Banking in Malaysia. A Historical Survey

Term Paper, 2006

11 Pages

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Banking in Malaysia: A Preliminary Analysis

Historical Backdrop

Commercial Banks

Development of Islamic Banking in Malaysia


Works Cited

Banking in Malaysia: A Preliminary Analysis

The origins of modern banking in Malaysia can be traced back across four centuries ago. The story of the industry’s development and the birth of Malaysia’s banking had better institutionalized and structured in the mid of 1950s, in the emergence of an increasingly diversified and broad-based economy with an expanding industrial base in the country. Malaysia has witnessed tremendous changes since achieving independent in 1957. Stimulating expansion was begun in the new growth industries and high potential activities were structured to develop credible finance and efficient banking industry to support the financing needs of the economy in the phase of development.

The Central Bank of Malaysia (BNM) was established in 1959, to maintain a strong Ringgit, promote financial stability and foster the growth of a sound financial structure. It functions to supervise and regulates banking and related activities in Malaysia and to cater the building of a sound financial structure as the monetary policy operates through the financial markets. The expansion of the domestic banking network throughout the country has seen more change in the financial services arena which has led to the development of a sophisticated money market.1 By the passage of the twenty-first century the financial sector was profoundly growing and the banking business gaining a niche providing commercial banking and personal banking, internet banking facilities, business banking and consumer loans to the community. Likewise, the corporate banking trade services offers international banking, business banking, and consumer products based on the most up-to-date technology with a vibrant banking facilities and services environment.

Malaysia’s financial institution comprises of banking system and non-bank financial intermediaries. The banking system is the largest component of the financial system, accounting for about 70% of total asset of financial system. The banking system consists of Bank Negara Malaysia, the banking institutions and other financial institution, namely the Discount Houses, the Representatives Offices of Foreign Bank and Offshore Bank. Bank Negara Malaysia is responsible for the regulation and supervision of the banking system. According to the annual report published by the BNM, the share of total financial system assets held by the banking system (excluding the Islamic Banks) had risen from 69.5 % at the end of 1987 to 73% in 1997.2

Non-Banking financial institutions have begun to flourish during the late 1980s and early 1990s. They came from an industry comprising many small bankers such as insurers, retailers and building societies. Currently there are 10 anchor banks established with a major 15 commercial banks and 9 Islamic banks expanding throughout the country. The major commercial banks institutions in Malaysia are:

1. Affin Bank Berhad

A wholly owned subsidiary of Affin Holdings Berhad (AHB), commenced on 1 April 2006, operating through a network of more than 100 branches across Malaysia.

2. Alliance Bank Berhad

A financial service company that includes the Alliance Islamic Bank, Alliance Investment Bank and Alliance Bank Malaysia.

3. Ambank Bank (M) Berhad

The sixth largest financial services group, with over 170 branches, chaired by Tan Sri Azman Hashim.

4. CIMB Bank Berhad

One of the leading financial institutions in Malaysia, operating in 16 countries in ASEAN.

5. Edaran Otomobil Nasional Bank Berhad (Eon Bank)

One of the largest conglomerates established in 1984.

6. Hong Leong Bank Berhad

One of the leading banking and financial services companies. It has market capitalization of approximately MYR 21.7 billion (US$ 5.5. billion).

7. Malayan Banking Berhad (Maybank)

Malaysia’s largest financial services group with total assets of more than US $164 billion. Established in 1960 by Khoo Teck Puat.

8. Public Bank Berhad

One of the leading financial services provider founded by Teh Hong Piow.

9. Rashid Hussein Bank berhad (RHB Bank)

The fourth largest financial services group with more than 200 branches across the country.

10. Southern Bank Berhad

Founded as Southern Banking Limited in 1965, beginning in Penang and expanding in Kuala Lumpur. Offering products including wealth-management, credit cards and loans.

Traditionally, the main functions of commercial banks are to provide retail banking services such as the acceptance of deposit, granting of loans and advances, and financial guarantees, and to deal in foreign exchanges and to provide treasury services trade financing facilities.3

Historical Backdrop

The first Commercial Bank was the Chartered Merchantile Bank of India, London and China (later called Merchantile Bank) branches in Penang in 1859. This was followed by the establishment of a Chartered Bank branch in Penang in 1875. Several bank branches were also established in Perak and Johor, following the development of tin in these area in 1888. However, in the early stages the bank was bound by trade financing, working capital and foreign exchange remittances with London, India and China. Most of the credits provided by the bank are for short-term loans in the form of overdrafts, package credits, advances on shipping documents, trust receipts and for billing discounts. The more organized banking business only started from 1900-59 when trade activities involving tin and rubber became increasingly important and properly ordered. As a result, several foreign bank branches were opened in Klang (1909), Seremban (1910), Kota Bahru and Melaka (1911) and Ipoh (1912).

The first local bank established in Kuala Lumpur was Kwong Yik (Selangor) Banking Corporation in July, 1913. At that time, the development of local banks was in slow pace. A total of 18 banks established in Malaya in 1926. However, only three were from local bank branches, two branches in Singapore and 13 branches of foreign, mainly British. The British Bank pioneered the development of banking in the country. The establishment of the British Bank in the country was aimed at providing services to international trade and foreign exchange. One of the determinants of the development of British banks internationally is that they are controlled from London which is the administrative center of the bank. British banks have branches all over the world and the network forms an international force in the world financial markets. The main task of the bank was to provide assistance to the British colonies.

Today, Malaysia is able to manage its own resources with a banking system that uses modern and advanced technology capable of providing fast and efficient services to customers. The introduction of automatic teller machines (ATMs) for various financial-related functions and tasks is significant evidence. Apart from the ATM system introduced for the first time in 1981 at Malayan Banking Berhad, several other facilities are also provided including housing loans and transfers from savings accounts to current accounts.

Commercial Banks

The commercial banks are the main players in the banking system. They are the largest and most significant providers of funds in the banking system with total loans and total deposits amounting to RM 285.1 billion and RM 287.6 billion respectively, as at the end of June 1999, representing approximately 76% and 71% of the banking system’s total loans and deposits respectively. Total assets of commercial banks increased at RM 77.8 billion, from RM 98.2 billion at the end of 1988 to RM 175.5 billion at the end of 1992, representing 36.1% of the increase in total assets of financial system. The strong growth of commercial banks is due to the growth of deposit base and rapid rising incomes and an increased move of capital in economy and the expansion of bank branch network. There are 34 commercial banks (excluding Islamic banks) operating with a total of 1,735 branches nationwide.4

Development of Islamic Banking in Malaysia

Islamic banking emerged as the new reality in the late 1970s following the revolution in various part of Muslim countries demanding an implementation of Islamic principles in banking and finance that gives Muslims the choice in fulfilling their banking and financing needs and transacting business in the manner deem fit according to the requirements of the Syariah.

Greater collaboration and exchanges among the Muslim countries has worked to promote the establishment of Islamic banking and to mobilize the resources of the Ummah which culminate in the effort to Islamize economy. Malaysia has become one of the prominent major propounder to promulgate the Islamisizing effort. It has developed framework providing a comprehensive and well-structured Islamic financial system that comply with a variety of Shariah based criteria with a greater social implication and distinguished philosophies to foster development and to increase the role of Muslim in the global economy. In the last 20th century, a number of Islamic banks were created, to cater to this particular banking market. At present, there are more than 70 Islamic financial institutions operating in some 45 countries throughout the world.

The earliest form of Islamic banking in Malaysia is traced back to September 1963 when the Pilgrim’s Savings Corporation or Perbadanan Wang Simpanan Bakal-Bakal Haji (PWSBH) was set up. This institution was established for Muslims to save for pilgrimage expenses. In 1969, PWSBH merged with Pejabat Urusan Haji to form the Pilgrim’s Management Fund Board or Lembaga Urusan dan Tabung Haji (now known as LTH). LTH is a savings mechanism for Muslims and the fund invested is uncontaminated by Riba’ (interest).5

In 1980, Bumiputra Economic Congress made a proposal to government to allow the setting up of Islamic banking in Malaysia. National Steering Committee was then assembled in 1981 and performed a study to the idea and recommend to government the operations of a viable Islamic banking and to develop their overall marketing and positioning of their products and services with a far reaching result and great opportunity to encouraged the banks to compete more actively with one another and the confidence which they could command in the local community.

The establishment of the first Islamic banking, Bank Islam Malaysia Berhad (BIMB) was officiated in July 1983, with an initial paid up capital of RM 80 million. The Bank became a new milestone in the Islamic financial system operating in parallel to the commercial banks, and introduced a range of new customer facilities, such as saving accounts Wadiah (safekeeping), Wakalah (agency) Sukuk (Islamic bonds) Takaful (Islamic insurance) and Islamic equity funds which comply with the requirements of the syariah and serves the interests and needs of the Ummah.

The Bank offers deposit-taking products such as current and savings deposit under concept al-Wadiah yad dhamamah (guaranteed custody) and investment deposits under concept al-Mudharabah (profit sharing), grants finance facilities and working capital financing under al-Murabahah (cost-plus), hire-purchase finance under Bai’ Bithaman Ajil (deferred payment sale), lease finance under al-Ijarah, and al-Takriji, project financing under al-Musyarakah (profit and loss sharing) and trade finance and benevolent loan (Qardu Hassan).6

The strong growth and diversification of Islamic banks has become truly viable, and BIMB was listed on the main board Kuala Lumpur Stock Exchange (KLSE) on 17th January 1992. According to the Bank Negara Malaysia’s annual report, BIMB’s total assets rose from RM 325.5 million in 1984 to RM 10.12 billion in 2000. At present, the Bank has 82 branches in Malaysia.7

The Islamic Banking Acts (IBA) which was formed in 7th April 1983 has become the legal basis for the establishment of Islamic banks in Malaysia. IBM provides Bank Negara Malaysia (BNM) powers to supervise and regulate Islamic banks, similar to the case of other licensed banks. The Government Investment Act 1983 also enacted at the same time to empower the government of Malaysia to issue Government Investment Issue (GII). This certificate is a government securities issued based on syariah. It gives Islamic banks ability to invest in the Government Investment Issue as the certificate is regarded as a liquid assets, where Islamic banks could invest to meet the prescribed liquidity requirements as well as to invent their surplus funds.

To deepen the impact and role of Islamic Banks, and to compete in the financial market place, BIMB requires three vital elements to qualify as viable system. It needs to have large number of players in the market place, broad variety of instruments, and Islamic money market. The emergence of large national banks and the expansion, consolidation and innovation of financial institutions, has encouraged the Central Bank of Malaysia to introduce Interest-Free Banking System (SPTF) in the 4th March 1993. A large number of banking institutions participating in the system has contributed to the invention of more than 40 Islamic financial products and services obtained by a total of 36 financial institutions, comprising of 14 commercial banks (4 are foreign banks), 10 finance companies, 5 merchant banks, and 7 discount houses.

To link the institutions and the broad instruments in the market place, the Islamic Inter-bank Money Market (IIMM) was introduced on 4th January 1994. Islamic instruments was introduced to bring comprehensive Islamic banking system and to provide additional services of the larger banks in the industry. Malaysia becomes known as the first Islamic money market in the world having an inter-bank trading in Islamic financial instruments, Islamic inter-bank investments and cheque clearing system. IIMM serves as a channel for transmission of monetary policy. Through the IIMM, the Islamic banks and banks participating in the Islamic banking scheme (IBS) able to match the funding requirements efficiently.8

In Malaysia, National Syariah Advisory Council (NSAC) was set up at BNM on the 1st May 1997, to advices BNM on Shariah aspects of the operations on the Islamic banking institutions, as well as the on the products and services of Islamic banks and Takaful.

The second Islamic Bank, Bank Muamalat Malaysia Berhad (BMMB) was established in the 1st October of 1999.9 The established importance of BMMB has increased the flow of funds from Islamic banks and further strengthens the role of Islamic banks industry in the overall monetary distributional channels in the country. Significance progress of the BMMB had transform the nation’s economy to enter into new areas of activity, and the Bank became more aggressive to develop wide range of products and services comparable to conventional banking, both on liabilities and assets, from retail to corporate and investment bank products. As at the end of March 2005, the Bank has 1,154 workforce and 42 branches in Malaysia.10

The achievement of Islamic banking in the world economic and financial environment is truly remarkable. Malaysia’s success to develop dual banking system and full-fledged Islamic system has created a spill-over effect to non-bank Islamic financial intermediaries which start to offer Islamic financial products and services. Such institutions include Takaful, the saving institutions (i.e. National Savings Bank (BSN) and Bank Rakyat) and the developmental financial institution (Bank Pembangunan dan Infrastruktur Malaysia and Bank Pertanian).11

With the growing acceptance of Islamic banking in Malaysia, Bank Negara Malaysia (BNM) has received persistent requests from conventional banks to operate Islamic counters. The requests for operating Islamic counters have been allowed for over 10 years (upon amendments made to the banking and financial institutions act) under the supervision of the Central Bank, BNM. Currently, there were 2 full-fledged Islamic banking companies operating in Malaysia, a number that had increased to 15 recently. These banks are:

1. Bank Islam Malaysia Berhad
2. Bank Muamalat Malaysia Berhad
3. Hong Leong Islamic Banking Berhad
4. Commerce Tijari Bank Berhad
5. RHB Islamic Bank Berhad
6. AmIslamic Bank Berhad
7. Affin Islamic Bank Berhad
8. EONCAP Islamic Bank Berhad
9. Kuwait Finance House (Malaysia) Berhad
10. Commerce Tijari Bank Berhad
11. Al-Rajhi Banking & Investment Corporation (Malaysia) Berhad
12. Alliance Islamic Bank Berhad
13. HSBC Amanah Malaysia Berhad
14. OCBC Al-Amin Bank Berhad
15. Standard Chartered Saadiq Berhad

Today Islamic banking and finance represents a viable and competitive financial system able to operate successfully in the mainstream financial system. The Islamic banking system currently constitutes 8.2 % of the total banking system in terms of assets, with approximately 70% of the assets being generated by the conventional banks.12 The asset quality of Islamic financing improved in 1999. In that year, total financing extended by the Islamic banking sector continued to expand by RM 3.1 billion or 2.8 % and the growth in the broad property increased by RM 1.1 billion of money.


The financial market in Malaysia continued to attract steady foreign direct investment due to its strong performance and growth. The greater pace of development in banking industry and financial sector has given confidence to global investors and financial players to invest and secure partnership in the country’s growing market and business initiative. The steady growth of market and banking industry help Malaysia to march into new benchmark of financial sector in the future. It was expected to bring steady progress and unprecedented growth into Malaysia’s Banking industry for tomorrow’s world of finance. This strategic market provided the Banking indispensable tool to joining the bandwagon of other developing industries and financial powerhouse in Southeast Asia in chasing the new pace of development in the post-modern world.

Works Cited

Al-Harran, Saad Abdul Sattar, ed. Leading issues in Islamic Banking and Finance. Petaling Jaya, Selangor: Pelanduk Publications (M), 1995. . Islamic Finance: Partnership Financing. Petaling Jaya, Selangor: Pelanduk Publications (M), 1993.

Bala Shanmugam, Vignesen Perumal, Alfieya Hanum Ridzwa, ed. Islamic Banking: an International Perspective. Serdang, Selangor: UPM Press, 2004.

Bank Negara Malaysia. Islamic Banking and Finance: Progress and Prospects. Collected Speeches: 2000-2005 Dr. Zeti Akhtar Aziz. Kuala Lumpur: Bank Negara Malaysia, 2005.

Bank Negara Malaysia. Annual Report. Kuala Lumpur: Bank Negara Malaysia, 1999.

Bank Negara Malaysia. The Central Bank and the Financial System in Malaysia: A Decade of Change 1989-1999. Kuala Lumpur: Bank Negara Malaysia, 1999.

Eby Ruin, Josef. Financial and Banking Services in Malaysia. Selangor: Leeds Publications, 2004.

Economics Research and Statistics Department, Bank Negara Malaysia. Money and Banking in Malaysia. Kuala Lumpur: Bank Negara Malaysia, 1994

Haron, Sudin. Islamic Banking: Rules and Regulations. Petaling Jaya, Selangor: Pelanduk Publications (M), 1997

Nik Mustapha Nik Hassan, Mazilan Muda, ed. The Economic and Financial Imperative of Globalization: an Islamic Response. Kuala Lumpur: Institute of Islamic Understanding, 2000.

Peng, Leong Toong. The Business of Banking in Malaysia. Petaling Jaya, Selangor: Pelanduk Publications (M), 1998.

Sivagnanam, Kalathevy. “Conventional or Islamic Loan Financing?” The sun, 2nd June, 2006: 6.

Yok, Johnson Pang, G. Savarimuthu, Nathaniel. Banking in Malaysia. Petaling Jaya, Selangor: Longman Malaysia, 1985.

Yok, Johnson Pang. Banking and Finance in Malaysia. Subang, Selangor: Times Federal Publications Sdn Bhd, 1995.


1 Economics Research and Statistics Department, Bank Negara Malaysia. Money and Banking in Malaysia. Kuala Lumpur: Bank Negara Malaysia, 1994, p. 33.

2 Bank Negara Malaysia. The Central Bank and the Financial System in Malaysia: A Decade of Change 1989-1999. Kuala Lumpur: Bank Negara Malaysia, 1999, p. 368.

3 Bank Negara Malaysia. The Central Bank and the Financial System in Malaysia: A Decade of Change 1989-1999. Kuala Lumpur: Bank Negara Malaysia, 1999, p. 393.

4 Ibid, p. 390.

5 www.


7 Bank Negara Malaysia. Annual Report. Kuala Lumpur: Bank Negara Malaysia, 1999, p. 231.

8 Haron, Sudin. Islamic Banking: Rules and Regulations. Petaling Jaya, Selangor: Pelanduk Publications (M), 1997, p. 21.

9 This bank emerges from an effect of the spin-off following the merger between Bank Bumiputra Malaysia Berhad and Bank of Commerce (BOCB). Under the merger arrangement, the Islamic banking assets and liabilities of Bank Bumiputra Malaysia Berhad (BBMB), Bank of Commerce (BOCB) and Bank Bumiputra Malaysia Kewangan Berhad (BBMBK) were transferred to BMMB, while conventional operations of BBMB to BOCB. See: and http;//


11 Al-Harran, Saad Abdul Sattar. Islamic Finance: Partnership Financing. Petaling Jaya, Selangor: Pelanduk Publications (M), 1993, p. 45.

12 Bank Negara Malaysia. Islamic Banking and Finance: Progress and Prospects. Collected Speeches: 2000-2005 Dr. Zeti Akhtar Aziz. Kuala Lumpur: Bank Negara Malaysia, 2005, p.35.

11 of 11 pages


Banking in Malaysia. A Historical Survey
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banking, malaysia, historical, survey
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Dr. Ahmad Nabil Amir (Author), 2006, Banking in Malaysia. A Historical Survey, Munich, GRIN Verlag,


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