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Central Bank of Malaysia
Bank Negara Malaysia (BNM)

Logo
Headquarters	Kuala Lumpur, Malaysia
Established	26 January 1959
Governor	Nor Shamsiah Mohd Yunus [1]
Central bank of	Malaysia
Currency	Malaysian ringgit MYR (ISO 4217)
Website	www.bnm.gov.my

BNM headquarters in Kuala Lumpur.

The Central Bank of Malaysia (BNM; Malay: Bank Negara Malaysia) is the Malaysian central bank. Established on 26 January 1959 as Central Bank of Malaya (Bank Negara Tanah Melayu), its main purpose is to issue currency, act as banker and adviser to the Government of Malaysia and regulate the country's financial institutions, credit system and monetary policy. Its headquarters is located in Kuala Lumpur, the federal capital of Malaysia.

The bank is active in developing financial inclusion policy and is an important member of the Alliance for Financial Inclusion.^[2]

Powers of the bank

The Central Bank is empowered through enactment of legislation by the Parliament of Malaysia. New legislation are created and current legislation is amended to reflect the needs of the time and future.

Central Bank of Malaysia Act 2009

Provides the establishment, administration and powers of the bank.^[3] This act repealed the Central Bank of Malaysia Act 1958.

Financial Services Act 2013

Consolidates the regulatory and supervisory framework for Malaysia’s banking industry, insurance industry, payment systems, and other relevant entities. The Act also includes money market oversight and foreign exchange administration matters.^[4] This act repealed Banking and Financial Institutions Act 1989, Insurance Act 1996 (though sections 144, 147(4), 147(5), 150, 151 and 224 of the Insurance Act 1996 continue to remain in full force and effect by virtue of section 275 of FSA 2013), Payment Systems Act 2003 and Exchange Control Act.^[3]

Islamic Financial Services Act 2013

Sets out the regulatory framework for Malaysia’s Islamic financial sector with the principal regulatory objectives of promoting financial stability and compliance with Shariah.^[3] This act repealed Islamic Banking Act 1983 and Takaful Act 1984.

Money Services Business Act 2011

Provides for regulation of money services business industry which consists of remittance, wholesale currency and currency exchange businesses.^[3]

Anti-Money Laundering and Anti-Terrorism Financing Act 2001

This act is actually renamed from a previous act. The act provides powers to the bank to prevent money laundering and terrorism financing, and every funds transferred from offshore banks in Malaysia to any other bank within or outside Malaysia that are above 1 million US Dollars incurs a 0.1 percent charge, and payment should be made cash to the primary bank where the funds is deposited for the period of time, 21 working days should be placed on money been transferred and such money should be investigated with care. After careful investigation, the ministry of finance Malaysia should issue and endorse a certification to show that the Central Bank has fully cleared the funds while Member states of the Association of Southeast Asian Nations (ASEAN) should also endorse their certification. This will be at a cost of 0.25 percent of the total funds to be transferred and you are advised to go through your attorney within Malaysia. A mandate of 0.35 percent of the total funds to be transferred is required to be paid in cash to the necessary authority.^[3]

Development Financial Institutions Act 2002

Promotes the development of effective and efficient development financial institutions.^[3]

Governors of Bank Negara

Headquarters and Branches

Bank Negara Malaysia.

The Bank Negara headquarters are located at Jalan Sultan Salahuddin; off Jalan Kuching. Bank Negara is geographically located at latitude (3.1518 degrees) 3° 9' 6" North of the Equator and longitude (101.6926 degrees) 101° 41' 33" East of the Prime Meridian on the map of Kuala Lumpur.

Landmarks located near the Bank Negara building include Dataran Merdeka, St Mary's Cathedral, Kuala Lumpur City Hall building, Lake Gardens, Kuala Lumpur and the Tugu Negara.

Bank Negara had previously maintained branches in each of the state capitals. Most of them were closed in the 1990s when retail banks began taking over most of the counter services. There are still branches maintained in Penang, Johor Bahru, Kota Kinabalu, Kuching, Kuala Terengganu and Shah Alam. Some branches were converted into currency distribution and processing centres.

Bank Negara also retains representative offices in London, New York City, and Beijing.

A new building for the Financial Services and Resources Center (FSRC) was constructed in 2004 to house the FSRC, SEACEN, IFSB and the FMAG (the museum arm of Bank Negara). Located along Jalan Dato Onn, in front of the Tun Hussein Onn Memorial, the building was designed by renowned Malaysian architect firm, Hijjas Kasturi Associates. Officially declared opened in August 2011, the building is now known as Sasana Kijang.

Institutional development

Asian Institute of Finance was established in 2009 by Bank Negara Malaysia and Securities Commission Malaysia and focuses on developing human capital across the financial services industry in Malaysia.

History

In 1837 the Indian rupee was made the sole official currency in the Straits Settlements, but in 1867 silver dollars were again legal tender. In 1903 the Straits dollar, pegged at two shillings and fourpence (2s. 4d.), was introduced by the Board of Commissioners of Currency and private banks were prevented from issuing notes. Since then, the continuity of the currency has been broken twice, first by the Japanese occupation 1942 – 1945, and again by the devaluation of the Pound Sterling in 1967 when notes of the Board of Commissioners of Currency of Malaya and British Borneo lost 15% of their value.

On 12 June 1967, the Malaysian dollar, issued by the new central bank, Bank Negara Malaysia, replaced the Malaya and British Borneo dollar at par. The new currency retained all denominations of its predecessor except the $10,000 denomination, and also brought over the colour schemes of the old dollar.

In 1985, following the "Plaza meeting" of G-5 finance ministers in New York City, the US dollar fell sharply causing major losses in Bank Negara's dollar reserves. The bank responded by starting a program of aggressive speculative trading to make up these losses (Millman, p. 226). Jaffar Hussein, the Bank Negara Governor at the time, referred to this strategy as "honest-to-God trading" in a December 1988 speech in New Delhi.

In the late 1980s, Bank Negara, under Governor Jaffar Hussein, was a major player in the forex market. Its activities caught the attention of many; initially, Asian markets came to realise the influence Bank Negara had on the direction of forex market. Alan Greenspan, the Federal Reserve's chairman, later realised Bank Negara's massive speculation activities and requested the Malaysian central bank to stop it.

On 21 September 1990, BNM sold between $500 million and $1 billion worth of pound sterlings in a short period, driving the pound down 4 cents on the dollar (Millman, p. 228). In response, bankers began front running Bank Negara's orders. Two years later on Black Wednesday, Bank Negara attempted to defend the value of the British pound against attempts by George Soros and others to devalue the pound sterling. George Soros won and Bank Negara reportedly suffered losses of more than US$4 billion.^[5] Bank Negara lost an additional $2.2 billion in speculative trading a year later (Millman, p. 229). By 1994, the bank became technically insolvent and was bailed out by the Malaysian Finance Ministry (Millman, p. 229).

Bank Negara Malaysia's Foreign Exchange Reserves Management (1985 until 1993)

BNM started currency trading (as part the wealth diversification strategy) in 1985, did very well in the beginning but suffered huge losses in 1992 and by 1994 was technically insolvent. Against this background, the aim of this exploratory note is twofold. First, it analyses the logic behind the decision. Second, it evaluates the probable causes of the failure. Simple game theory demonstrated that decision to gamble with taxpayers' money was a dominant strategy (defection). To evaluate the probable causes of failure, we employed gamblers' ruin simulator. The findings are as follows: BNM were eventually succumbed to the curse of gambler’s ruin i.e. although it would have made enough money in the long run, it lost so much in the short-run that it could not continue to play. Two explanations why BNM fallen into the trap;

1. BNM officials want to bet lightly enough, relative to his capital, to fend off gambler’s ruin, but heavily enough to make the desired rate of return. Unfortunately, in real life, a gambler does not know the true odds of winning on each bet, so he/she cannot look up at the optimum betting.


2. BNM did not stop playing the games after winning the desired amount which is closely related to risk aversion after prior losses, gambling with house money and break even effects.

Pegging of the Ringgit and Reserves

In 1998, Bank Negara pegged 3.80 ringgit to the US dollar after the ringgit substantially depreciated during the 1997 Asian financial crisis. In July 2005, the central bank abandoned fixed exchange rate regime in favour of managed floating exchange rate system an hour after China floated its own currency. This resulted in capital flight of more than US$10 billion, thought to be due to the repatriation of speculative funds that entered the country in anticipation of the abandonment of the peg: Bank Negara's foreign exchange reserves increased by $24 billion in the one-year period between July 2004 and July 2005 (see table below). During this period there was widespread belief that the ringgit was undervalued and that if the peg was removed, the ringgit would appreciate.

Bank Negara continues to run a negative interest rate differential to USD. The ringgit has appreciated gradually since the peg was abandoned and as at 28 May 2007, it traded at around 3.40 to the US dollar. Malaysia's foreign exchange reserves have increased steadily since the initial capital flight, and as at 31 March 2007 the reserves stood at approximately US$88 billion, which is approximately $10 billion more than the reserves just prior to the peg being abandoned.

On 31 July 2007 the Malaysian reserves stood at approximately US$98.5 billion, which is equivalent to RM340.1 billion. The figure increased to $101.3 billion on 31 December 2007, which is equivalent to RM335.7 billion.^[6] Bank Negara's international reserves increased further 15 days later to $104.3 billion or MYR 345.4 billion.^[8][9]

See also

• 
  Bank Negara Monetary Notes
  


• International Centre for Education in Islamic Finance


• Malaysian ringgit


• Payment system


• Real-time gross settlement

References

• 
  Millman, Gregory J. (1995). The Vandal's Crown: How Rebel Currency Traders Overthrew the World's Central Banks (published in UK as Around the World on a Trillion Dollars a Day. Bantam Press. ISBN 978-0593036235.
  

External links

• 
  Media related to Central Bank of Malaysia at Wikimedia Commons


• 
  (in Malay) (in English) Official website
  


• Islamic Banking Law


• [1]