6 0.0

1.4

1.6

0.4

100.

0

2,41

8.3

2,86

3.0

1,31

2.4

4,97

6.9

112,

409.

4

0.0

1,79

4.5

2,09

4.5

128,

375.

2

1,73

6.0

2,08

9.1

1,03

9.3

1,50

6.6

70,7

01.1

0.0

749.

0

937.

5

44.1

78,8

02.7

Not

e: N

umbe

rs m

ay n

ot n

eces

saril

y ad

d up

due

to

roun

ding

Annex

P51

Table A.36Commercial Banks1: Income and Expenditure

For the financial year For the calendar year

20042002 2003 2003 2004 2005p

RM millionInterest income2 34,178.6 17,471.5 19,183.1 38,762.1 41,070.5 43,381.5Less: Interest expense 17,178.6 17,471.5 19,183.1 20,038.8 21,372.0 22,113.6

Net interest income 17,628.3 18,261.6 19,172.5 18,723.3 19,698.6 21,268.0Add: Fee-based income 2,951.0 3,211.9 3,925.1 3,355.3 3,878.0 4,334.1

Add: Other income 2,631.7 4,135.9 6,850.0 1,930.8 3,300.8 3,625.6

Gross operating profit 10,738.0 11,323.0 11,606.6 11,612.8 11,939.5 12,816.5

Gross operating profit after provision 10,085.4 10,680.7 10,977.0 7,762.0 7,454.1 7,414.1

Less: Loan loss and other provisions 652.6 642.3 629.6 3,850.9 4,485.4 5,402.5

Less: Staff cost 4,501.0 4,718.5 5,332.7 4,826.1 5,364.6 5,958.8 Overheads 5,340.3 5,432.1 6,158.3 5,639.7 6,272.5 6,826.7

Pre-tax profit 12,717.1 14,816.6 17,827.0 9,692.8 10,754.9 11,039.71 Includes finance companies and Islamic banks2 Effective January 2005, banking institutions no longer accrue interests on non-performing loan accountsp PreliminaryNote: Numbers may not necessarily add up due to rounding

Table A.37Merchant Banks: Income and Expenditure

For the financial year For the calendar year

20042002 2003 2003 2004 2005p

RM millionInterest income1 1,714.3 1,624.3 1,744.0 1,636.5 1,661.7 1,698.5 Less: Interest expense 1,138.7 1,081.7 1,269.7 1,145.7 1,196.0 1,265.9

Net interest income 575.5 542.6 474.3 490.8 465.8 432.6Add: Fee-based income 306.2 332.6 375.7 327.6 351.4 349.9

Add: Other income 306.3 519.6 412.6 398.2 550.9 1,162.0

Gross operating profit 549.9 481.4 394.5 424.3 365.1 251.3

Gross operating profit after provision 435.7 385.2 283.0 287.0 263.6 178.3

Less: Loan loss and other provisions 114.3 96.2 111.5 137.4 101.5 73.0

Less: Staff cost 214.8 263.1 295.4 260.6 297.5 350.2 Overheads 117.0 130.8 160.2 133.4 154.6 181.0

Pre-tax profit 742.0 904.8 695.6 685.2 814.4 1,340.31 Effective January 2005, banking institutions no longer accrue interests on non-performing loan accountsp PreliminaryNote: Numbers may not necessarily add up due to rounding

P52

% s

hare

2005

2001

As

at e

nd-

2002

2004

2003

2001

2002

2003

2004

2005

Tab

le A

.38

Co

mm

erci

al B

anks

1 : D

irec

tio

n o

f Le

nd

ing

Bu

sin

ess

ente

rpri

ses

208,

607.

6 20

6,50

8.4

203,

643.

5 21

0,80

0.6

217,

797.

3 49

.9

47.1

44

.0

41.8

39

.6H

ou

seh

old

s 17

8,31

6.8

204,

552.

4 23

0,69

2.1

263,

824.

2 30

3,79

1.7

42.7

46

.6

49.9

52

.3

55.3

Oth

ers

30,8

25.9

27

,652

.5

28,3

98.1

29

,818

.6

27,7

29.0

7.

4 6.

3 6.

1 5.

9 5.

0

Tota

l2 41

7,75

0.3

438,

713.

3 46

2,73

3.6

504,

443.

4 54

9,31

8.0

Loan

s by

sec

tor

(RM

mill

ion)

1 In

clud

es f

inan

ce c

ompa

nies

and

Isla

mic

ban

ks2

Incl

udes

loan

s so

ld t

o C

agam

asN

ote:

Num

bers

may

not

nec

essa

rily

add

up d

ue t

o ro

undi

ng

Agr

icul

ture

, hun

ting,

for

estr

y an

d fis

hing

10

,921

.9

10,8

40.9

9,

861.

8 10

,433

.3

10,6

44.4

2.

6 2.

5 2.

1 2.

1 1.

9M

inin

g an

d qu

arry

ing

1,22

1.0

948.

1 1,

048.

4 94

2.7

761.

6 0.

3 0.

2 0.

2 0.

2 0.

1M

anuf

actu

ring

60,3

16.7

59

,264

.2

59,4

15.2

61

,725

.2

59,6

13.0

14

.4

13.5

12

.8

12.2

10

.9El

ectr

icity

, gas

and

wat

er s

uppl

y 4,

799.

5 6,

035.

8 4,

681.

3 4,

785.

2 4,

480.

1 1.

1 1.

4 1.

0 0.

9 0.

8W

hole

sale

and

ret

ail t

rade

, res

taur

ants

and

hot

els

35,2

23.7

36

,358

.0

38,5

06.5

42

,725

.0

46,3

50.6

8.

4 8.

3 8.

3 8.

5 8.

4

Who

lesa

le t

rade

19

,735

.5

20,7

12.8

21

,896

.7

25,3

80.3

27

,198

.6

4.7

4.7

4.7

5.0

5.0

Re

tail

trad

e 11

,008

.4

11,4

44.4

12

,069

.5

12,9

90.8

14

,712

.6

2.6

2.6

2.6

2.6

2.7

Re

stau

rant

s an

d ho

tels

4,

479.

8 4,

200.

8 4,

540.

3 4,

353.

9 4,

439.

4 1.

1 1.

0 1.

0 0.

9 0.

8Br

oad

prop

erty

sec

tor

158,

892.

7 17

0,22

6.0

185,

854.

9 20

5,62

8.7

226,

381.

3 38

.0

38.8

40

.2

40.8

41

.2

Con

stru

ctio

n 31

,100

.8

29,6

94.1

27

,774

.6

28,7

90.3

28

,165

.4

7.4

6.8

6.0

5.7

5.1

Pu

rcha

se o

f re

side

ntia

l pro

pert

y 86

,112

.8

100,

288.

6 11

6,47

4.8

132,

833.

3 14

9,12

4.5

20.6

22

.9

25.2

26

.3

27.1

Pu

rcha

se o

f no

n-re

side

ntia

l pro

pert

y 27

,437

.3

27,4

47.1

28

,648

.0

31,0

22.7

35

,026

.6

6.6

6.3

6.2

6.1

6.4

Re

al e

stat

e 14

,241

.8

12,7

96.2

12

,957

.6

12,9

82.4

14

,064

.8

3.4

2.9

2.8

2.6

2.6

Tran

spor

t, s

tora

ge a

nd c

omm

unic

atio

n 9,

547.

7 9,

393.

4 9,

882.

6 9,

595.

1 10

,959

.7

2.3

2.1

2.1

1.9

2.0

Fina

ncia

l, in

sura

nce

and

busi

ness

ser

vice

s 31

,354

.0

28,9

43.2

28

,624

.2

30,3

74.9

29

,829

.2

7.5

6.6

6.2

6.0

5.4

Fi

nanc

ial s

ervi

ces

22

,006

.4

20,1

02.2

20

,177

.9

20,7

62.3

20

,351

.7

5.3

4.6

4.4

4.1

3.7

In

sura

nce

550.

3 60

4.9

206.

6 12

7.7

137.

2 0.

1 0.

1 0.

0 0.

0 0.

0

Busi

ness

ser

vice

s 8,

797.

3 8,

236.

1 8,

239.

7 9,

484.

9 9,

340.

3 2.

1 1.

9 1.

8 1.

9 1.

7C

onsu

mpt

ion

cred

it 22

,870

.0

25,3

30.0

27

,750

.9

31,7

20.4

36

,702

.3

5.5

5.8

6.0

6.3

6.7

Pe

rson

al u

ses

13,5

38.1

14

,331

.2

15,1

41.6

17

,170

.5

19,7

35.6

3.

2 3.

3 3.

3 3.

4 3.

6

Cre

dit

card

s 8,

812.

0 10

,591

.4

12,2

36.5

14

,235

.1

16,6

92.9

2.

1 2.

4 2.

6 2.

8 3.

0

Purc

hase

of

cons

umer

dur

able

goo

ds

519.

9 40

7.4

372.

8 31

4.8

273.

7 0.

1 0.

1 0.

1 0.

1 0.

0Pu

rcha

se o

f se

curit

ies

19,2

19.5

19

,658

.2

18,0

97.2

17

,919

.2

19,1

01.0

4.

6 4.

5 3.

9 3.

6 3.

5Pu

rcha

se o

f tr

ansp

ort

vehi

cles

48

,971

.5

58,0

22.6

64

,773

.3

74,5

54.6

89

,315

.9

11.7

13

.2

14.0

14

.8

16.3

Pu

rcha

se o

f pa

ssen

ger

cars

45

,419

.1

54,9

87.0

61

,469

.6

72,0

61.3

86

,460

.9

10.9

12

.5

13.3

14

.3

15.7

Com

mun

ity, s

ocia

l and

per

sona

l ser

vice

s 5,

684.

6 5,

514.

3 4,

870.

2 5,

036.

7 5,

504.

3 1.

4 1.

3 1.

1 1.

0 1.

0O

ther

s 8,

727.

6 8,

178.

5 9,

367.

1 9,

002.

3 9,

674.

6 2.

1 1.

9 2.

0 1.

8 1.

8

Annex

P53

% s

hare

2005

2001

As

at e

nd-

2002

2004

2003

2001

2002

2003

2004

2005

Tab

le A

.39

Mer

chan

ts B

anks

: Dir

ecti

on

of

Len

din

g

Bu

sin

ess

ente

rpri

ses

13,3

04.0

12

,282

.6

9,89

7.8

8,26

6.8

7,80

6.7

91.1

91

.1

89.6

87

.6

89.2

Ho

use

ho

lds

337.

3 31

7.1

383.

1 55

8.5

571.

2 2.

3 2.

4 3.

5 5.

9 6.

5O

ther

s 96

5.5

881.

4 76

2.1

608.

1 36

9.7

6.6

6.5

6.9

6.4

4.2

To

tal1

14,6

06.8

13

,481

.0

11,0

42.9

9,

433.

4 8,

747.

6

Loan

s by

sec

tor

(RM

mill

ion)

1 In

clud

es lo

ans

sold

to

Cag

amas

Not

e: N

umbe

rs m

ay n

ot n

eces

saril

y ad

d up

due

to

roun

ding

Agr

icul

ture

, hun

ting,

for

estr

y an

d fis

hing

86

4.4

807.

4 65

2.3

445.

5 33

4.5

5.9

6.0

5.9

4.7

3.8

Min

ing

and

quar

ryin

g 87

.5

69.2

47

.7

47.4

48

.9

0.6

0.5

0.4

0.5

0.6

Man

ufac

turin

g 2,

205.

0 2,

012.

1 1,

667.

9 1,

295.

2 1,

050.

3 15

.1

14.9

15

.1

13.7

12

.0El

ectr

icity

, gas

and

wat

er s

uppl

y 45

5.3

779.

8 38

4.7

410.

6 16

8.7

3.1

5.8

3.5

4.4

1.9

Who

lesa

le a

nd r

etai

l tra

de, r

esta

uran

ts a

nd h

otel

s 80

6.8

705.

2 65

5.3

729.

8 70

2.3

5.5

5.2

5.9

7.7

8.0

W

hole

sale

tra

de

172.

8 15

6.5

97.4

12

9.3

133.

9 1.

2 1.

2 0.

9 1.

4 1.

5

Reta

il tr

ade

190.

7 14

8.3

92.8

12

5.0

129.

3 1.

3 1.

1 0.

8 1.

3 1.

5

Rest

aura

nts

and

hote

ls

443.

3 40

0.4

465.

1 47

5.6

439.

0 3.

0 3.

0 4.

2 5.

0 5.

0Br

oad

prop

erty

sec

tor

4,38

3.3

3,85

9.9

2,85

8.8

2,83

2.2

2,61

6.4

30.0

28

.6

25.9

30

.0

29.9

C

onst

ruct

ion

2,80

0.4

2,49

5.3

1,70

8.0

1,92

0.8

1,82

6.4

19.2

18

.5

15.5

20

.4

20.9

Pu

rcha

se o

f re

side

ntia

l pro

pert

y 73

.5

77.1

78

.2

80.3

74

.0

0.5

0.6

0.7

0.9

0.8

Pu

rcha

se o

f no

n-re

side

ntia

l pro

pert

y 24

7.3

209.

0 15

0.0

111.

9 96

.7

1.7

1.6

1.4

1.2

1.1

Re

al e

stat

e 1,

262.

1 1,

078.

4 92

2.6

719.

2 61

9.3

8.6

8.0

8.4

7.6

7.1

Tran

spor

t, s

tora

ge a

nd c

omm

unic

atio

n 59

4.7

363.

0 84

5.3

320.

5 39

5.9

4.1

2.7

7.7

3.4

4.5

Fina

ncia

l, in

sura

nce

and

busi

ness

ser

vice

s 1,

026.

7 93

8.3

633.

1 56

4.5

314.

3 7.

0 7.

0 5.

7 6.

0 3.

6

Fina

ncia

l ser

vice

s 71

0.8

768.

2 53

5.2

520.

7 22

3.9

4.9

5.7

4.8

5.5

2.6

In

sura

nce

5.5

0.0

0.0

0.0

30.0

0.

0 0.

0 0.

0 0.

0 0.

3

Busi

ness

ser

vice

s 31

0.4

170.

2 97

.9

43.8

60

.4

2.1

1.3

0.9

0.5

0.7

Con

sum

ptio

n cr

edit

32.6

21

.2

35.5

11

6.6

182.

7 0.

2 0

.2

0.3

1.2

2.1

Pe

rson

al u

ses

32.5

21

.1

35.5

11

6.6

182.

6 0.

2 0.

2 0.

3 1.

2 2.

1

Cre

dit

card

s 0.

0 0.

0 0.

0 0.

0 0.

0 0.

0 0.

0 0.

0 0.

0 0.

0

Purc

hase

of

cons

umer

dur

able

goo

ds

0.1

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Purc

hase

of

secu

ritie

s 2,

199.

6 1,

981.

6 1,

709.

4 1,

468.

4 1,

803.

4 15

.1

14.7

15

.5

15.6

20

.6Pu

rcha

se o

f tr

ansp

ort

vehi

cles

12

.9

19.4

22

.0

21.4

20

.7

0.1

0.1

0.2

0.2

0.2

Pu

rcha

se o

f pa

ssen

ger

cars

12

.1

19.1

21

.5

20.9

20

.3

0.1

0.1

0.2

0.2

0.2

Com

mun

ity, s

ocia

l and

per

sona

l ser

vice

s 36

7.4

203.

9 98

.4

69.1

22

2.5

2.5

1.5

0.9

0.7

2.5

Oth

ers

1,57

0.8

1,72

0.0

1,43

2.6

1,11

2.2

887.

0 10

.8

12.8

13

.0

11.8

10

.1

P54

As

perc

enta

ge o

f to

tal l

oans

to t

he s

ecto

r (%

)

2005

2001

As

at e

nd-

2002

2004

2003

2001

2002

2003

2004

2005

Tab

le A

.40

Co

mm

erci

al B

anks

1 : N

on

-per

form

ing

Lo

ans

by

Sect

or

Bu

sin

ess

ente

rpri

ses

46,8

80.8

42

,282

.2

37,3

84.7

32

,959

.8

27,9

31.3

19

.4

17.8

15

.9

13.3

10

.9H

ou

seh

old

s 15

,019

.3

16,1

10.4

17

,104

.2

18,8

86.0

21

,341

.2

9.2

8.5

8.0

7.7

7.5

Oth

ers

1,54

3.8

1,29

4.9

964.

0 95

0.9

1,19

1.4

17.7

15

.8

10.3

10

.6

12.3

To

tal

63,4

43.9

62

,279

.9

55,4

52.9

52

,796

.7

50,4

63.9

NPL

by

sect

or (R

M m

illio

n)

1 In

clud

es f

inan

ce c

ompa

nies

and

Isla

mic

ban

ks2

Incl

udes

pas

seng

er c

ars

Not

e: N

umbe

rs m

ay n

ot n

eces

saril

y ad

d up

due

to

roun

ding

Agr

icul

ture

, hun

ting,

for

estr

y an

d fis

hing

85

8.1

920.

0 75

9.2

655.

3 58

1.2

7.9

8.5

7.7

6.3

5.5

Min

ing

and

quar

ryin

g 24

8.5

159.

5 14

3.6

85.9

11

9.1

20.4

16

.8

13.7

9.

1 15

.6M

anuf

actu

ring

11,6

81.1

11

,924

.8

9,46

3.3

8,15

1.1

6,23

8.1

19.4

20

.1

15.9

13

.2

10.5

Elec

tric

ity, g

as a

nd w

ater

sup

ply

227.

6 21

5.8

1,32

6.4

1,21

4.4

1,22

1.2

4.7

3.6

28.3

25

.4

27.4

Who

lesa

le a

nd r

etai

l tra

de, r

esta

uran

ts a

nd h

otel

s 4,

853.

6 4,

223.

9 4,

416.

1 4,

182.

8 3,

426.

7 13

.8

11.6

11

.5

9.8

7.4

W

hole

sale

tra

de

2,11

7.4

1,86

5.2

1,74

8.4

1,62

8.0

1,41

3.1

10.7

9.

0 8.

0 6.

4 5.

2

Reta

il tr

ade

1,35

8.9

1,23

3.8

1,42

1.6

1,25

1.7

1,11

3.0

12.3

10

.8

11.8

9.

6 7.

6

Rest

aura

nts

and

hote

ls

1,37

7.2

1,12

5.0

1,24

6.1

1,30

3.0

900.

7 30

.7

26.8

27

.4

29.9

20

.3Br

oad

prop

erty

sec

tor

26,4

78.8

26

,242

.2

25,6

36.4

25

,808

.4

26,1

21.1

16

.7

15.4

13

.8

12.6

11

.5

Con

stru

ctio

n 9,

909.

3 8,

926.

7 7,

647.

2 6,

789.

7 5,

679.

2 31

.9

30.1

27

.5

23.6

20

.2

Purc

hase

of

resi

dent

ial p

rope

rty

6,94

7.1

8,74

0.8

10,1

22.3

11

,852

.2

14,0

06.5

8.

1 8.

7 8.

7 8.

9 9.

4

Purc

hase

of

non-

resi

dent

ial p

rope

rty

5,02

5.7

4,90

0.6

4,73

7.9

4,38

2.8

4,08

8.2

18.3

17

.9

16.5

14

.1

11.7

Re

al e

stat

e 4,

596.

7 3,

674.

1 3,

129.

0 2,

783.

6 2,

347.

2 32

.3

28.7

24

.1

21.4

16

.7Tr

ansp

ort,

sto

rage

and

com

mun

icat

ion

1,55

6.1

1,39

9.6

1,16

5.1

778.

0 63

9.6

16.3

14

.9

11.8

8.

1 5.

8Fi

nanc

e, in

sura

nce

and

busi

ness

ser

vice

s 4,

511.

3 2,

996.

6 2,

270.

6 1,

874.

5 1,

772.

6 14

.4

10.4

7.

9 6.

2 5.

9

Fina

ncia

l ser

vice

s 2,

784.

8 1,

501.

4 1,

042.

0 78

2.4

783.

7 12

.7

7.5

5.2

3.8

3.9

In

sura

nce

42.5

33

.1

18.5

4.

2 1.

6 7.

7 0.

0 0.

0 0.

0 1.

2

Busi

ness

ser

vice

s 1,

684.

0 1,

462.

0 1,

210.

2 1,

087.

9 98

7.3

19.1

17

.8

14.7

11

.5

10.6

Con

sum

ptio

n cr

edit

2,43

7.5

2,48

0.1

2,62

9.9

2,56

9.1

2,68

5.5

10.7

9.

8 9.

5 8.

1 7.

4

Pers

onal

use

s 1,

952.

4 1,

981.

8 2,

002.

8 1,

868.

2 1,

910.

5 14

.4

13.8

13

.2

10.9

9.

7

Cre

dit

card

s 40

9.4

434.

3 57

8.6

663.

9 74

3.7

0.0

0.0

0.0

0.0

0.0

Pu

rcha

se o

f co

nsum

er d

urab

le g

oods

75

.7

63.9

48

.5

37.0

31

.2

14.6

15

.7

13.0

11

.8

11.4

Purc

hase

of

secu

ritie

s 4,

391.

4 3,

639.

7 3,

205.

7 2,

594.

7 2,

196.

7 22

.8

18.5

17

.7

14.5

11

.5Pu

rcha

se o

f tr

ansp

ort

vehi

cles

2 3,

439.

0 3,

069.

7 2,

749.

1 3,

167.

2 3,

550.

9 7.

6 5.

6 4.

5 4.

3 4.

0C

omm

unity

, soc

ial a

nd p

erso

nal s

ervi

ces

1,21

7.2

1,12

0.6

723.

5 76

4.4

719.

9 21

.4

20.3

14

.9

15.2

13

.1

Annex

P55

As

perc

enta

ge o

f to

tal l

oans

to t

he s

ecto

r (%

)

2005

2001

As

at e

nd-

2002

2004

2003

2001

2002

2003

2004

2005

Tab

le A

.41

Mer

chan

t B

anks

: No

n-p

erfo

rmin

g L

oan

s b

y Se

cto

r

Bu

sin

ess

ente

rpri

ses

3,59

7.7

3,22

2.7

2,31

4.5

1,94

7.2

1,45

1.9

30.1

29

.9

26.5

26

.0

21.3

Ho

use

ho

lds

453.

4 42

3.2

283.

9 16

1.7

127.

4 41

.4

42.9

32

.7

19.5

12

.1O

ther

s 33

3.3

343.

0 22

0.2

159.

2 15

5.7

21.2

19

.9

15.4

14

.3

17.6

To

tal

4,38

4.4

3,98

8.9

2,81

8.6

2,26

8.0

1,73

5.1

NPL

by

sect

or (R

M m

illio

n)

1 In

clud

es p

asse

nger

car

sN

ote:

Num

bers

may

not

nec

essa

rily

add

up d

ue t

o ro

undi

ng

Agr

icul

ture

, hun

ting,

for

estr

y an

d fis

hing

86

.5

47.3

22

.0

24.4

20

.5

10.0

5.

9 3.

4 5.

5 6.

1M

inin

g an

d qu

arry

ing

0.5

4.1

4.4

4.5

4.6

0.5

5.9

9.1

9.4

9.4

Man

ufac

turin

g 89

1.5

792.

5 53

8.1

554.

3 31

2.0

40.4

39

.4

32.3

42

.8

29.7

Elec

tric

ity, g

as a

nd w

ater

sup

ply

133.

4 20

8.4

118.

0 82

.3

0.0

29.3

26

.7

30.7

20

.0

0.0

Who

lesa

le a

nd r

etai

l tra

de, r

esta

uran

ts a

nd h

otel

s 19

7.4

181.

4 21

7.6

173.

9 17

6.7

24.5

25

.7

33.2

23

.8

25.2

W

hole

sale

tra

de

45.4

29

.8

9.8

7.8

7.0

26.3

19

.0

10.0

6.

0 5.

2

Reta

il tr

ade

33.1

5.

6 6.

5 1.

2 10

.8

17.4

3.

7 7.

0 0.

9 8.

3

Rest

aura

nts

and

hote

ls

118.

8 14

6.1

201.

3 16

5.0

158.

9 26

.8

36.5

43

.3

34.7

36

.2Br

oad

prop

erty

sec

tor

1,47

7.3

1,28

2.0

1,00

4.6

918.

2 76

4.5

33.7

33

.2

35.1

32

.4

29.2

C

onst

ruct

ion

807.

5 75

6.6

531.

2 49

6.5

447.

2 28

.8

30.3

31

.1

25.8

24

.5

Purc

hase

of

resi

dent

ial p

rope

rty

0.7

0.2

0.1

0.4

0.3

0.9

0.3

0.2

0.6

0.4

Pu

rcha

se o

f no

n-re

side

ntia

l pro

pert

y 91

.3

70.9

65

.9

49.3

36

.9

36.9

33

.9

43.9

44

.0

38.1

Re

al e

stat

e 57

7.8

454.

3 40

7.3

372.

0 28

0.1

45.8

42

.1

44.1

51

.7

45.2

Tran

spor

t, s

tora

ge a

nd c

omm

unic

atio

n 63

.6

38.4

22

.9

0.0

0.0

10.7

10

.6

2.7

0.0

0.0

Fina

nce,

insu

ranc

e an

d bu

sine

ss s

ervi

ces

187.

2 13

9.4

85.6

8.

3 5.

7 18

.2

14.9

13

.5

1.5

1.8

Fi

nanc

ial s

ervi

ces

134.

6 10

1.3

71.8

2.

9 1.

1 18

.9

13.2

13

.4

0.6

0.5

In

sura

nce

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Bu

sine

ss s

ervi

ces

52.6

38

.1

13.7

5.

5 4.

6 16

.9

22.4

14

.0

12.5

7.

6C

onsu

mpt

ion

cred

it 13

.2

12.2

11

.5

10.2

12

.6

40.4

57

.4

32.4

8.

8 6.

9

Pers

onal

use

s 13

.2

12.2

11

.5

10.2

12

.6

40.5

57

.5

32.5

8.

8 6.

9

Cre

dit

card

s 0.

0 0.

0 0.

0 0.

0 0.

0 0.

0 0.

0 0.

0 0.

0 0.

0

Purc

hase

of

cons

umer

dur

able

goo

ds

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Purc

hase

of

secu

ritie

s 87

8.9

821.

5 54

4.4

301.

9 22

8.9

40.0

41

.5

31.8

20

.6

12.7

Purc

hase

of

tran

spor

t ve

hicl

es1

0.1

0.1

0.1

0.0

0.0

1.2

0.6

0.4

0.1

0.1

Com

mun

ity, s

ocia

l and

per

sona

l ser

vice

s 12

1.6

118.

7 29

.2

30.9

53

.9

33.1

58

.2

29.7

44

.6

24.2

P56

Commercial banks2

20052001 2002 2003 2004

Table A.42Banking System1: Selected Indicators

1 Based on Malaysian operations only

2 Includes finance companies3 Cost = Staff cost and overheads (excluding loan loss provisions)4 Revenue = Net interest income + fee-based income + other income5 Including NIDs and repos

Pre-tax profit/Average assets (%) 1.0 1.3 1.3 1.4 1.3

Pre-tax profit/Average shareholders' funds (%) 14.7 17.6 18.0 17.9 16.9

Pre-tax profit/Average employee (RM'000) 72.6 98.2 112.4 123.9 124.9

Cost3 incurred per ringgit of revenue earned4 (sen) 40.9 42.7 43.2 42.9 43.1

Cost3 incurred per ringgit of net interest income4 (sen) 55.0 56.2 55.6 58.7 59.7

Overheads to staff cost ratio (%) 106.3 116.0 116.4 116.7 113.5

Staff cost per employee (RM'000) 50.8 50.9 54.9 60.1 64.3

Loan deposit ratio5 (%) 93.1 92.9 89.2 85.7 82.7

Loans per office (RM million) 161.8 180.0 187.6 216.6 255.1

Deposits per office5 (RM million) 173.7 193.8 210.3 252.8 308.3

Annex

P57

0.8 1.4 1.6 1.9 3.0 0.4 0.7 0.6 0.3 0.1 1.0 1.3 1.3 1.4 1.4

7.5 13.3 14.0 15.9 25.5 5.4 9.5 8.5 4.8 1.3 13.3 16.0 16.2 16.8 17.5

124.8 244.5 280.8 318.2 504.4 23.9 41.6 37.2 20.8 7.9 72.4 100.2 114.2 125.2 130.3

22.5 31.6 32.4 33.0 27.3 62.5 54.7 58.6 59.3 59.0 40.2 42.5 43.1 42.8 42.7

55.5 65.5 80.3 97.1 122.8 67.9 61.5 66.4 71.9 68.4 55.3 56.6 56.5 60.0 61.4

58.1 53.6 51.2 52.0 51.7 96.7 108.3 132.7 123.9 134.9 104.0 112.9 113.5 113.5 111.1

86.4 93.6 106.8 116.2 131.8 46.1 45.2 46.2 49.6 68.8 51.6 51.8 56.0 61.3 66.4

78.0 69.2 48.5 42.9 35.3 53.4 56.1 55.8 55.2 90.4 91.3 90.7 86.4 83.1 81.3

768.8 793.0 649.6 554.9 460.4 62.9 71.9 74.3 84.3 27.0 151.3 158.3 165.8 179.9 195.3

985.1 1,146.6 1,340.5 1,294.6 1,303.4 117.8 128.1 133.2 152.6 29.9 165.7 174.4 191.9 216.3 240.3

Banking systemIslamic banksMerchant banks

As at calendar year end-

20052001 2002 2003 200420052001 2002 2003 200420052001 2002 2003 2004

P58

Table A.43Banking System: Key Data

As at end-

20052001 2002 2003 2004

Number of institutions 49 47 46 41 42 - Commercial banks 25 24 23 23 23 - Finance companies 12 11 11 6 31

- Merchant banks 10 10 10 10 10 - Islamic banks 2 2 2 2 6

Risk-weighted capital ratio (%) 13.0 13.2 13.8 14.4 13.1 - Commercial banks2 12.6 13.0 13.6 14.1 12.9 - Merchant banks 19.6 19.0 19.2 22.9 17.5 - Islamic banks 14.4 12.6 11.7 12.3 14.2

Office network 2,675 2,531 2,563 2,429 2,857 - Commercial banks2 2,534 2,386 2,414 2,276 2,072 - Merchant banks 19 17 17 17 19 - Islamic banks 122 128 132 136 766

ATM network 4,169 4,213 4,396 4,708 4,892 - Commercial banks2 3,991 4,028 4,184 4,428 4,584 - Islamic banks 178 185 212 280 308

Number of banks with internet services 8 12 12 13 13 - Commercial banks 8 12 12 13 13

Persons served per office 8,724 9,757 9,839 10,605 9,295

Number of employees 93,329 90,864 90,844 93,948 96,106 - Commercial banks2 87,886 85,296 85,092 87,222 89,047 - Merchant banks 2,402 2,451 2,429 2,690 2,625 - Islamic banks 3,041 3,117 3,323 4,036 4,434

1 Includes RHB Delta Finance Berhad, Southern Finance Berhad and Bumiputra-Commerce Finance Berhad whose merger with commercial bank were completed on 1 January 20062 Includes finance companies

Annex

P59

Table A.44Housing Credit Institutions

Lendingrate for new

housing loans (%)

2004 2005 2004 2005

Commercial banks

Finance companies

Treasury Housing 1970 To provide housing loans to Government employeesLoans Division

Malaysia Building 1950 To be the nation’s single largestprovider of property finance andto contribute to the continuousgrowth of the nation

Society Berhad

Borneo Housing Mortgage 1958 To provide housing loans mainlyto Sabah and Sarawak StateGovernment employees

Finance Berhad

Sabah Credit Corporation 1955 To improve the social economicdevelopment of Sabah throughloans mainly to the property,agriculture and business sectors

Bank Kerjasama Rakyat 1954 A co-operative society whichcollects deposits and providesbanking facilities according toSyariah principles

7.31

Malaysia Berhad

Bank Simpanan Nasional 1974 To promote and mobilise savings particularly from small saversand to inculcate the habit ofthrift and savings

3.11

3.11

4.0

2.0 ~ 10.0

3.0 ~ 8.75

3.0 ~ 10.5

4.81

7.21

3.21

4.01

4.0

2.0 ~ 10.0

3.0 ~ 8.75

3.0 ~ 10.0

5.51

1,960

316

22

–

2

11

103

393

1,963

109

22

–

2

10

106

390

1 Average

Source: Bank Negara Malaysia and various housing credit institutions

Year of establishment

ObjectiveNo. of

branches

–

–

P60

55.4

3.7

23.6

1.2

-52.1

83.8

-6.1

12.7

Table A.45Outstanding Housing Loans

2004 2005p 2005p2004 2004 2005p


Commercial banks

Treasury Housing Loans Division

Finance companies

Bank Kerjasama Rakyat Malaysia Berhad

Bank Simpanan Nasional

Malaysia Building Society Berhad 1,874 1

Borneo Housing Mortgage Finance Berhad

Sabah Credit Corporation

Total

125,824

25,051

7,009

2,519

1,059

705

239

164,280

2,776

148,329

25,395

795

3,592

1,372

713

220

183,192

48.2

17.9

1.4

-88.7

42.6

29.6

1.0

-8.3

11.5

2

81

14

…

2

1

…

…

100

0.0

p Preliminary… Negligible


77

15

4

100

2

1

...

...

Table A.46Approved Housing Loans

2005p 2005p 2005p2004


Commercial banks

Treasury Housing Loans Division

Finance companies

Bank Kerjasama Rakyat Malaysia Berhad

Malaysia Building Society Berhad

Borneo Housing Mortgage Finance Berhad

Bank Simpanan Nasional

Sabah Credit Corporation

Total

34,140

4,086

1,553

1,040

89

249

6

42,520

22.2

-13.8

-25.7

75.9

2.4

111.1

-69.3

18.3

p Preliminary… Negligible


80

10

1

…

100

…

4

2

1,357

36,482

4,188

97

1,111

62

848

8

44,197

1,401

6.9

2.5

-93.8

6.8

-30.1

240.8

35.5

3.9

3.2

83

9

…

3

…

2

…

100

3292.7 3

20042004

Annex

P61

Table A.47Islamic Banking System: Key Data

As at end-

2001 2002 2003 2004

p Preliminary

2005p

Number of financial institutions 38 37 33 29 29Islamic banks 2 2 2 2 6Commercial banks 14 14 13 13 11Finance companies 10 9 7 3 1Merchant banks 5 5 4 4 4Discount houses 7 7 7 7 7

Number of branches 132 138 143 153 782Islamic banks 122 128 132 136 766Commercial banks 8 8 10 16 15Finance companies 2 2 1 1 1

Total assets (RM million) 60,244.5 68,967.9 83,105.2 95,033.9 111,823.5Islamic banks 17,404.8 20,119.1 20,917.3 24,857.4 43,432.9Commercial banks 27,026.1 29,074.3 36,837.5 53,912.6 59,697.9Finance companies 9,821.6 12,501.9 17,879.2 7,767.5 1,254.1Merchant banks 1,352.9 1,429.6 1,715.8 2,552.4 1,465.6Discount houses 4,639.1 5,843.0 5,755.4 5,944.0 5,973.0

Total deposits (RM million) 47,106.5 53,162.8 60,211.6 72,856.9 83,874.8Islamic banks 14,375.6 16,401.4 17,583.8 20,753.7 35,625.5Commercial banks 22,031.0 23,353.9 26,518.7 39,775.4 42,775.2Finance companies 7,663.7 9,092.6 10,965.6 5,951.6 684.1Merchant banks 673.4 684.3 851.7 1,526.8 796.6Discount houses 2,362.8 3,630.6 4,291.8 4,849.4 3,993.4

Total financing (RM million) 28,317.6 36,719.8 48,613.9 57,841.3 67,364.6Islamic banks 7,671.0 9,159.9 9,764.5 11,423.1 20,627.1Commercial banks 12,257.6 16,706.4 22,326.1 38,802.2 45,398.5Finance companies 7,617.4 10,050.0 15,742.5 6,823.3 1,070.9Merchant banks 771.6

–– – ––

–– – ––

803.5 780.8 792.7 268.1Discount houses

Financing-deposits ratio (%) 60.1 69.1 80.7 79.4 80.3Islamic banks 53.4 55.8 55.5 55.0 57.9Commercial banks 55.6 71.5 84.2 97.6 106.1Finance companies 99.4 110.5 143.6 114.6 156.5Merchant banks 114.6 117.4 91.7 51.9 33.7Discount houses

P62

Table A.48Islamic Banking System: Sources and Uses of Funds

1 Denotes the interbranch balances pending settlementp Preliminary

As at end-

2004 2005p

IslamicBanks Total

RM million

IBS BanksIslamicBanks TotalIBS Banks

SourcesCapital and reservesDepositsFunds from other financial institutionsOther liabilities

Total

UsesCashReserves with Bank Negara MalaysiaDeposits with other financial institutionsFinancingSecuritiesOther assets

Total

7,436.572,826.9

4,029.610,740.9

95,033.9

270.61,358.4

16,060.157,841.416,200.2

3,303.2

95,033.9

5,671.552,073.2

3,590.78,841.1

70,176.5

11.0816.4

9,920.946,418.310,979.2

2,030.7

70,176.5

1,765.020,753.7

438.91,899.8

24,857.4

259.6542.0

6,139.211,423.1

5,221.01,272.5

24,857.4

3,559.235,625.5

1,578.22,670.0

43,432.9

322.2972.3

11,928.420,627.1

8,436.71,146.2

43,432.9

6,492.548,249.3

2,880.910,767.9

68,390.6

7.0953.6

8,446.546,737.512,364.2

-118.21

68,390.6

10,051.783,874.8

4,459.113,437.9

111,823.5

329.21,925.9

20,374.967,364.620,800.9

1,028.0

111,823.5

Table A.49Islamic Banking System: Commitments and Contingencies

p Preliminary

As at end-

2004 2005p

IslamicBanks

Total

RM million

IBS Banks IslamicBanks

IBS Banks%share

%share

Total

RM million

Assets sold with recourse and commitments with drawdown 139.8 3,747.3 3,887.1 14.8 354.5 4,716.9 5,071.4 16.4Credit extension commitments 1,572.7 9,194.2 10,766.9 40.9 4,298.4 8,829.8 13,128.2 42.4Direct credit substitutes 429.4 507.0 936.4 3.5 481.6 568.7 1,050.3 3.4Foreign exchange related contracts 374.0 – 374.0 1.4 1,373.1 65.5 1,438.6 4.6Trade-related contingencies 1,442.5 5,860.7 7,303.2 27.8 1,540.0 4,548.9 6,088.9 19.6Transaction-related contingencies 1,421.9 864.2 2,286.1 8.7 1,906.3 990.7 2,897.0 9.3Underwriting obligations 56.0 467.4 523.4 2.0 143.0 745.0 888.0 2.9Others 43.8 187.3 231.1 0.9 65.9 359.1 425.0 1.4

Total 5,480.1 20,828.1 26,308.2 100.0 10,162.8 20,824.6 30,987.4 100.0

Annex

P63

Tab

le A

.50

Isla

mic

Ban

kin

g S

yste

m: I

nco

me

and

Exp

end

itu

re

1 Fr

om f

inan

cing

act

iviti

es a

nd s

ecur

ities

p Pr

elim

inar

y

For

the

finan

cial

yea

rFo

r th

e ca

lend

ar y

ear

RM m

illio

n

Isla

mic

Bank

sTo

tal

Isla

mic

Bank

sIB

SBa

nks

Tota

lIs

lam

icBa

nks

IBS

Bank

sTo

tal

Isla

mic

Bank

sIB

SBa

nks

Tota

l

2004

2003

2005

p20

04

IBS

Bank

s

Inco

me1

net

of

in

com

e-in

-sus

pens

e(In

com

e-in

-sus

pens

e)Le

ss:

Expe

nse1

Net

inco

me

Add

: O

ther

inco

me

Less

: Fi

nanc

ing

loss

and

oth

er

prov

isio

ns

St

aff

cost

Ove

rhea

ds

596.

92,

266.

82,

863.

763

8.3

2,

607.

33,

245.

695

3.5

3,

345.

14,

298.

61,

588.

63,

631.

65,

220.

251

.614

4.1

195.

756

.1

166.

122

2.2

108.

219

8.0

306.

282

.0

152.

523

4.5

26

5.4

966.

51,

231.

928

9.0

1,

100.

11,

389.

141

0.2

1,

403.

71,

813.

958

7.6

1,

435.

42,

023.

0

331.

51,

300.

31,

631.

834

9.3

1,

507.

21,

856.

554

3.3

1,

941.

42,

484.

71,

001.

02,

196.

23,

197.

2

64.9

102.

616

7.5

105.

7

178.

4

284.

114

0.6

22

7.5

36

8.1

16

0.5

25

5.0

415.

5

108.

050

6.6

614.

611

5.7

72

1.7

83

7.4

16

2.5

1,

013.

71,

176.

244

2.9

50

2.4

945.

3

104.

773

.117

7.8

131.

6

69.7

201.

3

186.

3

80.7

26

7.0

29

1.6

14

0.2

431.

8

131.

214

4.0

275.

215

2.8

13

6.7

28

9.5

22

3.7

19

7.8

42

1.5

39

3.5

28

7.3

680.

8

52.5

679.

273

1.7

54.9

75

7.5

81

2.4

11

1.4

87

6.7

98

8.1

33

.5

1,52

1.3

1,55

4.8

Pre-

tax

pro

fit

P64

Table A.51Islamic Banking System: Financing Activities

p Preliminary

For the year

2005p2004

IslamicBanks

IBSBanks

Total IslamicBanks

IBSBanks

Total

RM million

2005p2004

IslamicBanks

IBSBanks

Total IslamicBanks

IBSBanks

Total

RM million

As at end-

Financing approvals 3,304.5 13,968.5 17,273.0 7,915.9 18,873.3 26,789.2Financing disbursements 8,771.6 32,317.0 41,088.6 13,014.0 36,044.7 49,058.7Financing repayments 7,680.0 25,999.0 33,679.0 11,341.6 30,865.9 42,207.5

Outstanding financing 11,423.1 46,418.2 57,841.3 20,627.1 46,737.5 67,364.6

p Preliminary

2005p2004

IslamicBanks

IBSBanks

Total IslamicBanks

IBSBanks

Total

RM million

Table A.52Islamic Banking System: Financing to Small and Medium Enterprises

For the year

As at end-

2005p2004

IslamicBanks

IBSBanks

Total IslamicBanks

IBSBanks

Total

RM million

Financing approvals

Financing disbursements

Total non-performing financing

Outstanding financing

382.3 2,300.0 2,682.3 751.9 2,807.1 3,559.0

1,856.5 4,702.8 6,559.3 1,957.1 5,894.7 7,851.8

1,860.9 6,133.1 7,994.0 2,512.4 6,095.3 8,607.7

375.9 307.0 682.9 535.5 576.5 1,112.0

Annex

P65

Table A.53Islamic Banking System: Direction of Financing

As at end-

2005p2004

IslamicBanks

IBSBanks Total

RM million

Total

p Preliminary

%share

Islamic Banks

IBSBanks Total

RM million

%share

Total

Business enterprises 5,469.8 18,305.7 23,775.5 41.1 8,256.4 25,591.1 38.0Households 5,803.4 27,392.0 33,195.4 57.4 12,193.2 60.9Others 149.8 720.6 870.4 1.5 177.5 538.6 716.1 1.1

11,423.0 46,418.3 57,841.3 100.0 20,627.1 46,737.5 67,364.6 100.0

Agriculture, hunting, forestry and fishing 241.6 2,086.9 2,328.5 4.0 531.4 1,837.9 2,369.3 3.5Manufacturing 1,687.7 4,424.9 6,112.6 10.6 2,368.5 5,151.0 7,519.5 11.2Mining and quarrying 15.1 61.5 76.6 0.1 16.4 88.5 104.9 0.2Electricity, gas and water supply 11.7 707.5 719.2 1.2 275.8 143.3 419.1 0.6Wholesale and retail trade, restaurants and hotels 447.2 2,623.7 3,070.9 5.3 820.5 2,567.5 3,388.0 5.0

Wholesale trade 292.3 1,951.0 2,243.3 3.9 559.3 1,832.9 2,392.2 3.6Retail trade 135.3 602.6 737.9 1.3 231.3 673.7 905.0 1.3Restaurants and hotels 19.6 70.1 89.7 0.2 29.9 60.9 90.8 0.1

Broad property sector 5,985.2 16,425.5 22,410.7 38.7 8,523.5 22,923.1 34.0Real estate 86.3 820.1 906.4 1.6 294.6 678.1 972.7 1.4Construction 1,452.2 2,078.7 3,530.9 6.1 1,440.3 1,891.3 3,331.6 4.9Purchase of residential property 3,596.4 11,796.6 15,393.0 26.6 5,796.7 10,178.0 15,974.7 23.8Purchase of non- residential property 850.3 1,730.1 2,580.4 4.5 991.9 1,652.2 2,644.1 3.9

Transport, storage and communication 181.3 995.2 1,176.5 2.0 254.5 1,033.0 1,287.5 1.9Finance, insurance and business services 146.1 1,830.9 1,977.0 3.4 461.9 1,537.1 1,999.0 3.0

Financial services 94.3 1,103.3 1,197.6 2.1 141.2 1,235.1 1,376.3 2.1Insurance 0.6 2.6 3.2 0.0 0.2 1.2 1.4 0.0Business services 51.2 725.0 776.2 1.3 320.5 300.8 621.3 0.9

Consumption credit 2,134.5 14,986.5 17,121.0 29.6 6,232.2 24,376.1 36.2Personal uses 810.6 1,637.8 2,448.4 4.2 1,236.1 2,502.1 3,738.2 5.5Credit cards 127.1 184.9 312.0 0.5 166.1 301.0 467.1 0.7Purchase of consumer durables 33.0 10.6 43.6 0.1 31.3 6.7 38.0 0.1Purchase of passenger cars 1,163.8 13,153.2 14,317.0 24.8 4,798.7 15,334.1 20,132.8 29.9

Purchase of securities 256.1 621.8 877.9 1.5 571.6 348.7 920.3 1.4Purchase of transport vehicles 72.5 609.0 681.5 1.2 164.2 542.4 706.6 1.0Community, social and personal services 94.2 324.3 418.5 0.7 229.0 406.2 635.2 0.9Others 149.8 720.6 870.4 1.5 177.6 538.4 716.0 1.1

11,423.0 46,418.3 57,841.3 100.0 20,627.1 46,737.5 67,364.6 100.0

P66

As at end-

2005p2004

IslamicBanks

IBSBanks Total

RM million

Total

p Preliminary

%share

Islamic Banks

IBSBanks Total

RM million

%share

Total

Business enterprisesHouseholdsOthers

Others

Table A.54Islamic Banking System: Non-performing Financing by Sector

1,090.1 1,346.7 2,436.8 49.0 1,383.1 1,262.8 2,645.9 44.2572.4 1,864.4 2,436.8 49.0 1,005.2 2,137.0 3,142.2 52.4

6.2 88.4 94.6 2.0 11.3 192.5 203.8 3.4

1,668.7 3,299.5 4,968.2 100.0 2,399.6 3,592.3 5,991.9 100.0

Agriculture, hunting, forestry and fishing 38.4 7.4 45.8 0.9 58.1 8.7 66.8 1.1Manufacturing 195.4 69.7 265.1 5.3 287.3 155.8 443.1 7.4Mining and quarrying 5.1 1.1 6.2 0.1 5.6 4.3 9.9 0.2Electricity, gas and water supply 2.1 0.1 2.2 0.0 2.8 0.3 3.1 0.1Wholesale and retail trade, restaurants and hotels 92.9 138.8 231.7 4.7 104.0 103.5 207.5 3.5

Wholesale trade 54.7 52.7 107.4 2.2 67.1 27.5 94.6 1.6Retail trade 29.1 80.6 109.7 2.2 29.8 69.4 99.2 1.7Restaurants and hotels 9.1 5.5 14.6 0.3 7.1 6.6 13.7 0.2

Broad property sector 992.0 2,320.2 3,312.2 66.7 1,446.4 2,183.7 3,630.1 60.6Real estate 0.9 302.2 303.1 6.1 5.5 180.8 186.3 3.1Construction 407.2 364.2 771.4 15.5 439.9 352.9 792.8 13.2Purchase of residential property 373.9 1,416.0 1,789.9 36.0 726.5 1,447.3 2,173.8 36.3Purchase of non- residential property 210.0 237.8 447.8 9.0 274.5 202.7 477.2 8.0

Transport, storage and communication 36.4 92.9 129.3 2.6 81.0 72.4 153.4 2.6Finance, insurance and business services 14.7 7.6 22.3 0.4 32.7 36.0 68.7 1.1

Financial services 10.8 1.1 11.9 0.2 12.0 31.0 43.0 0.7Insurance 0.5 0.2 0.7 0.0 0.2 – 0.2 0.0Business services 3.4 6.3 9.7 0.2 20.5 5.0 25.5 0.4

Consumption credit 134.1 86.0 220.1 4.4 166.6 116.9 283.5 4.7Personal uses 124.8 75.2 200.0 4.0 155.3 85.5 240.8 4.0Credit cards 6.9 10.4 17.3 0.3 8.0 31.2 39.2 0.6Purchase of consumer durables 2.4 0.4 2.8 0.1 3.3 0.2 3.5 0.1

Purchase of securities 65.4 93.9 159.3 3.2 65.7 124.5 190.2 3.2Purchase of transport vehicles1 64.4 362.5 426.9 8.6 112.3 572.7 685.0 11.4Community, social and personal services 21.6 30.9 52.5 1.1 26.0 21.0 47.0 0.8

6.2 88.4 94.6 1.9 11.1 192.5 203.6 3.3

1,668.7 3,299.5 4,968.2 100.0 2,399.6 3,592.3 5,991.9 100.0

1

Annex

P67

As at end- As percentage of total deposits (%)

Commercial banks

RM million %

p Preliminary

Table A.55Islamic Banking System: Deposits by Type and Institution

2001 2002 2003 2004 2005p 2001 2002 2003 2004 2005p

Total deposits 47,106.5 53,162.8 60,211.6 72,856.9 83,874.8 100.0 100.0 100.0 100.0 100.0Islamic banks 14,375.6 16,401.4 17,583.8 20,753.7 35,625.5 30.9 29.2 28.5 42.5

22,031.0 23,353.9 26,518.7 39,775.4 42,775.2 46.8 43.9 44.0 54.6 51.0Finance companies 7,663.7 9,092.6 10,965.6 5,951.6 684.1 16.3 17.1 18.2 8.2 0.8Merchant banks 673.5 684.2 851.7 1,526.8 796.6 1.4 1.3 1.4 2.1 0.9Discount Houses 2,362.7 3,630.7 4,291.8 4,849.4 3,993.4 5.0 6.8 7.2 6.6 4.8

Demand deposits 6,457.4 9,191.7 10,979.7 12,916.8 14,785.6 13.7 17.3 18.2 17.7 17.6Islamic banks 2,616.2 3,457.2 4,142.9 4,577.9 6,954.7 5.6 6.5 6.9 6.3 8.3Commercial banks 3,841.2 5,734.5 6,836.8 8,338.7 7,830.9 8.1 10.8 11.3 11.4 9.3

Savings deposits 4,149.4 5,425.0 6,865.7 8,432.1 9,504.5 8.8 10.2 11.4 11.6 11.3Islamic banks 1,454.0 1,762.3 1,951.9 2,301.6 3,424.8 3.1 3.3 3.2 3.2 4.1Commercial banks 2,133.4 3,030.5 4,174.8 5,771.3 6,047.1 4.5 5.7 6.9 7.9 7.2Finance companies 562.0 632.2 739.0 359.1 32.6 1.2 1.2 1.3 0.5 0.0

Investment deposits 33,504.0 35,843.4 35,227.5 41,993.5 44,579.3 71.1 67.4 58.5 57.6 53.2Islamic banks 10,181.1 11,089.6 11,183.0 12,916.9 19,972.6 21.6 20.9 18.5 17.7 23.8Commercial banks 13,609.6 12,455.5 10,226.5 19,150.2 19,328.9 28.9 23.4 17.0 26.3 23.1Finance companies 6,985.8 8,403.4 9,019.4 3,859.6 651.6 14.8 15.8 15.0 5.3 0.8Merchant banks 369.8 377.0 590.3 1,304.0 744.9 0.8 0.7 1.0 1.8 0.9Discount houses 2,357.7 3,517.9 4,208.3 4,762.8 3,881.3 5.0 6.6 7.0 6.5 4.6

Other deposits 2,995.7 2,702.7 7,138.7 9,514.6 15,005.4 6.4 5.1 11.9 13.1 17.9Islamic banks 124.3 92.4 306.0 957.2 5,273.3 0.3 0.2 0.5 1.3 6.3Commercial banks 2,446.9 2,133.4 5,280.6 6,515.1 9,568.3 5.2 4.0 8.8 8.9 11.4Finance companies 115.8 56.9 1,207.1 1,732.8 0.0 0.2 0.1 2.1 2.4 0.0Merchant banks 303.7 307.3 261.4 222.8 51.6 0.7 0.6 0.4 0.4 0.1Discount houses 5.0 112.7 83.6 86.7 112.2 0.0 0.2 0.1 0.1 0.1

P68

Table A.56Development Financial Institutions1: Sources and Uses of Funds

As at end-

20052001 2002 2003 2004

RM million

Sources:

Shareholders’ fundsPaid-up capitalReservesRetained earnings

Deposits accepted

BorrowingsGovernmentMultilateral/International agenciesOthers

Others

Total

Uses:

Deposits placed

Investmentsof which:

Government securitiesShares

QuotedUnquoted

Loans and advances

Fixed assets

Others

Total

Contingencies:

Guarantee

Export credit insurance

Total

1 Refers to Bank Pembangunan Malaysia Berhad, Bank Kerjasama Rakyat Malaysia Berhad, Bank Simpanan Nasional, Export-Import Bank of Malaysia Berhad, Bank Pertanian Malaysia, Bank Perusahaan Kecil & Sederhana Malaysia Berhad (SME Bank), Malaysian Industrial Development Finance Berhad, Sabah Development Bank Berhad, Borneo Development Corporation (Sabah) Sendirian Berhad, Borneo Development Corporation (Sarawak) Sendirian Berhad, Credit Guarantee Corporation Malaysia Berhad, Sabah Credit Corporation and Lembaga Tabung Haji. Prior to 1 October 2005, data include Bank Industri & Teknologi Malaysia Berhad and Malaysia Export Credit Insurance Berhad and exclude SME Bank

6,906.7 7,905.4 9,424.1 10,543.8 12,616.45,416.9 6,012.4 7,192.3 7,862.3 8,563.41,196.2 1,517.0 1,599.6 2,051.3 2,448.1

293.6 376.0 632.2 630.2 1,604.9

39,305.7 39,797.6 42,403.3 49,878.0 53,536.6

13,024.9 13,977.0 16,576.8 18,730.9 20,981.66,625.8 8,875.4 11,730.2 13,050.1 14,871.4

3,321.7 3,434.3 3,158.5 4,044.2 4,646.73,077.4 1,667.3 1,688.1 1,636.6 1,463.5

8,828.5 10,766.4 10,686.2 12,297.2 13,009.8

68,065.8 72,446.4 79,090.4 91,449.9 100,144.4

12,265.2 12,446.2 16,244.7 18,908.0 14,111.1

21,968.0 19,268.1 21,229.5 25,557.0 29,731.3

3,715.0 1,952.3 2,950.8 2,629.3 4,777.85,099.4 6,427.4 6,778.1 8,256.0 9,791.24,478.5 5,325.6 5,200.9 6,369.1 7,933.7

620.9 1,101.8 1,577.2 1,886.9 1,857.5

24,486.3 29,442.4 32,354.8 37,747.1 47,478.4

3,011.6 3,606.7 3,707.5 4,057.7 4,226.9

6,334.7 7,683.0 5,553.9 5,180.1 4,596.7

68,065.8 72,446.4 79,090.4 91,449.9 100,144.4

3,341.5 3,160.1 3,661.6 3,949.0 4,404.1

148.0 151.4 123.3 308.6 380.4

3,489.5 3,311.5 3,784.9 4,257.6 4,784.5

Annex

P69

Table A.57Development Financial Institutions1 under DFIA2 : Sources and Uses of Funds

As at end-

20052001 2002 2003 2004

RM million

Sources:

Shareholders’ fundsPaid-up capitalReservesRetained earnings

Deposits accepted

BorrowingsGovernmentMultilateral/International

agenciesOthers

Others

Total

Uses:

Deposits placed

Investmentsof which:

Government securitiesShares

QuotedUnquoted

Loans and advances

Fixed assets

Others

Total

Contingencies:

Guarantee

Export credit insurance

Total

1 Refers to Bank Pembangunan Malaysia Berhad, Bank Kerjasama Rakyat Malaysia Berhad, Bank Simpanan Nasional, Export-Import Bank of Malaysia Berhad, Bank Pertanian Malaysia and Bank Perusahaan Kecil & Sederhana Malaysia Berhad (SME Bank). Prior to 1 October 2005, data include Bank Industri & Teknologi Malaysia Berhad and Malaysia Export Credit Insurance Berhad and exclude SME Bank2 Development Financial Institutions Act 2002

3,495.0 4,087.6 5,359.4 6,178.1 7,719.32,718.0 3,288.5 4,167.5 4,811.1 5,503.6

389.1 877.7 964.1 1,339.4 1,736.3387.9 -78.6 227.8 27.6 479.4

28,663.3 29,373.9 30,762.7 37,278.5 40,225.5

9,668.2 9,851.7 12,347.7 14,586.9 16,660.84,659.0 6,248.0 9,039.8 10,438.2 12,146.2

3,037.8 3,135.1 2,933.9 3,846.3 4,205.91,971.4 468.6 374.0 302.4 308.7

6,088.6 8,358.2 8,403.7 9,730.3 10,217.7

47,915.1 51,671.4 56,873.5 67,773.8 74,823.3

8,771.4 8,212.5 11,383.5 12,949.5 8,185.6

12,579.6 11,637.0 12,970.7 15,868.1 18,666.7

3,355.0 1,952.3 2,736.5 2,549.8 4,730.02,364.4 6,427.4 1,778.5 1,705.8 1,803.32,205.4 5,325.6 1,664.7 1,616.7 1,686.7

159.0 1,101.8 113.8 89.1 116.6

21,135.9 25,191.1 28,072.3 33,472.5 43,381.0

947.2 1,496.0 1,550.3 1,786.1 1,842.0

4,481.0 5,134.8 2,896.7 3,697.6 2,748.0

47,915.1 51,671.4 56,873.5 67,773.8 74,823.3

672.5 575.4 549.1 533.3 613.5

148.0 151.5 123.3 308.6 380.4

820.5 726.9 672.4 841.9 993.9

P70

474.4

37,747.1

984.2

2,156.7

1,228.94,126.2

66.83,261.3

698.810,084.74,186.64,078.1

463.91,356.14,665.2

9,896.5

1,104.824.3

103.4

473.1

32,354.8

1,694.7

1,405.3

617.13,952.0

75.22,874.0

250.48,376.64,009.42,927.9

441.1998.2

4,433.7

8,066.5

800.223.7

136.2

530.4

29,442.4

1,780.5

934.4

453.83,356.6

90.02,964.3

240.47,840.63,790.62,785.2

393.4871.4

4,362.1

6,716.1

816.548.0

173.2

733.1

24,486.3

1,300.7

1,234.4

334.93,147.5

46.12,750.2

618.15,700.42,346.92,593.8

268.8490.9

2,860.5

5,404.2

819.247.8

356.2

Maritime

Table A.58Development Financial Institutions1: Direction of Lending

As at end-

20052001 2002 2003 2004

RM million

Import and export, wholesale and retail

of which:

Total1 Refers to Bank Pembangunan Malaysia Berhad, Bank Kerjasama Rakyat Malaysia Berhad, Bank Simpanan Nasional, Export-Import Bank of Malaysia Berhad, Bank Pertanian Malaysia, Bank Perusahaan Kecil & Sederhana Malaysia Berhad (SME Bank), Malaysian Industrial Development Finance Berhad, Sabah Development Bank Berhad, Borneo Development Corporation (Sabah) Sendirian Berhad, Borneo Development Corporation (Sarawak) Sendirian Berhad, Credit Guarantee Corporation Malaysia Berhad, Sabah Credit Corporation and Lembaga Tabung Haji. Prior to 1 October 2005, data include Bank Industri & Teknologi Malaysia Berhad and exclude SME Bank

Finance, insurance and business services

Others

Electricity, gas and water supplyManufacturingMining and quarryingAgriculture, forestry and fishery

trade, restaurants and hotelsBroad property sector

ConstructionPurchase of residential propertyPurchase of non-residential propertyReal estate

Transport, storage and communication

Consumption credit

Purchase of motor vehiclesCredit card

Purchase of securities

47,478.4

810.7682.5

3,551.5

2,253.04,458.6

56.63,357.6

643.311,662.95,120.55,475.1

429.6637.7

5,844.5

14,069.0

1,508.232.688.2

Annex

P71

Table A.59Development Financial Institutions1 under DFIA2: Direction of Lending

As at end-

20052001 2002 2003 2004

RM million

Total

Agriculture, forestry and fisheryMining and quarryingManufacturingElectricity, gas and water supplyImport and export, wholesale and retail

trade, restaurants and hotelsBroad property sector


Transport, storage and communicationMaritimeFinance, insurance and business servicesConsumption creditof which:

Purchase of motor vehiclesCredit card

Purchase of securitiesOthers

1 Refers to Bank Pembangunan Malaysia Berhad, Bank Kerjasama Rakyat Malaysia Berhad, Bank Simpanan Nasional, Export-Import Bank of Malaysia Berhad, Bank Pertanian Malaysia and Bank Perusahaan Kecil & Sederhana Malaysia Berhad (SME Bank). Prior to 1 October 2005, data include Bank Industri & Teknologi Malaysia Berhad and exclude SME Bank2 Development Financial Institutions Act 2002

2,628.3 2,823.1 2,749.1 3,148.3 3,239.534.5 80.5 58.8 49.1 35.5

2,204.2 2,130.2 2,675.3 2,872.2 3,254.5334.9 453.8 617.1 1,228.9 2,251.6

129.0 125.9 151.5 260.7 356.9 5,078.2 6,846.9 7,371.4 8,933.1 10,580.92,192.1 3,641.3 3,842.0 3,973.7 4,908.82,288.0 2,480.3 2,629.3 3,797.0 5,195.4

267.3 391.3 438.8 461.2 429.1330.8 334.0 461.3 701.2 47.6

2,746.5 4,321.6 4,390.0 4,615.0 5,794.9733.1 530.4 473.1 474.4 682.5

1,198.0 877.6 896.0 827.4 657.0 5,339.6 6,567.8 7,812.8 9,571.1 13,693.8

754.6 741.2 800.2 1,104.8 1,508.247.8 48.0 23.7 24.3 32.6

356.2 173.2 136.2 103.4 88.2353.4 260.1 741.0 1,388.9 2,745.7

21,135.9 25,191.1 28,072.3 33,472.5 43,381.0

P72

Table A.60Bank Perusahaan Kecil & Sederhana Malaysia Berhad (SME Bank)(formerly known as Bank Industri & Teknologi Malaysia Berhad)

Year of establishment

Objectives

Duringthe year

Dec 041 Sept 051 Dec 05 20041

SMEsBumiputeraNon-Bumiputera

MaritimeShipping industryShipyard industryMarine-related services

Manufacturingof which: High-technology

Others

Source : Bank Perusahaan Kecil & Sederhana Malaysia Berhad

Sector

Total

Loans Outstanding

As at end-

To provide financing and advisory services to SMEs involve in manufacturing, services andconstruction sectors, particularly Bumiputera entrepreneurs.

RM million

October 2005

During the period Duringthe year

During the period

Loans Approved Loans Disbursed

Jan - Sept051

Oct - Dec05

20041Jan - Sept

051

Oct - Dec05

1 Refers to data for Bank Industri &

2,133.01,694.5

438.5

–––

–––

–––

–––

–––

–––

474.4 534.6 378.1 171.5309.4 355.5 217.5 144.6112.9 116.0 9.2 10.9

52.1 63.1 151.4 16.0407.9 452.7 329.8 147.6

38.0 132.7 70.0 1.984.4 88.9

–––––––

–––––––

–––––––37.6 39.0

966.7 1,076.2 2,133.0 745.5 358.1

319.7271.0

333.8311.222.6

333.8

15.0

118.4 55.3

48.7

24.3

214.0

80.632.2

111.8

234.5

319.7

122.017.9

241.4

7.60.0

448.5

0.0

Annex

P73

Objectives1

Table A.61Export-Import Bank of Malaysia Berhad

Year of establishment 1995

Loans Approved (RM million) Loans Disbursed (RM million)Loans Facility

2005 20052004 2004

Buyer credit facilityOverseas investment credit facilitySupplier credit facilityExport of services financing facilityExport credit refinancing

Total

Total

Source: Export-Import Bank of Malaysia Berhad

To provide credit facilities to finance and support the exports and importsof goods, services and overseas project financing with concentration tothe non-traditional markets, as well as to provide export credit insuranceservices, export financing insurance, overseas investment insurance andguarantee facilities; as well as other services which are normally offeredby the export-import financial institutions and credit insurance financialinstitutions.

Sub-total2

Medium- and Long-term PoliciesSpecific policiesBuyer credit guaranteeBond indemnity supportOverseas investment insuranceOthers

Guarantee and Insurance Policy

Short-term PoliciesComprehensive policiesBank letter of credit policySpecific policiesBond indemnity supportOthers

Sub-total

As at end-2004 As at end-2005

Contingent Liabilities (RM million) Business Coverage (RM million)

20052004

1 Effective 1 October 2005, the bank has been entrusted with a new and revised mandated role following the merger with Malaysia Export Credit Insurance Berhad (MECIB)2 Excluding Banker's export finance insurance policy

252.7 393.3 24.3 145.3196.4 215.8 212.6 160.6306.8 496.7 363.8 455.8

0.0 42.3 0.0 0.06,762.6 7,286.1 6,762.6 7,286.1

7,518.5 8,434.2 7,363.3 8,047.8

351.3 459.4 1,540.5 1,715.3307.0 369.5 1,479.3 1,577.220.4 45.7 61.2 138.1

0.8 0.0 0.0 0.02.5 0.0 0.0 0.0

20.6 44.2 0.0 0.0

351.3 459.4 1,540.5 1,715.3

490.6 534.5 22.1 3.81.0 0.0 9.6 0.0

277.8 241.7 0.0 0.024.7 23.0 4.1 0.07.5 10.9 8.4 3.8

179.6 258.9 0.0 0.0

490.6 534.5 22.1 3.8

841.9 993.9 1,562.6 1,719.1

P74

Table A.62Bank Simpanan Nasional


Objectives Bank Simpanan Nasional is a savings bank, incorporated under theNational Savings Bank Act 1974 and focuses on retail banking andpersonal finance especially for small savers.

Deposits Accepted(RM million)

Interest Rate /Rate of Return (%)Deposits facility

As at end-2004 As at end-2005 2004 2005

Savings depositsFixed depositsGIRO depositsIslamic depositsPremium savings certificates

Total

RM millionInvestments

Quoted sharesMalaysian Government SecuritiesPrivate debt securitiesSubsidiary companiesAssociate companies

Total

Number of branchesNumber of account holders (‘000)Number of automatic teller machines (ATM)

Source: Bank Simpanan Nasional

As at end-2005As at end-2004

3,626.6

231.8

393

5,034.1

1,319.4437.8231.8

1,208.81,277.72,267.1

819.7437.8

11,446599

6,824.4

39011,537

616

0.30~1.503.00~3.700.30~1.501.00~3.81

1.00~2.00

265.0

3.00~3.701.00~2.001.90~5.52

882.66,823.74,262.5

1,103.74,654.24,054.1

252.0922.8

10,986.8 13,085.2

1.50851.4 –

Annex

P75

Table A.63Bank Kerjasama Rakyat Malaysia Berhad


Objectives Bank Kerjasama Rakyat Malaysia Berhad mobilises savings andprovides financing services to its members as well asnon-members.

Financing Outstanding (RM million)

As at end-2004 As at end-2005Sector

Members Non-membersMembers Non-members

AgriculturePurchase of propertyGeneral commercePurchase of securitiesPurchase of motor vehiclesConsumption creditManufacturingOthers

Total

Source: Bank Kerjasama Rakyat Malaysia Berhad

10.2 14.9822.7 1,333.3399.5 497.6

78.9 69.30.6 0.5

1,032.1 2,859.6100.8 100.8251.1 295.1

2,695.9 5,171.1–

45.710.8

649.66,656.8

–––

1,122.9

2,800.6

7,623.9

9,658.0 11,659.2

58.37.8

48.3 45.72,246.8

P76

Tab

le A

.64

Ban

k Pe

mb

ang

un

an M

alay

sia

Ber

had

(fo

rmer

ly k

no

wn

as

Ban

k Pe

mb

ang

un

an d

an In

fras

tru

ktu

r M

alay

sia

Ber

had

)

Yea

r of

est

ablis

hmen

t

Obj

ectiv

es1

Dur

ing

the

year

Dec

04*

Dec

05

Sept

05*

2004

*

Sect

or

Tota

l

Loan

s O

utst

andi

ng

As

at e

nd-

To p

rovi

de m

ediu

m-

and

long

-ter

m f

inan

cing

for

infr

astr

uctu

re p

roje

cts,

mar

itim

e, c

apita

lin

tens

ive

and

high

tec

hnol

ogy

indu

strie

s in

man

ufac

turin

g se

ctor

and

oth

er s

elec

ted

sect

ors

in li

ne w

ith t

he n

atio

nal d

evel

opm

ent

polic

y.

RM m

illio

n

1973

Dur

ing

the

perio

dD

urin

gth

e ye

arD

urin

g th

e pe

riod

Loan

s A

ppro

ved

Loan

s D

isbu

rsed

Jan

- Se

pt 0

5*O

ct -

Dec

05

2004

*

* 1

Jan

- Se

pt 0

5*O

ct -

Dec

05

Infr

astr

uctu

reG

over

nmen

t pr

ogra

mm

esPr

ivat

e pr

ogra

mm

esSM

Es o

f w

hich

: Bum

iput

era

Mar

itim

eSh

ippi

ng in

dust

rySh

ipya

rd in

dust

ryM

arin

e-re

late

d se

rvic

esM

anuf

actu

ring

of w

hich

: Hig

h te

chno

logy

O

ther

s

9,92

9.4

12,7

76.7

13,3

13.8

7,42

8.8

1,90

5.5

7,21

8.1

9,23

2.6

9,32

4.2

3,41

2.2

863.

02,

711.

33,

544.

13,

989.

64,

016.

61,

042.

51,

673.

91,

925.

61,

583.

664

8.3

1,39

1.6

1,67

4.7

1,50

6.5

– –– –

– –60

1.2

682.

539

6.4

222.

164

.018

5.8

185.

857

.4

– – – – – – –

– – – – – – –

– – – – – – –

– – – – – – –

– – – – – – –

– – – – – – –

11,6

03.3

14,7

02.3

14,2

39.5

9,01

2.4

2,55

3.8

12.3

1,64

3.0

276.

61,

366.

41,

317.

0

247.

470

.017

7.4

8.9

577.

21,

226.

0

2,96

0.0

0.0

0.0

23.0

23.08.9

3,99

0.9

2,55

2.9

1,43

8.0

597.

7

669.

718

9.5

480.

2

68.4

36.7

19.4

39.0

39.0

777.

1

0.0

0.0

279.

34,

588.

6

Sour

ce: B

ank

Pem

bang

unan

Mal

aysi

a Be

rhad

Annex

P77

Table A.65Bank Pertanian Malaysia


Objectives

Loans Approved Loans Disbursed

(RM million)

Sub-sector

2004 2005 20052004

Oil palm

Total

Source: Bank Pertanian Malaysia

Food crops

Agriculture, Forestry & Fishery

LivestockFisheryForestryTobaccoRubberOthers

Bank Pertanian Malaysia was established to promote sound agriculturaldevelopment in the country, through the provision of loans and advances.The main function of the bank is to co-ordinate and supervise the grantingof credit facilities for agricultural purposes and mobilise savings, particularlyfrom the agriculture sector and community.

196.874.460.4

122.721.0

0.78.4

615.2

1,099.6

19.79.3

578.0

928.0

1.4

865.5 716.7

307.3

186.485.863.542.6

69.246.8

8.5

7.5

82.4

16.5308.4

1.616.2

14.0

67.4109.2110.3237.0 121.2

P78

Table A.66Other Development Financial Institutions1: Core Activities

As at end-

RM million

2005

Lending Activity

AgricultureManufacturingBroad property sector


Total

Other Activities

Deposits acceptedof which:

SavingsGuarantee issued

1

(Sabah) Sendirian Berhad, Borneo Development Corporation (Sarawak) Sendirian Berhad, Credit Guarantee Corporation Malaysia Berhad, Sabah Credit Corporation and Lembaga Tabung Haji

2004200320022001

Consumption creditOthers

122.0 141.2 124.9 113.1 118.1943.3 1,226.4 1,276.7 1,254.0 1,204.0622.2 993.7 1,005.2 1,151.6 1,082.0154.8 149.2 167.4 212.9 211.7305.7 304.9 298.6 281.1 279.6

1.5 2.1 2.3 2.7 0.5160.2 537.5 536.9 654.9 590.264.6 148.4 253.6 325.4 375.3

1,598.3 1,741.7 1,621.9 1,430.5 1,318.0

3,350.4 4,251.4 4,282.3 4,274.6 4,097.4

10,642.4 10,423.7 11,640.6 12,599.5 13,311.2

10,565.8 10,270.4 11,286.6 12,085.4 12,771.22,669.0 2,584.7 3,112.5 3,415.7 3,790.6

Annex

P79

Table A.67Development Financial Institutions: Selected Data

As at end-

2004 2005

DFIs under DFIA1: Branch ATM Staff Branch ATM Staff

Bank Pembangunan Malaysia Berhad2

Bank Kerjasama Rakyat Malaysia BerhadBank Simpanan NasionalExport-Import Bank of Malaysia Berhad3

Bank Pertanian Malaysia

Sub-total

Other DFIs:

Malaysian Industrial DevelopmentFinance Berhad

Sabah Development Bank BerhadBorneo Development Corporation (Sabah) Sendirian BerhadBorneo Development Corporation (Sarawak)

Sendirian BerhadCredit Guarantee Corporation Malaysia BerhadSabah Credit CorporationLembaga Tabung Haji

Sub-total

Total1 Development Financial Institutions Act 2002

Bank Perusahaan Kecil & Sederhana Malaysia Berhad3

14 690 377103 119 2,866 106 127 2,860393 599 5,220 390 616 5,098

72 160181 142 2,585 172 142 2,628

15 678

691 860 11,433 683 885 11,801

7 334 8 33282 81

16 13

36 351610 10 210

325 16 374212

119 1,581 119 1,600152 2,586 153 2,645

843 860 14,019 836 885 14,446

– – –

– – – –

– – – –

– –– – – –

– – – –

– – – –– –– –– –– –

P80

2004 2005 2005 20052004 2004

1 Inclusive of funds from Bank Negara Malaysia, which are channelled through 25 participating banks2 Funds have been fully utilised… Negligible

Loans (RM million)

Approved Disbursed Outstandingas at end-

Table A.68a

6,770.8 7,286.1 6,770.8 7,286.1 1,189.7 1,508.3

9.3 9.3 5.9 11.9 20.2 30.2

0.9 10.4 1.7 – 8.8 7.19.0 14.7 6.6 7.5 17.6 20.01.4 4.5 1.4 1.6 2.2 3.6

30.4 45.7 30.2 33.8 25.3 26.6– 6.4 5.4– 1.6 1.3 1.2– … …

0.2 2.9 0.2 0.2 0.1 …5.7 3.9 12.8 21.1 17.6 63.1

–

–– ––

–

–

–

–

–

–

– 40.9 33.71.6 1.9 1.6 1.4 15.9 15.4

4.0 1.3 2.2 1.5 0.3 1.8– – 0.4 … 15.7 10.5

4.5 8.9 1.1 1.7 1.1 2.82.3 2.8 0.3 1.9 0.3 2.1

26.1 87.3 42.2 29.7 88.0 96.90.8 0.4 0.7 0.5 1.4 1.6

Development Financial Institutions: Government Special Funds

Export-Import Bank of Malaysia BerhadExport Credit Refinancing (ECR) Scheme1

Bank Kerjasama Rakyat Malaysia BerhadFinancing Scheme for Rural Economic Development

Bank Pertanian MalaysiaAgricultural Mechanisation and Automation SchemeBumiputera Commercial and Industrial Community SchemeCommercial Agriculture Graduate Entrepreneurs SchemeCredit Scheme for PaddyFinancial Credit Scheme2

Food Production Credit SchemeHardcore Poor Development Programme2

Low Intensity Tapping SchemeOil Palm Replanting SchemeSpecial Agriculture Financing Scheme2

Special Fund for Fishery

Malaysian Industrial Development Finance BerhadMalaysian Industrial Energy Efficiency Improvement ProjectModernisation Automation Scheme2

Soft Loan for Factory Relocation SchemeSoft Loan for Information and Communication Technology SchemeSoft Loan for Small and Medium Enterprises SchemeSpecial Fund for Terengganu-based Small and Medium Industry

Annex

P81

2004 2005 2005 20052004 2004

Loans (RM million)


Table A.68b

– 15.8 – 5.9 – 6.08.8 0.3 5.0 6.2 4.4 7.5

– – … … 0.3 0.38.8 10.9 5.2 9.1 29.0 34.2

– – – – 2.6 2.45.9 5.5 5.0 5.1 11.7 13.0

52.5 1.5 27.6 22.3 66.8 79.1211.0 177.3 100.5 96.8 132.4 226.0

4.4 2.1 14.9 3.2 15.0 12.95.0 – 15.2 4.2 8.4 6.8

205.0 52.0 66.8 30.7 83.7 79.4– – 0.2 … 8.2 8.8

– 12.1 0.1 13.2 6.7 6.0

– 1.4 – 0.8 – 0.8– 0.2 – 0.2 – 0.2

41.4 78.9 15.6 68.1 38.0 48.435.0 222.0 29.2 213.2 71.7 197.0

– 11.3 1.1 11.4 7.3 5.9

– – 10.0 56.5– 3.7 29.6 223.2–

–––

–––20.0 4.2 91.7

– … 0.6 6.7– … 0.3– 4.0 2.2 35.2– 2.3– 1.7 1.8 14.3– 3.0 75.1– 32.6 33.2 257.1– 0.8 1.5 12.7– – 6.4– – 6.7

– – 1.0–

–––– –––––––

––

––––––––––

––

–

–

–

––

– 1.5 5.1 11.1– 0.4 1.1– 0.2 0.4

–––

–––

0.70.4

–– – 4.9

Development Financial Institutions: Government Special Funds

Funds prior to rationalisation (data until end-September 2005)Bank Pembangunan dan Infrastruktur Malaysia BerhadFiction Film Financing SchemeFinancing Programme for Wholesalers and Distributors (Tanmiah 2)Financing Scheme for Indian Rural Economic DevelopmentFinancing Scheme for Rural Economic Development Fund for Film IndustryGraduate Entrepreneurs FundSeed Capital SchemeSpecial Fund for Tourism 2Terengganu Entrepreneurs FundThird Window Financing Scheme (Tanmiah 1)Tourism Infrastructure FundVenture Capital FundBatik Entrepreneurs ProgrammeHandicraft Entrepreneurs Programme

Bank Industri & Teknologi Malaysia BerhadEasy Financing Scheme - PAKSIHigh Technology FundNew Ship Financing FacilityWomen Entrepreneurs Fund

Funds after rationalisation (data for October-December 2005)Bank Pembangunan Malaysia BerhadHigh Technology Fund**New Ship Financing Facility**Tourism Infrastructure Fund*

Bank Perusahaan Kecil & Sederhana Malaysia BerhadFinancing Programme for Wholesalers and Distributors (Tanmiah 2)*Financing Scheme for Indian Rural Economic Development*Financing Scheme for Rural Economic Development*Fund for Film Industry*Graduate Entrepreneurs Fund*Seed Capital Scheme*Special Fund for Tourism 2* Terengganu Entrepreneurs Fund*Third Window Financing Scheme (Tanmiah 1)*Venture Capital Fund*Fiction Film Financing Scheme*Batik Entrepreneurs Programme*Handicraft Entrepreneurs Programme* Easy Financing Scheme - PAKSI**Women Entrepreneurs Fund**

* Funds originated from Bank Pembangunan dan Infrastruktur Malaysia Berhad** Funds originated from Bank Industri & Teknologi Malaysia Berhad… Negligible

P82

Loans (RM million)


2004 2005 2005 20052004 2004

1

2 Funds have been fully utilised

4 Administers and channels the funds through various lending institutions

Malaysian Industrial Development Finance BerhadNew Entrepreneurs Fund2

New Entrepreneurs Fund 2Fund for Small and Medium Industries2

Fund for Small and Medium Industries 2Rehabilitation Fund for Small and Medium Industries3

Industrial Adjustment Fund2

Bumiputera Industrial Fund2

Bank Pertanian MalaysiaFund for FoodFund for Small and Medium Industries2


Credit Guarantee Corporation Malaysia Berhad4

New Entrepreneurs Fund 2Fund for Small and Medium Industries2

Table A.69aDevelopment Financial Institutions: Bank Negara Malaysia Funds1

– – – – 5.6 4.318.5 28.2 11.4 21.5 35.1 53.7

– – – – 19.5 –79.7 81.1 38.9 74.8 46.9 102.7

– – – – 1.4 0.9– – – – 3.7 –– – – – 1.4 –

117.6 96.0 119.2 116.6 595.8 628.7– – – – 81.3 –

1.3 – 1.2 0.8 4.3 4.9– – – – 12.3 10.9

– – – – 305.0 262.7– – 1.2 – 276.7 63.8

Annex

P83

Loans (RM million)


2004 2005 2005 20052004 2004

1 Bank Negara Malaysia fund for the ECR scheme administered by EXIM Bank is merged with the Government fund in Table A.68a2 Funds have been fully utilised3 Fund was closed on 1 November 2003 and replaced by the Rehabilitation Fund for Small Businesses

Funds prior to rationalisation (data until end-September 2005)Bank Pembangunan dan Infrastruktur Malaysia BerhadSpecial Fund for Tourism2

New Entrepreneurs Fund2

New Entrepreneurs Fund 2Bumiputera Industrial Fund2

Fund for FoodFund for Small and Medium Industries2


Bank Industri & Teknologi Malaysia BerhadShip Financing Facility2

Fund for Small and Medium Industries2

Fund for Small and Medium Industries 2New Entrepreneurs Fund 2Industrial Adjustment Fund2

Rehabilitation Fund for Small and Medium Industries3

Funds after rationalisation (data for October-December 2005)Bank Pembangunan Malaysia BerhadNew Entrepreneurs Fund 2Fund for Small and Medium Industries2


Bank Perusahaan Kecil & Sederhana Malaysia BerhadSpecial Fund for Tourism2

New Entrepreneurs Fund2

New Entrepreneurs Fund 2Bumiputera Industrial Fund2

Fund for FoodFund for Small and Medium Industries2


Table A.69bDevelopment Financial Institutions: Bank Negara Malaysia Funds1

– – – – 7.7 6.4– – – – 96.9 87.5

193.3 92.4 182.5 62.7 328.5 377.0– – – – 11.8 10.7– – – – 4.2 4.1– – – – 69.4 54.3

12.8 15.9 8.4 12.7 14.4 22.5– – – – 38.6 37.4

– – – – 282.1 274.3– – – – 17.6 13.1

27.4 15.7 12.9 15.6 16.6 27.88.5 13.1 8.3 1.1 8.8 8.9

– – – – 6.3 –– – – – 4.0 3.6

– 8.2 – 7.9 – 7.4– 5.0 – 5.0 – –– 1.7 – 1.5 – 1.5– 1.6 – 1.6 – 1.0

– – – 20.2 – 6.4– – – 376.1 – 87.5– 588.9 – 549.3 – 436.5– – – 36.0 – 10.7– 6.6 – 6.6 – 4.0– – – 234.1 – –– 190.2 – 75.9 – 51.5– – – 50.3 – 40.0

P84

74.822.320.4

Table A.70aDevelopment Financial Institutions: Funds from Multilateral and International Agencies

Loans (RM million)


2004 2005 2005 20052004 2004

1 Funds have been fully utilised

Malaysian Industrial Development Finance Berhad

Bank Pertanian Malaysia

ASEAN-Japan Development Fund-Overseas EconomicCooperation Fund1 13.5 21.1 86.0

40.4––ASEAN-Japan Development Fund-Overseas Economic

Cooperation Fund1 – – 34.2

0.6––ASEAN-Japan Development Fund/EXIM1 – – 0.214.30.11.2

Japan Bank for International Cooperation-Overseas EconomicCooperation Fund/Small and Medium Scale IndustryPromotion Programme – 0.8 10.9

93.114.020.3Japan Bank for International Cooperation-Fund for Small and Medium Industries 38.0 19.0 95.2

Annex

P85

–

–

––

–

–17.53.3

2.0––

9.3

9.7

2.0

–

24.7

–

–––

–

–

––

–––––Japan Bank for International Cooperation

Table A.70bDevelopment Financial Institutions: Funds from Multilateral and International Agencies

Loans (RM million)


2004 2005 2005 20052004 2004

1 Funds have been fully utilised*

** Funds originated from Bank Industri & Teknologi Malaysia Berhad

Funds prior to rationalisation (data until end-September 2005)Bank Pembangunan dan Infrastruktur Malaysia BerhadASEAN-Japan Development Fund-Overseas Economic Cooperation Fund1

Japan Bank for International Cooperation-Overseas EconomicCooperation Fund/Small and Medium Scale IndustryPromotion Programme1

Japan Bank for International Cooperation-Fund for Small and Medium IndustriesJapan Bank for International Cooperation 1 - JEXIM1 –Islamic Development Bank 4.0Japan Bank for International Cooperation 2 741.0

Bank Industri & Teknologi Malaysia BerhadASEAN-Japan Development Fund-Overseas Economic Cooperation Fund1 –The Export-Import Bank of Japan1 –Japan Bank for International Cooperation-Overseas Economic

1 –

–

––

Japan Bank for International Cooperation 3001 –Japan Bank for International Cooperation 2001 –

Japan Bank for International Cooperation-Fund for Small and Medium IndustriesJapan Bank for International Cooperation-Overseas Economic

Cooperation Fund/Small and Medium Scale IndustryPromotion Programme1

1

Funds after rationalisation (data for October-December 2005)Bank Pembangunan Malaysia Berhad

Bank Perusahaan Kecil & Sederhana Malaysia Berhad

Export-Import Bank of Malaysia Berhad2

19.9

24.9

–

Japan Bank for International Cooperation 2001 –

Japan Bank for International Cooperation-Fund for Small and Medium Industries1 18.1



1 –

Japan Bank for International Cooperation-Overseas Economic

Promotion Programme**1 –

Japan Bank for International Cooperation-Overseas EconomicCooperation Fund/Small and Medium Scale IndustryPromotion Programme*1 –

Japan Bank for International Cooperation-Fund for Small and Medium Industries –

Islamic Development Bank –ASEAN-Japan Development Fund-Overseas Economic Cooperation Fund*1 –

–Japan Bank for International Cooperation 3001

–Japan Bank for International Cooperation 2001

Japan Bank for International Cooperation 2 ––Japan Bank for International Cooperation 1–

12.63.7

–

––

24.8185.272.1

120.7––

–

–

–

–

105.8

–

–––

–

–

––

–––––

46.1

51.1

82.462.4 1,127.6

– 10.2– –

11.5 3.3 2.22.2 1.1 0.9

24.5

3.60.9

–

–

–

–– –

21.7 16.3 15.9172.0 153.5 122.458.1 30.3 39.6

2.4

8.0

0.1

1,116.614.3

–

96.3

49.5

57.8

– 116.3 90.5

92.5 69.6 58.8

186.1 144.8–

0.4 35.7–3.3––6.0––

8.6 38.3–

8.7 97.3–

3.8–5.60.1 40.7–

– 78.1–– 35.0–

204.7145.7 –1.1– –1.7– –

P86

Table A.71Leasing Companies1: Sources and Uses of Funds

As at end-

2001 2002 2003 2004 2005

RM million

SourcesCapital and reservesBorrowings from financial institutionsInter-company borrowingsOthers

Total

UsesCash and bank balancesInvestmentsReceivables

LeasingFactoringHire purchaseOthers

Others

1,017839 7701,8161,923 2,141

6051,343 1,4542,0952,400 2,684

5,5336,505 7,049

157229 225327309 323

2,1803,014 3,1181,4871,423 1,420

17 209 1014531,275 1,307139299 182

2,869

1,0181,9851,0012,139

6,143

106309

2,8601,539

931,077

1512,8672,953 3,384

1,5541,7591,3752,342

7,030

198387

2,3701,508

204503155

4,074

1 Statistics shown are for pure leasing companies only

As at end-2005, 370 leasing companies and 35 factoring companies had registered with Bank Negara Malaysia. However,only 126 leasing companies and 21 factoring companies submitted statistics pertaining to their operations to Bank NegaraMalaysia. Total assets of the 126 leasing companies and 21 factoring companies amounted to RM17.5 billion and RM8.0billion respectively at end-2005. Nevertheless, of the 126 leasing companies, only 23 were pure leasing companies, whileof the 21 factoring companies, only eight were pure factoring companies. The remaining companies only undertookleasing and factoring business as part of their overall business activities.

Annex

P87

Table A.72Leasing Companies1: Income and Expenditure

During the period

20042001 2002 2003 2005

RM million

Income


Others

Total

ExpenditureInterest paid

Financial institutionsBlock discounting

Bad debts written off and provisionOthers

Total

Pre-tax Profit1 Statistics shown are for pure leasing companies only

107217 2123

5185 7611

303188 306

469501 607

122187 165117166 155

521 1091108 3595165 199

309460 398

16141 209

532

3

98

45

221

371

115111

46780

261

110

4

49

Income from 167313 302 150326226

67520200

526

141134

75

183

329

197

Table A.73Leasing Companies1: Financing by Sector

During the period

20042001 2002 2003 2005

RM million

Transport and storage

Total1 Statistics shown are for pure leasing companies only

695585 7091,535

Mining and quarrying123102 172172 139

Electricity106125 116266 66General commerce20738 9750 34

Others 53128 48108 103

577

Real estate00 10 0

Sector2514 3317 25

Consumption credit 00 00 0

Agriculture93 43 2

Manufacturing00 01 0

Property sector17936 6846 33Construction282 284 0

Residential property5354 55805 63

Business, insurance and other services 116121 184113 146

P88

Table A.74Factoring Companies1: Sources and Uses of Funds

As at end-

2001 2002 2003 2004

RM million

SourcesCapital and reserves 164 164 81Borrowings from financial institutions 445 293 267Inter-company borrowings 600 416 267Others 658 1,092 425

Total 1,867 1,964 1,040

UsesCash and bank balances

00

4

45202 234

Investments 35Receivables 998 1,170

Leasing

4Factoring 872 1,111Hire purchaseOthers 122 55

Others 622 525

9977

644121

941

185

2022

614

72298

59285

2005

101618118176

1,013

149

1330

612

84303

75358

0

1424

602

4542

57401

1 Statistics shown are for pure factoring companies only

Table A.75Factoring Companies1: Income and Expenditure

During the period

20042001 2002 2003 2005

RM million

IncomeIncome from


Others

Total

ExpenditureInterest paid

Financial institutionsBlock discounting

Bad debts written off and provisionOthers

Total

Pre-tax Profit

5737 3812

06

2 02129 296

1708

116129

28

297

173166 335

2417

002428 17

0928 14

5633 45

8989 76

84

5110209

1238

89

18

018

1121

50

3977 259

310

2406

75

106

151505

17

37

681 Statistics shown are for pure factoring companies only

Annex

P89

Table A.76Factoring Companies1: Financing by Sector

During the period

20042001 2002 2003 2005

RM millionSector

AgricultureMining and quarryingManufacturingElectricityGeneral commerceProperty sector

ConstructionReal estateResidential property

Transport and storageBusiness, insurance and other servicesConsumption creditOthers

Total

1 Statistics shown are for pure factoring companies only… Negligible

00

5866 572 0

94140 17931270 10329222 76

048 270

20 2037541 513

2871,096 927

1…30

15 3

3

20

605051

1

46

120433616

37

18

286

0

1

3

17 0

491

882521

0

21

242

41

25

510

P90

Tab

le A

.77

Cap

ital

Mar

ket

Deb

t Se

curi

ties

1 : A

mo

un

t O

uts

tan

din

g

As

at e

nd-

2003

2000

2001

2002

2004

RM m

illio

n (n

omin

al v

alue

)

Mal

aysi

an G

over

nmen

t Se

curit

ies

Gov

ernm

ent

Inve

stm

ent

Issu

es

Kha

zana

h Bo

nds

Mal

aysi

a Sa

ving

s Bo

nds

Mer

deka

Sav

ings

Bon

ds2

Dan

ahar

ta B

onds

Dan

amod

al B

onds

Cag

amas

Bon

ds

Oth

er C

orpo

rate

Bon

ds

Tota

l

154,

350

89,0

5010

3,45

0 1

09,5

50

9,10

04,

000

4,00

05,

000

10,0

0010

,000

10,0

00 1

0,00

0

359

379

––

464

796

11,1

40

–11

,000

26,7

5217

,312

18,4

2722

,595

160,

057

102,

220

120,

584

108,

416

362,

983

245,

081

1999

78,3

36

2,00

0

8,98

0

10,3

44

11,0

00

13,0

19

79,3

13

203,

370

278,

601

278,

165

11,1

4011

,140

11,0

0011

,000

– ––

130

,800

7,00

0

11,

000

455

25,6

28

144,

595

328,

018

8,53

9

1,92

9

2005

p

166,

050

10,1

00

11,0

00 –

24,1

07

182,

896

of w

hich

: Med

ium

Ter

m N

otes

14,7

821,

726

2,91

04,

465

681

8,59

624

,668

397,

597

3,44

4–

––

––

1 R

efer

to

debt

sec

uriti

es w

ith a

n or

igin

al m

atur

ity p

erio

d of

mor

e th

an o

ne y

ear

2 M

erde

ka S

avin

gs B

onds

wer

e in

trod

uced

in 2

004

p P

relim

inar

y

statutory requirements - bnm.gov.my · other financial institutions 190 discount houses 190...

Documents