Bank Finance and Regulation Survey - Lex Mundi

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Bank Finance and Regulation Survey

MALAYSIA

Skrine Malaysia consists of Peninsular Malaysia and the states of Sabah, Sarawak and Federal Territory of Labuan located in the Borneo Island. The official monetary unit is Ringgit Malaysia ("RM"). Although the "financial services sector" in Malaysia includes the insurance and stock-broking industries, we have for the purposes of this questionnaire, confined our responses to the banking sector and to quasi-financial and quasi-credit institutions. I. BANKS AND FINANCIAL INSTITUTIONS SUPERVISION 1. Applicable laws and regulation. Provide a list of main laws and regulations that refer to the

supervision and control of banks and financial institutions. Give a brief summary of the substance of each of them.

1.1 The following are the principal legislation that regulate banks and financial institutions:- 1.1.1 Banking and Financial Institutions Act 1989 ("BAFIA") which provides for the

licensing, regulation and supervision of institutions that conduct banking, finance company, merchant banking, discount house and money-broking businesses. It also provides for the registration and, if necessary, the regulation of any 'scheduled business' or any institution that carries on the same.1

1.1.2 Islamic Banking Act 1983 ("IBA") which provides for the licensing, regulation and

supervision of Islamic banking business. 1.1.3 Offshore Banking Act 1990 ("OBA") which provides for the licensing, regulation and

supervision of institutions that conduct offshore banking business and offshore investment banking business. The OBA also provides for the registration and, if necessary, the regulation of any institution that conducts any 'offshore financial business'.2

1.1.4 Payment Systems Act 2003 ("PSA") which provides for the regulation and supervision

of payment systems and payment instruments (such as credit cards and electronic money). The PSA empowers Bank Negara Malaysia ("BNM"), the central bank of

1 Refer to Paragraph 3.1.3 as to the businesses that comprise a "scheduled business" under BAFIA. 2 Refer to Paragraph 3.3.2 as to the businesses that comprise an "offshore financial business" under OBA.



Malaysia, to designate a payment system as a "designated payment system" if such system poses systematic risks or the designation is necessary to protect the public. BNM may designate a payment instrument as "designated payment instrument" if such instrument is widely used and it is necessary to protect public interest or maintain the reliability of that instrument.

Operators of designated payment systems and issuers of designated payment instruments are required to comply with specific requirements under the PSA.

1.1.5 Development Financial Institutions Act 2002 ("DFIA") which provides for the prescription of certain institutions as 'development financial institutions' ("DFIs") and for the regulation and supervision of such institutions.

DFIs are institutions established to develop and promote strategic sectors of the economy, such as agriculture, small and medium-sized enterprises, infrastructure and shipping. Institutions which have been prescribed as DFIs include Development and Infrastructure Bank of Malaysia Berhad, Industrial and Technology Bank of Malaysia Berhad, Export-Import Bank of Malaysia Berhad and Agricultural Bank of Malaysia.

1.1.6 Exchange Control Act 1953 which empowers the Controller of Foreign Exchange to

regulate dealings in gold and foreign currencies, payments to and from residents, issuance of securities outside Malaysia, imports and exports and settlements.

1.2 The following are other legislations that affect banks, financial institutions and quasi-financial and

quasi-credit institutions:-

1.2.1 Moneylenders Act 1951 ("MLA") which provides for the licensing and regulation of money lending business and the protection of borrowers of money lent in the course of such business. Licensed banks, merchant banks and finance companies under BAFIA, Islamic banks and DFIs are exempted from the MLA.

1.2.2 Hire Purchase Act 1967 ("HPA") which regulates the conduct of hire purchase

business. 1.2.3 Money-Changing Act 1998 ("MCA") which provides for the licensing and regulation of

money-changing business, including the buying of travelers’ cheques. 1.2.4 Anti-Money Laundering and Anti-Terrorism Act 2001 ("AMLA") which renders

money laundering activity an offence and provides for measures to be taken by reporting institutions to prevent and detect such activity and for reporting of suspicious transactions.

Reporting institutions under AMLA include licensed institutions and scheduled institutions under BAFIA, Islamic banks and institutions that conduct offshore banking business, offshore investment banking business and offshore financial business under OBA.3

2. Entities/Authorities in charge of the control and supervision. Purposes, powers and

functions of each of them – their organization and structure (i.e. public or private, independency or body of the Government to which they belong, size, etc).

2.1 The Minister of Finance ("MOF") – The powers and responsibilities of the MOF include:-

3 First Schedule, AMLA.



(a) approving the issue of licenses under BAFIA, IBA and OBA; (b) imposing restrictions on or revoking any license issued under BAFIA, IBA and OBA; (c) regulating particular aspects of the business and affairs of licensed institutions under

BAFIA; and (d) regulating particular aspects of the business and affairs of "scheduled institutions" under

BAFIA where the MOF is satisfied of the need to do so.

2.2 BNM – It is a statutory body incorporated under the Central Bank Act 1958 ("CBA"). Its functions and responsibilities include:- (a) promoting and maintaining banking and financial services to the public; (b) establishing the policy to be followed by banking institutions in relation to advances and

credit facilities to be granted by them; (c) making recommendations on interest and discount rates and commissions chargeable by

banking institutions (other than Islamic banks); (d) making recommendations on reserves to be maintained by banking institutions; (e) supervising and regulating banking and financial institutions under BAFIA and IBA; (f) making policies with respect to institutions regulated under BAFIA, IBA, DFIA and

MCA; and (g) the administration of AMLA and PSA.

2.3 Labuan Offshore Financial Services Authority ("LOFSA") – It is a statutory body established under the Labuan Offshore Financial Services Authority Act 1996. Its primary functions include:-

(a) supervising the activities and operations of offshore financial institutions, including

offshore banks and offshore investment banks; (b) overseeing the promotion and development of the Labuan International Offshore

Financial Centre.

2.4 Securities Commission ("SC") – The SC is a statutory body established under the Securities Commission Act 1993. It is the primary regulatory authority over capital markets activities.

3. Describe briefly the activities under supervision and give a list of the different types of licenses available.

3.1 BAFIA Licensed Businesses

3.1.1 The following businesses require a license under BAFIA:-

(a) banking business; (b) finance company business;



(c) merchant banking business; (d) discount house business; and (e) money-broking business.4

3.1.2 A company that is licensed to carry on a licensed business is defined as a "licensed

institution" under BAFIA.

Scheduled Business

3.1.3 Each of the following is a "scheduled business" under BAFIA:- (a) building credit business; (b) development finance business; (c) factoring business; (d) leasing business.5

3.1.4 A company that wishes to carry on a scheduled business is required to deposit prescribed

information and documents with BNM and to obtain written acknowledgement of such compliance from BNM before it can commence such business.6

3.1.5 If the MOF is satisfied that it is necessary to regulate any particular scheduled business or any category of scheduled businesses, he may publish an order to extend certain of the regulatory powers in BAFIA over the particular scheduled business or category of scheduled businesses.7

Representative Office 3.1.6 Subject to the prior written approval of BNM and compliance with the relevant statutory

requirements, a foreign institution (as defined in BAFIA) may set up a representative office in Malaysia.8

3.1.7 A representative office is not permitted to carry on any licensed business or scheduled

business and may only conduct the activities or business specified by BNM.9 3.1.8 If the MOF is satisfied that it is necessary to regulate any particular representative office

or representative offices generally, he may publish an order to extend certain of the regulatory powers in BAFIA over the particular representative office or representative offices generally.10

3.2 IBA

Islamic Banking Business 4 Section 4, BAFIA. 5 Refer to the Third Schedule, BAFIA. 6 Section 19(1), BAFIA. 7 Section 24(1), BAFIA. 8 Section 20(1), BAFIA. 9 Sections 20(2) and (3), BAFIA. 10 Section 24(1), BAFIA.



3.2.1 Islamic banking business may be transacted only by a licensed Islamic bank under IBA.11

3.2.2 Islamic banking business is defined in Section 2 of IBA as banking business whose aims

and operations do not involve any element which is not approved by the Religion of Islam.

3.3 OBA

Offshore Banking Business

3.3.1 The conduct of offshore banking business and offshore investment banking business require a license under OBA.12

Offshore Financial Business

3.3.2 Each of the following is an "offshore financial business" under OBA:-

(a) building credit business;

(b) credit token business; (c) development finance business; (d) leasing business; (e) factoring business; and (f) such other offshore financial business as may be specified by LOFSA.13

3.3.3 Offshore financial business may not be conducted in Malaysian currency.14

3.3.4 A person who wishes to carry on any offshore financial business must be registered under

OBA.15 An approved registrant is called a "registered institution". 4. Describe briefly non regulated financial and banking activities.

4.1 There is a variety of consumer credit and quasi-credit facilities available in Malaysia provided by quasi-credit institutions. Some forms of such credit are subjected to minimal regulatory oversight while others may lie within a grey area or are not subjected to any regulatory supervision. These include the following:- Money lending business

4.1.1 Moneylenders are licensed under the MLA. The MLA contains provisions that regulate the conduct of money lending business, such as forms of money lending agreements to be used and the maximum rate of interest chargeable by moneylenders. The regulatory supervision over licensed moneylenders is significantly less stringent as compared to the supervision over licensed institutions under BAFIA.

11 Section 3(1), IBA. 12 Section 4, OBA. 13 Refer to definition of "offshore financial business" in Section 2(1), OBA. 14 This prohibition is contained in the definition of "offshore financial business" in Section 2(1), OBA. 15 Section 23A, OBA.



4.1.2 The MLA falls under the jurisdiction of the Minister of Housing and Local Government. Money lending licences are issued by the Registrar of Moneylenders.

Hire-purchase business

4.1.3 The conduct of hire purchase business is governed by the HPA. The HPA only applies to prescribed goods, such as consumer items and motor vehicles ("scheduled goods") and does not extend to other goods.

4.1.4 The HPA contains provisions that regulate the conduct of hire-purchase business in relation to scheduled goods. These provisions include limitation on terms charges, prescription of minimum deposits and procedures to be complied with for repossession.

4.1.5 The HPA does not set down any licensing requirements and institutions that conduct such business are largely unregulated.

4.1.6 The administration of the HPA falls under the jurisdiction of the Minister of Domestic Trade and

onsumer Affairs. C Pawn broking business

4.1.7 Pawn broking business is licensed under the Pawnbrokers Act 1972. This Act contains provisions that regulate the conduct of pawn broking business, such as the maximum permissible charges, the minimum redemption period for pledges and the pawnbroker's rights in relation to unredeemed goods. Regulatory oversight of licensed pawnbrokers is minimal.

Payment Instruments

4.1.8 A person is required to obtain the written approval from BNM before issuing a "designated payment instrument" under the PSA. Credit cards, charge cards and electronic money have been prescribed as designated payment instruments.16

4.1.9 The regulatory supervision by BNM over issuers of designated payment instruments is less stringent than the supervision of licensed institutions under BAFIA.

16 Payment Systems (Designated Payment Instruments) Order 2003 (P.U.(A) 398/03).



Credit sales

4.1.10 This activity is carried out by some retail outlets of consumer goods such as furniture and electrical products. Consumers are required to pay for goods purchased by periodic instalments. This activity is largely unregulated.

4.1.11 The provisions of the HPA which apply to scheduled goods are excluded from credit sales transactions through arrangements whereby a credit card issuer will pay the purchase price in full to the supplier of the goods and allow the credit card holder to settle the same by agreed instalments, on an interest-free or minimal interest basis.

5. Describe briefly non-permitted financial and banking activities and/or government

monopolies.

There is no general prohibition against banking and financial business in Malaysia so long as the relevant licensing or registration requirements under the relevant legislation are complied with. There is no government monopoly over any specific area of banking and financial business.

II. BANKING ACTIVITIES 6. Different types of banking licenses. Activities permitted under each of them. Activities

prohibited. 6.1 BAFIA

Banking license

6.1.1 The holder of a banking license is permitted to carry on the following businesses:- (a) receiving deposits on current account, deposit account, savings account or other

similar account; (b) paying or collecting cheques drawn by or paid in by customers; (c) provision of finance; and (d) such other business as BNM, with the approval of the MOF, may prescribe.17

Banking and Finance Company

6.1.2 A "banking and finance company", namely, an institution that holds both a license to

carry on banking business and a license to carry on finance company business is permitted to carry on the following businesses:-

(a) banking business, as described in paragraph 1.1(a) to (d) above; (b) giving of credit facilities; (c) leasing business; (d) hire-purchase business, including those subject to the HPA;

17 Refer to definition of "banking business" in Section 2(1), BAFIA.



(e) acquiring rights and interests in a hire-purchase, leasing or other similar

transaction; and (f) such other business as BNM, with the approval of the MOF, may prescribe.18

Merchant Banking License 6.1.3 The holder of a merchant banking license is permitted to carry on the following

businesses:-

(a) receiving deposits on deposit account; (b) provision of finance; (c) providing consultancy and advisory services relating to corporate and

investment matters;

(d) making or managing investments on behalf of any person; and

(e) such other business as BNM, with the approval of the MOF, may prescribe.19

6.1.4 The holder of a merchant banking license is permitted to deal in foreign currency and to

carry out transactions in any form of derivatives if they satisfy the criteria specified by BNM from time to time and subject to such conditions and restrictions as may be imposed by BNM.20

6.2 IBA

Islamic Banking License The holder of an Islamic banking license is permitted to carry on Islamic banking business.21

6.3 OBA

Offshore Banking License 6.3.1 The holder of an offshore banking license is permitted to carry on the following

businesses:-

(a) receiving deposits on current account, deposit account, savings account, or any other accounts as may be specified by LOFSA;

(b) offshore investment banking business; (c) subject to such terms and conditions as may be specified by LOFSA, an Islamic

banking business; and (d) such other business as LOFSA, with the approval of the MOF, may specify.22

18 Refer to definition of "banking and finance company" in Section 2(1), BAFIA. 19 Refer to definition of "merchant banking business" in Section 2(1), BAFIA. 20 Banking and Financial Institutions (Licensed Merchant Banks)(Additional Business) Order 1995 (P.U.(A) 406/95). 21 Refer to Paragraph 3.2.2 for definition of Islamic banking business. 22 Refer to definition of "offshore banking business" in Section 2(1), OBA.



Offshore Investment Banking License

6.3.2 The holder of an offshore investment banking license is permitted to carry on the following businesses:- (a) providing credit facilities; (b) providing consultancy and advisory services relating to corporate and

investment matters or making and managing investments on behalf of any person;

(c) undertaking foreign exchange transactions, interest rate swaps, dealings in

derivative instruments or derivative financial instruments or any other similar risk management activities; and

(d) such other business as LOFSA, with the approval of the MOF, may specify.23

Currency of Transaction

6.3.3 Licensed offshore banks may not transact any business in Malaysian currency other than

the purchase or sale of foreign currency against Malaysian currency and swap transactions that involve Malaysian currency.24

7. Procedures to be followed and requirements to be met to obtain each of the different

licenses. Formalities to be fulfilled, documentation to be submitted, guaranties requested, time estimation, etc.

7.1 BAFIA

Application Requirements 7.1.1 An application for a banking license or merchant banking license must be made in

writing to the MOF and submitted through BNM together with the following:-

(a) a copy of the incorporation or constituent documents; (b) a copy of the latest audited balance sheet; (c) a statement on the following:-

(i) the name, place and date of the establishment of the applicant and of its

related corporations; (ii) the sources of the applicant’s funds and the purposes for which and the

manner in which they are utilized; (iii) the principal business and field of operations of the applicant and of its

related corporations; and (iv) the names and addresses of the directors and substantial shareholders of

the applicant and its related corporations; and

23 Refer to definition of "offshore merchant banking business" in Section 2(1), OBA. 24 Sections 20(1) and (2), OBA.



(d) such other information or documents as may be specified or required by BNM.25

Minimum Requirements 7.1.2 The minimum criteria which an applicant must fulfill are set out in the Second Schedule

to BAFIA. They may be summarized as follows:-

(a) Every person who is, or to be, a director, controller or manager of the institution is a fit and proper person to hold the particular position which he holds or is to hold;

(b) The business of the institution is to be directed by at least two (2) individuals; (c) The board of directors include such number of non-executive directors as BNM

considers appropriate having regard to the circumstances of the institution and the nature and scale of its operations;

(d) The institution conducts, or will conduct, its business in a prudent manner; (e) The institution will carry on its business with integrity and professionalism

appropriate to the nature and scale of its activities; (f) The shareholding structure of the institution complies with the economic policy

of Malaysia; and (g) Such other criteria as BNM may prescribe.

7.1.3 Details as to the factors and circumstances to be considered in determining whether the

minimum criteria are fulfilled are set out in the Second Schedule.

License Fees 7.1.4 Section 44 authorizes the MOF to prescribe various license fees payable by a licensed

institution. The fees presently are as follows26:-

(a) Upon the institution being licensed:- (i) a licensed bank – RM100,000; (ii) a licensed bank which is a banking and finance company –

RM150,000; (iii) a licensed merchant bank – RM100,000;

(b) Upon obtaining BNM's consent to open any office other than the principal place of business:- (i) a licensed bank – RM10,000; (ii) a licensed bank which is a banking and finance company – RM10,000; (iii) a licensed merchant bank – RM10,000;

25 Section 5(1), BAFIA. 26 Banking and Financial Institutions (Licence Fee)(Licensed Institutions) Order 2004 (P.U.(A) 188/2004).



(iv) if the place of business of a licensed bank or a licensed bank which is a

banking and finance company is a money changing booth or a mobile place of business - RM500;

(c) Annual fee

(i) a licensed bank:-

• an office at the principal place of business – RM100,000; • each office other than the principal place of business –

RM10,000; • each office that is a money changing booth or a mobile place of

business - RM500;

(ii) a licensed bank which is a banking and finance company:- • an office at the principal place of business – RM150,000; • each office other than the principal place of business –

RM10,000; • each office that is a money changing booth or a mobile place of

business - RM500; (iii) a licensed merchant bank:-

• an office at the principal place of business – RM100,000; • each office other than the principal place of business –

RM10,000.

7.2 IBA Application Requirements

7.2.1 An application for an Islamic banking license must be submitted in writing to the MOF

and submitted through BNM together with the following:-

(a) a copy of the incorporation or constituent documents; and (b) such other document or information as may be required by the MOF.27

Conditions for Approval 7.2.2 BNM shall not recommend that a license be granted and the MOF shall not grant a

license unless they are satisfied that:-

(a) the aims and operations of the proposed banking business will not involve any element which is not approved by the Religion of Islam; and

(b) provision is made in the articles of association of the applicant for the

establishment of a Syariah advisory body.28

License Fee

27 Section 3(2), IBA. 28 Section 3(5), IBA.



7.2.3 Section 9 authorizes the MOF to prescribe the annual license fee payable by a licensed Islamic bank. The annual fee presently is RM100,000 for a head office and RM10,000 for every branch office.29

Syariah Advisory Body 7.2.4 An Islamic bank must establish a Syariah advisory body, as may be approved by BNM,

to advise on its Islamic banking business to ensure that such business does not involve any element which is not approved by the Religion of Islam.

7.3 OBA

Eligibility

7.3.1 Only the following entities are eligible to conduct offshore banking business or offshore investment banking business:-

(a) an offshore company or a foreign offshore company incorporated or registered

under the Offshore Companies Act 1990 ("OCA") for the sole purpose of carrying on offshore banking business or offshore investment banking business in the Federal Territory of Labuan; or

(b) a Malaysian bank.30

Application Requirements

7.3.2 An application for a license to carry on offshore banking business or offshore investment

banking business shall be made in writing to the MOF and submitted through LOFSA together with the following:-

(a) a copy of the incorporation or constituent documents of the applicant;

(b) where an applicant is an offshore company or a foreign offshore company, a

proposed amendment, if required, to its constituent documents to the effect that:-

(i) the sole and exclusive object of the offshore company shall be the carrying on of offshore banking business in the Federal Territory of Labuan; or

(ii) the sole and exclusive object of the foreign offshore company in the

Federal Territory of Labuan shall be the carrying on of offshore banking business;

as the case may be;

(c) a copy of the audited balance sheets for the three financial years immediately

preceding the date of the application of:- (i) the applicant, where it is a foreign offshore company or a Malaysian

bank; or

29 Notification under Section 9, IBA (P.U.(B)358/94). 30 Section 4, OBA.



(ii) the applicant and its holding company, where the applicant is an offshore company which is a subsidiary of another company; or

(iii) the applicant and each participant who holds 10% or more of the paid-

up capital of the applicant, where the applicant is an offshore company which is not a subsidiary of any corporation;

(d) a statement on the following:-

(i) the name, place and date of establishment of the applicant; (ii) the principal business and the principal place of business of the

applicant; (iii) the names and addresses of the directors of the applicant and the

participants who each hold 10% or more of the paid-up capital of the applicant;

(e) in the case where an applicant is an offshore company, a guarantee secured and

an undertaking given, and, in the case of an application by a foreign offshore company, an undertaking given, by the applicant in respect of its offshore banking business in the Federal Territory of Labuan, in such manner and form acceptable to LOFSA, which, inter alia, provides that:-

(i) the applicant shall comply with the financial obligations and

requirements imposed under OBA and shall meet the applicant’s liabilities in respect of its offshore banking business in, from and through the Federal Territory of Labuan;

(ii) where the applicant is an offshore company, none of its participants

who holds 10% or more of the applicant’s paid-up capital shall be changed without the prior written approval of LOFSA and, where the applicant is a foreign offshore company, that it shall promptly notify LOFSA of any change in its participants who hold 10% or more of its paid-up capital; and

(iii) every director or the chief executive officer of the applicant responsible

for the management of its offshore banking business in the Federal Territory of Labuan shall be a fit and proper person and the appointment of such director or chief executive officer shall only be made after consultation with LOFSA; and

(f) a statement on the names, addresses, qualifications, working experience and

proposed positions of all directors and officers who will be responsible for the management of the applicant’s offshore banking business in the Federal Territory of Labuan.31

7.3.3 An application for an offshore banking license or an offshore investment banking license

by a person on behalf of a company that is proposed to be incorporated under the OCA or a foreign company that seeks to be registered as a foreign offshore company under the OCA must comply substantially with the requirements set out in paragraphs (a) to (f) above.32

31 Sections 5(1) and (2), OBA. 32 Section 5(3), OBA.



7.3.4 LOFSA may, before an application is determined by the MOF, require the applicant to

provide such additional information or documents as LOFSA deems necessary to determine the suitability of the applicant for the license.33

License Fee

7.3.5 A licensed offshore bank shall pay such annual license fee of such amount or calculated

at such rate as may be set out in the regulations made by the MOF.34 The prescribed annual license fee is presently RM80,000, or its equivalent in foreign currency. Such fee is payable immediately upon a license being granted under OBA.35

8. Legal structure admitted/requested for each of the different licenses. (a) Different types of legal structures that may be used, i.e. corporations, limited liability

partnerships, branches, subsidiaries, etc.

8.1 BAFIA 8.1.1 To be eligible to hold a banking license, a merchant banking license or to be a bank and

finance company, an entity must be a public company, namely, a company incorporated under the Companies Act 1965 ("CA") and has the status of a public company.36 A public company need not be a listed company and may have a single shareholder.

8.1.2 Subject to the prior written consent of BNM, a licensed bank or licensed merchant bank

is permitted to establish branches (which form part of the same legal entity) within or outside Malaysia.37

8.2 IBA

8.2.1 To be eligible to hold an Islamic banking license, an entity must be a company incorporated under the CA.38 It need not be a public company.

8.2.2 Subject to the written consent of BNM, a licensed Islamic bank is permitted to establish

branches (which form part of the same legal entity) within or outside Malaysia.39

8.3 OBA

8.3.1 To be eligible to hold an offshore banking license or an offshore investment banking

license, an entity may be:- (a) an offshore company or a foreign offshore company incorporated or registered

under the OCA; or (b) a Malaysian bank, namely a licensed bank, as defined in BAFIA or a licensed

Islamic bank, as defined in IBA.40

33 Section 5(4), OBA. 34 Section 19, OBA. 35 Regulations 2 and 3, Offshore Banking (Annual Licence Fees) Regulations 1990 as amended by P.U.(A) 129/01. 36 Section 4(a), BAFIA 37 Section 30, BAFIA. 38 Section 3(1), IBA. 39 Section 7, IBA. 40 Section 4, OBA.



8.3.2 A licensed offshore bank is not permitted to carry on offshore banking business in or

from or through any place in Malaysia other than the Federal Territory of Labuan.41

8.3.3 A licensed offshore bank which is an offshore company:-

(a) is not permitted to open any office in Malaysia other than in the Federal

Territory of Labuan;42 and (b) is permitted to establish offices in the Federal Territory of Labuan or outside

Malaysia with the prior written consent of LOFSA.43

8.3.4 A licensed offshore bank which is a foreign offshore company is permitted to establish

offices other than its principal office in the Federal Territory of Labuan with the prior written consent of LOFSA.44

(b) Capital requirements and own fund rules. 8.4 BAFIA

Maintenance of Capital Funds

8.4.1 A licensed institution is required at all times to maintain such capital funds, unimpaired by losses, as specified by BNM.45

8.4.2 Presently the minimum capital funds are:-

(a) RM300 million, unimpaired by losses, where a licensed bank is more than 51%

owned by any foreign person; and (b) RM2 billion, unimpaired by losses, in the case of any other licensed bank or

licensed merchant bank, such capital may be either by itself or in aggregation with the capital funds of its related corporation that is a licensed bank, licensed merchant bank or licensed finance company.46

Maintenance of Reserve Funds

8.4.3 A licensed institution must maintain a reserve fund and transfer to such fund, out of its

net profits for each year (after provision for taxation), such amount specified in BAFIA before declaring any dividend.47

8.4.4 The reserved fund may, subject to approval of BNM, be applied in paying-up un-issued

shares to shareholders by way of fully-paid bonus shares but may not be used to pay dividend.48

Other Requirements

41 Section 14(1), OBA. 42 Section 14(2), OBA. 43 Section 14(3), OBA. 44 Section 14(4), OBA. 45 Section 37(1), BAFIA. 46 Banking and Financial Institutions (Minimum Amount of Capital Funds) Order 2001. 47 Sections 36(1) and 36(2), BAFIA. 48 Sections 36(3) and 36(4), BAFIA.



8.4.5 A licensed institution may be required to maintain a minimum amount of liquid assets and a minimum amount of assets in Malaysia as specified by BNM.49

8.5 IBA


8.5.1 A licensed Islamic bank may be required to maintain capital funds, unimpaired by losses, in such proportion to its assets within and/or outside Malaysia as BNM may by written notice prescribe.50

8.5.2 The prescribed minimum capital funds is RM10 million51 but this amount may be

modified by written notice by BNM.52

Maintenance of Reserve Funds

8.5.3 A licensed Islamic bank must maintain a reserve fund and transfer to such fund, out of its net profit for each year (after provision for zakat or taxation), such amount specified in IBA before declaring any dividend.53

Liquid Assets

8.5.4 A licensed Islamic bank may be required to hold a minimum amount of liquid assets as prescribed by BNM in a written notice to that bank.54

8.6 OBA


8.6.1 A licensed offshore bank must maintain at all times a capital fund, unimpaired by losses, of not less than RM10 million or its equivalent in any other currency.55

(c) Transfer of control and ownership regime. Is it regulated? 8.7 BAFIA

8.7.1 Section 45(1) imposes an obligation on a person to obtain the prior written approval of

the MOF before he enters into an agreement or arrangement to:- (a) acquire, together with any interests in shares already held (if any) by the

acquirer or by persons acting in concert with him, not less than 5% interest in the shares of a licensed institution; or

(b) dispose, together with the interests in shares previously disposed by him to any

single person or any persons acting in concert, to such single person or such persons acting in concert not less than 5% interest in the shares of a licensed institution.

49 Sections 38 and 39, BAFIA. 50 Section 14(1), IBA. 51 Notification under Section 5(2), IBA (P.U.(B) 469/83). 52 Section 14(2), IBA. 53 Section 15(1), IBA. 54 Section 16(1), IBA. 55 Section 11, OBA.



8.7.2 As a general rule, Section 46(1) permits an individual to hold a maximum of 10% and a person other than an individual to hold a maximum of 20% of interests in shares of a licensed institution.56 The MOF may exempt an individual or institution from the foregoing restrictions if he is satisfied that it would not be prejudicial to the promotion of a sound financial structure in Malaysia and contrary to the public interest to do so.57

8.7.3 An individual who holds 10% or more or a person (other than an individual) who holds

20% or more of interest in shares of a licensed institution is required to notify BNM in writing of any intention to dispose of any of his interest and to continue to notify BNM of further intention to dispose any of his interest so long as that individual or other person holds not less than 5% of interest in shares of the licensed institution.58

8.7.4 Section 49(1) prohibits any person from entering into an agreement or arrangement:-

(a) which results in a change in control of a licensed institution or its holding

company; (b) for the sale, disposal or transfer of the whole or any part of the business of a

licensed institution; (c) for the amalgamation or merger of a licensed institution with any other person;

or (d) for the reconstruction of a licensed institution; unless the proposed agreement or arrangement is in writing and all parties thereto have applied in writing to and obtained the approval of the MOF to such agreement or arrangement.

8.7.5 Sections 45(1) and 49(1) are strictly construed and preclude a person from commencing any negotiations until BNM's approval is obtained.

8.8 IBA

8.8.1 Whenever a change is about to occur in the control of a licensed Islamic bank, that bank

shall report the proposed change to BNM.59

8.8.2 A licensed Islamic bank is required to obtain the prior approval of the MOF of any

proposed:-

(a) arrangement or agreement – (i) for the sale or disposal of its shares or business; or (ii) affecting voting power, management or other matters;

which will result in a change in its control or management; and

(b) scheme –

56 Refer to Section 46(2) to 46(4) for the rules of aggregation that apply in determining the interests in shares of an individual and other person. 57 Section 46(1), BAFIA. 58 Section 46(5), BAFIA. 59 Section 21(1), IBA.



(i) for reconstruction of the licensed Islamic bank; (ii) for amalgamation, merger or otherwise between the licensed Islamic

bank and any other corporation; wherein the whole or any part of its undertaking or the property is to be transferred to another corporation.60

8.9 OBA

8.9.1 The OBA does not impose any obligation on a licensed offshore bank to obtain the

approval of the MOF or LOFSA for any change in its ownership, control or shareholding. However it is possible that:- (a) a licensed offshore bank which is an offshore company may have undertaken to

obtain the prior approval of LOFSA before permitting any of its participants who hold 10% or more of its paid up capital to change its shareholding; and

(b) a licensed offshore bank which is a foreign offshore company may have

undertaken to promptly notify LOFSA of any change in its participants who hold 10% or more of its paid up capital.61

(d) Personal requirements and restrictions that may apply in each case for officers, directors,

shareholders, etc. 8.10 BAFIA

Fit and proper person

8.10.1 Every person who is a controller62, director or manager of a licensed institution must be a

fit and proper person to hold the position which he holds.63

Appointment of Directors 8.10.2 The prior written consent of BNM is required before any person may accept an

appointment or election as a director of a licensed institution.64

Disqualification of Director or Officer 8.10.3 A person is automatically disqualified from being appointed or elected or from

continuing to hold office as a director, manager, secretary or other officer concerned in the management, of a licensed institution if:- (a) he is a bankrupt, has suspended payment or has compounded with his creditors;

(b) he is convicted of an offence relating to dishonesty, fraud or violence punishable

with imprisonment of one year or more in any court;

60 Section 22(1), IBA. 61 Section 5(2)(ee)(ii), OBA. 62 "controller" is defined in Section 2(1) of BAFIA as a person who (a) holds more than 50% of the issued shares of an institution, or (b) has the power to appoint a majority of the directors of an institution, or (c) has the power to make decisions in respect of the management or administration of an institution and to give effect to such decisions. 63 Paragraph 1(1), Second Schedule, BAFIA. 64 Section 55(1), BAFIA.



(c) he is convicted of any offence under BAFIA;

(d) any detention, supervision, restricted residence, banishment or deportation order has been made against him or any restriction or supervision has been imposed on him under any laws relating to prevention of crime, drug trafficking or immigration; or

(e) unless otherwise permitted by the MOF, he has been a director of, or directly

concerned in the management of, any corporation which is wound up by a court or other competent authority, or of any licensed institution whose license has been revoked under BAFIA.65

Appointment of Chief Executive 8.10.4 A licensed institution shall obtain the prior written approval of BNM before appointing a

chief executive.66 The appointee must be an individual and be resident in Malaysia during the tenure of his appointment.67

Credit Facilities 8.10.5 Unless exempted in writing by BNM, a licensed institution is prohibited from granting

any credit facilities to:-

(a) any director or officer; (b) any body corporate, un-incorporate, or a sole proprietorship, in which any of its

directors or officers is a director or manager or for which any of its directors or officers is a guarantor or an agent;

(c) any corporation in which any of its directors or officers has an interest in shares

thereof; (d) any person for whom any of its directors or officers has given any guarantee or

other undertaking that involves financial liability.68

8.10.6 Exceptions to the above prohibitions are:-

(a) a credit facility to an officer (including an executive director) under his scheme

of service, or if no such scheme exists, a loan given on compassionate or special grounds for an amount not exceeding 6 months salary (or such greater amount approved by BNM);69

(b) a housing loan to the spouse, child or parent of an officer (including an

executive director);70 and (c) a credit facility to a corporation in which none of its directors and officers has

any material interest in the shares of that corporation.71

65 Section 56(1), BAFIA. 66 Section 57(2), BAFIA. 67 Section 57(1), BAFIA. 68 Section 62(1), BAFIA. 69 Section 62(2), BAFIA. 70 Section 62(3)(a), BAFIA. 71 Section 62(3)(b), BAFIA.



8.10.7 For the purpose of the above provisions, a director or officer is defined to include the spouse, child or parent of a director or officer.72

Disclosure of Director’s Interest

8.10.8 Every director who has any interest in a proposed credit facility, directly or indirectly and

in any manner, to be given to any person by the licensed institution must declare his interest in writing in accordance with the requirements of BAFIA.73

8.10.9 In addition, every director who holds any office, or possesses any property, whereby,

directly or indirectly, duties or interests might be created in conflict with his duties or interests as a director of a licensed institution, shall declare at a meeting of the directors of such licensed institution the fact of his holding such office or possessing such property and the nature, character and extent of the conflict.74

8.11 IBA

Disqualification of Director or Officer

8.11.1 Any person who is a director, manager, secretary or other officer concerned in the management of a licensed Islamic bank shall cease to hold office if he becomes a bankrupt, suspends payment or compounds with his creditors or is convicted of an offence involving dishonesty or fraud.75

8.11.2 A person who has been a director of, or directly concerned in the management of, a

licensed Islamic bank or a licensed bank which has been wound up by a court shall, without the express consent of the MOF, act or continue to act as a director of, or be directly concerned in the management of an Islamic bank.76

Credit Facilities 8.11.3 Unless exempted by BNM, a licensed Islamic bank is prohibited from granting any

advances, loans or credit facilities to:-

(a) any director, officer or employee; (b) any firm in which any of its directors, officers or employees is interested as a

partner, manager, agent or guarantor; (c) any corporation in which any of its officers (including executive directors) or

employees is a director, manager, agent or guarantor or any corporation in which any of its officers (including executive directors) or employees has any material interest as determined by BNM;

(d) any corporation in which any of its directors (not being an executive director) is

a member, director, manager, agent or guarantor or any corporation in which such director of the bank has any interest, directly or indirectly;

72 Section 62(4), BAFIA. 73 Sections 64(1) to (3), BAFIA. 74 Sections 64(4) and (5), BAFIA. 75 Section 23(1), IBA. 76 Section 23(2), IBA.



(e) any individual for whom any of its directors, officers or employees is a guarantor.77

8.11.4 Exceptions to the above prohibitions are:-

(a) loans to officers (including executive directors) or employees under its

appropriate scheme of service and where the bank is satisfied that special or compassionate grounds exist, a loan not exceeding 6 months remuneration of that officer or employee;78

(b) advances, loans or credit facilities to:-

(i) a corporation which is listed on a recognized stock exchange and in the

shares of which no director of the Islamic bank has, directly or indirectly, any material interest as determined by BNM; or

(ii) a public company in which a director has no interest in his personal

capacity, as determined by BNM; Provided that the director concerned must not be an executive director.79

8.11.5 For the purpose of the above provisions, a director, officer or employee is defined to

include the spouse, child or parent of a director, officer or employee.80

Disclosure of Director’s Interest

8.11.6 Every director who has any interest, directly or indirectly and in any manner, in an advance, loan or credit facility or a proposed advance, from that Islamic bank must declare his interest in writing in accordance with the requirements of IBA.81

8.11.7 In addition, every director who holds any office or possesses any property whereby, directly or indirectly, duties or interests might be created in conflict with his duties or interests as a director of the Islamic bank, shall declare at a meeting of the directors of such bank the fact and the nature, character and extent of the conflict.82

8.12 OBA

8.12.1 The OBA has no statutory prohibitions or restrictions on shareholders, directors or officers of licensed offshore banks. However, it is possible that an offshore company or a foreign offshore company which is a licensed offshore bank may have undertaken to ensure that every director or the chief executive officer responsible for the management of its offshore banking business in the Federal Territory of Labuan shall be a fit and proper person and the appointment of such director or chief executive officer may only be made after consultation with LOFSA.83

77 Section 25(1), IBA. 78 Section 25(2), IBA. 79 Section 25(4), IBA. 80 Section 25(5), IBA. 81 Sections 28(1) and (3), IBA. 82 Sections 28(4) and (5), IBA. 83 Section 5(2)(ee)(iii), OBA.



e. Special requirements/restrictions for foreigners either individuals or legal entities (including short description of WTO/GATS commitments and exemptions).

General Agreement on Trade in Services ("GATS") 8.13 The special requirements/restrictions on foreign participation in the banking industry can be

elicited from Malaysia's commitments under GATS.84 They include the following:-

Off-shore Banking

8.13.1 Foreign banks are permitted to establish commercial presence in the Labuan International Offshore Financial Centre through a registered branch office or a Malaysian incorporated subsidiary.

On-Shore Banking

8.13.2 A commitment that 13 existing wholly-foreign owned commercial banks be permitted to remain wholly-owned by their existing shareholders.

8.13.3 No commitment for the issue of any new banking licenses. 8.13.4 Foreign participation in the banking sector is allowed through equity participation in

existing Malaysian-owned or controlled commercial banks and merchant banks, subject to the following limitations:-

(a) The maximum foreign ownership is limited to 30%; (b) Shareholding by a single person individually or jointly with related persons is

limited to 20%; (c) A foreign bank is allowed to acquire 5% or more of the shareholding in a

Malaysian-owned or controlled commercial bank or merchant bank only if the following criteria are fulfilled:-

(i) the foreign bank has the ability to contribute to the financial and

economic development of Malaysia; (ii) the country of origin of the foreign bank must have significant trade

and investment interest in Malaysia; and (iii) the country of origin of the foreign bank should not have significant

direct representation in the Malaysian banking industry; (d) A commercial bank is not allowed to acquire any share in another commercial

bank, but may do so in a merchant bank and vice versa; (e) Other persons are not allowed to acquire 5% or more of the shareholding in a

commercial bank or merchant bank if they already hold 5% or more of the shareholding in another licensed financial institution.

8.13.5 Foreign institutions are permitted to establish representative offices, but such offices may

only undertake research, exchange of information and liaison services.

84 Schedule of Specific Commitments for Malaysia, Supplement 3 (Ref : GATS/SC/52/Suppl.3).



8.13.6 A commitment to allow employment of two senior managers for each commercial bank or merchant bank which has an aggregate foreign shareholding in excess of 50%.

8.13.7 A commitment to allow commercial banks and merchant banks to employ up to 5 foreign

experts in the areas of trade financing, corporate finance, treasury management and information technology.

Financial Sector Masterplan ("FSMP")

8.14 The FSMP is a blue-print prepared by BNM for the financial system for a 10-year period from 2001 to 2010. The recommendations under the FSMP include the following:-

8.14.1 To encourage greater participation by institutional investors in the financial sector,

Section 46 of BAFIA which imposes a 20% shareholding limit by a corporation and a 10% shareholding limit by an individual in a banking institution be strictly enforced and that a divestment of shares over a reasonable period of time is to be introduced to meet this objective;85

8.14.2 To uplift restrictions on employment of experts with expertise in specific areas of

banking;86

8.14.3 The establishment of investment banks through mergers between merchant banks and

stock broking houses or discount houses;87

8.14.4 To encourage rationalization of branch networks and to extend banking facilities to rural

areas which are under-served.88 As part of this initiative, foreign-owned banks operating in Malaysia are allowed to establish up to four (4) additional branches within a period of one (1) year with effect from 1 January 2006 based on a pre-determined ratio of 1 (market centre) : 2 (semi-urban) : 1 (non urban); and

8.14.5 To increase the number of Islamic banks to stimulate competition.89 In furtherance of this

objective, IBA was amended in 2003 to remove the restrictions on foreign ownership or control of Islamic banks and thereafter, Islamic banking licenses were issued to 3 wholly foreign-owned Islamic banks.

9. Is there a Deposit Insurance? Is it mandatory or based on self-regulation? Provide a brief explanation of how it operates.

9.1 In 2005 the Malaysian Government introduced a mandatory deposit insurance scheme for bank

deposits under the Malaysian Deposit Insurance Corporation Act 2005 ("MDICA "). The scheme is administered by the Malaysia Deposit Insurance Corporation ("MDIC"), a statutory corporation established under the MDICA.90

9.2 The scheme protects all deposits (other than foreign currency deposits, deposits not payable in Malaysia, negotiable instruments of deposits, and other bearer deposits, repurchase agreements and money-market deposits)91 with commercial and Islamic banking institutions up to a maximum

85 Recommendation 3.11, FSMP. 86 Recommendation 3.5, FSMP. 87 Recommendation 3.10, FSMP. 88 Recommendation 3.33, FSMP. 89 Recommendation 5.5, FSMP. 90 Section 4(1)(a), MDICA. 91 Refer to Section 36, MDICA for deposits that are excluded from the scheme.



sum of RM60,000, per depositor per member institution, namely licensed banks and finance companies under BAFIA and Islamic banks under IBA.92

9.3 The premiums are borne by the member institutions. The premium is presently based on a flat-rate system but it has been announced that a differential-premium system may be implemented in future.

9.4 A mandatory obligation to make payment to a depositor arises under Section 55 of the MDICA

upon the winding-up of a member institution (or a transferee thereof). 9.5 MDIC is vested with powers to make discretionary payment under Section 56 of the MDICA

when all of the following conditions are fulfilled:- (a) a member institution (or its transferee) is unable to make any payment in respect of a

deposit by reason of an order of court or any action taken by a regulatory body or any action taken by a receiver and/or manager;

(b) a winding-up petition has been presented against that member institution (or a transferee

thereof); and (c) the membership of the member institution is terminated.

9.6 MDIC is conferred a discretion to make an advance payment to the depositor under Sections 55 and 56.93

10. Interest Rate. Is it regulated? Should the answer be affirmative, explain briefly its

regulatory framework. 10.1 On 26 April 2004, BNM introduced a new interest rate framework. Amongst the measures

implemented was the replacement of the 3-month Intervention Rate with an Overnight Policy Rate ("OPR") which serves as the primary reference rate in determining other market rates.94 The OPR is determined by BNM from time to time.

10.2 Under this new framework, each banking institution is free to determine its own Base Lending

Rate ("BLR") based on its cost and business strategies. 10.3 Lending rates in certain sectors remain subject to prescription by BNM. These include lending

rates for loans granted from the Special Fund established for Small and Medium Enterprises (which is fixed between 3.75% and 5%), housing loans to borrowers in the lower income group (which is capped at the lower of BLR+1.75% or 9%) and interest rate for credit cards (which is capped at 18%).

10.4 Minimum rates have been prescribed for fixed deposits with tenures between 1 and 12 months for

balances of RM1 million and below. These range from 3% for 1-month deposit to 3.7% for 12-month deposit.

11. Sanctions (civil, administrative, or criminal) for violations of the legal and regulatory dispositions.

92 Sections 49(1) and (2), MDICA. 93 Section 57, MDICA. 94 Chapter 2, Bank Negara Malaysia Annual Report 2004.



11.1 BAFIARevocation of License

11.1.1 If the MOF is satisfied that a licensed institution failed to comply with any obligation

imposed on it under BAFIA or has contravened any condition imposed on it under its license, he may, on the recommendation of BNM, revoke the license pursuant to Section 7.95

Imposition of Conditions in lieu of Revocation 11.1.2 If the MOF is satisfied, on the recommendation of BNM, that there are grounds to revoke

a license but circumstances are not such as to justify revocation, the MOF may, on the recommendation of BNM, impose restrictions or conditions on the license.96

11.1.3 The restrictions and conditions may include:-

(a) requiring the licensed institution to take such steps as specified by the MOF; (b) restricting the scope of the licensed institution's business; (c) requiring the removal of any director, controller or manager.97

Regulatory powers in particular circumstances 11.1.4 If BNM is satisfied that a licensed institution has contravened any provision of BAFIA or

any condition of its license or any provision of any written law, BNM may by order in writing exercise any one or more of the following powers under Section 7398:- (a) require the licensed institution to take or refrain from taking any action; (b) prohibit the licensed institution from extending further credit facility; (c) remove any officer of the licensed institution; (d) appoint any person or persons as a director or directors of the licensed

institution; (e) appoint any person as advisor of the licensed institution.99

11.1.5 The actions to be taken by the licensed institution are set out in the order and may be

subject to restrictions and conditions set out therein. The powers set out in paragraphs (b) to (d) above may be exercised only with the prior concurrence of the MOF.

Assumption of Control, Judicial Management and Winding Up

11.1.6 Where the circumstances set out in Section 73 exist, the MOF may on recommendation of BNM, issue an order that authorizes BNM to:-

95 Section 7(1)(b) and (c), BAFIA. It should be noted that the powers under Section 7 are also exercisable in the other circumstances set out in that provision. 96 Section 8(1), BAFIA. 97 Refer to Section 8(3), BAFIA for complete list of restrictions and conditions that may be imposed. 98 The powers in Section 73 are also exercisable in the other circumstances set out in that provision. 99 Section 73(1)(A) to (E), BAFIA.



(a) assume control of the whole of the business and affairs of a licensed institution or to authorize any person to do so on behalf of BNM;

(b) authorize BNM to apply to Court for appointment of a receiver or manager to

manage the whole or part of the business and affairs of a licensed institution; or (c) present a petition to Court to wind-up the licensed institution.100

Extension of Powers 11.1.7 The powers set out in Section 73 (and ancillary provisions in Sections 69 to 81) are

exercisable in relation to a related corporation of the licensed institution concerned and to a person controlled by a director or directors of the licensed institution or by persons acting in concert with such director or directors.101

Other Offences and Penalties 11.1.8 Any person found guilty of an offence under BAFIA shall on conviction be liable to fines

or imprisonment or both as prescribed under BAFIA.102 The maximum imprisonment term ranges from 1 year to 10 years and the maximum fines from RM5,000 to RM10 million. In addition, continuing offences are liable to a maximum daily fine ranging from RM500 to RM100,000 for each day that the offence continues.

11.1.9 The offences are compoundable by the Governor of BNM with the concurrence of the

MOF.103

11.2 IBA

Revocation of License 11.2.1 If an Islamic bank is contravening any provision of IBA, the MOF may, on the

recommendation of BNM, revoke the license issued to that bank after giving the bank concerned not less than 21 days to submit reasons why its license should not be revoked.104

Regulatory powers in particular circumstances 11.2.2 If BNM is of the opinion, after due investigation, that an Islamic bank has contravened or

failed to comply with any provision of IBA or any condition of its license, BNM may, with the concurrence of the MOF, exercise any one or more of the following powers:-

(a) order the Islamic bank to take or refrain from taking any action; (b) prohibit the Islamic bank from extending further advance, loan or credit facility; (c) remove from office any of its directors or appoint any person as its director; (d) appoint any person to advise the Islamic bank on the proper conduct of its

business; 100 Section 73(2), BAFIA. 101 Section 79, BAFIA. 102 Section 103 read with the Fourth Schedule and Section 104, BAFIA. 103 Section 108(1), BAFIA. 104 Sections 11(1) and (2), IBA. It should be noted that the powers under Section 11 are also exercisable in the other circumstances set out in that provision.



(e) assume control of the business of the Islamic bank or appoint some other person

to do so; (f) petition to the Court to wind up the Islamic bank.105

Extension of Powers 11.2.3 The powers set out in Section 37 (and ancillary provisions in Sections 31 to 43) are

exercisable in relation to a subsidiary of an Islamic bank.106

Other Offences and Penalties 11.2.4 Any person found guilty of an offence under IBA shall on conviction be liable to fines or

imprisonment or both as prescribed under IBA. In addition, continuing offences are liable to a daily fine for each day that the offence continues.


MOF.107

11.3 OBA

Revocation of License 11.3.1 The MOF may, on the recommendation of LOFSA, revoke the license of any offshore

bank if the bank has contravened any provision of its license or its constituent documents or any provision of OBA or any written law.108

Other Offences and Penalties 11.3.2 Any person found guilty of an offence under OBA shall on conviction be liable to the

sanctions prescribed in Sections 24(2) and (3) of OBA. In addition, continuing offences are liable to a daily fine for each day that the offence continues.

11.3.3 The sanctions for offences prescribed in Section 24(2) is a term of imprisonment not

exceeding 5 years or a fine not exceeding RM10 million or to both. The maximum daily fine is RM10,000.

11.3.4 In the case of offences prescribed in Section 24(3), the sanction is a term of imprisonment

not exceeding 3 years or a fine not exceeding RM5 million or to both. The maximum daily fine is RM5,000.


MOF.109

105 Sections 37(1) and (2), IBA. It should be noted that the powers under Section 37 are also exercisable in the other circumstances set out in that provision. 106 Section 41, IBA. 107 Section 51(1), IBA. 108 Section 8(1), OBA. 109 Section 25(1), OBA.



III. BANK SECRECY LAWS 12. Is clients’ information protected? Are there any restrictions for its use? 12.1 BAFIA

12.1.1 Section 97(1) prohibits a director or officer of any licensed institution, whether during his tenure of office or employment or thereafter, from disclosing to any person any information or document whatsoever relating to the affairs or account of any customer.

12.1.2 Section 96 precludes BNM from making any inquiry into the affairs of any individual

customer of any licensed institution. However, such prohibition does not prejudice BNM or any investigating officer from exercising their powers of inspection, examination, investigation and inquiry under BAFIA.

12.2 IBA

12.2.1 Section 34(3) prohibits an officer of any Islamic bank and any other person having access to the records of such bank from disclosing any information regarding the moneys or other relevant particulars of the customer's account except with and to the extent specified in the written consent of BNM.

12.2.2 Section 34(1) precludes BNM from inquiring specifically into the affairs of any

individual customer of any Islamic bank. 12.3 OBA

12.3.1 Section 22(1) prohibits a director or officer of any licensed offshore bank, whether during his tenure of office or employment or thereafter, from disclosing to any person any information or document whatsoever relating to the affairs or account of any customer.

12.3.2 Section 21 precludes LOFSA from inquiring specifically into the identity, accounts or

affairs of any particular customer of any licensed offshore bank. 13. Should answer to number (12) be affirmative, please describe the legal framework, i.e. scope,

limitation, exceptions. 13.1 BAFIA

13.1.1 Section 43(2) is a specific exception to Section 96 which empowers BNM to require licensed banks, merchant banks and finance companies to submit credit information relating to their customers to a credit bureau established pursuant to the CBA. BNM is authorized under the CBA to disclose, in such manner and to such extent as it deems fit, the credit information collected by the credit bureau to other banking or financial institutions to assist the latter to assess the creditworthiness of their existing or potential customers and eligibility of a customer to maintain or open a current account with a bank. The information disclosed to an institution shall be secret.110

13.1.2 Section 97(1) of BAFIA does not apply to information which at the time of disclosure is already lawfully available to the public from any source other than the licensed institution, or to any information supplied in a summary form which does not relate to any particular customer.111

110 Section 30(1)(mmm), CBA. 111 Section 97(2), BAFIA.



13.1.3 The obligation of secrecy is, however, not absolute and the following exceptions are

permitted:-

(a) disclosure to BNM or its director, officer or employee or any person authorized by BNM to enable the latter to discharge their functions and duties;

(b) where the customer or his personal representative has given permission in

writing to disclose; (c) where the customer has been declared bankrupt or wound up; (d) where the information is required to enable a party to assess the creditworthiness

of the customer in relation to a transaction or prospective transaction to which the customer is a party, provided that the information required is of a general nature and does not enable the details of the customer's account or affairs to be ascertained;

(e) in criminal proceedings or in civil proceedings between the licensed institution

and its customer or his guarantor, or in inter-pleader proceedings involving the licensed institution in relation to money in the customer's account;

(f) where the licensed institution has been served a garnishee order attaching

monies in the account of the customer; (g) disclosure to a credit bureau established, or to an agent appointed, by a licensed

institution with the prior written consent of BNM; (h) where disclosure is required under any other provision of BAFIA or is

authorized in writing by BNM; (i) where disclosure is authorized under any Federal Law to be made to a police

officer investigating an offence specified in such law (and is limited to the account and affairs of the person suspected of the offence); and

(j) information required to be furnished pursuant to an order issued under the

Banker's Books (Evidence) Act, 1949.112 13.2 IBA

13.2.1 Exceptions to the obligation of secrecy are as follows:- (a) disclosure to BNM pursuant to the exercise of its powers of investigation under

IBA; (b) where the customer or his personal representative, has given permission in

writing to disclose; (c) where the customer has been declared bankrupt; (d) where the information is required to assess the creditworthiness of the customer

in relation to a commercial transaction or prospective commercial transaction; and

112 Sections 98 to 100, BAFIA.



(e) information to be furnished pursuant to an order issued under the Banker's

Books (Evidence) Act, 1949.113 13.3 OBA

13.3.1 Exceptions to the obligation of secrecy are as follows:- (a) disclosure authorized in writing by the customer or his personal representative; (b) disclosure required by an order of the High Court made upon the application of:-

(i) an interested party, where the customer is deceased or declared bankrupt or wound up;

(ii) any public officer investigating an offence; (iii) LOFSA where disclosure is certified by the MOF as being in the

interest of the financial well being of Malaysia or by the Minister of Internal Security as being in the interest of the internal security of Malaysia; and

(c) information required to be furnished pursuant to an order issued under the

Banker's Books (Evidence) Act, 1949.114 14. Sanction (civil, administrative, or criminal) for violations.

Criminal Sanction 14.1 BAFIA

A breach of the secrecy obligations under Sections 97 and 99 is a criminal offence punishable with a fine of not exceeding RM3 million or a term of imprisonment not exceeding 3 years or both.115

14.2 IBA

A breach of the secrecy obligations under Section 34 is a criminal offence punishable with a fine of not exceeding RM40,000 or a term of imprisonment not exceeding 3 years or both.116

14.3 OBA

A breach of the secrecy obligations under Section 22 is a criminal offence punishable with a fine of not exceeding RM10 million or a term of imprisonment not exceeding 5 years or both. If the offence is a continuing one, it is further punishable with a daily fine not exceeding RM10,000 per day for each day the offence continues.117

113 Sections 31 to 34, IBA. 114 Sections 22(3) to (5), OBA. 115 Serial Nos.126 to 129, Fourth Schedule, BAFIA. 116 Section 34(5), IBA. 117 Section 24(2), OBA.



Civil Sanction 14.4 BAFIA, IBA and OBA A party who is aggrieved by a breach of the secrecy obligations may also attempt to seek damages in civil proceedings and to obtain an injunction against further disclosure of the information.

Documents

Bank Finance and Regulation Survey - Lex Mundi