Banking System Is A Key Element

Published Date: 02 Nov 2017

Introduction

Banking system is a key element of international economic. Banks act as a bridge between the investor and the financial institution of the world. Bank also known as financial intermediaries that responsible to maximize investor satisfied on investment return. Besides that, banks is financial intermediaries between depositor who providing capital resources and borrowers who looking for demand on capital. Banking system could divide into few different segments which is Islamic banking system, non-Islamic banking system and shadow banking system.

According to Bessis,.J (2002),banking system could be also define as a model that banks accept capital from depositor and making loan to borrower with capital from depositor to earn specific return. On the other hand, banking system included various type of structure to offer financial services within a country. Normally members of banking system are commercial banks, investment bank and national central banks. Function of commercial bank are accepts deposit from public then lend out those funds collected from depositor to borrowers. Objective of investment banks is specializing in capital market issues and trading (Bank Negara Malaysia, 2000). National central banks are responsible to issue currency and promote stable of country economic.

Bank would also provide product and service such as saving account, current account, fixed deposit account, housing loan and so on to satisfied customer needed. Banks are often responsibility to keep secret on customer information according to the BAFIA act. Besides that, bank would also offer letter of credit to those customers who are conducting in export and import of goods. Bank have various type of groups, different groups provided different product and service such as commercial bank provide loan, saving a/c and deposit a/c, merchant bank provide investment product and deposit product.

Next, introduce about Shadow banking system. Shadow banking system refer to receive of non-bank financial intermediary that provide financial service likely to conventional commercial banks such as hedge funds, money market funds and structure vehicles (Smith,R&Walter, 2003). Shadow institution under shadow banking system usually does not have banking licenses and different with depository bank because it don’t acceptance deposit from public. Therefore, shadow banking system does not subject to same rules, regulations and any other restriction. Shadow banking institution is intermediaries between investor and borrowers. Shadow banking institution allocated funds from investor to other corporation and it gain revenue from fees or difference in interest rate receives from borrower.

The importance of banking is capital foundation, transfer of funds, dealing in foreign exchange, money market operation, reservoir of funds and inexpensive media of exchange (Hughes & McDonald, 2002). Furthermore, a good quality banking system can be deal with certain feature such as adequate capital, good reputation, liquidity, effective publicity and good personnel and efficiency. A good banking system must commitment with these several elements in order to gain satisfactions and foreign return from customer.

A bank must held reserve of base monetary know as reserve requirement with the aim of cover the check written and cash withdrawals by depositor to reduce the risk insolvency or unclaimed money by depositor. This would be counted as liquidity for a bank to meet financial obligation on their lending, finance investment and short or long term liabilities. Requirement reserve cover bank’s treasury to maintain the stable of financial problem and unexpected economic crisis. Normally, FED require bank to maintain at least 10 % of each demand deposit from public and averaged over succeeding 14-day period time.

According to Harvey& Hanson (2003), money central bank would be one of the topics in banking system. Money central bank is the largest banks in home country, Malaysia we known as Bank Negara Malaysia. Money central bank commits activities of portfolio business, corporate finance, trading and distribution. Bank plays a very important role in the monetary system to lending and finance loan to customer with return of high interest rate. However, non-bank institution also provided lending and finance product. Bank do not lend their deposit allocated from the deposit they obtain where lend out to borrower with new deposit at the same time it is necessary to meet reserve ratio. Bank lending has no effect on bank’s own asset and capital but lending product is limited by capital ratio requirement that’s meant bank are able to expand to issuing more loan they have sufficient capital.

History of Banking System

Banking system was originated in the Ancient Mesopotamia. At that time, the royal palaces and temples had the responsible to provide secure places for the safe-keeping of grain and other commodities. There also involved the banking operations and laws regulating in the private houses of Mesopotamia. The laws were including the code of Hammurabi to regulating the people.

In the early age, Egypt, Greece and Babylonia are the countries that practice the banking system. At that time the banking only approving loans in the temples. The temples is the place which provide gold and silver which were deposited for safekeeping, loans to borrowers and charged high interest rates on those items. The private banking was modified by Greeks, Romans and Byzantines while Medieval banking was leaded mainly by the Jews and Levantine.

In the Egypt, banking system was focus on the harvests in the state warehouses. Written orders for the withdrawal of separate lots of grain by owners whose crops had been deposited there for safety and convenience, or which had been compulsorily deposited to the credit of the king, and soon became used as a more general method of payment of debts to other persons including tax gatherers, priests and traders. Even after the introduction of coinage these Egyptian grain banks served to reduce the need for precious metals which tended to be reserved for foreign purchases, particularly in connection with military activities.

On the other hand, there are also some particular purpose oriented banks like Bank of Venice (1171) and the Bank of England, which looked after the loans to the government, and the Bank of Amsterdam (1694) was formed to receive the gold and silver deposits. Bank of England was the first bank that established in 1696 and its main objective of this bank is to assist the government of its economic ventures. In 1781, the real banking in the United States was begun with the Bank of North America established by Robert Morris. The bank play an important role and it become the national bank of the United States of America in 1865. In the eighteenth and nineteenth century, the banking sector also developed proportionately with the development in the business sector. Banking has helped the financial institutions to increase its general production and established a system that enhances the perfect flow of exchange or trading between merchants. 

Nowadays, there are different types of banks has been established for different purposes. There are different types of banks such as commercial bank, mutual saving bank, World Bank etc. The commercial bank includes the national and state-charted banks, stock savings banks, and industrial banks. The function of commercial bank is to provide the services of savings, loans, deposits, and so on. However, mutual savings bank is to provide some limited type of loans and deals in savings and other deposits. The investment and loan amount depends on the available customer's deposits. 

In the 1945, World Bank was established to approve loans to private investors and to the governments of different countries. Besides that, the purpose of International Monetary Fund (IMF) is to simplifying the process of debt clearance between the nations. It also provided valuable suggestions to the members in the field of international banking. In 1998, European Central Bank has been established. The function of this bank is to handle the joint monetary policy of those European countries, which have adopted a single currency.

History of banking system in Malaysia

During 19th century, the British merchant communities in Penang and Singapore. Malaysia Banking System was begun with the Straits Settlements in 1867. The Street Settlements was a standard colony encompassing Penang, Singapore and Malacca. It is because Penang was a strategic location and has port facilities therefore attract many mercantile bank operate at here.

In 1859, the first commercial bank established in Malaysia was a branch of a British exchange bank called The Chartered Mercantile Bank of India, London and China (renamed as Mercantile Bank) in Penang. Followed by the Chartered Bank (known as Standard Chartered) in 1875 established a branch in Penang. In 1913, the first domestic bank to be incorporate in Kuala Lumpur was Kwong Yik (Selangor) Banking Corporation. Then followed by 1917, branches of Singapore incorporate bank have established branches in Malacca and Muar.

In 1907, the Currency Board was established for the purpose to issue currency and protect its value. In 1955, World Bank Mission which reviewed the country’s situation and potential for development. The Central Bank was providing a recommendation. Therefore, this leads to established of the Central Bank of Malaya known as Bank Negara Malaysia under the Central Bank of Malays Ordinance. On the other hand, under Financial Sector Master Plan (FSMP), the financial industry is now going through a phase of consolidation. Commercial Banks are merger with their finance companies and it enables financial institutions to become one-stop financial centers to be more competitive and to better prepare for the financial services sector.

Besides that, the top of the monetary and banking system was the Bank Negara Malaysia. Its play an important role to ensure that a strong financial system is maintained, which is essential for a country’s steady and balanced economic and social development. On the other hand, commercial banks also play a vital role in Malaysia Banking system. Commercial Bank has attempted to avoid unhealthy overlapping of banking activities with other financial institution especially the finance companies and the merchant banks. The commercial banks are not allowed to engage in hire-purchase and leasing, factoring and corporate advisory activities.

However, Malaysia is the first country that to implement dual banking system which is the conventional banking system and the Islamic banking system. Malaysia banking system has a unique setting which conventional banks are allowed to offer Islamic banking and finance products along with the conventional products. The main difference between Islamic banks and the contemporary banks is that, while the latter is based on the conventional interest-based principle, the former follows a principle of interest free financing and profit and loss sharing (PLS) in performing their business as intermediaries.

In Malaysia, the first Islamic bank, Bank Islam Malaysia Berhad (BIMB), operated as the only Islamic bank for 10 years since July 1983 before the government allowed other conventional banks to offer Islamic banking services using their existing infrastructure and branches in 1993. (Bank Negara Malaysia, 1994, 1999) The government decided to allow the conventional banking institutions to offer Islamic banking services or ‘‘Islamic windows’’, because this was thought to be the most effective and efficient mode of increasing the number of institutions offering Islamic banking services at the lowest cost and within the shortest time frame (Bank Negara Malaysia, 1994, 1999) (Mokhtar, Abdullah & Alhabshi, 2008).

On the other hand, Islamic finance traces its root back to 1963, with the establishment of the Pilgrims Fund Board or Lembaga Tabung Haji (LTH) by the govenment. It is a specialized financial institution that provides a systematic mobilization of funds from Muslims to assist them to perform pilgrimage in Makkah as well as to encourage them to participate in investment opportunities and economic activities. In fact, due to its uniqueness, Tabung Haji is considered to be the first of its kind in the world. It has been the aspiration of the Government to create a vibrant and comprehensive Islamic banking and finance system operating side-by-side with the conventional system.

A single Islamic bank does not fit the definition of a system. An Islamic banking and finance system requires a large number of dynamic and pro-active players, a wide range of products and innovative instruments, and a vibrant Islamic money market. The first step is to releasing the vision was to disseminate Islamic banking on a nationwide basis with as many players as possible and within the shortest period possible. This was achieved through the introduction of Skim Perbankan Islam (SPI) in March 1993.

Furthermore, SPI allows conventional banking institutions to offer Islamic banking products and services using their existing infrastructure, including staff and branches. The scheme was launched on 4 March 1993 on a pilot basis involving three banks. Following the successful implementation of the pilot-run, Bank Negara Malaysia (BNM) has allowed other commercial banks, finance companies and merchant banks to operate the scheme in July 1993 subject to the specific guidelines issued by the central bank (Sufian, 2007).

Banking System in Malaysia

According to Business Dictionary, banking system can be defined as the structural network of institutions that offer financial services within a country. The members of banking system and functions they typically perform include commercial banks that take deposits and make loans, investment banks that specialize in capital market issues and trading, and national central banks that issue currency and set monetary policy. There are various types of financial institution in Malaysia under Bank Negara Malaysia (BNM) which is Central Bank of Malaysia such as commercial bank, investment bank, Islamic bank, International Islamic bank, insurance company, Takaful operator and non-bank financial institution.

According to Campbell R. Harvey (2012), commercial bank can be define as bank that offers a wide range of deposit accounts, cover checking, savings and time deposits and extends loans to individuals and business. Meanwhile, commercial banks can be contrasted with investment banks, such as brokerage firms where basically involved in arranging for the sale of corporate or municipal securities.

First of all, there are 27 local and foreign licensed commercial banks in Malaysia. 8 out of 27 commercial banks are local bank that included Affin Bank Berhad, Alliance Bank Malaysia Berhad, AmBank (M) Berhad, CIMB Bank Berhad, Hong Leong Bank Berhad, Malayan Banking Berhad, Public Bank Berhad, and RHB Bank Berhad. However, foreign commercial banks included Bank of America Malaysia Berhad, Bank of China (Malaysia) Berhad, Citibank Berhad, Deutsche Bank (Malaysia) Berhad, HSBC Bank Berhad, OCBC Bank (Malaysia) Berhad, Standard Chartered Bank Malaysia Berhad, United Overseas Bank (Malaysia) Berhad and so on.

Moreover, investment bank is financial intermediaries that perform variety of services, including underwriting ad sale of securities, facilitating mergers and other corporate reorganizations, acting as brokers to both individual and institutional clients, and trading for their own accounts. (Campbell R. Harvey, 2012) All the 15 licensed investment banks that listed in BNM are based on local. It included Affin Investment Bank Berhad, Alliance Investment Bank Berhad, AmInvestment Bank Berhad, CIMB Investment Bank Berhad, Hong Leong Investment Bank Berhad, Maybank Investment Bank Berhad, OSK Investment Bank Berhad, Public Investment Bank Berhad, RHB Investment Bank Berhad etc.

According to Farlex Financial Dictionary (2012) Islamic bank is a bank that provides shariah products or products that follow Islamic law. For Islamic Banks, 10 out of 16 listed in BNM are from local that contain Affin Islamic Bank Berhad, Alliance Islamic Bank Berhad, AmIslamic Bank Berhad, Bank Islam Malaysia Berhad, Bank Muamalat Malaysia Berhad, Maybank Islamic Berhad, OCBC Al-Amin Bank Berhad and so on. However, Al Rajhi Banking & Investment Corporation (Malaysia) Berhad, HSBC Amanah Malaysia Berhad, OCBC Al-Amin Bank Berhad are based on foreign countries.

Insurance company is a company may be for profit or non-profit that sell promise to pay for certain expenses in exchange for a regular fee which called a premium. Meanwhile, Takaful is also an insurance structure but it compatible with Islamic law. Conventional insurance and uncertainty are not allowed under Muslim jurists and Shariah. It is because it requires insurer to gamble on likelihood of an insured event’s occurrence (Farlex Financial Dictionary, 2012).

Products and Services

Commercial banks

Basically, different types of product and service were offered by different types of bank in worldwide. Let’s use Affin Bank Berhad as an example for local commercial bank and Citibank Berhad as an example for foreign commercial bank. In personal banking, all commercial banks will provide deposit products, loan products and cards but Affin Bank Berhad provides hire purchase, AFFIN bancassurance, unit trust, and remittances too. Normally, deposit products provided are current account, saving account, fixed deposit, foreign currency account, and basic banking services.

Besides, Affin Bank Berhad also offers AffinGOLD, Affin FD PLUS, Affin , junior saver and AffinPlus. AffinGOLD is a savings account that pays higher interest on savings, other benefits and specially designed for those aged 50 and above. Affin FD PLUS is the first KLIBOR pegged Fixed Deposit (FD) product with high interest rate of returns. However, Affin is a Fixed Deposit Account that offers foreign currency conversion benefit with high interest rate up to 3.80% per annum. While junior saver is either a trust which is for age less than 12 years or personal account for age 12 and above. AffinPlus is an account that manifestation of Affin Banking without barriers philosophy. Customers can gain flexibility of cheque writing convenience with high interest by using this account. At the same time, it allow customers have greater accessibility, opportunities to plan and manage their funds and going beyond boundaries of conventional banking for their own benefit (Affin Bank Berhad, 2007).

However, Citibank Berhad offers Citibank Max Yield account, Citibank Step-Up interest account, premium checking account, time deposit, foreign currency call account, foreign currency time deposit, FPX direct debit, and Citibank global transfer. Citibank Max Yield account is a gold class product, checking account that is designed to give higher interest rates based on customer’s total Assets Under Management (AUM) balances. Citibank Step-Up interest account is a checking account that increased interest rates as customers increase their monthly Average Balance. It was like gain higher interest as customers save more money. Premium checking account is a unique integrated savings and checking account that work harder than a savings account. However, time deposit allows customers earn monthly interest so they can grow their money faster and enjoy the flexibility of partial withdrawls before maturity date (Citigroup, 2013).

On the other hand, foreign currency call account will answer all customer’s needs if they have frequent transactions that involve foreign currency meanwhile foreign currency time deposit is an account designed to help customers to manage their foreign currency needs. FPX direct debit is known as Financial Process Exchange direct debit. It is a free and convenient way of performing automatic direct debit transactions from others local bank to their local Citibank check and savings accounts. Customers are able to transfer funds instantly between various Citibank accounts worldwide by using Citibank Global Transfer. By the way, all the hassle-free online service is all free of charge (Citigroup, 2013). Overall, Affin Bank offer products or services that Citibank doesn’t have and vice versa but some products they offer provide the same function to customers such as savings and current account.

In addition, 14 types of loan product that provides by Affin Bank Berhad which are Home Solution Plus, Home Flexi Plus, Home Extra Plus, Credit Plus, Home Assist Plus, Biz Solution Plus, Invest Plus, Housing Guarantee Sheme by SJKP, SmartMoney, Skim Rumah Pertamaku, Armed Forces Time Loan, Home Build, and BNM target lending to the priority sector housing loan. Home Solution Plus helps customers manage their finances, upgrade their home and offer more flexibility on their repayment and savings on interest while Home Flexi Plus offers combination of term loan and overdraft financing for financing or refinancing or subsale of completed or under construction residential properties with minimum property value of RM200, 000.

Meanwhile, Home Extra Plus is a plan that enable customers increase personal fund and it only granted to mortgage borrowers who paid off at least RM20, 000 from the original approved limit of the existing mortgage loan which is fully disbursed and clean the repayment record. Home Assist Plus helps customers have a saving flexible financial plan to own their house. Credit plus is so much different from what mentioned as above because it is a remortgage financial plan for personal consumption. Last but not least, Biz Solution Plus is a flexible plan that helps customers to finance their business premise.

As compare to Affin Bank Berhad, Citibank only offers 5 types of loan product to customers that are shop house loan, business power loan, personal loan, sharing financing, and overdraft against time deposit. Shop house loan allow customers expand their business to next level, simply refinance business property and earn extra cash at disposal. One of the loan products, business power loan is integrated account that comprising business premises loan and checking account. However, sharing financing offers competitive interest rates and take advantage of market opportunities. Based on what have mentioned above, Affin Bank Berhad and Citibank Berhad offer few loan products that has similarity functions to meet client’s need.

Investment banks

Alliance Investment Bank Berhad provides capital market, stock broking and investment research. Corporate finance, debt finance and advisory under capital market are provided by Alliance Investment Bank Berhad. Corporate finance advice services were giving under several areas such as Initial Public Offerings (IPOs), transfer listing, secondary offering, and so on.

For IPOs, public issue of new equity securities and offer for sale of existing equity securities for companies to seek a listing and quotation on the Main Market or ACE Market of Bursa Malaysia Securities Berhad. It includes listings of Real Estate Investment Trust (REITs). However, transfer listing is ACE Market companies who qualify and wish to transfer their listing status to the Main Market of Bursa Malaysia Securities Berhad while secondary offering is fund raising subsequent to the IPO, through right issues, restricted issues, private placements and special issues of equity securities and equity-linked securities (Alliance Investment Bank Berhad, 2012).

At the same time, corporate rationalisation and restructuring, merger, takeover and acquisition advisory, employee share option and incentive plans, and independent advice also offered by Alliance Investment Bank. On the other hand, debt finance and advisory team advises give in innovative conventional and Islamic solutions which included private debt securities, loan syndications and project financings.

Furthermore, there are many areas and sub areas under stock broking that are retail share trading, institutional share dealing, online share trading services or e-services, share margin financing, nominees and custodian services, underwritings and private placement, and investment research. First of all, retail share trading breaks into 3 parts which are retail trading account and collateralized trading account, Alliance Flexi 7, and foreign share trading. Basically, institutional share dealing provides local and regional corporate and institutional clients with insightful, reliable and timely investment advice.

In addition, eAlliance share and new online brokerage are sub areas of online share trading services or e-services. Meanwhile, share margin financing offers attractive interest rate that is Alliance M-Switch, Alliance MaxiMargin, Alliance FBM30, 2T8, and normal share margin financing. Nominees and custodian services were offered to clients such as opening, maintaining and operating securities accounts with Malaysian Central Depository. It also provided monitoring and processing of various types of corporate action to fit client’s needs. Yet, Alliance Investment Bank provided investment research included fundamental equity research, technical equity research and economic research.

Islamic banks

Let’s use Bank Muamalat Malaysia Berhad and OCBC Al-Amin Bank Berhad as example of local Islamic bank and foreign Islamic bank that invest in Malaysia. Normally, consumer banking into few parts which is deposit, financing, investment, Takaful, electronic banking, internet banking, and wealth management. Bank Muamalat Malaysia provides savings account, current account and general account that based on Al-Mudharabah. Al-Mudharabah is refers to contract made between depositor and bank to enable bank to carry out business ventures under Shariah guidelines.

At the same time, it also offers savings account and current account that either basic or based on Al-Wadiah. Basically, Al-Wadiah is refers to a contract between owner of the goods and custodian for safekeeping. Depositors grant bank their permission to utilize the money for whatever purpose that permitted by Shariah. The bank in return guarantees the value of the deposit thus creating a Wadian Yad-Dhamanad contract. However, Bank Muamalat Malaysia also offers BeeSTAR which is a children savings account that based on Islamic concept of Al-Mudharabah (Bank Muamalat Malaysia Berhad, 2009).

Besides, OCBC Al-Amin Bank Berhad provides two types of products for each savings account, current account and general investment account. Savings account includes Aqil Savings Account that suitable for adults aged above 18 and Imaq Young Savings Account for children aged below 18. For current account, Mumtaz Current Account and Wafi Current Account are provides for customers. Mumtaz Current Account is a basic Islamic current account with convenience of a checking facility for preferred transactions while Wafi Current Account guarantees the safe custody on money and may choose award the return based on bank’s business profit subject to discretion of the bank.

Moreover, Nabil Mudharabah and Commodity Mudharabah are two types of general investment account offer by OCBC Al-Amin Bank Berhad. Nabil Mudharabah General Investment Account is an option to the conventional fixed deposit account that share earned profit with customers based on an agreed profit sharing ratio. However, Commodity Mudharabah General Investment Account is different from Nabil Mudharabah General Investment Account because it provides fixed profit rate to customers and help to plan their wealth better. On top of that, both local and foreign Islamic bank offer almost the same function products and all products are Shariah compliance (OCBC Al-Amin Bank Berhad, 2005).

Insurance Company

Insurance Company has divided into different types which are Life and General Business, Life Business Only, General Business Only, Life and General Reinsurance Business, Life Reinsurance Business, and General Reinsurance Business. Etiqa Insurance Berhad and Prudential Assurance Malaysia Berhad are example of local and foreign Life and General Business.

Etiqa Insurance Berhad provides General Insurance Services, Life services, Insurance Products, and Marine Cargo Portal. General Insurance Services provides policies that cover customer’s physical assets and belongings at the same time offer financial aid when needed while Life Services cover up unfortunate incidents that could happen to individual or family. However, Marine Cargo Portal allows expedites the issuance of marine certificates for Marine Cargo shipments but Etiqa customer’s Marine Open Cover terms applied. Last but not least, there are personal and corporate insurance under insurance products provided by Etiqa Insurance Berhad. For health and protection, insurance plan will provide clients comprehensive protection such as medical fees or surgery fees against financial difficulties they might face and it protect insured for health purpose only (Etiqa Insurance Berhad, 2009).

However, almost all insurance plans under savings category include both saving money and at the same time provide protection to who insured. Comprehensive coverage for home included fire, lighting, thunderbolt, explosion, flood, earthquake, and so on cases that occur on home building. Insurance plan for car will protect vehicles owners if anything happen that damage the vehicles and funds that save under education category will go to children future education purpose. Meanwhile, there are lot sub divisions although only 2 main divisions of corporate insurance those are business and who deal through. Business includes retail or shop, services, manufacturing, construction, engineering, communication, agriculture, energy, and transportation but who deal through includes broker, Permodalan Nasional Berhad, corporate direct and employee benefits, and Enterprise Financial Services.

Yet, Prudential Assurance Malaysia Berhad offers more variety of products and services as compare to Etiqa Insurance Berhad. It is because Prudential’s products break into more detail where they provides savings and investments, senior insurance, female insurance, child, and even retirement plan. Their products are more specific and segment based on category of customers or party insured. On top of that, although both insurance companies provide different type of products but their initiative is the same which is help others in their life by providing protection (Prudential Assurance Malaysia Berhad, 2013).

Takaful Industry

There are 3 types of Takaful that are Takaful Operators, ReTakaful Operators, and International Takaful Operators. Let’s use Great Eastern Takaful and Prudential BSN Takaful as examples of local and foreign Takaful Operators. Great Eastern Takaful offers 13 Riders and 6 types of family Takaful products to customers that are i-GrEaT Damai, i-GrEaT Abadi, i-GrEaT Amal, i-GrEaT Iqra’, i-Medik Rider, and i-Early Payout Critical Care Rider. While apply few of the above insurance plan, customers can attach additional protection such as i-Critical Illness Benefits Rider, i-Provider Plus Provider, i-Hospitalisation Benefits Rider, etc.

i-GrEaT Damai provides combination of Takaful protection and investment that protects customer’s family upon their death and total permanent disability (TPD) when facing financial difficulty. It allows clients enjoy the finer things in life with affordable comprehensive protection. Besides, i-GrEaT Abadi is a family Takaful plan that aligns with performance of the underlying assets. It is a regular contribution investment linked family Takaful plan that matures at age 99 next birthday. Therefore, it can be said as a protection that builds wealth for future generation. In case there is an event of death, Basic Sum Covered from Tabarru (fund) and total amount from the Participant’s Individual Account will be paid out in full under i-GrEaT Amal in order to reduce the family’s burden (Great Eastern Takaful, 2009).

In addition, i-GrEaT Iqra’ is a plan that offers savings for child’s education, protection for them and at the same time reward cash incentive based on child’s examination results. Furthermore, i-Medik Rider and i-Early Payout Critical Care Rider are unit deduction Medical and Health Takaful rider attachable to regular contribution investment linked family Takaful plans. The function of i-Medik Rider is to cover costly medical expenses. However, i-Early Payout Critical Care Rider is a special investment linked Takaful rider that pay upon early diagnosis of critical illness before illness getting serious.

On the other hand, Prudential BSN Takaful divided into 3 parts that are Family Takaful, General Takaful and Riders. On top of that, protection toward life’s uncertainty, children’s future and possessions are included in Family Takaful. At the same time, Family Takaful and General Takaful break even smaller to agency and bancatakaful where bancatakaful define as delivery and distribution of a suitable range of specific bankable long term savings, protection and pension products (Sohail Jaffer, 2009). Yet, Prudential BSN Takaful also provides various additional benefits around 20 Riders to clients in order to empower their insurance certificate plan. Overall, Prudential BSN Takaful provides more variety of products as compare to Great Eastern Takaful (Prudential BSN Takaful, 2012).

Recommendations

Commercial Bank

The commercial bank has played a vital role in the banking system. Commercial banks are the largest and most significant providers of funds in the banking system. There are several recommendations to improve commercial banking system.

Firstly, commercial banking should encourage strategic alliances (Heffernan. S, 2005). Equity alliances are one of the means for domestic commercial bank to catch up to international standard in terms of technology, culture, skills and scale. Opening up new growth avenues through access to new markets or skills is one of the strategic alliances. Besides, this strategic will be encourage either in joint venture, minority equity stake, equity swap and contractual alliance. Innovation and competition among commercial bank are also encouraged through alliance between bank and non-banking institutions.

Besides that, management of commercial bank should give a greater attention to development of ICT. Attention from senior management level will be important to ensure relevant of ICT strategies being adopted. ICT is a strategic tool to create value and not operational tool to enhance work process. To improve marketing and strategic focus, customer relationship management (CRM) tool should be used to analyses customer profiles and behaviors.

Therefore, commercial bank should encourage the development of new delivery channels (Bank Negara Malaysia, 2011). As internet and mobile phone had become more and more commonly used, therefore development of this channel will be essential part of modern banking system. It will offer commercial bank a significant advantages in customer retention, service cost reductions and customer acquisition. The internet technology has also improves accessibility to banking product and services. At the same time, a new business venture through the setting up of virtual banks by banking institutions.

Thus, deregulation pricing and rules of association on rate, fee and charges should be apply in commercial bank (Smith, R. &Walter, I., (2003). The ability of commercial bank to price their product improves over time, present rule on pricing and imposition of fees and charges would be further liberalized. This is to avoid high lending margins through tacit agreement by not to price below the base lending rates. Besides, it is to avoid overpricing to certain customer segments and credit rationing that happen when price cap is imposed.

Furthermore, a system of incremental enforcement action should be implemented (Bank Negara Malaysia, 2011). This action is divided into two parts which are formal and informal enforcement actions. Formal enforcement actions are classified as written agreement, prompt corrective actions and penalties. This is to ensure commercial bank seek remedial actions on the findings raised by the examiners. In additions, informal actions may classified as board resolutions and memorandum of understanding

Commercial banks should increase the product specific and institutional transparency. This means that, product transparency shall be upgrade through the implementation of full disclosure requirement for retail financial products. There are several actions shall be considered in moving forward a standards full disclosure model for products: (1) BNM maintains the right of ex post factoto to recall product that is misleading or reissue, (2) standardize disclosure rules in formats consistent with international recognized best practices and (3) disclose a clearly defined guidelines for comparable of all fees, interest rate and other standard product features.

Lastly, commercial bank should rationalize their branch network and relocate branches (Bessis. J, 2002). There are high concentrations of commercial bank in urban areas, certain areas are found to be under-branched and certain geographic locations are not served by any commercial bank. Therefore, commercial banks need to improve the dispersion of the branches in the country. It is recommended that all areas continuously served by at least one commercial bank.

Investment bank

Nowadays, Investment bank must remain resolutely focused on the many challenges. That the ways, they can ensure they are positioned to take advantage of the next wave of growth and instead of having to reach to it. Investment banks that successfully capitalize on the future strategic opportunities will be the early adopters of emerging technologies. This will enable them to make measured assessments of tomorrow’s key battleground. There are several recommendations should be conduct by investment banks.

Investment bank should promote a competitive and efficient money market with greater liquidity. Thus, investment bank can promote larger volume of securities and collateral transactions to decrease counterparty risks and enhancing liquidity in money market transactions. As well as, it will be facilitated by administering monetary operations including accepting qualified foreign currencies securities and highly rated corporate short-term papers.

In additions, investment bank should expand the investor base for the government securities market (Bank Negara Malaysia, 2011). This can be made by exploring cost-effective investment and distribution channels for direct retail participation in the sukuk markets and debt securities. Investment bank could develop a regional principal dealer’s framework to be market makers for cross-border dealing of government securities.

To support efficient and cost effective foreign currency trading, Investment banks can develop infrastructures and institutional arrangements (Mullineux, A.X &Murinde, V., 2003). This includes promoting common network infrastructures that establishing linkages between Real time Electronic Transfer of Funds & securities system and international securities depositories. Investment bank can create an electronic trading platform for regional currencies to complement cost-effective offering of cross-border financial products and services.

Improving access of information to reduce asymmetries information is also one of the recommendations (Bank Negara Malaysia, 2011). Investment bank can strengthen the credit information to facilitate more comprehensive financial assessments of borrowers. Besides, setting up an integrated platform to allow investors for network with entrepreneurs and explore more investment opportunities.

Besides, investment bank should support the use of regional currencies for trade settlement and direct investment activities (Bank Negara Malaysia, 2011). This including encourage financial institutions to provide direct foreign exchange cross quotations with both onshore and offshore counterparties , promote Malaysia as a centre for regional treasury operations for home-grown resident and foreign multinational corporations.

Refocusing on client needs is a must for investment banks (Hughes & McDonald, 2002). In the years leading up to the financial crisis, investment banks moved away from their historical role as intermediaries. These banks started concentrating on developing complex products. Hence, investment bank should refocusing on client relationships and providing a greater client intimacy by better aligning service offerings with client needs.

Lastly, investment bank should maximize client profitability (Beim, D. & Calomiris., 2001). Banks will continue concentrate on client portfolio optimization. The reason is reduced leverage and proprietary trading in decline, client business represent an attractive source of future profitability. Therefore, a key challenge facing investment banks is how to increase client revenues while reducing client cost-to-serve.

Islamic bank

Islamic bank Malaysia Berhad is the biggest player in Malaysia Islamic banking. It is the most awaited bank by Muslims in Malaysia. It becomes the focus of the society pertaining to the effort of Muslim community to prove the viability of Islamic financial system. Over the 14 years of its existence in Malaysia, however only 1% of the market share in the whole banking operation of the country.

Islamic bank should create awareness and consumer education regarding Islamic banking (Bank Negara Malaysia, 2011). A consumer’s education is to enhance public awareness of the features of Islamic banking products and services. There are still areas of challenges that need to be translated into action for Islamic finance to improve. Hence, appropriate Islamic banking system would be largely based on the national agenda of the respective countries.

Thus, Islamic bank should encourage the development of comprehensive Shariah framework (Bank Negara Malaysia, 2011). Islamic bank need to establish Shariah advisory committee to ensure all Islamic products, services, transactions and operations are Shariah-compliant. This is to promote greater understanding and acceptance of such decisions.

Establish an effective legal structure is also one of the recommendations for Islamic banks (Eun & Resnick, 2009). To promote the confidence among the industry practitioners and customers, hence a sufficient number of judges and lawyer equipped with expertise in both Shariah and civil laws is needed. For instance, create awareness and training programmes for judges and lawyers on Islamic banks. Committee to establish Syariah commercial court in dealing legal matter on Islamic banks should be formed.

To further promote Malaysia as an Islamic financial centre, a deep market structure should be developed to fulfill the sophisticated requirements of customers. Besides that, it also can enhance the integrity of the financial system as a whole and safeguarding the soundness. Such as encourage the application of musyarakah and mudharabah financing via setting up special fund to enhance these modes of financing.

On other hand, Islamic banking should strengthen the regulatory framework. This means that strengthening the Islamic Banking Act (IBA) 1983 by taking into account the distinct characteristics of Islamic Banking (Bank Negara Malaysia, 2011). Hence, the revise IBA will developed a conducive environment to move towards a supervised market framework and approach. Furthermore, introducing a statutory reserve, separate capital adequacy and liquidity requirement will enhance the regulatory framework for Islamic banks.

Numbers of Islamic bank should be increase to stimulate market competition. In order to capitalize on competition as the driving force for growth, full-fledged Islamic banks should be increased. As an interim measure, Islamic banking licenses to qualified foreign Islamic banking player will be considered and analyses initially. Islamic Banking division (IBD) model will provide the basis to identify potential players that are ready to operate as full –fledged Islamic banks.

Besides that, strong management teams should be created (Mishkin, F.S, 2013). An expertise will facilitate the transfer of knowledge to build innovative and capable management teams that committed to Islamic banking. Benchmarking programme should be introduced by Islamic bank. This programme helps in evaluating their relative efficiency, formulating strategies improve and identifying the performance gaps.

Furthermore, Islamic bank should enhance the knowledge and expertise. More efforts should be made to increase the number of bankers and Takaful operators who are competent and knowledgeable (Bank Negara Malaysia, 2011). There are several ways to encourage the growth of industry which is promoting Islamic banking institutional to embark on promotional programmes on Islamic banking, enhance the teaching skills of Islamic banking in curriculum and institutions of higher learning.

After all, Islamic banks should also consider upgrading the infrastructure Islamic system. The focus of implementation is to be preparing for the expansion of Islamic banking. It involves the establishment of the industry –owned research and training institute, creating market depth, formulating an effective Syariah framework and improving the prevailing operational structure of Islamic banking institutional.

Insurance Company

Although Malaysia’s insurance industry has achieved significant progress in last decade, there are still some challenges faced by them. Therefore, some recommendations for insurance company will be mention here and hopefully it can be aid for insurance industry. There are three main phrases that recommend to banking system of Malaysia.

First of all, insurance company should build capabilities which are promoting incentives for the growth of bancassurance. This is because stable and mature growth of bancassurance can able for bank to own their insurers, offer insurance or pension funds. Thus, insurers and banks will have the same customer information. There are some banks have practice the bancassurance in Malaysia such as Alliance Insurance. Customer will be attracted to the bancassurance by increase their interests. Since 1988 insurance industry bring under banking system, therefore increase the bancassurance in Malaysia will increase the banking system in Malaysia (Bank Negara Malaysia, 2012).

Besides that, banking system will be improve by disclose the commission that earn by the insurer. In other words, customer should know the commission that the insurer paid to the insurance agent. Once there are transparency of pricing on the product that sell to customer, it make customer able to make more rational decisions because customers have more information of the alternative products available in market. It will help banking system in Malaysia because more mature in terms of customers know the role of insurance in their life.

Second phases, Insurance companies of Malaysia have increase performance which is to be more knowledgeable and skillful in order to upgrade Malaysia’s banking system as international level. Thus, there are essential to add extra compulsory exams into the training insurance agent programs. The exams should have both practical and test because it will make sure how much the insurance agent’s professional to be. More than that, insurance agents have to pass all the tests after some times of servicing customer in order to continue to become an insurance agent. Besides that, it will ensure the quality of the insurance agent. Hence, customers will have more confidence on the banking system and banking system of Malaysia able to update to new information.

On the other hands, insurance industry should establish prudential risk management standards which is introduce risk-based capital model that applies to different risk profiles and capital requirement that based on own structure and business mix of insurers. Whether Malaysia adopts the standard or not, it depends on the assessment of ability to accurately capture, liquid capital markets for risk in Malaysia.

Third phases that recommend to the insurance company is boost the innovation through progressive liberalization. Insurance industry should allow new insurance licenses for innovative players. Those innovative players able to create value of new product for consumers and more efficient service offered in market. In addition, the entry of innovative players into the insurance industry are force the existing insurers to improve their performance by invest in research and development, business strategies in order to compete with their rivals.

In addition, insurance company should open up the reinsurance industry fully to foreign competition in order to improve the banking system of Malaysia (Bank Negara Malaysia, 2012). If the foreign reinsurers into the domestic market will help to enlarge national capacity and it will contain reinsurance premium outflows. The retention levels in Malaysia are important over last decade especially in the insurance industry. Hence, the new foreign entrants will be offered a professional reinsurance business’s licenses in Malaysia. Those licenses for reinsurance business in Malaysia will be issued under the World Trade Organization (WTO) agreement.

After insurance company demonstrate those recommendation that mention above, it will increase the quality and the professional of the insurance. Therefore, banking system in Malaysia will be increase. Since there are high qualities of banking system in Malaysia, it will be answer the goal which is provide a world class products and services to all Malaysian consumers with maintain the stable of domestic industry.

Takaful industry

Takaful is an Arabic word which is Islamic insurance with compliance of Shariah and focus on the join responsibility among participants. There are a lot of contract under Takaful such as Murabaha and Mudarabah. Malaysia’s Takaful has improved much more last few years but there are still need a large effort in order to increase the international standard.

Besides that, according to Bank Negara Malaysia (2012) there are three main areas of recommendation for Takaful industry which is institutional capacity enhancement, the development of financial infrastructure and regulatory framework.

For enhance of institutional capacity, Takaful industry has to gather lot of knowledgeable Takaful operators and bankers. This is because it will promote well develop human capital and foster the growth of the Takaful industry by request the Takaful operators to design allocate budget for the skill development. It will promote expertise in the Takaful industry. Hence, quality of banking system will be rise.

Before Takaful industry become knowledgeable, Takaful industry should have a standard program; stronger fundamental for inner part of Takaful industry will increase the chance of success in the insurance market. Standard program can be a benchmark for the Takaful industry. Besides, standard program in the Takaful industry able to facilitate by evaluate the efficiency and identified the performance gaps at Takaful industry. After that, standard program able to formulate strategies for the particular performance in order to enhance better performance of Takaful operators. Hence, Takaful operators improve their skill and deliver better service to customer; the Takaful industry will increase the economic growth (Bank Negara Malaysia, 2012).

For the development financial infrastructure, train and support an innovative and competitive Takaful industry which can compete with conventional insurance, they need to allow more qualified players to sell Takaful product and increase Takaful operators. The qualified players will have licenses under Takaful Act 1984. This will increase development of Takaful industry in terms of increase the competitive among the all insurance industry which is both conventional and Islamic insurance industry. Where increase the number of Takaful operators will acceleration to expand the Takaful business. Thus, the banking system in Malaysia will be stronger due to components of banking system increase their performances.

On the other hands, Islamic financial markets need to be strengthened (Bank Negara Malaysia, 2012). In other words, a deep market structure has to be developed to fulfill all the customers need and want. This is because only customer satisfaction able to make the Takaful industry growth constantly with compliance of the integrity. For example, Takaful industry should encourage the application of Mudharabah and Musyrakah financing through the set up of a special subsidiary to undertake the particular modes of financing.

According to Bank Negara Malaysia (2012), for the regulatory of framework development in the Takaful industry, regulatory frameworks need to be improved. There are several areas which are introduced accounting standards for Takaful business or draft the model accounts for Takaful operators and refine the code of ethics and standard market practices for Takaful operators. Moreover, improve the ability to compete in the domestic market with enhance capital base do increase the framework too. It will help Takaful industry improve the standard as well as banking system in Malaysia.

In addition, increase number of professional like lawyers or judges who expertise in both Syariah and civil laws to handle legal matters on Takaful industry. There are able to promote confidence or faith of customer on the Takaful industry. Takaful industry establishes the legal structure make the continuous growth in the market.

As a conclusion, stronger infrastructure of Takaful industry, stimulate the competition and raising performance standards are able to increase the quality of the Takaful industry in Malaysia. Therefore, banking system will be improving once the Takaful industry growth constantly. This is able to make all Malaysian enjoy the world class banking system in Malaysia.

Conclusion

It is important for us to study the importance of banking system. This is because when there is monetary instability, prices are either rising or falling will resulted in distortions and undermine the long-term economic growth prospects of the country. Malaysia is one of the most open economies in the world. Hence, performance of the Malaysian economy is significantly influenced by developments outside its borders.

Recently, Bank Negara Malaysia (BNM) moved to improve the soundness of banking institutions. The measure is improvement in credit allocation, strengthening of prudential regulations, resolutions of nonperforming loan and recapitalization of the banking sectors. We had included 5 types of banking system which is Commercial bank, Investment bank, Islamic bank, Insurance Company and Takaful industry.

Commercial bank can be define as bank that offers a wide range of deposit accounts, cover checking, savings and time deposits and extends loans to individuals and business. Investment bank is financial intermediaries that perform variety of services. Islamic bank will provide Shariah products or products that follow Islamic law. Insurance company is a company may be for profit or non-profit that sell promise to pay for certain expenses in exchange for a regular fee which called a premium. Takaful is also an insurance structure but it compatible with Islamic law.

The recommendation for these banking systems is encourage the development of new delivery channels, promote a efficient money market with greater liquidity, create awareness and consumer education regarding Islamic banking, establish prudential risk management standards, regulatory of framework development in the Takaful industry, regulatory frameworks need to be improved and improving access of information to reduce asymmetries information.

As a conclusion, this assignment had highlighted the banking system in Malaysia. Through this assignment, we had learned the important and usefulness of Banking System for a country. In a nutshell, it is beneficial to us in terms of indentifying the type of banking system. We appreciate and Thanks you to Ms. Wei Chooi Yi for continuously guiding us throughout the whole assignment.