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Bank Negara Malaysia Annual Report 2003 
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Statutory Requirements
In accordance with section 48 of the Central Bank of Malaysia Act 1958, Bank Negara Malaysia
hereby publishes and has transmitted to the Minister of Finance a copy of this Annual Report
together with a copy of its Annual Accounts for the year ended 31 December 2003, which have
been examined and certified by the Auditor-General. The Annual Accounts will also be published
in the Gazette.
26 March 2004
Zeti Akhtar Aziz
Chairman
Board of Directors


Board of Directors
Dr. Zeti Akhtar Aziz
D.K. (Johor), P
.S.M., S.S.A.P
., D.P
.M.J.
Governor and Chairman
Dato’ Mohd Salleh bin Hj. Harun
D.S.D.K.
Deputy Governor
Dato’ Ooi Sang Kuang
D.M.P.N.
Deputy Governor
Tan Sri Dato’ Seri Dr. Samsudin bin Hitam
P
.S.M., P.N.B.S., D.C.S.M., S.S.A.P
., S.M.J., D.P
.M.T., D.P
.M.P., J.S.M., K.M.N., A.M.N.
Secretary General to the Treasury
Datuk Oh Siew Nam
P
.J.N.
Tan Sri Datuk Amar Haji Bujang bin Mohd. Nor
P
.S.M., D.A., P
.N.B.S., J.S.M., J.B.S., A.M.N., P
.B.J. P
.P
.D.(Emas)
Tan Sri Dato’ Seri Dr. Mohd. Noordin bin Md. Sopiee
P
.S.M., D.I.M.P., D.M.S.M., D.G.P
.N.
Dato’ N. Sadasivan
D.P
.M.P., J.S.M., K.M.N.


Governor
Dr. Zeti Akhtar Aziz
Deputy Governor
Dato’ Mohd Salleh bin Hj. Harun
Deputy Governor
Dato’ Ooi Sang Kuang
Assistant Governor
Datuk Zamani bin Abdul Ghani
Assistant Governor
Dato’ Mohamad Daud bin Hj. Dol Moin
Assistant Governor
Datuk Latifah Merican Cheong
Assistant Governor
Dato’ Mohd Razif bin Abd. Kadir
Secretary to the Board
Mohd Nor bin Mashor
Directors/Heads of Department
Governor’s Office
Ng Chow Soon
Internal Audit
Yahaya bin Haji Besah
Legal
Gopala Krishnan Sundaram
Economics
Monetary Assessment and Strategy
V. Vijayaledchumy
Economics
Dr. Phang Hooi Eng
International
Wan Hanisah binti Wan Ibrahim
Foreign Exchange Administration
Mahdi bin Mohd. Ariffin
Statistical Services
Chan Yan Kit
Regulation
Bank Regulation
Nor Shamsiah binti Mohd Yunus
Insurance Regulation
Donald Joshua Jaganathan
Islamic Banking and Takaful
Bakarudin bin Ishak
DFI Regulation
Che Zakiah binti Che Din
Risk Management
Teo Kee Tian
Supervision
Bank Supervision I
Azizan bin Haji Abd Rahman
Bank Supervision II
Chung Chee Leong
Insurance Supervision
Sani bin Ab. Hamid
Payment Systems
Ahmad Hizzad bin Baharuddin
Information Systems Supervision
Ramli bin Saad
Special Investigation
Kamari Zaman bin Juhari
Financial Intelligence
Koid Swee Lian
Investment and Operations
Investment Operations and Financial Market
Muhammad bin Ibrahim
Finance
Abdul Aziz bin Abdul Manaf
Organisational Development
IT Services
Hong Yang Sing
Human Resource Management
Mainor bin Awang
Human Resource Development Centre
Lim Lai Hong
Corporate Services
Mohd Nor bin Mashor
Corporate Communication
Abu Hassan Alshari bin Yahaya
Strategic Planning
Mior Mohd Zain bin Mior Mohd Tahir
Currency Management and Operation
Hor Weng Keng
Security
Ahmad bin Mansur
Property and Services
Zulkifli bin Abd Rahman
Chief Representative
London Representative Office
Lillian Leong Bee Lian
New York Representative Office
Shamsuddin bin Mohd Mahayiddin
Branch Manager
Pulau Pinang
Ong Boon Teck
Johor Bahru
Ishak bin Musa
Kota Kinabalu
Yusoff bin Yahaya
Kuching
Nallathamby s/o Nalliah
Kuala Terengganu
Mokhtar bin Mohd Noh
Shah Alam
Hamzah bin Abu Bakar


Contents
Governor’s Statement
The Malaysian Economy in 2003
Overview ................................................................................................................. 02
White Box: Potential Output of the Malaysian Economy ....................................... 07
Sectoral Review ....................................................................................................... 12
Domestic Demand Conditions .................................................................................. 27
Prices and Employment ............................................................................................ 32
External Sector......................................................................................................... 37
White Box: Recent Trends in Foreign Direct
Investment in Malaysia ....................................................................... 47
Flow of Funds .......................................................................................................... 56
Monetary and Fiscal Developments
Monetary Policy in 2003 .......................................................................................... 60
White Box: Monetary Policy Statement ................................................................. 61
Monetary Developments .......................................................................................... 62
Exchange Rate Developments .................................................................................. 68
Fiscal Policy and Operations ..................................................................................... 69
Outlook and Policy
The International Economic Environment ................................................................. 80
Malaysian Economy in 2004 .................................................................................... 85
White Box: Liberalisation and Simplification of Foreign
Exchange Administration Rules ........................................................... 89
Monetary Policy in 2004 .......................................................................................... 96
Fiscal Policy in 2004 ................................................................................................. 98
Financial Sector Policy in 2004 ................................................................................. 99
White Box: Report on SME Development Framework ......................................... 101
The Financial Sector
Sources and Uses of Funds of the Financial System................................................. 104
Management of the Banking System...................................................................... 107
White Box: The International Center for Leadership in Finance............................ 110
Supervisory Activities.............................................................................................. 119
White Box: Banking Measures Introduced in 2003.............................................. 122
Performance of the Banking System ....................................................................... 128
White Box: Financial Sector Masterplan .............................................................. 141
White Box: The Proposed Deposit Insurance System in Malaysia ......................... 150
Other Financial Institutions ..................................................................................... 152
Financial Markets ................................................................................................... 157
White Box: Key Capital Market Measures in 2003 .............................................. 164
Developments in Payment and Settlement Systems ................................................ 172
White Box: Payment Systems Act 2003 .............................................................. 173
Malaysia’s Anti-Money Laundering and Counter Financing
of Terrorism (AML/CFT) Programme........................................................................ 178


The Islamic Financial System
Growing Significance of the Islamic Financial System.............................................. 182
Policy Thrusts in 2003 ............................................................................................ 186
White Box: Introduction of Islamic Variable Rate Mechanism .............................. 187
White Box: The Framework of the Rate of Return ............................................... 190
White Box: Guidelines on the Specimen Reports and Financial
Statements for Licensed Islamic Banks (GP8-i) ................................... 193
Performance of the Islamic Banking System............................................................ 196
Development Financial Institutions
Introduction ........................................................................................................... 204
Policies and Measures ............................................................................................ 204
Performance of Development Financial Institutions................................................. 208
External Relations
Economic Surveillance ............................................................................................ 222
International Financial Architecture ........................................................................ 222
External Relations with the IMF .............................................................................. 223
Islamic Banking ...................................................................................................... 223
Combating Money Laundering and Terrorist Financing ........................................... 224
Financial Sector Liberalisation ................................................................................. 224
Regional Co-operation ........................................................................................... 229
White Box: Asian Bond Market Initiative ............................................................. 231
Bilateral Co-operation ............................................................................................ 232
Technical Assistance and Information Exchange...................................................... 232
Organisation and Human Resource
Organisation Development – Overview................................................................... 234
Risk Management in Bank Negara Malaysia ........................................................... 238
Organisation Structure ........................................................................................... 241
Annual Accounts
Balance Sheet as at 31 December 2003 ................................................................. 245
Annex .................................................................................................................. 253


The more optimistic global environment and stronger domestic economic conditions have
enhanced Malaysia’s prospects as we advance into 2004.  The renewed strength of the recovery
of the world economy is now supported by a more synchronised expansion of the major
industrial economies and the strong growth in the Asian region.  While economic and financial
policies have been important in providing the stimulus to the improved overall growth
performance, the increasing significance of the private sector in driving this growth has
increased the prospects for the sustainability of these positive trends.
Strong domestic demand has been particularly evident in the Asian region, reflecting the
increased role of the private sector in driving the growth.  This strong growth in regional
demand has provided a rapidly expanding market for Asian goods and services.  The increased
regional integration is, however, not only occurring as a result of the growth in intra-regional
trade, but also in the form of financial flows, with intra-Asian investments gaining greater
significance, resulting in a growing amount of the savings in Asia being reinvested in the region.
As these trends become more pronounced, they would not only contribute towards greater
regional integration but would also reinforce further the regional growth momentum. In
addition, the growing demand from the Asian economies has also been increasingly supportive
of the global recovery.  Indeed, this trend would contribute towards reducing the external
imbalances existing in the global economy and increase the prospects for a more balanced
global growth.
The Malaysian economy in 2003 benefited from the more robust external demand and increased
private sector activity in the domestic economy.  A better-than-expected economic performance
of 5.2% was recorded during the year.  The growth momentum is projected to strengthen
further in the region of 6 – 6.5% in 2004, with the private sector assuming the lead role as the
engine of growth.  Private consumption and investment activity are projected to be stronger,
underpinned by improved economic and employment conditions and stronger balance sheets in
both the corporate and financial sectors.  Growth is expected to be stronger across almost all
sectors of the economy, with the services and manufacturing sectors being the main drivers of
growth.  While the role of the Government in the economy remains important, the focus of
policy has now shifted to providing an enabling environment, including enhancing the
Government delivery system to reduce the cost of doing business, and to providing a stable and
sound macroeconomic environment.
The underlying economic and financial fundamentals have continued to strengthen in the
early part of 2004, according monetary policy the flexibility to remain supportive of private
sector activity.  This is reflected in the near absence of inflationary pressures in both the
consumer and asset markets and excess capacity in the system, evident in the gap between
actual and potential output.  Price stability has also been reinforced by productivity
improvements and further capacity expansion.  In addition, as the globalisation process
intensifies, there is increased access to goods and services at lower costs.  Moreover, as the
corporate sector performance improves, higher costs will not always translate into higher
prices in this more competitive environment.  The Government’s fiscal prudence has also been
a factor in reinforcing price stability.  Against this environment, low interest rates can remain
for some time to come.
Governor’s Statement


In this stable environment, and with the much strengthened banking system and progress
achieved in the development of the financial infrastructure, it is timely to transition to the new
interest rate framework.  The aim is to achieve greater efficiency in the operations of the
financial markets and thus facilitate more effective pricing in the financial system as well as
enhance the effectiveness of the monetary transmission mechanism.  The window of
opportunity will therefore be taken during this period when the current interest rate policy will
remain unchanged.  This will provide the market with the opportunity to adjust to the new
monetary operating procedures to achieve the desired outcome of more efficient functioning
financial markets and increased effectiveness of monetary policy.
Liquidity has remained ample in an environment of a strong external balance, a steady inflow of
foreign direct investment and increased portfolio inflows.  Sterilisation operations, however, have
been conducted, taking into consideration the need to ensure adequate liquidity to support
financing of the private sector-led growth, while at the same time, ensuring that this does not
result in any risks to the financial system and to the economy.  Important to this process is that
the Central Bank has the instruments and the capacity to absorb this liquidity.  The costs
involved in these operations are essentially covered by the returns on the investment of the
increased inflows.  The Central Bank will absorb such immediate-term costs of monetary policy
to ensure the stability and sustainability of our medium and long-term prospects.  In the current
environment, the net position has continued to remain positive.  In managing the reserves, a
well-diversified reserves portfolio is maintained. Major considerations taken into account are
capital preservation and liquidity, while optimising returns.  This has ensured a sound financial
position for the Central Bank.
On the exchange rate, the objective of our policy remains unchanged, that is, to achieve
exchange rate stability, in particular, with our trading partners.  As our trade with the region
becomes increasingly significant, exchange rate stability in the region becomes increasingly
important. At the very outset, when the pegged exchange rate arrangement was introduced
almost six years ago, we have stated that we want an effective exchange rate mechanism that
will efficiently facilitate international trade and investment. While there may be trade-offs, the
benefits of the present system have far outweighed any costs.  Consideration for an alternative
system should only be made in the event of anticipated fundamental misalignment or structural
change or if new regional arrangements can be evolved.
Extreme movements and high volatility in exchange rates have always been a concern, even to
the major economies.  For emerging market economies, the ramifications of such movements
are even more pronounced and far-reaching.  Recent pronouncements and pressures on Asian
economies to adopt more flexible exchange rate regimes have been based on the view that
adjustments in the exchange rate would correct structural imbalances in the global economy.  It
needs to be recognised that the comparative advantage that Asia possesses is not due to
exchange rates but reflects other factors that have resulted in lower costs.  Adjustments in
exchange rates are therefore unlikely to correct such structural imbalances.  In addition, whether
exchange rate appreciation can address any signs of overheating needs to take into account the
nature of the price pressures.  In situations where the pressures are sectoral or localised, other
measures, including prudential measures, may be more effective in addressing these


developments.  Indeed, the exchange rate should not be used for the purpose for which it may
not be able to yield the desired results.
In strengthening our competitiveness, Malaysia has adopted a more comprehensive strategy,
addressing all dimensions that will enhance competitiveness.  This includes strategies to enhance
labour quality and productivity, innovation, enterprise and the public delivery system, applied not
only to the manufacturing sector but to all sectors of the economy. The strategy is essentially to
assess costs on a more comprehensive basis.  The strategy is towards achieving an enhanced
overall cost competitiveness, leveraging on our low country risk, including the economic, social
and political stability, reliable intellectual property protection framework, and our industrial
maturity.  Moving forward, efforts will therefore be focused on developing an efficient supply
chain that is reinforced with local supporting industries, and on becoming more knowledge-
based with the necessary skills and competencies.
An integral part of the strategy on competitiveness is to develop a robust Small and Medium-
Scale Enterprises (SME) sector that will be able to contribute more significantly to the economy.
Two years ago, Bank Negara Malaysia proposed a comprehensive framework for the
development of SMEs to provide an enabling environment and to strengthen the infrastructure
for SME development.  The progress of the work achieved thus far will be deliberated by the
National SME Development Council.  The Council, which is being set up by the Government, will
function as the highest policy-making body that will chart the future direction and strategies for
SME development and ensure coordination and comprehensiveness of the policies.
As part of the efforts to enhance overall cost competitiveness, reduce country risks and sustain
our position as a destination of choice for both local and foreign investors, a gradual
liberalisation of rules and regulations will be undertaken by Bank Negara Malaysia to improve
the delivery systems and reduce regulatory costs to business.  Leveraging on technology to
improve the surveillance system on capital flows has improved the ability to monitor the risks
associated with these flows.  This has therefore enabled the further deregulation and
liberalisation of foreign exchange rules. In addition to the liberalisation in early 2003, further
liberalisation of foreign exchange rules will take effect from 1 April 2004 to improve efficiency
in the delivery system, while further reducing the cost of doing business.
In the development of the financial system, significant progress has been achieved during
the first three years of the Financial Sector Master Plan.  The efforts to evolve a more
diversified financial structure that is complemented with the development of strengthened
financial institutions have now yielded positive results.  While the banking sector is still the
main mobiliser and provider of financing, the more diversified financial infrastructure has
increased the potential for new and alternative channels to mobilise savings as well as
increased the alternative sources of financing. Financing from the capital market, in
particular, the private bond market, specialised financial institutions and the insurance
sector, have now become more significant.  The provision of financial services to micro-
enterprises has also been strengthened, while venture capital as an alternative form of
financing has provided increased support to the new areas of growth that are more
technology and knowledge intensive.


Significant progress has been achieved on institutional development and capacity building.  The
level of capitalisation, the capacity to lend to a wider range of activities, the level of operational
efficiency, the level of skills, the more differentiated scope of business, the level of innovation,
the standards of service quality and the risk management capacity have shown significant
improvements.  This is reflected, in particular, in the lower operating costs, the narrowing of
margins, and the wider range of new products and services. These improvements are also
reflected in the ability of the domestic institutions to maintain market shares in an environment
of increased competition and narrowing margins.
The supporting infrastructure has also been strengthened to reinforce this trend.  These include
the consumer education programme, the strengthening of the Credit Guarantee Corporation,
the establishment of the International Centre for Leadership in Finance to develop world-class
leaders in the financial services sector and the new Financial Mediation Bureau to be established
this year.  Work is also underway to develop a deposit insurance scheme that will add another
layer to the consumer protection framework, representing a further building block in our
financial infrastructure.  Of significance is that it is designed to take into account the structure
and conditions in our financial system and economy.  The deposit insurance system will have a
broader mandate that will integrate the financial restructuring processes and structure within its
operations.  The system will also be the first to provide for the protection of Islamic deposits in
line with Shariah principles. These developments have also been complemented by
improvements in the regulatory and supervisory framework to ensure the soundness and
resilience of the financial system.
Access to financing to a wider range of activities in the private sector, in particular, to the SMEs,
continues to improve.  Outstanding loans to SMEs grew at an annual rate of 10% in 2003.
Financing to the private sector and to the SMEs is expected to remain robust in 2004.  Other
measures that have supported this trend include the establishment of the Small Debt Resolution
Committee, supported by Bank Negara Malaysia’s SME Special Unit and continued availability of
Bank Negara Malaysia’s special funds that currently amount to RM5.6 billion.  New avenues are
also being developed to increase the SMEs’ access to capital market funding.
As the financial sector evolves to meet the needs of increasingly sophisticated consumers,
attention has been directed to ensure that basic banking facilities are widely available and that
these facilities are offered at minimal costs to all segments of society.  In addition, as banking
consumers become more empowered by their awareness of financial products and facilities, they
will exercise their rights and ability to select between products and services offered by different
institutions.  This, combined with the transparency requirements, will ensure that pricing is
commensurate with the financial products and services.  The competitive process is also
expected to result in more competitive pricing of products and services and encourage greater
innovation.
The insurance industry continued to perform an important role in supporting economic
growth as a mobiliser of long-term funds and as a risk transfer mechanism.  An important
aspect in the development of the insurance industry is also the increasing socio-economic role
of insurance in meeting the demand for healthcare financing support.  This is being realised


Zeti Akhtar Aziz
Governor
26 March 2004
through the increasing provision of medical and health insurance products. As major
institutional investors, insurers have an increasingly important role in the development of the
capital markets. The insurance fund assets have increased significantly in 2003 to account for
the largest share of the total fund assets of the industry.  During the year, the framework
governing insurance market practices, including claims handling practices, standards of
product disclosure and dispute resolution mechanisms, were further strengthened to ensure
greater consumer protection.  A comprehensive consumer education programme was also
launched to promote a larger role for consumer activism in the insurance business and
practices and to ensure competitive prices to consumers.
The comprehensiveness of the Islamic financial system in Malaysia, in terms of both the pool
of Islamic financial players as well as the broad spectrum of innovative Islamic financial
products have enhanced the role of the Islamic financial system as a financial intermediary
and enabler of economic growth.  Further progress in the development and expansion of
the Islamic financial system was achieved in 2003.  Policy initiatives have focused on
liberalising the domestic Islamic banking system, increasing the level of competition, and
promoting financial innovation.  Other measures were also directed towards strengthening
and broadening the legal framework for Islamic banking and finance.  On the global front,
the Islamic Financial Services Board (IFSB) has drawn wide participation and has made
significant progress in fulfilling its mandated role.  The promulgation of standards on the
capital adequacy and risk management is progressing rapidly and work on establishing
standards for corporate governance has already been initiated.  The year has also seen
further Islamic-based issues accessing the international capital markets.  Cumulatively, these
developments have enhanced the role of Islamic finance as an integral component of the
international financial system.
Bank Negara Malaysia has continued its developmental role during the year, over and above
our core mandate of monetary and financial stability.  This broader mandate is outlined in
our Financial Sector Master Plan and essentially takes a holistic approach in the development
and management of the financial system.  While efforts to address areas of vulnerability and
identifying emerging risks are important, these need to be complemented with efforts to
build the financial infrastructure.  Institutional and capacity building are necessary
foundations for the financial system.  It is in this context that the Central Bank drives the
development of the financial sector.


The Malaysian 
Economy in 2003
02-12
Overview
07
White Box: Potential Output of the
Malaysian Economy
12-27
Sectoral Review
27-32
Domestic Demand Conditions
32-37
Prices and Employment
37-56
External Sector
47-51
White Box: Recent Trends in Foreign Direct
Investment in Malaysia
56-58
Flow of Funds


4.H-2
2
OVERVIEW
While events in the first half of the year had an
impact on growth, the mutually reinforcing
combination of strong economic fundamentals,
supportive monetary and financial policies and
decisive Government action provided the platform
for growth to accelerate in the second half. For the
year as a whole, real gross domestic product (GDP)
expanded by 5.2% (2002: 4.1%), exceeding the
official forecast of 4.5%.
The Malaysian Economy in 2003
The Malaysian economy demonstrated greater resilience in the
face of uncertainties to expand by 5.2%, more rapidly than
previously forecast.
Growth in 2003 was broad based and balanced
across sectors. The manufacturing sector grew by
8.2% on the back of strong production growth, both
in the export-oriented and domestic-oriented
industries. Export-oriented industries, particularly the
electronics and chemicals industries, benefited from
the recovery in the global electronics sector as
investment demand picked up in most major
economies. This growth was also seen in the strong
expansion in manufactured exports (8.2%) and
capacity utilisation levels that exceeded 80%. In
Graph 1.1
The Economy in 2003 (at 1987 Prices)
Supply of goods and services (RM458.3 billion)
Services
25.3%
Construction
1.6%
Imports of services
8.9%
Imports of goods
40.7%
Manufacturing
15.6% 
Agriculture
4.2%
Mining
3.6%
Trade, etc. 25.6%
Finance, etc. 25.3%
Government services 12.9%
Transport, etc. 15.1%
Utilities 7.2%
Others 14.0%
Demand for goods and services (RM458.3 billion)
Exports of goods
48.9%
Exports of services
6.3%
Private consumption
23.4%
Public consumption
7.4%
Public investment
9.2%
Private investment
4.9%


3
The Malaysian Economy in 2003
certain industries, the 90% utilisation level was
breached in 2003, prompting an increase in capital
expenditure.
The agriculture sector also enjoyed higher growth of
5.5% as higher production and prices, mainly of
palm oil and rubber, drove growth. The mining
sector, which grew by 4.8%, also enjoyed the
benefits of higher prices. In addition, the production
capacity in the sector was enhanced with the MLNG
Tiga plant and four new oil and gas fields each
coming on-stream. Higher prices and improving
external demand conditions led to the strong growth
in exports of primary commodities (30.4%).
The services sector experienced the greatest impact
from the uncertainties in the first half, most notably
the impact of the severe acute respiratory syndrome
(SARS) outbreak on tourism and travel-related
activities. The wholesale and retail trade, hotels and
restaurants sub-sector and air passenger travel
segment, in particular, were severely affected as the
number of tourist arrivals dropped significantly from
a pre-SARS monthly average of one million to about
half that number in April. However, the impact of
SARS proved transitory and these sub-sectors
recovered rapidly in the second half. In addition, the
strong loan growth, increased use of new services in
the cellular telecommunications segment and
sustained volume of international trade ensured that
growth in the sector remained resilient. The sector
recovered rapidly and for the year as a whole
expanded by 4.1%.
Growth in the construction sector moderated to
1.9% due to slower growth in the civil engineering
sub-sector as a result of the completion of several
privatised projects. On the other hand, strong
2
4
6
8
10
1999
2000
2001
2002
2003
0
0
50
100
150
200
250
Annual change (%)
RM billion
Graph 1.2
Real GDP
Real GDP value (RHS)
Real GDP growth (LHS)
-5
0
5
10
15
20
1999
2000
2001
2002
2003
Annual change (%)
-5
0
5
10
15
20
RM ('000)
Graph 1.4
GNP Growth and Nominal GNP per Capita
Nominal GNP per Capita (RHS)
Nominal GNP (LHS)
Real GNP (LHS)
0
5
10
15
20
1999
2000
2001
2002
2003
Annual change (%)
Graph 1.3
Real GDP and Aggregate Domestic Demand 
GDP
Aggregate domestic demand
-10
-5
0
5
10
15
1999
2000
2001
2002
2003
Percentage
point 
-10
-5
0
5
10
15
Annual change
(%)
Graph 1.5
Contribution to Real GDP Growth:
Domestic Demand and Net Exports
Domestic demand (LHS)
Net exports (LHS)
Real GDP growth (RHS)


4.H-4
4
Table 1.1: Malaysia – Key Economic Indicators
2001
2002
2003p
2004f
Population (million persons)
24.0
24.6
25.1
25.6
Labour force (million persons)
9.9
10.2
10.5
10.9
Employment (million persons)
9.5
9.8
10.2
10.5
Unemployment (%)
3.6
3.5
3.5
3.4
Per Capita Income
(RM)
12,855
13,683
14,592
15,376
(US$)
3,383
3,601
3,840
4,046
NATIONAL PRODUCT (% change)
Real GDP
0.3
4.1
5.2
6.0 – 6.5
(RM billion)
210.6
219.3
230.7
244.6
Agriculture, forestry and fishery
-0.9
3.0
5.5
2.6
Mining and quarrying
-0.8
3.7
4.8
5.5
Manufacturing
-5.8
4.0
8.2
10.2
Construction
2.1
2.3
1.9
1.5
Services
5.8
4.1
4.1
5.2
Nominal GNP
-1.6
8.7
10.1
6.5
(RM billion)
308.7
335.6
369.4
393.3
Real GNP
1.2
4.7
6.6
5.6
(RM billion)
193.0
202.1
215.4
227.5
Real aggregate demand1
2.5
4.2
4.8
5.0
Private expenditure1
-3.3
0.7
4.3
8.7
Consumption
2.4
4.4
5.1
8.1
Investment
-19.9
-13.1
1.1
11.5
Public expenditure1
15.6
10.8
5.5
-1.3
Consumption
17.0
12.2
7.9
4.2
Investment
14.5
9.8
3.6
-5.7
Gross national savings (as % of GNP)
34.9
34.4
36.9
35.8
BALANCE OF PAYMENTS (RM billion)
Goods
69.9
72.1
97.7
96.4
Exports (f.o.b.)
334.3
357.7
398.9
443.3
Imports (f.o.b.)
280.2
303.1
317.7
366.8
Services balance
-8.4
-6.0
-15.0
-11.9
(as % of GNP)
-2.7
-1.8
-4.1
-3.0
Income
-25.6
-25.1
-22.6
-24.7
(as % of GNP)
-8.3
-7.5
-6.1
-6.3
Current tranfers
-8.2
-10.6
-9.3
-9.8
Current account balance
27.7
30.5
50.8
50.0
(as % of GNP)
9.0
9.1
13.7
12.7
Bank Negara Malaysia reserves, net2
117.2
131.4
170.5
–
(as months of retained imports)
5.1
5.4
 6.8
–
PRICES (% change)
CPI (2000=100)
1.4
1.8
1.2
1.5
PPI (1989=100)
-5.0
4.4
 5.7
–
Real wage per employee in the manufacturing sector
1.6
 3.2
2.6
–
Note: Figures may not necessarily add up due to rounding.
1 Exclude stocks.
2 All assets and liabilities in foreign currencies have been revalued into ringgit at rates of exchange ruling on the balance sheet date and the gain/loss has been reflected
accordingly in the Bank’s account.
p Preliminary
f Forecast


5
The Malaysian Economy in 2003
Table 1.2: Malaysia – Financial and Monetary Indicators
2001
2002
2003p
FEDERAL GOVERNMENT FINANCE (RM billion)
Revenue
79.6
83.5
92.8
Operating expenditure
63.7
68.7
75.2
Net development expenditure
34.2
35.1
38.5
Overall balance
-18.4
-20.3
-20.9
Overall balance (% of GDP)
-5.5
-5.6
-5.3
Public sector net development expenditure
59.7
69.1
72.0
Public sector overall balance (% of GDP)
-0.3
-0.7
-0.4
EXTERNAL DEBT
Total debt (RM billion)
173.4
185.6
187.2
Medium and long-term debt
149.3
153.6
152.8
Short-term debt1
24.1
32.1
34.5
Debt service ratio (% of exports of goods and services)
Total debt
6.8
6.7
6.1
Medium and long-term debt
6.6
6.5
6.0
Change in 2001
Change in 2002
Change in 2003
RM billion
%
RM billion
%
RM billion
%
MONEY AND BANKING
Money Supply
M1
2.5
3.2
8.3
10.3
13.0
14.6
M2
7.8
2.2
21.0
5.8
42.5
11.1
M3
13.0
2.9
31.6
6.7
48.5
9.7
Banking system deposits
8.6
1.8
25.3
5.3
49.5
9.8
Banking system loans2
16.1
3.9
19.8
4.6
21.8
4.8
Manufacturing
…
…
-1.2
-2.0
-0.2
-0.3
Broad property sector
12.4
8.2
10.8
6.6
14.7
8.4
Finance, insurance and business services
0.7
2.2
-2.5
-7.7
-0.6
-1.9
Loan-deposit ratio
85.9%
84.9%
80.9%
Financing-deposit ratio3
95.7%
95.1%
91.7%
2001
2002
2003
%
%
%
INTEREST RATES (AVERAGE RATES AS AT END-YEAR)
3-month interbank
3.27
3.13
2.87
Commercial banks
Fixed deposit
3-month
3.21
3.20
3.00
12-month
4.00
4.00
3.70
Savings deposit
2.28
2.12
1.86
Base lending rate (BLR)
6.39
6.39
6.00
Finance companies
Fixed deposit
3-month
3.22
3.20
3.00
12-month
4.01
4.00
3.68
Savings deposit
2.94
2.65
2.18
Base lending rate (BLR)
7.45
7.45
6.90
Treasury bill (3-month)
2.73
2.82
2.77
Government securities (1-year)
2.93
2.94
2.93
Government securities (5-year)
3.18
3.15
4.28
2001
2002
2003
%
%
%
EXCHANGE RATES
Movement of Ringgit (end-period)
Change against composite
3.5
-3.4
-3.2
Change against SDR
3.8
-7.3
-8.5
Change against US$4
0.0
0.0
0.0
1 Excludes currency and deposits held by non-residents with resident banking institutions.
2 Includes loans sold to Cagamas.
3 Adjusted to include holdings of private debt securities.
4 Ringgit was pegged at RM3.80=US$1 on 2 September 1998.
p Preliminary


4.H-6
6
demand for housing sustained activity in the
residential construction segment.
In 2003, GDP growth was private sector-driven.
Private expenditure contributed 2.5 percentage
points of the 5.2% growth rate. Both households
and the corporate sector benefited from rising
disposable incomes, the improving terms of trade
for commodities and strengthening external
demand. While household incomes increased as a
result of growth in wages and higher commodity
prices, the corporate sector generated higher profits
and cash flows from rising productivity and higher
export earnings. From a sample of 300 non-financial
companies listed on the Kuala Lumpur Stock
Exchange (KLSE), 54% recorded higher cumulative
profits for the first three quarters of 2003 compared
with the same period a year earlier and the
annualised return-on-equity rose from 5.4% in the
third quarter of 2002 to 7.3% in the third quarter
of 2003.
As a result of higher disposable income, especially for
households, private consumption increased by 5.1%.
In addition, the low interest rate environment,
coupled with the high savings rate, provided the
impetus for households to increase their borrowings
for consumption expenditure. Measures unveiled in
the Economic Package in May improved consumer
confidence, further supporting consumption
expenditure.
A significant development in 2003 has been the
turnaround in private investment, which increased by
1.1% after two years of contraction. The improved
economic outlook, particularly in the second half,
stronger corporate balance sheets and cashflow
positions and high capacity utilisation, especially in
the manufacturing sector, prompted increased capital
spending. In addition, the low interest rate
environment and the steps taken to improve
companies’, especially the small and medium
enterprises’ (SMEs), access to finance, provided the
impetus for capital expansion.
The public sector continued to play an important role
in sustaining domestic demand, especially in the first
half. Real public consumption increased by 7.9% due
to higher spending on supplies and services. On the
other hand, real public investment growth
moderated to 3.6% in line with the moderate
increase in Federal Government development
expenditure and lower capital spending by the
non-financial public enterprises.
As a result, real aggregate domestic demand
(excluding change in stocks), increased more rapidly
by 4.8%. However, this pick-up in demand did not
lead to an increase in inflation. The Consumer Price
Index (CPI) increased more moderately by 1.2%
during the year (2002: 1.8%), with core inflation –
inflation that excludes price-volatile and price-
administered items – amounting to 0.6% in spite of
higher commodity prices. While stronger economic
growth led to a narrowing of the output gap, it was
not completely eliminated and reflected excess
capacity in selected sectors.
In 2003, the external sector’s contribution to growth
turned positive (2 percentage points; 2002: –1.3
percentage points), primarily due to the acceleration
of exports of goods in the trade account by 11.5%
(2002: 7%). The trade surplus increased to RM81.1
billion (2002: RM54.6 billion). Sustained consumer
demand and the pick-up in investment activity in the
major industrial economies as well as higher
commodity prices spurred the growth in exports of
manufactures and primary commodities. On the
other hand, import growth moderated to 4.8%
(2002: 8.1%) as exports of primary commodities,
unlike manufactured exports, had a low import
content. Further, the changing pattern of investment,
especially foreign direct investment (FDI), into the
services sector were smaller in scale but had higher
potential to generate value added. As a result,
imports of capital goods remained relatively stable
(0.7%).
The large trade surplus, coupled with a smaller
income account deficit brought about by the
repatriation of earnings from overseas investments by
Malaysian firms, more than compensated for the
larger services account deficit (RM15 billion) due to
lower tourism receipts. As a result, the current
account surplus increased to RM50.8 billion,
equivalent to 13.7% of gross national product (GNP)
(2002: 9.1% of GNP).
The financial account in the balance of payments
remained stable, recording a deficit of RM12.1
billion (2002: -RM11.9 billion). Stronger inflows of
funds for investment were balanced by higher
repayments and prepayments of external debt by
the public sector and overseas investments by
Malaysian companies. FDI into Malaysia remained
significant while funds for portfolio investment
turned around to record an inflow as the KLSE
staged a markedly improved performance, especially
since the third quarter.


7
The Malaysian Economy in 2003
Potential Output of the Malaysian Economy
Potential output is output derived from the full use of available capital and potential employment,
which is the level of employment that is consistent with the “natural” or “long run” rate of
unemployment.  Therefore, the potential output is defined as the maximum capacity of output that
the economy can achieve without experiencing either inflationary pressures or external imbalances.
The output gap is the difference between actual and potential output and is measured as a
percentage of potential output.  When actual output is lower than its potential, the output gap is
negative and, theoretically, output can sustain an increase without exerting undue inflationary
pressures on the economy.
Table 1
Actual GDP and Potential Output
Actual
Potential
Investment
Labour
Output
GDP
output
Gap
Period
Annual change (%)
(% of
potential
output)
1992-1997
9.2
8.2
14.1
3.9
-1.9
1998
-7.4
3.7
-43.0
-2.1
-11.4
1999
6.1
2.4
-6.5
3.7
-8.3
2000
8.5
4.0
25.7
4.3
-4.3
2001
0.3
3.2
-2.8
3.3
-6.9
2002
4.1
1.7
0.3
3.1
-4.8
2003
5.2
3.4
2.7
3.3
-3.1
-30
-20
-10
0
10
20
30
40
50
60
-15
-10
-5
0
5
10
15
20
25
30
RM billion
% of potential
output 
Potential output
Actual output (GDP)
Output gap
Graph 1
Actual and Potential Output
92
93
94
95
96
97
98
99
00
01
02
03
During the high growth years of the early 1990s, actual output closely followed its potential, as shown in
Table 1 and Graph 1. Amidst the pronounced contraction in output experienced after the Asian financial
crisis, the output gap had widened significantly in 1998 but as the economy recovered, the gap narrowed.
In 2002, the output gap was 4.8% compared to 6.9% in 2001. Subsequently, in 2003, the stronger
pickup in economic activity compared to the growth in potential output led to a further narrowing of the
output gap. Bank Negara Malaysia’s latest estimates of potential output indicated that actual GDP
increased at a faster pace (5.2%) compared to potential GDP (3.4%). Nevertheless, the faster growth of
GDP did not exert inflationary pressures as actual GDP would have to increase by more than 8% before
the output gap could be bridged in 2003.
The potential growth rate doubled in 2003, due mainly to stronger growth in capital investment (2.7%;
2002: 0.3%) as business sentiment improved amidst higher capital utilisation rates in selected sectors of
the economy.
The estimated short-run elasticity of capital is significantly higher than the short-run elasticity of labour,
implying that changes in capital have a greater impact on output and that returns to capital have
continued to improve. This has encouraged firms to accelerate their investment activities, including the
upgrading of technological capabilities that, in turn, could have had an immediate impact on output.
In line with previous findings, the long-run elasticity of capital, which is estimated to be 0.50, is higher
than its short-run counterpart. This higher return to capital implies more efficient capital utilisation, as
calculated by the ratio of output to capital, which has had a faster rate of increase compared to the ratio
of output to labour. Previous supportive infrastructure investments, which have long gestation periods,
have begun to show positive returns, while stronger investment activities were visible in the services sector,
mainly in technology and logistics infrastructure. With the greater focus and emphasis placed on a
knowledge-driven economy, expectations are for potential output to expand further.


4.H-8
8
As a result of the large current account surplus,
sustained inflows of funds for investment, including
FDI, and revaluation gains from the translation of
non-US dollar assets into ringgit terms, the net
international reserves of Bank Negara Malaysia
increased to RM170.5 billion, or equivalent to
US$44.9 billion at the end of 2003. This represented
an increase of RM39.1 billion or US10.3billionduringtheyear.Theincreasingtrendinreservescontinuedinto2004.By15March,thereservesrosetoRM194.9billionorUS51.3 billion, sufficient to
finance 7.8 months of retained imports and was 5.2
times the short-term external debt.
Malaysia’s external debt position remained stable in
2003, standing at RM187.2 billion or 50.7% of GNP
(2002: RM185.6 billion or 55.3% of GNP) in spite of
a RM4.1 billion revaluation adjustment that resulted
mainly from the appreciation of the euro and yen.
Malaysia’s external debt position remains sustainable
with the debt service ratio improving from 6.7% in
2002 to 6.1% in 2003. In addition, the nation’s debt
profile remains healthy, with short-term debt
accounting for only 18.4% of total external debt.
The health of the banking system improved in 2003,
in tandem with stronger economic growth. Banks
continue to be well capitalised with the risk-weighted
capital ratio sustained at a high level at 13.4%, well
above the prescribed 8% mark. The trend for non-
performing loans (NPLs) also reversed with the ratio,
on a 6-month basis, declining from 7.5% as at end-
2002 to 6.8% as at end-2003.
Macroeconomic Management
Coming into 2003, the Malaysian economy was
already in a strong position. Private sector activity
was exhibiting an upward trend. Commodity prices
remained high, providing a significant positive
multiplier effect on rural incomes. Further, both the
monetary and fiscal stance were conducive to
sustaining growth without increase in risk, given the
benign inflation outlook, strong external position and
the sustainable public sector finances. Given this
strength, it was assessed that the economy had the
resilience to absorb the impact of uncertainties that
could adversely affect growth prospects. Hence, the
macroeconomic policy stance was left unchanged in
the early part of the year.
By the second quarter, however, the unforeseen
SARS outbreak and the weaker-than-expected global
economic conditions prompted new policy measures.
Economic and financial indicators for the first half-
year also indicated that growth in the United States
remained well below trend, mainly due to subdued
investment. Deflationary concerns and continued
financial market volatility cast doubt on the strength
of global economic activity. This prompted the
authorities to take pre-emptive measures in order to
support economic activity. On 21 May, Bank Negara
Malaysia reduced its policy rate, the 3-month
Intervention Rate, by 50 basis points to 4.5%. This
move was aimed at mitigating the effects of a more
adverse external environment on domestic demand.
A comprehensive economic stimulus and relief
package, encompassing fiscal and financing
measures, was announced by the Government. The
package was designed to provide immediate relief to
affected sectors, diversify economic activity and
improve long-term competitiveness.
In the short term, the main stimulus measures were
designed to provide relief to affected sectors and
encourage private consumption in order to diversify
the sources of growth. Hotels and restaurants were
exempted from service taxes and received a
discount on utility charges. Income tax payments for
travel agencies were suspended, the road tax on
taxis was reduced and import duties on selected
items were lowered. In addition, a Special Relief
Guarantee Fund of RM1 billion was set up by Bank
Negara Malaysia to provide working capital to
affected companies while existing funding facilities,
especially for SMEs, were enlarged. To encourage
consumer spending, employees’ contribution to the
Employees Provident Fund was reduced by two
percentage points and civil servants were given an
interim half-month bonus. In addition, measures
targeted at construction activities, particularly
measures to provide affordable housing to the
lower income group, also had a positive effect on
consumption.
With the additional expenditure, coupled with
revenue foregone arising from the relief measures
implemented, the overall Federal Government deficit
was revised from the budgeted 4% of GDP to 5.3%
of GDP. However, the higher deficit did not exert
pressure on domestic consumer prices and interest
rates as the high savings rate and excess liquidity in
the banking system made it possible for the bulk of
the deficit to be financed from non-inflationary
domestic sources. While the deficit led to higher
Federal Government debt (48.2% of GDP as at end-
2003), this level was sustainable. Debt servicing
remained low (14% of operating expenditure).
Similarly, the Federal Government external debt


9
The Malaysian Economy in 2003
declined to 9.5% of GDP
, thus lowering exposure to
external risks. Given the Government’s target to
achieve a balanced budget in the near term, the
debt-to-GDP ratio is expected to decline in the
medium term as growth accelerates.
The immediate effect of the measures was to
strengthen domestic demand and hence, growth.
After recording a 4.5% growth in the first half, real
GDP accelerated to 5.2% in the third quarter. As
conflict in the Middle East was resolved and SARS
abated, domestic consumer and business sentiment
improved markedly in the third quarter. Further
declined during the year. The average lending rate
charged by commercial banks declined further, and
at end-year was 39 basis points lower than the end-
2002 level. Liquidity remained ample during the year
as BNM’s operations stabilised inter-bank interest
rates at low levels.
The ringgit peg has provided stability and
predictability during a period of increased uncertainty
in financial markets, thereby facilitating trade and
investment activities. While the US dollar depreciated
during the year, Bank Negara Malaysia’s estimates
indicate that the ringgit remains close to its fair
The proactive monetary and fiscal measures implemented by the
Government in response to uncertainties in the first half
supported growth and provided the platform for the private
sector to take the lead in generating growth. For the longer
term, Malaysia has formulated a comprehensive strategic
framework to meet new challenges.
favourable signs started to emerge from September
as growth in the United States exceeded the trend
rate in the third quarter following a recovery in
investment and a build-up in inventories. In tandem,
the other major economies also recorded stronger
growth. The mutually reinforcing combination of
fiscal expansion and monetary easing provided the
platform on which the domestic economy was able
to leverage on the accelerating global and regional
growth momentum. In the fourth quarter, growth
accelerated to 6.4%, the fastest rate since the fourth
quarter of 2000.
The reduction in interest rates spurred loan growth,
prompted by increased demand from both
households and businesses, particularly SMEs. As a
result, total financing from the banking system
through loans and holdings of private debt securities
increased by 5.9%. The demand for credit intensified
in the latter part of the year as global economic
conditions improved, consequently leading to a
strengthening of the growth momentum in Malaysia.
In particular, funding to the SMEs increased strongly
with a large proportion of new loans directed to this
segment. By end-2003, loans to SMEs had expanded
by 10% and accounted for 38.4% of all loans
outstanding to business enterprises.
As a result of the reduction in the Intervention Rate,
ample liquidity and a competitive lending
environment, lending rates charged by the banks
value. The surplus in the current account remains
large while reserves continue to rise. Domestically,
inflation remains low at 1.2% and there appears to
be no significant imported inflation. Hence,
economic fundamentals continue to support the
current exchange rate arrangement.
The importance of strong fundamentals was
demonstrated in 2003. They allowed the
Government to implement a wide-ranging and
comprehensive response to adverse conditions
without creating undue risks. In addition, the
successful corporate sector restructuring undertaken
in recent years provided the enabling conditions for a
positive private sector response to the measures.
Equally important, the comprehensive and balanced
approach, with fiscal and monetary policy reinforcing
each other, increased the likelihood of achieving the
aims of the measures.
The May Economic Package did not only serve as a
short-term stimulus package but was also an integral
part of longer-term initiatives to meet emerging
challenges. The Mid-Term Review of the Eighth
Malaysia Plan (2001-2005) clearly identifies two
major challenges that are becoming increasingly
apparent: dealing with the changing dynamics of
global competition and increasing capacity to
manage risks from greater volatility. Thus, the May
Economic Package and the 2004 Federal
Government Budget laid out the following strategies


4.H-10
10
to ensure that growth is sustained over the longer
term while fundamentals are strengthened:
•
Increase competitiveness by enhancing
productivity
Integral to achieving this objective is the move
towards a knowledge-based economy. Some
important strides have been made in enhancing
the knowledge content of economic activity in
2003, especially by enhancing education and
training and promoting higher value-added
industries.
•
Strengthen resilience through sound
economic fundamentals and strong
financial and corporate sectors
The financial sector restructuring process
undertaken following the Asian financial crisis
has been completed and the corporate sector
has begun to increase investments and expand
operations. A major milestone in 2003 was
Danamodal Nasional Berhad’s redemption of
bonds with a nominal value of RM11 billion on
21 October. Currently, Danamodal still has
assets with a book value of RM2.2 billion. As
proceeds from their disposal is expected to
exceed book value, the net cost incurred by
Danamodal in recapitalising the banking sector
is estimated to be 0.15% of GDP.
Notwithstanding the successful completion of
the restructuring process, regulatory agencies
will continue to ensure that Malaysian
companies and financial institutions
continuously upgrade governance and reporting
standards.
•
Stimulate private domestic investment as
well as attract quality FDI
To promote private investment, a number of
measures were directly targeted at SMEs by
improving their access to financing as well as
making several tax and non-tax incentives
available to them. The focus on domestic
sources of investment, however, is not at the
expense of foreign investors. A number of
measures were announced under the economic
package that liberalised regulations governing
foreign investment.
•
Promote new sources of growth in the
manufacturing and services sector
Apart from making Malaysia a more conducive
location for existing businesses, several sectors
were earmarked as new sources of growth.
These included education, tourism and health
services in the services sector; Islamic finance;
and high-technology manufacturing.
•
Revitalise the agriculture sector
The agriculture sector recorded the fastest
growth after manufacturing in 2003. While high
commodity prices provided the incentive for
higher production, the sector has deep and
strong links with the rest of the economy. As
such, measures taken to improve productivity
and returns in this sector and develop new
downstream activities will have a significant
multiplier impact on the rest of the economy.
•
Pursue sound macroeconomic management
with fiscal prudence
The Government is committed to a programme
of gradual fiscal consolidation. Similarly,
monetary policy has remained supportive of
growth while ensuring risks, either in the form
of inflation or external imbalances, are
contained.
•
Improve the delivery system of the
Government to create a pro-business
environment
Improved efficiency, especially in the public
sector, will effectively reduce costs, thereby
boosting competitiveness. Therefore, the final
strategic prong was aimed at enhancing the
efficiency in the delivery of public services and
effectiveness in implementing national
development policies and strategies. These
included eliminating bureaucratic delays,
streamlining regulations and procedures,
reducing duplication and shortening waiting
periods.
Banking sector policies in 2003 were aimed at
enhancing the infrastructure and environment for
banking institutions to deliver quality products and
services, encouraging greater innovation while
maintaining financial stability. In addition, an
important strategy was to ensure that the banking
system continued to be a facilitator of growth,
particularly in providing financing and other
ancillary services to the SMEs.
•
Strengthening the capacity of domestic
banking institutions
During the year, efforts were directed at
developing and enhancing the quality of human
capital in the banking sector. As the business


11
The Malaysian Economy in 2003
environment and consumer demands are
constantly evolving, continuous upgrading of
skills is necessary, particularly at the top
management level. Recognising this, Bank
Negara Malaysia initiated two important
measures to enhance the quality of human
capital in the banking sector. The International
Centre for Leadership in Finance was established
to accelerate the development of skilled and
competent leaders of financial institutions and
corporations. Work has also been initiated to
reposition Institut Bank-Bank Malaysia to better
meet the needs of the financial sector through
more focused training and accreditation,
particularly in specialised areas.
To provide a conducive environment for banking
conglomerates to further improve their group
structures, rationalise their operations and improve
efficiency, the Banking and Financial Institutions
Act 1989 was amended to allow the merger of the
commercial bank and finance company within a
domestic banking group into a single legal entity.
•
Safeguarding financial stability and fortifying
the financial system
During the year, steps were taken to strengthen
corporate governance practices in the banking
institutions. These included enhancing the role of
the board of directors, especially independent
directors, and regulations covering the
appointment of external auditors.
To ensure that the activities of banking
conglomerates do not introduce risks to the
financial system, Bank Negara Malaysia is
formalising and strengthening the existing
infrastructure and regulatory framework. To
strengthen the legal framework, the Central Bank
of Malaysia Act 1958, the Banking and Financial
Institutions Act 1989, the Islamic Banking Act
1983 and the Takaful Act 1984 were amended in
2003. A new Payment System Act 2003 was also
enacted to formalise the Bank’s oversight authority
of the payment system.
•
Ensuring that all sectors of the economy have
adequate access to finance
Policies were directed at facilitating improved
access to credit for the various sectors of the
economy, particularly the SMEs. In addition, a
micro-financing programme that has an extensive
outreach was also established for micro
enterprises.
•
Strengthening the consumer awareness and
protection framework
Active consumerism is a critical prerequisite in the
transition towards greater market orientation.
Therefore, an effective consumer education and
protection framework is being developed to allow
banking consumers to eventually take greater
responsibility for their financial decisions. To assist
consumers in making their decisions, the Bank is
currently finalising the product transparency and
disclosure rules. Bank Negara Malaysia has also
initiated work on establishing a framework on
basic banking services, which aims to ensure that
the banking public, especially the low-income
group, would have access to affordable basic
banking services. To enable consumers to seek
redress on a broad range of retail consumer
issues raised against financial institutions
regulated by the Bank, the Financial Mediation
Bureau, a one-stop center for the resolution of
these issues, will be established in the first half
of 2004.
The increased strength and resilience of the
banking system has provided a positive
environment for the effective implementation of
a deposit insurance scheme in Malaysia. The
implementation of the system will further
strengthen the consumer protection framework
by providing for the explicit protection of deposits
as well as greater incentives for sound financial
and business practices among banking
institutions.
The rapid development of the domestic Islamic
financial system, accentuated by significant progress
on the global front in recent years, have set the stage
for it to play a more prominent role in the economy.
Currently, 33 banking institutions, including two
Islamic banks, offer a comprehensive range of Islamic
financial products and services to the Malaysian
public. Similarly, the takaful industry has progressed
rapidly, accounting for 5.6% of assets in the
insurance sector in 2003. During the year, policy
focused on strengthening the institutional
infrastructure, enhancing the regulatory framework,
strengthening the Shariah and legal infrastructure
and developing intellectual capital and consumer
education. In 2003, Bank Negara Malaysia brought
forward liberalisation in Islamic banking to allow
full-fledged foreign Islamic banks in Malaysia.
The strategies laid out for sustaining long-term
growth will continue to be complemented by


4.H-12
12
appropriate short-term measures. Conversely, taking
steps to ensure the long-term sustainability of growth
and strength of fundamentals would provide both
the resources and platform on which shorter-term
corrective measures may be taken. Thus, the
interaction between short- and longer-term
macroeconomic policies in Malaysia aims to be
complementary in nature, one reinforcing the other,
to achieve sustained economic development.
SECTORAL REVIEW
Manufacturing Sector
In 2003, output growth in the manufacturing sector
gained momentum especially in the second half-year,
following the broad-based recovery in the global
economy and strengthening domestic demand.
Manufacturing production growth strengthened to
10.5% (2002: 4.5%), with expansion across a wide
range of products in both the export- and domestic-
oriented industries. Consonant with the pick-up in
production activities, value-added growth of the
manufacturing sector doubled to 8.2% (2002: 4%),
Graph 1.6
Manufacturing Sector: Sales, Production  
and Exports 
Sales
Production
Exports
2002
2003
Annual change (%)
-15
-10
-5
0
5
10
15
20
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1997
1998
1999
2000
2001
2002
2003p
%
Annual change (%)
Capacity utilisation (LHS)
Output (RHS)
Graph 1.7
Capacity Utilisation in the Manufacturing 
Sector
p Preliminary
60
65
70
75
80
85
-20
-10
0
10
20
30
Pick-up in exports and strengthening domestic demand led to
stronger expansion in the manufacturing sector.
and contributed significantly to overall GDP growth.
Consequently, the share of the manufacturing sector
in GDP rose slightly to 30.9% (2002: 30.1%). The
capacity utilisation rate in the manufacturing sector
remained high at 82% in 2003 (2002: 82%), with
the export- and domestic-oriented industries
operating at 86% and 77% respectively (2002: 83%
and 81% respectively).
Export-oriented industries expanded by 11.9% in
2003, with stronger expansion in the second half-year,
led by the cyclical upturn in global electronics demand,
and further enhanced by the strong performance of
the chemicals and rubber products industries. Given
the strong inter-linkages, the chemical industry also
benefited from the spillover effects of the upsurge in
the electronics industry. Demand for chemical and
rubber products were strong, particularly from the US
and the Asia-Pacific region. Overall, the outbreak of
SARS in the region during the early part of the year
had a minimal impact on export-oriented industries,
notwithstanding some slowdown in the regional
economies.
While the SARS outbreak had affected consumer
demand, the Economic Package introduced in May
Table 1.3
Manufacturing Sector: Value Added and
Production
2002
2003
Annual change (%)
Value added
(Constant at 1987 price)
4.0
8.2
Overall Production
4.5
10.5
Export-oriented industries
5.0
11.9
 of which:
Electronics
13.4
15.1
Electrical products
-5.1
-7.0
Chemicals and chemical products
2.7
20.8
Wood and wood products
-6.0
0.9
Textiles and wearing apparel
-6.2
-2.2
Off-estate processing
7.1
11.8
Rubber products
2.0
18.7
Domestic-oriented industries
3.4
6.1
 of which:
Construction-related products
3.8
10.2
Fabricated metal products
0.8
7.4
Food products
8.7
8.8
Transport equipment
6.2
-5.5
Petroleum products
-4.1
2.3
Source: Department of Statistics, Malaysia.


13
The Malaysian Economy in 2003
helped to stimulate domestic demand and support the
growth of the domestic-oriented industries (6.1%).
Output was higher in all sub-sectors, except for the
transport equipment industry. Of significance, growth
strengthened in the fabricated metal products,
construction-related materials and food and beverages
industries. These industries benefited largely from the
improved domestic demand and continued growth in
the construction sector. Only the automobile industry
recorded lower output, affected by subdued sales of
motor vehicles.
The electronics industry recorded another year of
strong growth following the broad-based expansion
in global demand across all geographical regions
and products. Expansion in the first-half year was
moderate and picked up strongly in the second-half
year. Growth emanated mainly from the expansion
in the wireless and personal computer (PC) markets
as well as consumer electronics products.  While
growth in wireless products was driven by the rising
demand for wireless applications and cell phones,
the demand for PCs was led by the PC replacement
cycle, which took place in the latter half of the year
as companies invested to replace their equipment
acquired during the Y2K period. The consumer
electronics products experienced strong growth due
to growing consumer interest in adopting new
technology and multi-functional devices such as
camera phones, personal digital assistants (PDAs)
and digital video decoders (DVDs). In terms of
export markets, the Asia-Pacific region continued to
spearhead growth and remained the largest market
for the global semiconductor sales. Demand was
especially strong from the People’s Republic of
China (P.R.China), which became the largest
importer of chips in the world.
Malaysian manufacturers were able to benefit from
the emerging global electronics up-cycle, in view of
the diversity in product mix and export markets.
Local semiconductor manufacturers continued to
move up the value chain from assembly and
packaging activities to become full turnkey
providers to maintain their competitiveness.
Amidst increased global competition, the
performance of the electrical products sub-sector
continued to deteriorate. The decline was mainly in
the audio-visual and telecommunication products
as producers who emphasised on low labour cost
had relocated elsewhere. Nevertheless, output of
air conditioners, refrigerators and other ventilating
devices continued to increase in tandem with the
improving external demand. Overall, the
performance of the industry was also affected by
lower offtake from most of the major importers of
Malaysia’s electrical products, particularly from the
US, Japan, Hong Kong  China, the United Kingdom
and Netherlands. Nevertheless, exports to P
.R.China
increased strongly.
Growth in the chemical products industry
accelerated in 2003, benefiting from the spillover
effects of the strong pick-up in the electronics
industry as well as the improved external demand
for organic chemicals, and resins and plastic
products. The expansion was further reinforced by
the higher output of industrial gases following the
commencement of the new MLNG plant in
Sarawak. The resins and plastic products sub-sector
continued to experience strong growth, driven by
stronger domestic demand from the food,
construction and packaging industries as well as
increased demand from the Asia-Pacific region. In
particular, exports of Malaysia’s chemical products
to major markets, namely P.R.China, Singapore and
Japan, continued to expand strongly during
the year.
The stronger performance of the off-estate
processing industry was supported mainly by
higher activity in palm oil processing, arising from
improved offtake for processed palm oil products,
particularly from Japan and Europe. Production of
rubber products also increased strongly, driven by
higher external demand for rubber gloves for
medical examinations and surgery. Expansion in
production capacity enabled the industry to meet
the increased global demand for gloves following
tensions in the Middle-East and outbreak of SARS.
The industry’s aggressive promotions to expand to
Graph 1.8
Production and Exports of the Electronics  
Industry
Annual change (%)
Production of electronics in Malaysia
Electronics exports of Malaysia
Worldwide sales of semiconductors
-40
-20
0
20
40
J
J 
D
J
J 
D
2003
2002


4.H-14
14
new export markets also contributed to the
increase in demand for gloves. While the US
remained as Malaysia’s largest export market for
rubber products, exports to other countries,
namely P.R.China, Hong Kong China, Japan and
Singapore, also grew strongly to account for a
bigger market share.
Output of petroleum products recovered, driven
by strong demand from Asian countries, especially
from P.R.China, Japan and Singapore. Similarly,
output of wood products turned around to record
positive growth due to higher output of plywood
and particleboard. The increase was largely
attributable to higher export demand for veneer
and plywood arising from the recovery in
construction activities in Malaysia’s traditional
markets, especially Japan, P.R.China and Chinese
Taipei. Exports of furniture also increased due to
higher demand from the US, Singapore, Saudi
Arabia, Australia and P.R.China. While the export
performance remained favourable, the furniture and
wood products industries faced keen competition
from other countries in the region and cheaper
substitute products, such as PVC and steel.
The textiles and wearing apparel industry
registered another year of lackluster performance
due mainly to intensive competition from low cost
countries. Shipments by major importers,
particularly the US, the largest buyer of Malaysian
textiles and apparel, continued to contract.
Production in the transport equipment industry
was subdued in 2003 due entirely to lower
assembly of motor vehicles.  Demand for motor
vehicles in the domestic market slowed down as
consumers held back purchases due to uncertainty
over car prices following the phase-in of the
automotive industry into the AFTA framework. The
decline in assembly of motor vehicles was, to some
extent, offset by higher production of motor vehicle
parts and accessories, and assembly of motorcycles
and scooters arising from the higher demand for
locally-assembled motorcycles and scooters.
Output in the construction-related materials
industries expanded strongly, supported by higher
export demand and continued expansion in
construction activity. Growth was particularly strong
in the second half-year due to sharply higher
production of iron and steel as manufacturers
increased their exports to take advantage of the
strong demand and higher prices in the export
market. As a result, exports of metal products
increased strongly, particularly to the US, P
.R.China,
Japan, Singapore, Thailand and Australia.
Production of non-metallic mineral products also
increased during the year due to increased demand
from the construction sector, especially for
production of cement, fabricated construction
materials and structural clay products. However,
production of glass declined as it was affected by
lower export demand as well as subdued demand
from the domestic car industry.
Production in the fabricated metal products
industry increased further, reflecting higher
production of structural metals, wire and wire
products as well as tin cans and metal products. The
expansion was supported mainly by on-going
activity in the construction sector and increased
demand for packaging materials from the food
processing industry. On the other hand, production
of brass, copper and aluminium declined due to the
lower demand from the electrical products industry.
Meanwhile, growth in the paper products
industry moderated during the year due to lower
production of pulp, paper and paperboard, while
the manufacture of containers, boxes of paper and
paperboard remained flat. Performance of both the
sub-sectors was affected by the oversupply in the
market. Nevertheless, the production of the pulp,
paper and articles sub-sector continued to expand
strongly. Notwithstanding the moderation in
production, exports of paper and pulp products
increased further due to higher exports to Thailand,
P.R.China, the Philippines, Australia and US. Output
in the food and beverages sub-sector was higher,
supported by consumer spending and higher
demand from Singapore and Brunei.
Construction Sector
In 2003, the construction sector expanded at a
more moderate pace of 1.9% (2002: 2.3%) due
mainly to a slowdown in the civil engineering sub-
sector following the completion of several
privatised projects. Growth was mainly supported
by the residential sub-sector, while activity in the
non-residential sub-sector remained subdued
amidst the continued overhang of office and retail
space, although the excess supply was reduced
during the year.
Activity in the residential sub-sector was higher as
demand for houses remained strong, especially with
the incentives introduced in the Economic Package.
Favourable financing conditions, namely low


15
The Malaysian Economy in 2003
interest rates and attractive loan packages offered
by the banking institutions, helped support interest
in the residential sub-sector both for new property
as well as the secondary market. Construction of
new houses gained momentum during the first nine
months of the year, as reflected in a 17% increase
in housing starts. Reflecting house purchasers’
preference for bigger houses due to a rise in
affordability following higher disposable income
Table 1.4
Residential Property Indicators
2002
2003
Units
Residential property transactions
Units
162,269
164,723
Value (RM billion)
21.1
23.0
Approvals1
198,970
205,518
Developers’ licences
New
1,170
1,062
Renewals
397
436
Sales and advertising permits
New
1,134
1,103
Renewals
1,666
1,707
Loans by banking system
- Value (RM billion)
Outstanding
100.4
116.6
Approvals
29.2
30.0
1 Units approved for construction by private developers.
Source: NAPIC, Valuation and Property Services Department, Ministry of
Housing and Local Government and Bank Negara Malaysia
Construction sector grew at a moderate rate due to slower
growth in the civil engineering sub-sector.
and lower interest rates, the average price of
residential units transacted was higher at
RM139,700 (2002: RM130,300). Prices of
residential properties, including terraced houses as
well as high-rise units, remained firm during the
year, supported by continued demand for houses in
prime locations.
Demand for residential houses was stimulated by
innovative financing packages with attractive terms
provided by financial institutions. To encourage home
ownership, the Economic Package announced by the
Government on 21 May 2003 provided the following
incentives for one year, beginning 1 June 2003:
•
Stamp duty waiver on the Sale and Purchase
Agreements, loan and transfer documents for
houses costing RM180,000 and below;
•
Income tax relief on interest payments for new
buyers of completed houses, and first time
owners of houses costing between RM100,000
to RM180,000;
•
Subsidy of RM600 for new buyers of houses
costing below RM100,000; and
•
Exemption from real property gains tax.
In line with the Government’s objective to provide
affordable houses to the low-income group,
Syarikat Perumahan Negara Berhad (SPNB) has
targeted to build at least 150,000 units of medium-
cost and affordable houses within a five-year
period.  With the liberalisation of the Foreign
Investment Committee (FIC) guidelines in 2001, the
FIC has approved the purchase of 1,617 units of
residential properties (representing an increase of
30.1%) valued at RM771 million by foreigners in
Malaysia during the year. However, the purchase of
commercial properties by foreigners declined.
To reduce the cost of purchasing low-cost houses
and to improve purchasers' access to financing, the
following measures were announced during the year:
•
EPF contributors who purchase low-cost houses
built by SPNB will be provided with end financing
from the Malaysia Building Society Berhad;
•
State governments will exempt land premiums
for the construction of low-cost houses; and
•
The exemption from stamp duties in respect of
Sale and Purchase Agreements for low-cost houses
executed between the purchaser and the
developer on or after 1 July 2002 was gazetted in
February 2003.  In this connection, loan and
transfer documents associated with the Sale and
Purchase Agreements were eligible for exemption.
On the supply side, housing units approved for
construction by private developers in Peninsular
Malaysia increased by 3.3% in 2003, with approvals
picking up by 23% in the second half-year as
developers anticipated higher demand in response to
the incentives in the Economic Package. At the same
time, new sales and advertising permits issued
recorded a strong pick-up of 18% in the second half
of the year (first half: -20.1%). However, renewals of
permits continued to increase in 2003, reflecting a
longer duration required to sell the properties.
In the civil engineering sub-sector, growth was
significantly slower due to the completion of several
privatised projects, mainly power generation plants.
Nevertheless, ongoing road projects such as the
Kajang Ring Road, Guthrie Corridor Expressway,


4.H-16
16
Penchala Link of the SPRINT Expressway, New Pantai
Expressway, Kajang-Seremban Expressway and the
Butterworth Outer Ring Road, supported civil
engineering activity during the year. Construction
work was also ongoing for projects related to water,
ports, sewerage and power generation plants. In
view of the experience acquired in the domestic civil
engineering sub-sector, Malaysian construction
companies have diversified their earnings base and
expanded overseas, particularly in the construction of
highway projects and other infrastructure projects.
These companies are able to compete in the global
market, particularly in India and the Middle East.
Infrastructure projects by the public sector, as
reflected in the Federal Government development
expenditure, remained strong during the year,
especially in the transportation sub-sector.  Among
the major ongoing public projects supporting growth
was the SMART Intelligent Tunnel for Flood
Mitigation in Kuala Lumpur and the Kuala Lumpur
Convention Centre.
Construction activity in the non-residential sub-
sector remained subdued as reflected in lower
ongoing activity in projects related to purpose-built
office and shopping complex. In particular,
completion of new office space in the Klang Valley
slowed down during the last three years. In the
first nine months of 2003, only 93,000 square
metres of office space were completed compared
with 200,000 square metres in 2002 (2001:
178,000 sq. m; 2000: 1.4 million sq. m).  Large
shopping complexes that were completed in the
Klang Valley include the Berjaya Times Square,
Ikano Power Centre, IKEA, Maju Junction and the
Great Eastern Mall. The share of new starts to total
incoming supply for Malaysia as a whole increased
from 2% to 8% in the first nine months of 2003.
The average occupancy rate for office space and
retail complexes stabilised at 79% and 78%
respectively as at end-September 2003, reflecting
continued demand, particularly for projects located
in choice locations.
Table 1.5
Incoming Supply and Planned Supply of Property
Incoming
Planned
Incoming
Planned
Supply1
Supply2
Supply1
Supply2
June-03p
Sept-03p
 Units/’000 sq.m.
Units/’000 sq.m.
Residential (units)
573,117
533,784
569,994
537,919
Purpose-built office (‘000 sq.m.)
1,969
1,890
1,945
1,865
Shopping complexes (‘000 sq.m.)
1,479
1,715
1,535
1,639
Retail shops (units)
31,424
34,537
32,507
34,413
Industrial properties (units)
8,616
22,236
8,299
22,174
1 Consists of properties that are under construction, including those where certificates of fitness/temporary certificates of fitness have not been issued.
2 Approved but not started.
p Preliminary
Source: NAPIC, Valuation and Property Services Department
2,000
0
4,000
6,000
8,000
10,000
12,000
14,000
2000
2001
2002
3Q 2003p
70
75
80
85
90
Net lettable area
('000 sq.m)
Occupancy rate (%)
Graph 1.9
Supply and Occupancy Rate of Purpose-Built 
Office Space in Malaysia: 2000 - 2003
Existing stock
Completion
Occupancy rate (%)
Occupied space
Incoming supply
p Preliminary
1,000
0
2,000
3,000
4,000
5,000
6,000
7,000
2000
2001
2002
3Q 2003p
70
75
80
85
90
Net lettable area
('000 sq.m)
Occupancy rate (%)
Graph 1.10
Supply and Occupancy Rate of Retail Space in
Malaysia: 2000 - 2003
Existing stock
Completion
Occupancy rate (%)
Occupied space
Incoming supply
p Preliminary


17
The Malaysian Economy in 2003
Rentals for prime office space in the Klang Valley
stabilised at RM45 per square metre per month
during the year. In the case of shopping complexes,
the average monthly rental rates of prime retail space
also remained stable at RM226 per square metre.
Rentals of office and retail space in secondary
locations remained low to attract tenants.
In the case of hotels, there were 111 new hotels
completed during the year, providing 7,838
additional rooms. However, the hotel industry was
adversely affected by SARS, especially during the
second quarter of 2003, when tourist arrivals fell by
59% to below 500,000 in April. Arrivals for the year
as a whole declined to 10.6 million from 13.3 million
in 2002, thus resulting in the average occupancy rate
of hotels declining to 53% (2002: 58%).
Availability of adequate financing continued to play
an important role in supporting growth of the
construction sector. In recent years, there has been a
discernible shift in the source of financing for the civil
engineering sub-sector. The civil engineering sub-
sector has increasingly tapped the capital market by
issuing private debt securities (PDS) and also through
recourse to Bank Pembangunan dan Infrastruktur
Malaysia Berhad (BPIMB) to meet its financing
requirements. PDS issued for infrastructure projects
amounted to RM6 billion out of the total RM42.8
billion PDS issued for the year, representing 14% of
total PDS issued (2002: 8%). Similarly, total loans
approved by BPIMB for infrastructure projects rose to
RM5 billion in 2003 (2002: RM2.8 billion). However,
loans outstanding of the banking system for
infrastructure projects declined to RM3.4 billion
(2002: RM5.2 billion). For residential property, the
banking system continued to be the main source of
financing. Total housing loans approved by the
banking system increased by 2.9% to RM30 billion.
RM/sq.m
RM/sq.m
1  Refers to Kuala Lumpur and Selangor
Source: CH Williams Talhar & Wong Sdn. Bhd.
Graph 1.11
Average Monthly Rentals for Prime Office and 
Retail Space in the Klang Valley1
Prime office space (LHS)
Prime retail space (RHS)
38
40
42
44
46
48
50
1998
1999
2000
2001
2002
2003
100
150
200
250
Table 1.6
Office and Retail Space - Unoccupied Space, Incoming Supply and Planned
Supply by State (as at end-September 2003p)
Office Space
Retail Space
Unoccupied
Incoming
Planned
Unoccupied
Incoming
Planned
Space
Supply1
Supply2
Space
Supply1
Supply2
( ‘000 sq.m. )
WP Kuala Lumpur
1,414
1,085
1,028
286
746
649
Selangor
488
55
0
186
138
63
WP Putrajaya
0
295
155
0
66
0
Johor
260
140
493
326
228
789
Pulau Pinang
292
45
39
279
172
52
Negeri Sembilan
24
28
118
41
61
64
Perak
41
49
6
50
4
0
Melaka
25
0
0
56
0
0
Kedah
21
34
1
64
51
14
Pahang
14
15
9
33
0
8
Terengganu
10
0
0
6
7
0
Kelantan
9
4
16
2
63
0
Perlis
1
34
0
0
0
0
Sabah
112
142
0
25
0
0
WP Labuan
38
0
0
15
0
0
Sarawak
57
20
0
40
0
0
Total
2,806
1,946
1,865
1,409
1,536
1,639
1 Consists of properties that are under construction, including those where certificates of fitness/temporary certificates of fitness have not been issued.
2 Approved but not started.
p Preliminary
Source: NAPIC, Valuation and Property Services Department


4.H-18
18
Value 
added
Crude palm 
oil
Rubber
Saw logs
Cocoa
Annual change (%)
2002
2003p
Graph 1.12
Agriculture Production
-25
-20
-15
-10
-5
0
5
10
15
20
p Preliminary
Annual change (%)
Graph 1.13
Agriculture Exports
Total 
Agriculture 
Exports
Palm oil
Saw logs
Sawn 
timber
Rubber
p Preliminary
0
20
40
60
2002
2003p
In addition, loans approved by other housing credit
institutions as a group also increased during the
year. In tandem with higher approvals, housing
loans outstanding of the banking system as well as
other housing credit institutions rose by 16.1% and
10.4% respectively.
In 2003, construction activity was higher with the
return of foreign workers who were repatriated in
2002. Nonetheless, over-dependence on foreign
labour remained an issue in raising productivity in
the sector.  Meanwhile, the Construction Labour
Exchange Centre Berhad was set up in 2003 to act
as a centre for training and screening of foreign
workers as well as supplying and transferring excess
foreign workers to contractors who require these
workers from time to time.
Another development during the year was the
launch of the Building Materials Cost Index by the
Construction Industry Development Board in
collaboration with the Department of Statistics,
Malaysia. The Index gives an indication of pressures
arising from input cost. While the Index showed that
overall prices of building materials have remained
steady from the second half of 2002 until September
2003, some construction companies faced shortages
of building materials.  The shortage was mainly in
steel bars as millers preferred to export their
products to take advantage of the higher prices
overseas.
In line with the Government’s efforts to streamline
the approval and delivery process of the Government
machinery, the Ministry of Housing and Local
Government implemented a two-tier One-Stop
Centre at the local authority and state government
levels for building plan approvals and issuance of
Certificate of Fitness for Occupation (CFO). In
addition, the number of technical departments
involved in certifying CFOs was also reduced from
seven to four.
Agriculture sector
In 2003, the agriculture, forestry and fishery
(agriculture) sector recorded the strongest growth in
11 years against a backdrop of robust exports and
high prices. Value added growth picked up to 5.5%
driven mainly by significant increases in crude palm
oil and rubber output. Growth was also supported
by increases in production of saw logs and, to a
lesser extent, other agricultural commodities, namely
vegetables, fruits, livestock and fish, reflecting the
positive effects of measures taken by the
Government to increase domestic sources of growth
through increased food production. Meanwhile,
cocoa output declined significantly during the year.
Given the substantial increases of between 11-42%
in the prices of major commodities during the year
and improved export volume, export receipts from
agricultural commodities rose significantly by 28.1%.
Thus, the share of agriculture exports to total exports
rose from an average of 6.5% in the period
2000-2002 to 8.4% in 2003.
The strong performance of the agriculture sector
during the year was attributable to both supply and
demand factors. Crude palm oil and rubber
registered double-digit growth as farmers maximised
production by increasing yields through good
agriculture practices (including higher usage of
fertilisers), encouraged by more favourable prices.
Production of palm oil was also supported by
favourable weather conditions as well as the coming
on stream of new mature areas with high yielding


19
The Malaysian Economy in 2003
trees. Meanwhile, higher rubber production was due
to intensive tapping, including in areas that were
previously abandoned. At the same time, external
demand for these commodities was strong amidst
supply shortages in the global market.
The stronger performance of the agriculture sector in
2003 generated significant spill-over effects,
particularly on the rural population.  Given that the
agriculture sector employs about 14% of the total
workforce in Malaysia and that a sizable proportion
of them are smallholders, the higher incomes helped
support the increase in consumption among the rural
community. The plantation sector also benefited from
the stronger economic performance, resulting in
sharp increases in profits.
Crude palm oil (CPO) remained as the major
commodity, accounting for about 4.1 percentage
points of the increase in the value added of the
agriculture sector in 2003. CPO recorded a bumper
production of 13.35 million tonnes or an increase of
12.1%.  Growth was primarily due to expansion in
total mature area (3.1%), mainly in Sabah (6.3%) and
Sarawak (13%) as well as good agriculture practices.
Table 1.7
Agriculture Sector: Value Added, Production and Exports
2002
2003p
Volume
Annual
Volume
Annual
and
change
and
change
Value
(%)
Value
(%)
Value Added (RM million at 1987 prices)
18,438
3.0
19,453
5.5
Production1
of which:
Crude palm oil
      11,909
0.9
13,355
12.1
Rubber
           589
7.7
698
18.4
Saw logs
      20,649
9.1
21,381
3.5
Cocoa beans
             48
-17.4
36
-24.0
Exports (RM million)
26,327
31.9
33,728
28.1
of which:
Palm oil
(‘000 tonnes)
      10,854
3.7
12,509
15.2
(RM/tonne)
           1,367
44.9
1,617
18.3
(RM million)
        14,838
50.2
20,224
36.3
Rubber
(‘000 tonnes)
           928
12.9
945
1.9
(sen/kilogramme)
           269
17.0
379
41.0
(RM million)
        2,492
32.1
3,582
43.8
Saw logs
(‘000 cubic metres)
5,104
5.6
5,508
7.9
(RM/cubic metre)
359
13.9
366
1.9
(RM million)
1,832
20.3
2,015
10.0
Sawn timber
(‘000 cubic metres)
2,474
2.6
2,816
13.8
(RM/cubic metre)
990
5.0
926
-6.5
(RM million)
2,450
7.8
2,607
6.4
1
All in ‘000 tonnes, except for saw logs in ‘000 cubic metres.
p
Preliminary
Source: Department of Statistics, Malaysia
Malaysian Palm Oil Board
Forestry Departments (Peninsular Malaysia, Sabah and Sarawak)
Malaysian Cocoa Board
 Hectares
Tonnes
Graph 1.14
Oil Palm: Area, Production and Yield
Production in million tonnes (RHS)
Mature area in '000 hectares (LHS)
Yield of CPO in tonnes/mature hectare (RHS)
500
1,000
1,500
2,000
2,500
3,000
3,500
1999
2000
2001
2002
2003p
0
2
4
6
8
10
12
14
16
p Preliminary for mature area and yield


4.H-20
20
As a result, CPO output, which usually peaks in the
third quarter in a normal year, recorded monthly
production of above one million tonnes for an
extended period during April – December 2003. On
a regional basis, Peninsular Malaysia accounted for
almost 60% of total national output, or 7.94 million
tonnes of CPO, while Sabah and Sarawak produced
the remaining 5.41 tonnes. In terms of global
ranking, Malaysia maintained its position as the
leading palm oil producer and exporter in 2003,
accounting for 49% of the world’s output and 58%
of total exports.
Average export prices of Malaysian palm oil rose by
18.3% to RM1,617 per tonne in 2003. Against a
backdrop of supply shortages in the global oils and
fats markets, prices of most oilseeds, oils and meals
rallied in 2003, especially since August 2003. In line
with these developments, Malaysian CPO local
prices averaged RM1,577 per tonne in 2003 (2002:
RM1,364). The stronger prices reflected mainly
imbalances in the global vegetable oils and fats
markets arising from a marginal increase in output
of major oilseeds, especially soybean, amidst
stronger demand from major consumers of edible
oils. Soybean harvest in the United States was
adversely affected by drought during the year.  The
shortages in soybean, rapeseed and sunflower oils
led to large price premiums of these oils over palm
oil and this triggered import substitution by price
sensitive buyers.  Export demand for palm oil from
the major buyers of soybean oil (palm oil’s closest
substitute), namely P.R.China, the European Union
(EU) and Middle East, picked up strongly during
the year.
Demand from P.R.China, the EU, Pakistan and
emerging markets in the Middle East, rose between
4% and 29% during the year, on account of lower
domestic production amidst an expansion in their
refining capacities. In the case of P.R.China, the
higher offtake was also due to its higher import
quota for palm oil following its accession into
WTO. However, imports by India, which is one of
Malaysia’s major buyers, declined in 2003 due to
higher tariffs for palm oil products and imposition
of new import regulations, which made palm oil
less competitive against other major oilseeds.
Nonetheless, with double-digit increases in price
and export volume, palm oil generated an
additional export revenue of RM5.4 billion in 2003,
with total export receipts amounting to RM20.2
billion.  Despite the strong external demand,
Malaysian palm oil stocks remained almost
unchanged at 1.17 million tonnes (end-2002
stocks: 1.14 million tonnes) given that output had
also increased significantly during the year.
The palm oil industry made significant strides
during the year. Malaysia gained market shares for
palm oil-based products in five new markets,
namely Chechnya, Antigua, Mayotte, Cape Verde
and the Central African Republic. In the area of
research and development, the Malaysian Palm Oil
Board (MPOB) launched 35 new technologies and
products for commercialisation in the palm oil
industry in 2003.  To enhance utilisation of palm oil
products, MPOB together with local palm oil
related agencies conducted research in
collaboration with research organisations and
institutional users in several consuming countries.
Joint venture projects have been conducted with
P.R.China, Egypt, Oman, Poland, Russia, Ukraine,
South Africa, Pakistan, Turkey and Kuwait. In
addition, Malaysia participated actively in the
international scientific and trade meetings to
promote facilitation of international trade for palm
oil products.
Natural rubber production, which recorded its
first positive annual growth in seven years in 2002,
continued to expand strongly by 18.4% in 2003, to
reach nearly 700,000 tonnes. Smallholders
accounted for almost 90% of total national output
as remunerative prices motivated intensive tapping
activities, which led to a substantial increase in
output of 23.3%. The increase in production was
also contributed by tapping of trees that were
previously abandoned. In contrast, production by
estates declined further by 10.8% (2002: -14.7%)
due mainly to continued conversion of rubber land
into other economic activities during the year. Total
tapped area for Malaysia expanded by about
48,000 hectares or 7% to 737,600 hectares.
0
500
1,000
1,500
2,000
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2000
2001
2002
2003
Price 
(RM/tonne) 
Stocks
CPO Local delivered price
0
300
600
900
1,200
1,500
Stocks 
('000 tonnes) 
Graph 1.15
Palm Oil Price and Stocks


21
The Malaysian Economy in 2003
In line with developments in the global natural
rubber industry, the Malaysian rubber prices (RSS1)
strengthened significantly by 37% to 401 sen per
kilogramme in 2003 (2002: 292 sen). The increase
in prices gained momentum during the course of
the year, rising from 364 sen in the first quarter to
486 sen by the fourth quarter. RSS1 price peaked in
November to record a monthly high of 512 sen,
with the highest daily traded price at 543 sen on
5-6 November before consolidating to close the
year at 473 sen. The strong price performance
during the year was due to the surge in demand
from P.R.China, active purchases by European
traders as well as tight supplies in the major
producing regions, which were affected by the wet
weather, especially in the latter part of the year.
Purchases by P
.R.China picked up significantly for the
second consecutive year (60.2%; 2002: 51.4%),
fuelled mainly by strong demand from the local
automotive industry. The market was further
supported by the decision of the Chinese
government to raise the import quota for natural
rubber by an additional 200,000 tonnes to
accommodate the higher demand by the major tyre
manufacturers.  P.R.China remained as Malaysia’s
largest export market to account for 21.9% share of
total rubber exports (2002: 13.9%).  Besides
P
.R.China, the other major buyers were Korea,
Germany and the Middle East, which together
accounted for 52% of total rubber exports.
Reflecting both higher prices and export volume,
export receipts rose by 43.8% to RM3.6 billion
in 2003.
A significant development in the international natural
rubber sector in 2003 was the signing of the
agreement for the establishment of the International
Rubber Consortium Limited (IRCo) on 6 October by
Malaysia, Thailand and Indonesia. IRCo was formed
with the objective to undertake strategic market
operations, as and when deemed necessary, as well
as to complement agreed measures by these
countries under the Supply Management Scheme
and the Agreed Export Tonnage Scheme, which were
endorsed earlier in 2001. These schemes have
contributed positively to improving the overall
sentiment of the rubber market.
Given the importance of the natural rubber sector in
terms of employment of the rural community as well
as its strong linkages to the downstream rubber-
based industries, rubber has been identified as one of
the strategic crops for sustainable growth of the
Malaysian agriculture sector. In 2003, further
measures were taken to develop the natural rubber
sector, including a study on the medium-term master
plan. An interim report of the study has been
completed. Apart from traditional planting of rubber
to produce latex to sustain the encouraging growth
of the rubber wood-based industries, the
Government has announced incentives to encourage
private sector investment. This includes encouraging
cultivation of latex-timber clone rubber for both latex
and timber production. This clone would also assist
in reducing anticipated shortage in the supply of
rubber wood for the manufacture of furniture, as
80% of earnings from Malaysian furniture exports
are rubber wood-based.
Logging activities in all regions, namely Sarawak,
Sabah and Peninsular Malaysia, intensified in 2003.
Total production of saw logs increased by 3.5% to
21,381 cubic metres in response to stronger external
and domestic demand. Demand from the domestic
wood-based industries turned around to record a
growth of 0.9% in 2003 (2002: -6%), whilst
shipments of logs increased by 7.9%.  Exports
increased despite strong competition from other
hardwood producing countries such as Indonesia,
Vietnam, Brazil and Africa. Purchases by the major
regional buyers, namely Thailand, India, P
.R.China
and Chinese Taipei, which accounted for about 63%
of total exports, rose by 24%. Amidst the strong
regional demand and keen competition in the
international markets, prices of Malaysian logs
remained relatively stable at RM366 per cubic metre
(2002: RM359). Consequently, export revenue from
saw logs increased by 10% in 2003.  Meanwhile,
export volume of sawn timber rose by 13.8%,
especially to markets in the EU, but growth in export
receipts moderated during the year due entirely to
lower export prices (-6.5%).
On the international front, the Malaysian timber
industry continued to face pressures by the “green”
sentiment in Europe, especially in the Scandinavian
countries. This was reflected in the unilateral
restriction imposed by the Norwegian government
on imports of tropical timber for public projects,
unless certified by the Forest Stewardship Council
(FSC). The timber industry has also to contend with
new regulations and standards that are imposed by
developed countries ostensibly to protect the
environment as well as the safety and health of
consumers. Since October 2001, the Malaysian
timber industry has responded to the “green”
sentiment with the setting up of its own certification


4.H-22
22
scheme operated by the Malaysian Timber
Certification Council (MTCC). By end-2003, seven
states have been awarded the Certificate for Forest
Management, and 38 timber companies have been
given permits to use the MTCC logo to provide the
assurance of sustainable and legal source of forest
products to buyers of Malaysian timber and timber
products. Another significant development during
the year was the acceptance of the MTCC scheme by
Denmark as one of the accepted certification
schemes in its Environmental Guidelines for
Purchasing Tropical Timber. Given the wider
acceptance and recognition of Malaysia’s timber
certification efforts, a total of 6,629 cubic metres of
MTCC-certified sawn timber (2002: 732 cubic
metres) and 45 cubic metres of mouldings were
exported to a number of countries, particularly to
Europe, in 2003.
Production of other agriculture commodities,
comprising vegetables, fruits, livestock and fishery,
registered a mildly positive growth during the year.
The increase in vegetables (4.5%) and fruits (3.1%)
production was supported mainly by an expansion in
the cultivated area. The increase in cultivated area for
these crops was in line with the expansion in the
area allocated for the Permanent Food Production
Park (PFPP) scheme. As at end-2003, more than
2,160 hectares of land were developed under the
scheme, with the bulk or 1,681 hectares allocated
for the planting of vegetables. Similarly, growth in
the livestock sub-sector increased by 5.5%, mainly
on account of higher poultry production, as demand,
particularly from the domestic food processing
industries was higher. The fishery sub-sector also
expanded further by 2.6%, supported mainly by
higher landings of marine fish.
Output of cocoa beans declined sharply by 24% to
36,240 tonnes, attributable mainly to lower
cultivated area from 48,035 hectares in 2002 to an
estimated 46,395 hectares in 2003.  The reduction
reflected mainly conversion of cocoa land to other
crops as well as adverse effects from the wet
weather conditions, particularly in the final quarter
of 2003. Cocoa yields were lower as the higher
amount of rainfall affected the fruit-setting period
for the main crop and intensified the black pod
infection. Amidst the need to increase production
of cocoa beans to meet the requirements of local
cocoa grinders as well as to reduce dependency on
imported cocoa beans, rehabilitation programmes
involving mainly smallholders continued during the
year. Under the Cocoa Smallholders’ Development
Programme, a total of 6,916 hectares or 15% of
total acreage under the cocoa smallholdings area
were developed as at end-2003.
Export prices of cocoa rose further by 20.9% during
the year to RM6,314 per tonne due to supply
disruptions in a major producing country following
unfavourable political developments. However, the
Malaysian cocoa sector was unable to capitalise
fully from the high prices of cocoa as domestic
production also fell during the year. Hence, export
revenue from cocoa declined to RM83 million
(2002: RM110 million).
Mining Sector
The mining sector expanded by 4.8% in 2003, as
strong domestic and external demand amidst
expansion in production capacity stimulated higher
production of crude oil and natural gas. Following
higher shipments of oil and gas as well as the
significant increase in export prices, gross foreign
exchange revenue from exports of minerals
increased substantially by 33.1% in 2003.
Crude oil production (excluding condensates) rose
by 5% to 625,800 barrels per day (bpd) compared
with 2002, close to the year’s production target of
626,000 bpd under the National Depletion Policy.
The increase in production during the year was
driven by increased domestic demand for petroleum
products and higher external demand, particularly
from India, Australia, Thailand, P
.R.China and US,
which together accounted for about 65% of
Malaysia’s total export of oil. Exports to these
countries increased by 34% during the year. Higher
output emanated from existing oil fields as well as
four new oil fields that came on stream during the
year. The increase in export volume and sharply
1999
2000
2001
2002
2003
Annual change (%)
Graph 1.16
Mining Production
Crude oil
Natural gas
Value added
-3
-6
0
3
6
9
12


23
The Malaysian Economy in 2003
higher export prices (22%), lifted gross receipts from
crude oil exports by 35% to RM15.7 billion (2002:
RM11.6 billion), to account for 4% of gross exports.
Malaysian crude oil prices (Tapis Blend) strengthened
significantly to average US29.79perbarrel(2002:US25.55) in tandem with higher global crude oil
prices. Prices during the year were, to a large extent,
driven by market sentiments as well as fundamental
factors. In early 2003, geopolitical concerns in the
Middle East, supply disruptions in the major
producing countries, namely, Venezuela, Nigeria and
Iraq, and lean inventories in the major consuming
countries, especially in the US, sustained Malaysian
export prices at a high level of above US30perbarrelinthefirstquarteroftheyear.Inthesecondhalf−year,MalaysiancrudeoilpricesaveragedUS30
per barrel, in line with the international oil prices of
West Texas Intermediate and North Sea Brent, which
averaged US30.64andUS28.96 per barrel,
respectively.
Table 1.8
Mining Sector: Value Added, Production and Exports
2002
2003p
Volume
Annual
Volume
Annual
and
change
and
change
Value
(%)
Value
(%)
Value added (RM million at 1987 prices)
15,826
3.7
16,581
4.8
Production
Crude oil and condensates
698,462
4.9
736,000
5.4
(barrels per day)
of which:
Crude oil (barrels per day)
596,216
2.9
625,775
5.0
Natural gas - net
(million standard cubic feet)
1,706,141
2.9
1,794,388
5.2
Tin-in-concentrates
(tonnes)
4,215
-15.2
3,606
-14.2
Exports (RM million)
22,364
-4.6
29,777
33.1
of which:
Crude oil
(‘000 tonnes)
16,192
7.4
17,913
10.6
(US$/barrel)
24.81
-2.8
30.27
22.0
(RM million)
11,600
4.3
15,662
35.0
Liquefied natural gas
(‘000 tonnes)
15,007
-2.7
17,402
16.0
(RM/tonne)
659
-8.6
766
16.2
(RM million)
9,888
-11.1
13,328
34.8
Tin
(‘000 tonnes)
27,076
-0.7
15,164
-44.0
(RM/tonne)
15,713
-7.0
18,732
19.2
(RM million)
425
-7.7
284
-33.2
p Preliminary
Sources: PETRONAS
Department of Statistics, Malaysia
Department of Minerals and Geoscience, Malaysia
Decisions by the Organisation of Petroleum Exporting
Countries (OPEC) in managing global oil supplies was
a dominant factor in determining oil prices,
particularly during the post-Iraq war period. In the
first half of 2003, OPEC, which accounts for about
1999
2000
2001
2002
2003p
Annual change (%)
Graph 1.17
Mineral Exports
Total mineral exports 
Crude oil
LNG
-20
-40
0
20
40
60
80
p Preliminary


4.H-24
24
The services sectors remained resilient despite the occurrence of
SARS. Activity picked up strongly in the second half-year, largely
due to stronger domestic demand, aided by the Economic Package.
40% of world supply, raised its output quota twice,
by 1.3 million bpd and 2.4 million bpd respectively to
25.4 million bpd to ease the shortfall in supply.
Subsequently, in November, OPEC reversed part of its
earlier increases by cutting the output quota by
900,000 bpd to 24.5 million bpd amidst concerns of
increasing supplies by non-OPEC members. This,
together with the pick-up in global growth and the
seasonally higher demand during the fourth quarter,
helped to sustain the high oil prices towards end-
year. P.R.China accounted for almost 35% of the
increase in global oil demand during 2003. Reflective
of these developments, the Malaysian crude oil prices
remained relatively strong during the year to close at
US$32.15 per barrel as at end-December.
Natural gas production expanded by 5.2% in 2003
as the sector was able to respond to the higher
demand given an increase in production capacity,
especially with the commencement of the MLNG
Tiga plant in May 2003 and the coming on stream of
four new gas fields during the year. Domestic
Table 1.9
Malaysia: Crude Oil and Natural Gas Reserves1
As at end
2002
2003p
Crude oil
Reserves (billion barrels)
3.61
3.69
Reserve/Production (year)
16.0
16.0
Natural gas
Reserves
(trillion standard cubic feet)
87.76
89.67
Reserve/Production (year)
35.7
30 - 40
1
The National Depletion Policy was introduced in 1980 to safeguard the
exploitation of the national oil reserves by postponing the development and
control the production of major oil fields (with reserves of 400 million barrels
or more).
p Preliminary
Source: PETRONAS
due mainly to depleting tin reserves in existing tin
mines, which resulted in low productivity.
During the year, four new oil fields, two each in
Peninsular Malaysia and Sarawak, commenced
operations, thus bringing the total number of oil
fields in production as at end-2003 to 51. With the
commencement of four new gas fields in Peninsular
Malaysia and Sarawak, a total of 18 gas fields were
in operation by end-2003.
A significant development in the Malaysian oil sector
in 2003 was the discoveries of deepwater oil reserves
in offshore Sabah towards the latter part of the year.
Prior to these discoveries, oil was also found in
offshore Sabah in July 2002. A total of six new
production-sharing contracts were signed in 2003.
Services Sector
In 2003, the services sector remained resilient,
recovering rapidly from the adverse effects of the
Severe Acute Respiratory Syndrome (SARS) that
demand remained favourable, particularly from the
power generation sub-sector, which consumed 66%
of total domestic gas production. Higher offtake by
all LNG buyers, namely Japan, Korea and Chinese
Taipei as well as the increase in export prices (RM766
per tonne; 2002: RM659) led to the sharp increase of
34.8% in export receipts generated from LNG.
Production of tin-in-concentrates declined by 14.2%
in 2003, despite higher prices and an increase in the
number of active tin mines. Decline in production was
occurred in the early part of the year. Overall, the
effects of SARS were found to be transitory and
affected the retail, tourism and travel-related sectors,
mainly in the second quarter of the year. Tourist
arrivals fell significantly for a brief period in April-May
(average of 500,000) before gradually picking up in
the following months to reach the pre-SARS level of
above one million tourists by November. Amidst the
sharp decline in tourist arrivals and weaker consumer
sentiment, growth in the services sector slowed
down to 2.9% during the second quarter. The quick
containment of the disease globally and the pro-
active measures undertaken by the Government to
assist the affected industries and to boost consumer
confidence, contributed to the recovery in the
services sector in the second half-year, which grew by
4.5% (first half-year: 3.7%). While growth in final
services moderated largely due to the impact of
SARS, growth in the intermediate services was more
robust, supported by stronger trade-related activities.
Overall, growth in the services sector was sustained
at 4.1% during the year, but its share to GDP
declined slightly to 56.4% from 57% in 2002.
Within the final services sector, growth in the
wholesale and retail trade, hotels and


25
The Malaysian Economy in 2003
restaurants sub-sector moderated to 1.5% in
2003.  The sub-sector contracted in the second
quarter by 2% as consumers avoided public places,
whilst the hotel occupancy rate in some areas fell to
30% due to a decline in tourist arrivals and the
cancellation of several meetings, incentives,
conventions and exhibitions (MICE).  Nevertheless,
the Economic Package introduced in May helped the
tourism and travel-related industries to tide over the
difficult period as well as stimulate domestic
demand. The strong pent-up demand, amidst the
improving consumer confidence and recovery in
tourist arrivals to the pre-SARS level, helped support
-4
-2
-8
-10
-12
-6
0
2
4
6
8
10
12
14
16
18
1Q
00
2Q 3Q 4Q 1Q
01
2Q 3Q 4Q 1Q
02
2Q 3Q 4Q 1Q
03
2Q 3Q 4Q
-60
-40
-50
-20
-30
-10
0
20
10
40
60
50
30
80
70
90
Graph 1.18
Trends in Wholesale and Retail Trade, Hotels  
and Restaurants Sub-sector vis-a-vis Private  
Consumption and Tourist Arrivals
Value added of the sub-sector (LHS) 
Tourist arrivals (RHS)
Private consumption (LHS)
Annual change (%)
Annual change (%) 
Table 1.10
Growth in the Services Sector at Constant 1987 Prices
2002
2003p
2002
2003p
1H
2H
Year
Annual change (%)
% share of GDP
Services
4.1
3.7
4.5
4.1
57.0
56.4
Intermediate services
4.3
4.2
6.1
5.2
22.8
22.8
Transport, storage and communication
2.6
4.5
6.6
5.6
8.5
8.5
Finance, insurance, real estate and
5.3
4.1
5.7
4.9
14.3
14.3
    business services
Final services
4.1
3.3
3.4
3.4
34.2
33.6
Electricity, gas and water
3.9
7.3
5.1
6.2
4.0
4.0
Wholesale and retail trade, hotels and
2.6
0.6
2.4
1.5
14.9
14.4
   restaurants
Government services 1
6.7
6.4
4.9
5.6
7.2
7.3
Other services 2
4.6
3.3
3.2
3.2
8.0
7.9
1
Include general public services (general public administration, external affairs and public order and safety), defence, health, education and others.
2
Include imputed rent from owner-occupied dwellings; community, social and personal services; products of private non-profit services to households and domestic
services of households.
p Preliminary
Source: Department of Statistics, Malaysia
the recovery in the sub-sector. By September, the
average hotel occupancy rate rose above 50%. In
addition, the upward trend in the equity market
amidst stable employment conditions, disbursement
of bonus payments and year-end festivities, further
reinforced consumer sentiment, resulting in the
expansion of the sub-sector in the second half-year.
Value added growth was also affected by greater
competition among retailers especially
hypermarkets. Although the trend of lower prices
had benefited consumers in general, the price
competition had squeezed retailers’ margins.
Coupled with the evolving consumer preference to
shop in hypermarkets and large multi-concept
shopping centers, the year saw the exit of several
small- and medium-sized retailers and
rationalisation of existing retailers through mergers
and acquisitions.
The other services sub-sector which includes
community, social and personal services as well as
imputed rent from owner-occupied dwellings,
expanded at a moderate rate of 3.2% (2002: 4.6%).
The moderation reflects slower growth in the
community, social and personal services as
entertainment and gaming activities were affected by
SARS during the second quarter. Education and
private healthcare services were also affected, albeit
to a lesser extent. These sectors performed better for
the year as a whole. The total number of students
pursuing higher private education in Malaysia rose to
almost 300,000 as at end-2003 (end-2002: 294,600),
reflecting increases in students from both Malaysia


4.H-26
26
and abroad. Similarly, the private healthcare industry
continued to expand in response to increased
demand by locals and foreigners for better
healthcare services. The survey by the Association of
Private Hospitals in Malaysia showed that the number
of foreign patients treated in the private hospitals
rose to 102,946 as at end-2003 (end-2002: 84,585).
The Government services sub-sector expanded by
5.6% in 2003 (2002: 6.7%). The growth reflected
higher expenditure on emoluments following the
salary adjustment for civil servants with the
implementation of the Skim Saraan Malaysia in the
last quarter of 2002. Consonant with the
strengthening economic activity, the utilities sub-
sector registered a higher growth of 6.2%
(2002: 3.9%), reflecting mainly increased electricity
demand, as well as higher gas and water
consumption. The coming on stream of five power
plants by the Independent Power Producers also
contributed to the increase in electricity generation
during the year.
Within the intermediate services sector, growth in
the transport, storage and communication sub-
sector picked up strongly by 5.6% in 2003
(2002: 2.6%), owing largely to robust activities in
the telecommunications industry. The
telecommunications industry benefited from
economies of scale following the rationalisation of
Table 1.11
Selected Indicators for the Services Sector
2002
2003p
Annual change (%)
Electricity production index
10.3
5.8
Loans outstanding in the banking system
4.6
4.8
Insurance premiums
13.3
14.0
KLSE (turnover, volume)
12.0
101.7
LRT ridership1
3.5
8.8
Tourist arrivals
4.0
-20.4
Airport passenger traffic
4.2
1.3
Air cargo handled
16.3
6.9
Bulk cargo throughput at five major ports2
4.9
9.7
Container throughput at six major ports3
23.8
14.9
%
Hotel occupancy rate
57.9
53.3
Penetration rate:
- Internet dial-up
10.5
11.4
- Broadband
0.08
0.44
- Mobile phone
36.9
43.9
- Fixed line
18.8
18.1
1
Include STARline and PUTRAline.
2
Include Port Klang, Johor Port, Penang Port, Sabah Ports and Bintulu Port.
3
Include Port Klang, Johor Port, Port of Tanjung Pelepas, Penang Port,
Sabah Ports and Bintulu Port.
p Preliminary
Source:
Department of Statistics, Malaysia; Malaysia Airports Holdings Berhad; Kuala
Lumpur Stock Exchange; Malaysian Communications and Multimedia
Commission; Ministry of Finance; Port authorities; Syarikat Prasarana Negara
Berhad; Malaysia Tourism Promotion Board; and Bank Negara Malaysia
the cellular industry as well as the various measures
undertaken to promote new areas of growth in
telecommunications. In the cellular segment,
growth accelerated in 2003 due to further
expansion in the subscriber base (11 million; end-
2002: 9 million) as well as increased usage of both
traditional voice telephony and new applications in
mobile data. During the year, Short Messaging
Service (SMS) traffic rose significantly, boosted by
the wider usage of SMS in various applications,
such as entertainment and ticket reservation as well
as the downloading of data and other information.
Growth in mobile data was further reinforced by the
introduction of the Multimedia Messaging Service
(MMS) in the second half-year, which allows mobile
phone users to enhance their messages by
incorporating sounds and images. With the
continued popularity of mobile phones, fixed line
subscribers declined further.
Various measures undertaken to promote new areas
of growth in the telecommunications industry, such as
greater usage of e-commerce and on-line services for
the purchase of goods and services, supported growth
in the industry. In addition, the reduction in the access
fee for broadband and strong demand for high-speed
Internet access resulted in the number of broadband
subscribers rising five fold to 110,400 as at end-2003,
while the number of Internet subscribers increased by
10.1% to 2.9 million.
In the transportation industry, lower tourist arrivals
affected the air passenger segment.  Growth in the
other segments was supported by higher trade and
domestic tourism activities, particularly in the second
half of the year. Following the increase in both
indigenous and transhipment cargo, activity at the
ports continued to remain strong.  Total container
cargo handled at the six major ports increased by
14.9% in 2003 (2002: 23.8%). Air cargo business was
also enhanced by the introduction of the I-port
programme in the two major ports, facilitating more
efficient transfer of goods between ports and airports
in the country. Aggressive campaigns undertaken by
the Government to promote domestic tourism as well
as the rapid expansion of the no-frills budget airline to
many local destinations led to the continued increase
in domestic passengers, compensating for the decline
in international passengers during the year.
Growth in the finance, insurance, real estate and
business services sub-sector was sustained at
4.9% in 2003  (2002: 5.3%).  Growth emanated
from increased bank lending amidst lower lending


27
The Malaysian Economy in 2003
rates, more robust insurance activities, as well as the
pick-up in the stock market and real estate activities
in the latter part of the year. The low interest rates
and attractive financing packages offered by financial
institutions, additional funds provided by the
Government under the Economic Package, as well as
improved infrastructure for the small- and medium-
enterprises stimulated lending activities during the
year. Value added growth in the finance sector was
supported by interest income and strong growth in
fee-based income of financial institutions. The
significant increase in insurance premiums from both
conventional insurance and takaful products further
supported the growth in the sub-sector.
DOMESTIC DEMAND CONDITIONS
Domestic demand conditions strengthened further in
2003, as the economy successfully weathered the
uncertainty in the external environment, including
the outbreak of SARS and the geopolitical tensions in
the first half of the year. Growth was driven mainly
by stronger private sector activities and supported by
public sector expenditure. The improved external
environment in the second half-year, which led to
rising consumer and business confidence, as well as
the positive effects of the Government’s Economic
Package translated into higher private sector
activities. The low interest rate environment, stable
employment prospects, high commodity prices,
improvement in corporate cash flow positions as well
as further liberalisation of foreign equity ownership
in the manufacturing sector reinforced the positive
spill-over benefits from the Economic Package. As a
result, the private sector resumed its role as the main
driver of growth in 2003, led by the strengthening in
consumer spending and a recovery in private
investment. Meanwhile, growth in public sector
expenditure moderated with the Government
continuing to provide an enabling environment to
support private sector activities. Overall, growth in
aggregate domestic demand (excluding stocks)
strengthened to 4.8% from 4.2% in 2002.
The public sector continued to play an important role
in stimulating the economy. The pro-growth measures
taken in early 2003 were instrumental in mitigating
the impact of SARS and contributed towards the
momentum of growth in the second half-year. Overall,
the pace of expansion of public sector expenditure
moderated to 5.5% in 2003, in line with the move
towards gradual fiscal consolidation.
Graph 1.19
Real Domestic Demand Aggregates
Aggregate domestic demand (excl. stocks)
Private consumption
Public consumption
Private investment
Public investment
-60
-40
-20
0
20
40
93
94
95
96
97
98
99
00
01
02
03
Annual change (%)
Domestic demand conditions strengthened further in 2003. The
private sector resumed its lead role in driving growth, supported
by higher consumption and the turnaround in private investment.
Growth in public sector expenditure moderated but was
supportive of private sector activities.
Public consumption was sustained, increasing by
7.9% in 2003, due mainly to the continued high
expenditure on supplies and services, emoluments
and defence. The higher expenditure on supplies and
services was largely due to the measures to improve
the public sector delivery system. Meanwhile, the
higher expenditure on emoluments was partly due to
the implementation of the Malaysian Remuneration
System for employees in the public sector (effective
November 2002) as well as the special critical
allowance for staff in Government hospitals who
were directly involved in addressing SARS-related
cases.
Reflecting the public sector’s role of providing a
supportive environment for private sector activities,
public investment continued to increase in 2003,
albeit moderately. The increase in public investment
reflected higher outlays to improve and upgrade the
country’s infrastructure, including roads and


4.H-28
28
highways, and rail, port and airport facilities. Higher
outlays were also expended on the construction and
upgrading of hospitals as well as rural and health
clinics. In addition, expenditure on agriculture and
rural development increased in 2003 in line with the
Government’s effort to modernise the agriculture
sector and to narrow income disparities between
urban and rural areas by encouraging agro-based
industries. A large share of the expenditure
continued to be channelled towards education and
training, especially skills development and training in
technical fields and on information and
communication technology to facilitate the move
towards a knowledge-based economy.
Total capital expenditure of the NFPEs remained high
in 2003, on account of upgrading and capacity
expansion programmes. Petroliam Nasional Berhad
(PETRONAS) continued to invest in exploration and
production projects as well as the construction of
liquefied natural gas tankers and petroleum tankers.
In the case of Tenaga Nasional Berhad, the bulk of
the expenditure was for upgrading of the
transmission system and power generation, while a
large portion of Telekom Malaysia Berhad’s
expenditure was focussed on upgrading and capacity
expansion to improve telecommunication
infrastructure and services.
The private sector resumed its role as the main
engine of growth for the Malaysian economy in
2003, contributing 2.5 percentage points to real GDP
growth. Private sector expenditure increased
significantly by 4.3% (2002: 0.7%), reflecting the
up-turn in private investment and a further
strengthening of consumer spending. Private
consumption increased at a faster pace of 5.1% in
2003, after a hesitant start, particularly at the height
of the geopolitical tensions and the SARS outbreak
during the second quarter. Private consumption,
which was less robust in April and May, regained
strength from June as confidence improved following
the containment of the SARS threat and the
announcement of the Economic Package to promote
domestic demand. Measures to enhance household
disposable income included a voluntary reduction in
the EPF contribution rate for employees and various
tax exemptions. Lower interest rates following the
reduction in the policy rate by Bank Negara Malaysia
further improved consumer confidence. As a result,
consumer spending gathered momentum and
returned to its normal trend in the third quarter. The
rise in consumer spending also reflected the effects
of pent-up demand, with increased purchases of cars
and consumer durables as well as higher expenditure
on hotels and restaurants during the quarter. Retail
sales also turned around to register a positive growth
in the third quarter and strengthened further in the
latter part of the year, reinforced by seasonal factors
such as festivities, year-end bonus payments and
back-to-school shopping. Other factors supporting
higher consumer spending during the year included
the positive wealth effect from the improved stock
market performance as well as higher rural income
due to the large multiplier impact of higher
commodity prices.
Of significance, private investment turned around
to record positive growth beginning from the third
quarter of 2003. For the year as a whole, private
investment increased by 1.1% following two years of
contraction. The expansion in private sector
investment reflected the improvement in business
confidence, particularly in the second half-year. In
addition, improved capacity utilisation due to rising
external demand and higher production underpinned
Table 1.12
Private Consumption Indicators
2002
2003
1Q
2Q
3Q
4Q
Year
Sales of passenger
cars (incl. 4WD)
‘000 units
375.4
85.1
83.2
89.6
76.5 334.4
Annual change (%)
9.4
-7.4 -14.9
-9.5
-11.7 -10.9
Tax collection
Sales tax
(RM billion)
9.2
1.5
2.1
2.0
2.4
8.0
Service tax
(RM billion)
2.2
0.4
0.7
0.4
0.6
2.0
Narrow Money (M1)
Annual change (%)
10.3
8.4
10.0
11.9
14.6
14.6
Loans disbursed by
banking system
Consumption credit
(excl. passenger cars)
Annual change (%)
38.1
11.2
5.9
12.3
11.4
10.2
Retail trade,
restaurants and
hotels
Annual change (%)
-1.4
6.5
7.8
6.9
12.1
8.4
MRA retail sales
Annual change (%)
3.0
-0.1
-2.9
3.9
8.4
3.6
Credit card operation
Turnover spending
(RM billion)
26.8
7.2
7.1
8.0
8.6
30.9
Annual change (%)
25.0
18.8
13.8
15.5
14.2
15.5
MIER Consumer
Sentiments Index
- 105.2 106.9 112.8 115.5
-
KLSE Composite Index 646.3 635.7 692.0 733.5 793.9 793.9
Commodity prices
CPO (RM/tonne)
       1,364 1,585 1,486 1,444 1,793 1,577
Crude oil (USD/barrel)
26
33
28
28
32
30
Rubber (sen/kg)
292
364
367
387
486
401


29
The Malaysian Economy in 2003
capital spending activities, particularly in the
manufacturing sector. Other factors supporting the
improvement in investment activities were the low
interest rates as well as improved profitability and
cash flow positions of companies in line with higher
sales and profits.
Business investment improved in most sectors of the
economy except for the transportation sector where
capital outlays had tapered off following the
completion of large projects, and the
telecommunication sector. Manufacturing
investment turned around significantly to register a
positive growth of 3.2% in 2003 (2002: -32.8%),
reflecting the improvement in business conditions
and the high capacity utilisation rates (82% in 2003).
Capital outlays in the manufacturing sector were
mainly in the form of investment in machinery and
equipment as industries needed to expand
productive capacity in response to high demand and
utilisation rates.
A positive development during the year was the
significant improvement in the value of proposed
investment applications and approvals in the
manufacturing sector, signalling the improved
business confidence and the need to add new
capacity. The total value of applications received
increased by 37.1% to RM25.8 billion, while the
value of approved investment increased significantly
by 62.8% to RM29.1 billion. Of the total value of
investment approvals, approximately 77% was for
new investment, while the balance was for
reinvestment. Unlike in the past years when the
electrical and electronics industry accounted for a
large share of the total approved investment, a large
Table 1.13
Private Investment Indicators
2003
1Q
2Q
3Q
4Q
Year
Sales of commercial
vehicles (incl. 4WD)
 ‘000 units
59.6
14.9
16.2
19.4
20.1
70.6
 Annual change (%)
12.2
4.2
7.4
24.5
37.2
18.5
Applications to
MITI
No. of projects
878
208
225
272
228
933
Capital investment
(RM billion)
18.8
12.2
5.1
4.2
4.3
25.8
Foreign
11.7
5.7
1.7
1.8
2.3
11.6
Local
7.0
6.4
3.4
2.4
2.0
14.1
Approvals by MITI
No. of projects
792
292
199
261
213
965
Capital investment
(RM billion)
17.9
5.3
2.7
12.0
9.1
29.1
Foreign
11.6
2.1
1.7
6.0
5.8
15.6
Local
6.3
3.2
0.9
6.0
3.3
13.5
MSC-Status Companies
No. of companies
191
41
42
39
39
161
Approved investment
(RM billion)
2.7
0.3
0.4
0.3
0.5
1.6
Loans disbursed by
banking system
Manufacturing sector
Annual change (%)
0.9
1.9
3.0
7.3
7.0
4.8
Construction sector
Annual change (%)
41.8
-1.3
-34.3
11.2
3.5
-8.5
Business services
Annual change (%)
-7.4
7.4
-20.6
27.1
22.9
6.7
Private Debt
Securities
Total funds raised
(RM billion)
26.7
16.2
12.0
6.4
8.3
42.8
Initial Public Offerings
(KLSE)
Total funds raised
(RM billion)
6.8
0.2
0.2
0.6
3.0
4.0
MIER Business
Conditions Survey
Business Conditions
Index
-
99.3 104.9 109.8 109.9
-
Capacity Utilisation
Rate (%)
-
79.6
78.0
79.6
81.1
-
2002
Average net profit  
per company
Private Investment (RHS)
Graph 1.20  
Higher Investments with Higher Profits
ROE
-20
-10
0
10
20
30
40
50
60
1995
1996
1997
1998
1999
2000
2001
2002
2003
RM million,%
-60
-40
-20
0
20
40
60
80
100
120
140
160
180
Annual change (%) 
2003
Mining
15%
Services 
20%
Construction
23%
Manufacturing 
30%
Agriculture 
12%
Graph 1.21
Private Investment by Sector (% share)


4.H-30
30
proportion of the approved investment in 2003 was
in the basic metal products industry, which
accounted for a significant share of 30% of total
approved investment. This was followed by the
transport equipment sector (24%) and the electrical
and electronics industry (17%).
There has been some shift in the pattern of
investment towards higher value added and higher
technology projects, involving highly-skilled manpower
and higher capital investment. For example, in the
consumer electronics sub-sector, companies have
shifted production from traditional products to higher
value added products, such as digital audio-video
equipment, multimedia speakers, plasma television
sets and home theatres, while in the electronics sub-
sector, approved projects were for high-end computer
and computer peripheral products and high-end
telecommunications equipment. Some companies
have also set up their own research and development
centres to improve design capabilities and reduce
costs. This shift towards higher value added and
Annual change (%)
Utilisation rate (%)
Graph 1.22  
Manufacturing Investments and Capacity  
Utilisation Rates
Manufacturing investments
Utilisation rate
1999
2000
2001
2002
2003
-40
-30
-20
-10
0
10
20
30
40
50
70
72
74
76
78
80
82
84
higher technology is reflected in the gradual rise in the
capital intensity as measured by the ringgit value of
capital investment per employee (CIPE). The CIPE has
increased from RM0.08 million in the 1980s to
RM0.24 million in the 1990s and RM0.38 million in
2003.
Reflecting the increased confidence of foreign
investors, the value of approved foreign investment
increased significantly by 35.1% to RM15.6 billion and
accounted for 53.7% of the total approved
investment. Of this amount, 28% was reinvestment by
the existing foreign investors and 72% was for new
activities. This indicated that Malaysia remained an
attractive investment location despite the emergence
of competition from other regional countries. The five
most important sources of foreign investments in
Malaysia in 2003 were United Arab Emirates, United
Kingdom, the United States, Japan and Singapore,
which together accounted for 80% of total foreign
investments in approved projects. One of the
approved projects includes a high technology project
from the United Kingdom to develop a stratosphere-
based high altitude surveillance and communication
platform, which may eventually be a worldwide
system of surveillance and communications as it
complements contemporary satellite aerial
infrastructure.
Meanwhile, local manufacturers have become more
aggressive in their business expansion plans as their
share of the value of investment applications have
exceeded that of their foreign counterparts for the
first time since 1997. The value of approved domestic
investment more than doubled to RM13.5 billion,
reflecting the positive response to the Government’s
Graph 1.24
Approved Manufacturing Investment
by Industry, 2003 (% share)
Basic metal
products 30% 
Transport
equipment 24% 
Others
21%
Electrical & electronic
products 17% 
Fabricated metal
products 4%
Wood & wood
products 4% 
0
5
10
15
20
25
30
35
40
45
50
97
98
99
00
01
02
03
0
200
400
600
800
1,000
1,200
Graph 1.23 
Private Investment in the Manufacturing Sector
RM billion
No. of projects
Domestic investment
Foreign investment
No. of projects (RHS)
Applications:
Domestic investment
Foreign investment
No. of projects (RHS)
Approvals:


31
The Malaysian Economy in 2003
policy to encourage domestic investment to drive
growth. This development also reflected the success of
the government’s efforts in encouraging local
manufacturers to upgrade their productive capacity as
well as collaborate with foreigners in new business
ventures. Excluding a single large investment in the
basic metal products industry, local investments were
concentrated in the high value-added non-resource
based industries, namely, the transport equipment,
electrical and electronics products and fabricated
metal products industry.
Investment in the construction sector continued to
register a moderate increase during the year. A large
part of construction investment reflected activities in
the residential sub-sector, which was supported by the
conducive property market environment in response to
the low interest rates offered by the banking
institutions and the Government’s Economic Package
for the property sector. Meanwhile, capital investment
in the sector was also supported by activity in several
ongoing privatised road projects, namely the New
Pantai Expressway, Kajang Ring Road, Guthrie Corridor
Expressway, SPRINT Highway (Penchala Link), Kajang-
Seremban Expressway, Jelutong Highway and
Butterworth Outer Ring Road.
Stronger investment activities in the services sector
were visible in the utilities as well as the retail,
wholesale and business sub-sectors. Capital spending
in the utilities sub-sector continued to increase in 2003,
supported by activities in water supply projects as well
as the development works of several power plants. The
power plants that came onstream during the year
included the Teknologi Tenaga Perlis Power Plant, Prai
Power Plant and Panglima Power Plant, while the
construction of the new 2,100MW power plant in
Tanjung Bin was in progress. The consolidation of the
telecommunications industry affected investment in
this sub-sector. The rationalisation exercises of
telecommunication operators and the merger of
service providers contributed to lower capital spending.
Investment in the sub-sector was mainly towards
improving the existing network quality and increasing
coverage areas in response to intense competition,
particularly in the cellular services sector. Investment in
the transport sub-sector was largely supported by the
development of ports, reflecting mainly the capacity
expansion of Port of Tanjung Pelepas, West Port and
Kuantan Port. In recent years, capital spending in the
sub-sector had been on a declining trend due to the
completion of several major rail projects. The KL
Monorail was completed and started commercial
operations in the second half of 2003.
Capital spending in the retail business reflected the
establishment of new outlets in the expansion
programmes by major hypermarket operators and
established retailers. Various incentives introduced by
the Government have attracted companies to
establish shared services centres in Malaysia, which
provide information technology services, software
development, customer management and data
processing for the companies’ global or regional
operations. The setting up of these shared services
centres includes additional capital spending in
technology and logistic infrastructure. A major
development project during the year was the
intensification of the Proton City mixed development
project.
New capital expenditure in the mining sector was
largely by the oil and gas sub-sector, boosted by
higher upstream activities in exploration and
production. Higher demand for crude oil, coupled
with the increase in crude oil prices, encouraged
companies to increase capital expenditure for
production facilities. Sustained investment in the
agriculture sector was largely attributed to activities
in crop plantation, with a larger contribution from
palm oil plantations, buoyed by stronger demand for
crude palm oil and high prices. The capital
expenditure was mainly to improve efficiency in crop
harvesting processes and for new planting as well as
replanting activities. The increase in investment in the
agriculture sector was also reflected in higher imports
of agricultural equipment during the year. In
addition, higher investment committed under the
National Agricultural Policy continued to encourage
participation from the private sector, primarily for
food production.
Notwithstanding stronger consumption spending in
2003, gross national savings (GNS) increased by
18.1%. Higher incomes from the improvement in
external demand and strong export earnings from
high commodity prices led to a significant expansion
in gross national income in nominal value.
In the private sector, both households and the
corporate sector enjoyed stronger cash flows,
benefiting from higher disposable incomes as a result
of the measures in the Economic Package, the
significant improvement in domestic activities and
external demand, and sharply higher commodity
prices. This enabled private consumption to
strengthen further in 2003, while private sector
savings registered a strong increase of 34.7% during
the year, with the main contributor being corporate


4.H-32
32
savings. Higher corporate savings was reflected in a
marked increase of RM13.9 billion in new deposits
placed by businesses in the banking institutions,
compared with a net withdrawal of RM154 million in
2002.  Despite higher public consumption, public
sector savings increased further by 4.4% due mainly
to better revenue performance of both the Federal
Government and the non-financial public enterprises.
Overall, the share of GNS to GNP rose to 36.9% in
2003 compared with 34.4% in 2002. This high rate
of savings has enabled Malaysia to finance its
economic growth from domestic sources.  With the
recovery in investment still in its early stage, gross
domestic capital formation (including stocks)
registered modest growth. The savings-investment
balance as reflected in the current account of the
balance of payments, therefore, recorded a higher
surplus of RM50.8 billion or 13.7% of GNP
. The
savings-investment surplus is expected to moderate
as the recovery in investments would strengthen in
line with stronger economic growth.
PRICES AND EMPLOYMENT
Consumer Prices
Inflation remained low and stable in 2003. The
overall inflation rate, as measured by the annual
change in the Consumer Price Index (CPI), was
slightly lower at 1.2%, compared with 1.8% in the
previous year. Core inflation, which is inflation
excluding price-controlled and price-volatile items as
well as items that are subject to one-off price
Table 1.14
Savings-Investment Gap
2002
2003p
(RM million)
Public gross domestic
capital formation
53,698
56,304
Public savings
63,496
66,313
Deficit / surplus
9,798
10,009
Private gross domestic
capital formation1
31,317
29,329
Private savings
52,013
70,081
Deficit / surplus
20,696
40,752
Gross domestic capital formation
85,015
85,633
(% of GNP)
25.3
23.2
Gross national savings
115,509
136,394
(% of GNP)
34.4
36.9
Balance on current account
30,494
50,761
(% of GNP)
9.1
13.7
1 Includes the change in stocks. Previously, the change in stocks was distributed
between the public and private sector gross domestic capital formation.
p Preliminary
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
adjustments, remained broadly stable at 0.6% in
2003 (2002: 0.5%).  Several factors combined to
ensure that inflation was benign. While domestic
demand strengthened, excess capacity in selected
sectors and the absence of wage cost pressures,
amidst improving labour productivity, helped to
contain price pressures.  Small price adjustments, in
March 2003, in retail prices of petrol, diesel and
cooking gas and telephone rental contributed to
about 0.4 percentage point to the overall inflation
during the year.
Transport and communication prices moderated
significantly in 2003 due in part to the higher base in
2002, despite higher prices of petroleum and
petroleum-related products. Prices for clothing and
footwear, furniture, furnishing and household
equipment continued to decline during the year
0.5
0.0
1.0
1.5
2.0
2.5
Annual change (%)
Headline
Core inflation
0
1
2
3
4
5
6
7
8
9
Beverages &
tobacco  
Food
Overall
Transport &
communication 
Gross rent,
fuel & power 
-20
-10
0
10
20
30
40
Non-commodity
related 
Commodity 
related
Overall
Measures of Consumer Price Inflation
2000
2001
2002
J F MA M J J A S O N D J F MAM J J A S O N D J F MAM J J A S O N D
Producer Price Index
Annual change (%)
2000
2001
2002
Consumer Price Index
Annual change (%)
J F MAM J J A S O N D J F MA MJ J A S O N D J F MAM J J A S O N D
Graph 1.25
Inflation: Annual Rate of Change
2000
2001
2002
J F MAM J J A S O N D J F MAM J J A S O N D J F MAM J J A S O N D


33
The Malaysian Economy in 2003
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
Overall CPI
Food
Beverages and tobacco
Clothing and footwear
Gross rent, fuel and power
Furniture, furnishings and household equipment and operation
Medical care and health expenses
Transport and communication
Recreation, entertainment, education and cultural services
Miscellaneous goods and services
percentage point
Graph 1.26
Contribution to Annual Change in the Consumer Price Index
2002
2003
Table 1.15
Price Indicators
Weight
2002
2003
Annual change
%
Consumer Price Index
(2000=100)
100.0
1.8
1.2
of which:
Food
33.8
0.7
1.3
Beverages and tobacco
3.1
4.2
1.6
Clothing and footwear
3.4
-2.3
-2.0
Gross rent, fuel and power
22.4
0.7
0.9
Furniture, furnishings and
household equipment
and operation
5.3
-0.4
-0.6
Medical care and health
expenses
1.8
2.4
1.7
Transport and communication
18.8
6.6
1.6
Recreation, entertainment,
education and cultural services
5.9
0.2
0.6
Miscellaneous goods and services
5.5
1.1
1.3
Consumer Price Index
Durable Goods
9.4
-0.8
-1.1
Semi-Durable Goods
5.4
-1.6
-1.4
Non-durable Goods
40.2
1.6
1.6
Services
45.0
3.0
1.3
Producer Price Index
(1989=100)
100.0
4.4
5.8
of which:
Local Production
79.3
5.7
7.0
Imports
20.7
-0.7
0.8
House Price Index
(1990=100)
-0.6
-
of which:
Klang Valley
-0.3
-
Johor Bahru
-6.0
-
Penang Island
-5.2
-
Source:
Department of Statistics, Malaysia
NAPIC, Department of Valuation and Property Services
amidst increased capacity and rising competition
from imported goods.
Stronger demand was reflected mainly in higher
prices for food, rental, fuel and power. Generally,
higher prices for food items reflected stronger
demand amidst higher commodity prices, and higher
prices for selected imported food items. Meanwhile,
the increase in rental was moderate. Rental for
lower-end houses rose by 1%, while the increase for
the higher-end houses was 0.8%.
Producer Prices
Producer prices, as measured by the Producer Price
Index (PPI), rose at a higher annual rate of 5.7% in
2003 (2002: 3.7%), reflecting largely higher prices
for commodity-related products, following higher
prices of crude palm oil, rubber and crude petroleum.
Excluding commodity-related products, producer
prices remained subdued, increasing by 0.5% (2002:
0.1%). Prices paid for imported goods increased by
0.8% (2002: -0.7%), reflecting mainly higher
petroleum prices and the appreciation of major
currencies against the ringgit.
Labour Market Developments
The domestic labour market conditions remained
stable and healthy. In 2003, overall growth in total
employment and the labour force expanded
moderately by the same rate of 3.3% to 10.2 million
workers and 10.5 million persons respectively. The
unemployment rate remained low at 3.5%. Further


4.H-34
34
Annual change (%) 
%
0
2
4
6
8
10
1999
2000
2001
2002
2003
0
1
2
3
4
Graph 1.28
Output and Employment
GDP
Labour force
Source: Department of Statistics, Malaysia
 
Economic Planning Unit 
 
Bank Negara Malaysia
Total employment
Unemployment rate (RHS)
measures were undertaken in 2003 to improve the
quality of labour, narrow the skills mismatches and
address the changing demands of the economy.
The Beveridge Curve, which tracks the pattern of
unemployment and vacancies in the labour market,
shifted downwards and inwards in 2003, indicating
lower turnover in the labour market and increased
efficiency in the worker-job matching process. This
was corroborated by the findings of other surveys. The
Salary, Benefits and Employment Conditions Survey in
the Manufacturing Sector conducted by the
Federation of Malaysian Manufacturers (FMM) showed
that the overall average monthly turnover rate was
lower at 1.76% in 2003 (2002: 4.1%). Similarly, the
Salary and Fringe Benefits Survey undertaken by the
Malaysian Employers Federation (MEF), which also
Labour market conditions remained favourable, supported by
higher growth in productivity.
Table 1.16
Labour Market Indicators
1999
2000
2001
2002
2003e
Labour force (‘000)
9,177.8
9,572.5
9,892.1
10,198.8
10,535.3
(annual change in %)
3.7
4.3
3.3
3.1
3.3
Employment (‘000)
8,869.6
9,271.2
9,532.5
9,840.0
10,166.2
(annual change in %)
3.5
4.5
2.8
3.2
3.3
Unemployment rate (%)
3.4
3.1
3.6
3.5
3.5
Labour productivity (GDP/Employment)
(annual change in %)
2.6
3.9
-2.4
0.9
2.0
Real wage per employee in manufacturing sector
(annual change in %)
3.1
5.0
1.6
3.2
2.6
e Estimate
Source: Department of Statistics, Malaysia, Economic Planning Unit and Bank Negara Malaysia
Unemployment Rate (%)
Source: Economic Planning Unit 
 
Ministry of Human Resources 
 
Bank Negara Malaysia   
Vacancy rate
(%) 
Graph 1.27
Beveridge Curve for Malaysia (1998 - 2003)
0.2
0
0.4
0.6
0.8
1.0
1.2
1.4
1.6
3.1
3.2
3.3
3.4
3.5
3.6
3.7
1999
2000
2001
2002
1998
2003
included firms from the non-manufacturing sectors,
showed that the overall average monthly turnover rate
remained low at 1.76% in 2003 (2002: 1.66%).
The low turnover in the labour market was also
reflected in data on vacancies and retrenchment for
2003, while data on placements and unplaced job
seekers mirrored the efficiency in the job matching
process. Growth in the number of vacancies
reported, which were mainly in the manufacturing,
agriculture, services and construction sectors,
moderated by 40% to 96,918 (2002: 162,787).
Retrenchments, which occurred mainly in the
manufacturing and tourism-related sectors, were also
lower by 20% (21,206 persons; 2002: 26,452). The
main reasons for retrenchment included reduction in
demand for products, company reorganisation and
closure of company. Other reasons included
completion of projects, reduction in production and


35
The Malaysian Economy in 2003
employment, and outsourcing. Growth in the
number of placements during the year moderated by
16%, although the slowdown in the growth of
vacancies was higher. Concurrently, the number of
registered unplaced job seekers reached 28,404 at
end-2003, the lowest since January 2001. Both
developments indicate greater efficiency in the
matching of workers to jobs available.
Given some underemployment in selected sectors,
the pick-up in economic activity did not exert undue
pressure on wages in 2003. Available indicators on
wages showed that increases in wage rates
continued to moderate in 2003:
•
Data from the Monthly Manufacturing Survey
conducted by the Department of Statistics
indicated that, on an annual basis, real wage per
employee increased by 2.6% (2002: 3.2%).
•
The Salary and Fringe Benefits Survey undertaken
by the MEF showed that the increase in the
average private sector salary was slightly lower at
5.8% in 2003 (2002: 6%). On a sectoral basis,
the average salary increase in the non-
manufacturing sector was higher (6.1% in 2003
and 2002) than the manufacturing sector (5.5%;
2002: 5.9%). The average minimum monthly
salary offered to those with a basic degree was
marginally lower at RM1,669 (2002: RM1,675).
•
The Salary, Benefits and Employment Conditions
Survey in the Manufacturing Sector conducted by
the FMM showed that the increase in overall
average salary paid to employees was also
moderate at 5.5% in 2003, while the average
basic salary of a fresh graduate was RM1,861.
•
There were only two industrial strikes relating to
demand for higher wages in 2003, the same as in
the previous year.
Labour productivity, as measured by the ratio of
GDP to total employment, improved significantly
with growth doubling to 2% in 2003 (2002: 0.9%).
The productivity growth was attributed to the
improvement in output across most major sectors in
Agriculture, 
forestry 
and fishing 
Manufacturing 
Source: Economic Planning Unit
Construction 
Services 
Number ('000 persons)
Graph 1.29
Total Employment by Sector
2000
2001
2002
2003
0
1,000
2,000
3,000
4,000
5,000
6,000
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2000
2001
2002
2003
Number of workers
Graph 1.30 
Retrenchment in Selected Sectors
Total retrenchment
Retrenchment in manufacturing sector
Retrenchment in services sector
Retrenchment in agriculture sector
Retrenchment in construction sector
    
Source: Ministry of Human Resources
Number of employees
Graph 1.31 
Reasons for Retrenchment
1 Closure of companies
2 Sale of companies
3 Relocation to foreign countries
4 Relocation locally
5 High production cost
6 Reduction in demand for products
7 Company reorganisation and automation
8 Others
Source: Ministry of Human Resources
  2002
1
2
3
4
5
6
7
8
  2003
2,000
4,000
6,000
8,000
10,000
12,000
0


4.H-36
36
Source: Pembangunan Sumber Manusia Berhad
0
100,000
200,000
300,000
400,000
500,000
600,000
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Number of training places 
Graph 1.32
HRDF: Number of Training Places Approved
line with the stronger economic activities. Of
significance, productivity in the manufacturing sector
turned around to register a positive growth of 3%
(2002: -0.8%) due to increased use of capital. The
agriculture and services sectors recorded higher
productivity growth of 5.7% and 0.7% respectively
(2002: 3.1% and 0.5% respectively). Higher
productivity in the agriculture sector was due to good
weather, which is a critical factor in determining the
output of agricultural produce, improved agricultural
practices and greater automation.
Over the longer term, the Government continues to
encourage firms to adopt better work practices,
increase mechanisation and automation as well as
introduce structural changes, in order to increase
efficiency and productivity to alleviate the shortage of
workers, particularly for the lower end jobs. In the
interim, the Government continued to approve the
recruitment of new foreign workers from designated
countries, namely Bangladesh, Cambodia, P
.R.China,
India, Indonesia, Kazakhstan, Kyrgyz Republic, Lao
People’s Democratic Republic, Myanmar, Nepal,
Pakistan, the Philippines, Sri Lanka, Thailand,
Turkmenistan, Uzbekistan and Vietnam. During the
year, the Government concluded a total of six
Memoranda of Understanding, namely, with
Bangladesh, P
.R.China, Sri Lanka, Thailand, Pakistan and
Vietnam to regulate the recruitment process and
procedures, while agreements in principle were reached
with Nepal and Kyrgyz Republic.
In 2003, approval was given for the recruitment of
516,355 new foreign workers (2002: 545,725) mainly
in the agriculture, manufacturing and construction
sectors. A large majority of the new workers originate
from Indonesia, while the rest are mainly from Nepal,
Vietnam, India, Myanmar and Thailand. In total, the
number of registered foreign workers in the country
increased by 17% to 1,239,862 (2002: 1,057,156)
constituting about 12% of the total labour force. The
majority are engaged in the manufacturing sector,
followed by the agriculture, services (including domestic
services) and construction sectors. About 70% of the
foreign workers are from Indonesia, while those from
Nepal and Bangladesh constitute the second and third
largest group at about 8% and 7% respectively.
The policy on the employment of foreign nationals was
further liberalized to address the need for certain
specialized skills. In this regard, the period of
employment of foreign workers engaged in the 3'D'
areas (Difficult, Dirty and Dangerous) was extended
from five years up to a maximum of ten years. Similarly,
the policy on expatriate employment in the
manufacturing sector was liberalised.
In view of the strategy to diversify into new growth
areas, especially manufacturing related and research
and design services as well as high-technology
industries, employment opportunities were more
abundant in higher value added sectors which require
highly specialised skills. In this regard, the Brain-Gain
programme was launched in 2001 to attract Malaysians
overseas with special expertise in fields such as
medicine and health, ICT, accountancy and finance, to
return to work in Malaysia. The programme has
attracted 599 professionals, of which 234 were
approved.
Meanwhile, under the Economic Package, a Retraining
Fund of RM100 million was established with the
objective to provide unemployed graduates with
training to acquire skills that are in demand, such as ICT
and accountancy. As at end-2003, a total of 7,338
graduate trainees had benefited from training provided
under the Fund, commonly known as the Graduate
Training Scheme II (GTS II). Financial assistance granted
to the trainees under the GTS II amounted to RM55.7
million. As funds under the earlier special schemes
implemented in 2001 for unemployed graduates and
retrenched workers were still available, the schemes
were continued into 2003. As at end-2003, a total of
38,942 persons had participated in the various
attachments and training schemes for unemployed
graduates, commonly known as Graduate Training
Scheme I, while another 11,135 participants benefited
from the scheme for retrenched workers and the
unemployed.
In line with the push for knowledge-based and services-
led growth, the Human Resource Development
Fund (HRDF) played an important role to foster
increased training of staff by employers. In the period


37
The Malaysian Economy in 2003
1993-2003, a total of 3.9 million training places costing
a total of RM1.4 billion were approved (2003: 441,721
training places with financial assistance of RM206
million). The scope of the HRDF has been expanded to
meet changing demands. Reimbursement for promoted
courses were increased to the full amount of the levy
(85% previously), while additional schemes for smaller
companies and the SMEs were introduced. The
utilisation period of the HRDF by employers was
extended to five years, from two years previously. The
scope of the HRDF would be further expanded to
include training in related services such as ports and
logistics, health services, marketing, ICT and research
and development.
The Skills Development Fund (SDF) is another
skills training initiative that has been in place since
2001. Its aim is to enhance the participation of the
private sector as training providers and increase
accessibility to technical education and vocational
training by providing financial assistance to the
trainees. The SDF is open to all, including school
leavers, retrenched workers as well as workers
undergoing training at public and private training
institutes. The objective is to ensure that the
jobseekers acquire the skills required by employers. In
2003, besides an additional allocation of RM500
million under the Economic Package, guidelines on
the provision of financial assistance were reviewed to
enable more persons to pursue skills training under
the SDF. As a result, using the existing allocation
(excluding the RM500 million), the SDF was able to
provide financial assistance to a total of 45,856
applicants compared with 36,700 applicants a
year ago.
Apart from training polices, which are basically
government driven, an encouraging development is
that the private sector is also actively involved in the
drive to raise the quality of labour through the
adoption of productivity linked wage systems (PWLS).
Besides embedding rewards with performance and
higher productivity, such flexible practices have
helped employers to better manage costs and share
success with employees. The Salary and Fringe
Benefits Survey undertaken by the MEF in 2003
showed that the majority of respondent companies
adopted the PWLS.
EXTERNAL SECTOR
Balance of Payments
A stronger external environment and improved
investor sentiment, particularly in the second half
of the year, contributed to the strengthening of
the external position in 2003.  The overall
balance of payments registered a significantly
higher surplus on the back of a larger current
RM billion
RM billion
Current Account
Goods exports
Goods imports
Balance on services 
and income
Current account 
balance (RHS)
Graph 1.33
Malaysia: Balance of Payments
-100
-50
0
50
100
150
200
250
300
350
400
450
2001
2002
2003e
0
10
20
30
40
50
60
RM billion
Capital and Financial Account
-25
-20
-15
-10
-5
0
5
10
2001
2002
2003e
Portfolio investment 
Balance on capital and financial account
Other investment - private sector
Official long-term capital
Direct investment 
RM billion
Net International Reserves
Net international reserves
Balance on current account
Balance on capital and financial account
-50
0
50
100
150
200
2001
2002
2003
e  Estimate


4.H-38
38
account surplus, sustained inflows of foreign direct
investment and higher inflows of portfolio funds.
Errors and omissions, including exchange gain
from the revaluation of Bank Negara Malaysia’s
international reserves due to the appreciation of
the major currencies against the US dollar (RM11.9
billion), was RM0.4 billion. After adjusting for the
errors and omissions, the overall balance of
The external position strengthened further, supported by a
stronger current account surplus. Inflows of FDI were sustained
while inflows of portfolio investment were higher. The external
debt of the official sector was reduced.
Table 1.17
Balance of Payments
2002
2003e
Item
+
 -
Net
+
 -
Net
RM million
Goods
358,504
286,387
72,117
398,998
301,297
97,701
Trade account
 357,682
303,063
54,619
398,882
317,746
81,136
Services
        56,536
62,532
-5,996
51,594
66,620
-15,026
Balance on goods and services
415,040
348,919
66,121
450,592
367,917
82,675
Income
8,129
       33,190
-25,061
13,116
35,730
-22,614
Current transfers
2,513
       13,079
-10,566
1,929
11,229
-9,300
Balance on current account
425,682
395,188
30,494
465,638
414,876
50,761
% of GNP
9.1
13.7
Capital account
-
-
Financial account
-11,941
-12,063
Direct investment
4,935
4,242
Portfolio investment
-6,506
4,176
Other investment
-10,370
-20,481
Balance on capital and financial account
-11,941
-12,063
Errors and omissions
-4,362
360
of which:
Exchange revaluation gain (+) or loss (-)
6,627
11,927
Overall balance
14,191
39,059
Bank Negara Malaysia
international reserves, net
131,394
170,453
(USmillion)34,57744,856eEstimateSource:DepartmentofStatistics,MalaysiaandBankNegaraMalaysiapaymentsrecordedalargesurplusofRM39.1billionorUS10.3 billion. Consequently, the net
international reserves of Bank Negara Malaysia
increased to RM170.5 billion or US44.9billionatend−2003.ThereservesincreasedfurthertoRM194.9billionorUS51.3 billion as at 15 March
2004. This level of reserves represented 7.8
months of retained imports and 5.2 times coverage
of the short-term external debt. Malaysia’s reserves
are usable and unencumbered.
Current Account
In 2003, the current account recorded a larger
surplus of RM50.8 billion or 13.7% of GNP due to
a higher trade surplus. The stronger growth in
manufacturing exports and robust expansion in
export of commodities, which have low import
content, contributed to the larger trade surplus.
The larger surplus in the goods account generated
more than sufficient foreign exchange earnings to
finance the deficits in the services (4.1% of GNP),
income and current transfers accounts. The
services account deficit widened due to the impact
of SARS, which lowered travel receipts. On the
other hand, the income account deficit was
reduced, reflecting higher profits and dividends
accrued to Malaysian companies from their
investments abroad and higher returns from other
investment. Net outflows in the current transfers


39
The Malaysian Economy in 2003
account declined as a result of lower remittances
by foreign workers.
Amidst the improvement in the external
environment, gross exports expanded strongly by
11.5% in 2003 (2002: 7%). The stronger export
performance was due to higher manufactured
exports, as well as robust growth in exports of
primary commodities.
Growth in manufactured exports strengthened to
8.2% (2002: 5.9%), supported mainly by strong
demand for electronics, chemical products,
petroleum products, metal products and rubber
Annual change (%)
Graph 1.34
Export Performance of the Manufacturing 
Sector
-10
-5
0
5
10
15
20
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
2002
2003
Export Value
Export Volume
Export Prices
Graph 1.35 
Export Performance of Electronics and 
Non-electronics Industries
Annual change (%)
Manufactured exports
Electronics
Non-electronics
-15
-10
-5
0
5
10
15
20
25
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
2002
2003
Table 1.18
Gross Exports
2003p
RM  million
Annual change (%)
% share
Manufactured goods
326,950
8.2
82.0
Of which:
Electronics, electrical machinery and appliances
223,547
5.2
56.0
  Electronics
167,620
6.3
42.0
 
Semiconductor
85,184
16.3
21.4
 
Electronic equipment & parts
82,436
-2.4
20.7
  Electrical machinery & appliances
55,927
1.9
14.0
 
Consumer electrical products
19,747
-6.5
5.0
 
Industrial & commercial electrical products
20,414
3.5
5.1
 
Electrical industrial machinery and equipment
13,886
9.6
3.5
 
Household electrical appliances
1,880
36.7
0.5
Chemicals & chemical products
21,236
23.3
5.3
Manufactures of metal
11,303
28.5
2.8
Petroleum products
9,416
23.6
2.4
Optical and scientific equipment
9,213
13.0
2.3
Textiles, clothing and footwear
8,771
2.3
2.2
Wood products
6,698
6.1
1.7
Rubber products
5,060
12.3
1.3
Agricultural commodities
33,728
28.1
8.4
Of which:
Palm oil
20,224
36.3
5.1
Rubber
3,582
43.8
0.9
Sawn timber
2,607
6.4
0.7
Saw logs
2,015
10.0
0.5
Minerals
29,777
33.1
7.5
Of which:
Crude oil
15,662
35.0
4.0
LNG
13,328
34.8
3.3
Tin
284
-33.2
0.1
Other exports
8,427
25.5
2.1
Total
398,882
11.5
100.0
p   Preliminary
Source: Department of Statistics, Malaysia


4.H-40
40
products. Growth in electronics exports was largely
driven by the upturn in the global electronics cycle,
whilst the chemical products sector benefited from
higher export prices for iron and steel.  Overall, the
increase in export receipts was attributed entirely to
higher volume as prices continued to decline.
Exports of primary commodities rose markedly by
30.4%, driven mainly by the strong export
performance of agriculture (28.1%) and minerals
(33.1%).  Commodity exports was supported by
stronger prices (17.1%) and higher export volume
(11.9%) during the year. Strong demand for
commodities amidst the tight global supplies of
many major commodities during the year supported
the rise in prices.
Total receipts from agriculture exports rose to
RM33.7 billion with the main contributor to growth
being palm oil, which generated RM20.2 billion
foreign earnings following strong average export
prices of RM1,617 per tonne and higher export
volume of 12.5 million tonnes. Palm oil prices
increased due mainly to imbalances in the global
edible oils markets, arising from shortages in the
United States
ASEAN excl.
Singapore
Others
% share
0
5
10
15
20
25
Singapore
Japan
People's Republic of China,
Hong Kong China,
Korea & Chinese Taipei
European Union
2003
2000
Graph 1.36
Export of Manufactured Goods by Destination
Table 1.19
External Trade
2002
2003p
2002
2003p
RM billion
US$ billion
Gross export (f.o.b)
357.7
398.9
94.1
105.0
Annual change (%)
7.0
11.5
7.0
11.5
Annual change (%)
Volume1
6.1
7.2
6.1
7.2
Prices1
-0.4
1.0
-0.4
1.0
Gross import (c.i.f)
303.1
317.7
79.8
83.6
Annual change (%)
8.1
4.8
8.1
4.8
Annual change (%)
Volume1
6.1
1.1
6.1
1.1
Prices1
1.4
2.3
1.4
2.3
Trade balance
54.6
81.1
14.4
21.4
1 Volume and prices for 2003 are estimates.
p Preliminary
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
The significantly large trade surplus was due to stronger growth
in manufacturing exports and robust expansion in commodity
exports which have low import content.
the spillover effects of the strong electronics
performance as well as higher demand for organic
chemicals, resins and plastic products. Higher exports
of rubber products were driven largely by increased
global demand for rubber gloves. Exports of metal
products also rose strongly as manufacturers
increased their export volume to take advantage of
supply of major oilseeds amidst rising demand.
Malaysian palm oil also benefited from import
substitution by several price sensitive buyers given
the large price discounts of palm oil against other
major oilseeds, particularly soybean oil, its closest
substitute. The major export markets for Malaysian
palm oil in 2003 were P
.R.China, the Middle East,
India and the EU, which together accounted for 60%
of total Malaysian palm oil exports. With substantially
higher revenue, palm oil accounted for about 60%
of total agriculture export receipts and 5% of total
gross exports. The strong agriculture exports during
the year was also supported by increases in the
exports of other commodities, including rubber and
timber and timber products.
Export revenue from minerals turned around sharply
to record a growth of 33.1% to RM29.8 billion,
driven mainly by the significantly higher oil prices.
Malaysian crude oil export prices strengthened
significantly to average US$30.27 per barrel in
tandem with higher global crude oil prices. In line
with the upward trend in oil prices, liquefied natural
gas (LNG) prices also trended upwards to average
RM766 per tonne in 2003. The commencement of
the MLNG Tiga plant during the year also boosted
the exports of Malaysian gas. Thus, revenue from


41
The Malaysian Economy in 2003
crude oil and LNG exports rose to RM15.7 billion and
RM13.3 billion respectively.
Gross imports registered a moderate growth of
4.8% (2002:  8.1%) attributable to imports of capital
and intermediate goods, which picked up in the
fourth quarter. Import prices increased by 2.3%,
reflecting higher prices of imports of manufactured
goods, mineral fuel and chemicals.
Imports of intermediate goods, which were the main
driver of import growth, continued to grow by 6.4%.
Intermediate imports are inputs for the production of
manufactured exports, particularly electronic and
electrical products. Capital imports, excluding lumpy
items, increased by 6%, reflecting growth in investment
activity, particularly in the second half of the year.
Imports of lumpy items were lower due to fewer
deliveries of new aircraft. The continued strength of the
services sector as well as increased automation of
businesses induced the turnaround in imports of office
equipment to record positive growth. Increased
exploration activity in the oil and gas industry in the
wake of higher prices of petroleum led to the increase
in imports of construction and mining equipment.
Imports of telecommunication equipment declined by
9.5% against a background of industry consolidation
following the mergers of selected cellular service
providers. In line with higher disposable income,
imports of consumption goods increased by 1.1%
reflecting higher imports of consumer goods and
transport equipment.
The growth in intra-regional East Asian (excluding
Japan) trade since 1997 has reshaped trading
patterns, with P
.R. China providing the main impetus
to this growth. P.R. China is the sixth largest exporter
in the world and 30% of the P
.R. China’s exports is
exported to the region. Approximately 36% of P
.R.
China’s imports are sourced from East Asia.
Table 1.20
Gross Imports by End Use
2003p
 RM
Annual
 million
change (%)
% share
Capital goods
43,508
0.7
13.7
Capital goods (except transport equipment)
40,837
7.1
12.9
Industrial machinery and equipment
9,862
-0.4
3.1
Office equipment
7,404
26.6
2.3
Telecommunication equipment
5,213
-9.5
1.6
Transport equipment
2,671
-47.1
0.8
Intermediate goods
233,046
6.4
73.3
Food and beverages, mainly for industry
5,831
7.3
1.8
Industrial  supplies, n.e.s.
66,130
3.4
20.8
Metals & metal products
18,594
6.2
5.9
Chemicals
7,285
1.1
2.3
Fuels and lubricants
13,623
23.2
4.3
Parts and accessories of capital goods
(except transport equipment)
141,283
8.0
44.5
Electronics
95,314
7.1
30.0
Parts and accessories of telecommunication equipment
6,587
-9.8
2.1
Parts and accessories of transport equipment
6,179
-16.0
1.9
Consumption goods
18,866
1.1
5.9
Food and beverages, mainly for household consumption
6,777
-1.5
2.1
Transport equipment, non-industrial
337
90.9
0.1
Consumer goods, n.e.s.
11,752
1.3
3.7
Consumer durables
2,646
-2.0
0.8
Consumer  semi-durables
3,985
-5.1
1.3
Consumer non-durables
5,121
8.9
1.6
Dual use goods
7,057
15.2
2.2
Motor spirit
2,981
17.2
0.9
Passenger motor cars
4,075
13.8
1.3
Others
6,547
-4.4
2.1
Re-exports
8,722
-4.3
2.7
Gross Imports
317,746
4.8
100.0
n.e.s. Not elsewhere specified.
p Preliminary
Source: Department of Statistics, Malaysia


4.H-42
42
Consequently, Malaysia’s share of trade with major
trading partners, namely, the US and Japan, has
declined, while the share with the EU remained
unchanged. Malaysia’s trade with the US, Japan and
the EU as a group declined to account for a share of
43.1% of total trade (2002: 44.8%) while East Asian
trade increased to 44.9% (2002: 44%) of total trade.
Efforts continue to be made towards diversifying
markets particularly into non-traditional markets,
such as the South Asia and West Asia regions, and
increasing market share in East Asian countries. The
diversification of markets, which is measured by the
normalised Herfindahl-Hirschmann index, improved
in 2003.  In the normalised Herfindahl-Hirschmann
index, a ratio closer to zero reflects increasing
diversification. The index for exports declined to 0.15
in 2003 from 0.16 in 2002.  Similarly, the index for
imports also declined to 0.15 from 0.16.
The United States (US) remained as Malaysia’s most
important trading partner although its share of total
trade declined to 17.7% (2002:18.8%). Exports to
the US consist mainly of electronics components, in
particular integrated circuits, rubber, optical and
scientific instrument, furniture and parts and
apparatus. Approximately 65% of imports from the
US are intermediate inputs for the electrical and
electronics industry. Other imports include optical
and scientific instruments, plastics and chemicals. As
exports to the US increased while imports declined,
the bilateral trade surplus widened to RM29.2 billion
(2002: RM20.1 billion).
Singapore maintained its position as the second
most important trading partner of Malaysia despite
the decline in the share of trade to 14% (2002:
14.7%). The bulk of exports to Singapore were
electronics, with integrated circuits and micro-
assemblies accounting for 26%, parts and
accessories 13% and diodes and transistors 4.8%.
The lower share of exports to Singapore (15.7%;
2002: 17%) was attributable to the increased direct
trade and usage of local ports. On the imports side,
every one out of three imported products were
electronics and electrical goods while petroleum
and petroleum related products made up 18%. The
trade surplus with Singapore increased to RM25.5
billion as exports grew at a faster pace relative
to imports.
Graph 1.37
Exports Diversification Index
The export diversification index is a modified version of Herfindahl-Hirschmann 
index. It is normalized to obtain a numeric range from 0 to 1. A lower index 
signifies higher degree of diversification. 
0.10
0.12
0.14
0.16
0.18
0.20
0.22
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Rest of the world 
11.2%
Direction of Exports: 2003
Graph 1.38 
Direction of Exports:  1995
1  ASEAN excluding Singapore
2  Hong Kong China, South Korea and Chinese Taipei
1  ASEAN excluding Singapore
2  Hong Kong China, South Korea and Chinese Taipei
European Union  
14.2%
United States 
20.7%
NIEs2
11.3% 
People's
Republic of China 
2.7% 
Japan 
12.7%
ASEAN1
6.9%
Singapore 
20.3%
European Union  
12.1% 
United States 
19.6%
Rest of the world 
13.6% 
ASEAN1 
8.9% 
Singapore 
15.7%
Japan 
10.7%
NIEs2 
12.9% 
People's Republic 
of China 
6.5% 


43
The Malaysian Economy in 2003
Supported by a higher export growth relative to
imports, the trade balance with Japan, which has
been in Japan’s favour, improved to register a
smaller deficit of RM11.6 billion (2002: -RM14.1
billion). Export growth of 7.4% was underpinned
by increased export receipts from LNG, petroleum
and chemical products on the back of higher crude
oil and LNG prices. Imports grew marginally by
0.9% reflecting growth in imports of machinery
and transport equipment, manufactured articles
and crude materials.
Trade with the European Union (EU) turned around
to record a growth of 9.2% in the wake of an
improvement in economic performance of EU
countries. Malaysia continued to record a trade
surplus of RM11 billion (2002: RM9.5 billion) with EU
countries. Germany remained the leading trading
partner, accounting for 3.3% of total trade.
Exports to the North East Asia region (excluding
Japan), which accounted for 19.4% of total exports,
expanded by 18.3%. The impetus to this growth
stemmed from the continued strong export growth
of 29.6% to the P
.R.China and 26.7% to Hong Kong
China. The driver of this growth was the continued
relocation by multinational companies to the
P
.R.China and increased outsourcing activity.
Table 1.21
Direction of External Trade
2003p
Exports
Imports
Trade balance
RM million
% share
RM million
% share
RM million
ASEAN countries
98,225
24.6
76,345
24.0
21,879
Singapore
62,786
15.7
37,283
11.7
25,503
Thailand
17,538
4.4
14,549
4.6
2,989
Indonesia
8,091
2.0
11,168
3.5
-3,077
Philippines
5,459
1.4
11,835
3.7
-6,376
Other ASEAN countries
4,351
1.1
1,510
0.5
2,841
European Union (EU)
48,264
12.1
37,216
11.7
11,047
United Kingdom
8,872
2.2
5,991
1.9
2,881
Germany
9,145
2.3
14,787
4.7
-5,642
Netherlands
13,036
3.3
2,151
0.7
10,886
Other EU countries
17,210
4.3
14,287
4.5
2,923
United States
78,007
19.6
48,757
15.3
29,250
Japan
42,643
10.7
54,273
17.1
-11,630
The People’s Republic of China
25,878
6.5
27,739
8.7
-1,861
Hong Kong China
25,778
6.5
8,580
2.7
17,199
Chinese Taipei
14,351
3.6
15,698
4.9
-1,347
South Korea
11,550
2.9
17,308
5.4
-5,758
India
9,629
2.4
2,555
0.8
7,074
Australia
9,932
2.5
4,803
1.5
5,129
Rest of the world
34,626
8.7
24,473
7.7
10,153
Total
398,882
100.0
317,746
100.0
81,136
p Preliminary
Source: Department of Statistics, Malaysia
P
.R.China remained the biggest trading partner of the
region. About a quarter of Malaysia’s exports to
P
.R.China consisted of integrated and printed circuits,
semiconductor devices and light emitting diodes.
Another source of increase in export growth came
from demand for resource exports, particularly palm
oil and rubber.
Reflecting increasing intra-regional trade and better
economic performance of ASEAN countries
(excluding Singapore), the share of trade with
member countries expanded to 10.4% in 2003
(2002: 9.6%). The market share of imports from
ASEAN countries rose to 12.3% against a
background of increasing sourcing from low cost
suppliers such as Thailand, Indonesia and the
Philippines.
Services Account
Policies to promote exports of services have been
successful in reducing the services deficit in the
balance of payments to as low as -1.8% of GNP in
2002. In 2003, however, the services account
deficit widened to RM15 billion or -4.1% of GNP due
mainly to lower tourism receipts as travel, especially
into the Asian region, was severely affected by SARS.
Nevertheless, gross receipts from new sources of
foreign exchange income, namely education,


4.H-44
44
Tourist arrivals
in million 
Receipts in
RM million 
Graph 1.39
Tourist Arrivals and Tourism Receipts
Tourist arrivals
Tourism receipts
p Preliminary
0
2
4
6
8
10
12
14
1996
1997
1998
1999
2000
2001
2002
2003p
0
5,000
10,000
15,000
20,000
25,000
30,000
computer and information services, as well as ports
and airports continued to increase.
Despite the impact of SARS, travel remained the
largest contributor to services receipts in 2003,
accounting for 43.4% of total services receipts.
Tourist arrivals totalled 10.6 million visitors in 2003
(2002: 13.3 million visitors) with lower tourist
receipts of RM21.3 billion (2002: RM25.6 billion).
This resulted in the net surplus of the travel account
declining sharply to RM11.6 billion (2002: RM17.1
billion). The outbreak of SARS caused visitor arrivals
to decline by 51.6% in the second quarter. Tourist
arrivals from P.R.China and Singapore declined most
significantly. Tourist arrivals recovered strongly in
the fourth quarter with arrivals exceeding the
monthly average of one million attained in the
pre-SARS period.
For 2003 as a whole, the decline in receipts from the
tourism sector, however, was mitigated by new
sources of services export income, namely earnings
from education and healthcare services. The number
of foreign students increased by 8.5% to 39,577
students in 2003. Foreign students were mainly from
Indonesia and P
.R.China. Receipts from education
tourism are still small, accounting for about 1.4% of
total travel receipts and 0.6% of total services
receipts, although the spillover effects on the
economy through consumption spending and travel
are large.  Revenue from 102,946 foreign patients
seeking treatment in Malaysia in 2003 increased by
Table 1.22
Services and Income Accounts
2002
2003e
RM billion
Net
+
–
Net
Services  Account
Transportation
-11.6
10.5
23.8
-13.3
Travel
17.1
22.4
10.8
11.6
Other Services
-11.2
18.2
31.2
-13.0
Government services n.i.e.
-0.3
0.5
0.8
-0.3
RM billion
-6.0
51.6
66.6
-15.0
US$ billion
-1.6
13.6
17.5
-4.0
% of GNP
-1.8
-4.1
Income Account
Compensation of employees
-1.2
2.2
3.1
-1.0
Investment income
-23.9
10.9
32.6
-21.7
RM billion
-25.1
13.1
35.7
-22.6
US$ billion
-6.6
3.5
9.4
-6.0
% of GNP
-7.5
-6.1
e  Estimate
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Travel 
43.4%
Other services 
35.3%
Government 
transactions 
0.9% 
Transportation 
20.4%
Graph 1.40
2003: Components of Gross Receipts in the 
Services Account (% share)
Transportation
35.7%
Government  
transactions
1.2%
Other services
46.9%
Travel
16.2%
Graph 1.41
2003: Components of Gross Payments in the 
Services Account (% share) 


45
The Malaysian Economy in 2003
64.2%.  Foreign patients were mainly from Indonesia
(72.5%), other ASEAN countries, West Asian
countries and Japan.
On the payments front, travel outflows increased to
RM10.8 billion (2002: RM9.9 billion), reflecting
higher expenditure on business travel and education
abroad. Payments for travel abroad by Malaysians,
including business travel, expanded by 17.9% to
RM7.7 billion in 2003 in line with the pick-up in
economic activity. Meanwhile, education outflows
increased by 1.3% with a larger number of students
studying aboard.
There was a broadening of tourism products in
2003, with more niche products in areas such as
sports, eco-tourism, agro-tourism and meetings,
services related to infrastructure and oil and gas
exploration resulted in higher payments for contract
and professional charges. Payments for insurance
and financial services increased as larger external
trade transactions led to higher demand for
imported support services. Receipts from computer
and information services improved in line with the
expansion in business process outsourcing and ICT
services.
For the third consecutive year, the income account
deficit declined by 9.8% to RM22.6 billion or -6.1%
of GNP in 2003  (2002: -RM25.1 billion or -7.5% of
GNP). This improvement was attributable to profits
and dividends accruing to Malaysian companies
from their investments aboard, particularly in the oil
and gas and utilities sectors, which increased by
Higher profits and dividends of Malaysian companies operating
abroad contributed to an improvement in the income account.
incentives, conventions and exhibitions being
promoted. The main strategy of the new tourism
products was to increase the length of stay of
visitors. Promotion of tourism products and
services was undertaken through joint
collaboration by the public and private sectors.
Connectivity of air services was facilitated through
allowing greater use of charter flights and budget
fares offered by no-frills airlines. More gateway
points, such as Langkawi, Penang, Kuching and
Kota Kinabalu, enabled the travel industry to
expand into new as well as established markets.
The new markets targeted for promotion included
Pakistan and Iran.
The deficit in the transportation account widened
to RM13.3 billion in 2003 (2002: -RM11.6 billion),
as payments abroad increased while receipts were
sustained. Gross outflows reflected higher freight
charges as well as increased volume of trade. Gross
receipts were sustained, supported mainly by
earnings from cargo services and charter services
provided by domestic shipping companies and
airlines.  The increase in cargo handled was
underpinned by the increase in transhipment cargo
sourced from India, P.R.China, Myanmar, Indonesia
and Thailand.
In line with the improvement in the economy, the
higher demand for other services led to a higher net
payment of RM13 billion in the other services
account (2002: -RM11.2 billion). In particular,
imports of design, technical and project consultancy
190.6% to RM2 billion (2002: RM0.7 billion). It
accounted for 17.9% of the total gross investment
income inflows. Secondly, income from other
investments turned around to record a net inflow of
RM2.4 billion (2002: -RM0.9 billion), reflecting
largely the better returns from higher external
reserves while interest payments on external debt
declined.
On the payments side, gross profits and dividends
accruing to foreign direct investors also increased.
This was attributable mainly to higher earnings in
the electronics and electrical industries following
improved export performance, as well as the oil and
gas sector on the back of higher oil prices. While
profits and dividends accounted for 78.8% of the
gross investment income outflow, a substantial
portion is retained in Malaysia for further
reinvestment. Retained earnings were estimated at
42.5% of total profits and dividends, and credited
as inflows of foreign direct investment in the
financial account.
In 2003, the net outflow in the current transfers
account declined by 12% to RM9.3 billion. The
significant decline in current transfers payments by
14.1% in 2003 (2002: +28%), was largely due to
lower remittances by foreign workers following the
return of the illegal workers under the Amnesty
Program conducted in 2002. There were about 1.2
million registered foreign workers in Malaysia in
2003, more than half of whom were employed in
the plantation and manufacturing sectors.


4.H-46
46
Financial Account
In 2003, the financial account remained stable
with a net outflow of RM12.1 billion (2002:
-RM11.9 billion). Outflows of short-term capital,
comprising portfolio investment and other private
sector investment, were significantly lower
following improved investor sentiment in the equity
market as well as interest differentials in Malaysia’s
favour. In the long-term capital account, large
repayments of external loans by the official sector
and modest drawdown of loans helped to contain
the increase in Malaysia’s external debt position.
Private long-term capital, comprising mainly
foreign direct investment, was sustained at a
moderate level.
In terms of gross inflows, about half of the FDI
continued to be in the form of reinvested earnings,
particularly from the manufacturing sector. With
respect to new inflows of FDI as recorded by the
Cash BOP Reporting System of Bank Negara
Malaysia, both the services and manufacturing
sectors continued to receive significant shares of
about 38% and 37% respectively, while the share
of the oil and gas sector was about 15%. Large
inflows into the services sector continued to be
sustained. There was an increase in foreign
participation in Malaysia’s network of wholesale and
retail trade sub-sector, ranging from automotive
distribution, petrol station to hypermarkets. Foreign
interests were also higher in the higher value-added
Table 1.23
Balance of Payments: Financial Account
2002
2003e
2002
2003e
RM billion
US$ billion
Financial Account
-11.9
-12.1
-3.1
-3.2
Direct Investment
4.9
4.2
1.3
1.1
In Malaysia
12.2
9.4
3.2
2.5
Abroad
-7.2
-5.2
-1.9
-1.4
Portfolio Investment
-6.5
4.2
-1.7
1.1
Other Investment
-10.4
-20.5
-2.7
-5.4
Official sector
4.7
-11.2
1.2
-3.0
Of which:
Federal Government (net)
8.0
-3.7
2.1
-1.0
Gross borrowing
10.5
3.1
2.8
0.8
Repayment
2.5
6.9
0.6
1.8
NFPEs (net)
-3.3
-7.3
-0.9
-1.9
Gross borrowing
3.5
5.2
0.9
1.4
Repayment
6.8
12.4
1.8
3.3
Private sector
-15.1
-9.3
-4.0
-2.4
e Estimate
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
The financial account remained stable, reflecting sustained
inflows of FDI and higher portfolio investment. The official sector
reversed to record a large net loan repayment. Overseas
investment generated higher profits and dividends to Malaysia.
Gross foreign direct investment (FDI) in Malaysia
was higher in 2003 at RM21.8 billion (2002:
RM20.5 billion), reflecting largely broad-based
inflows into the services and manufacturing sectors,
as well as the oil and gas sector. On a net basis,
however, FDI moderated to RM9.4 billion or 2.5%
of GNP in 2003 (2002: RM12.2 billion), due largely
to the acquisition of foreign interests in the oil and
gas sector by a Malaysian company upon the expiry
of joint venture contracts, as well as large loan
repayments to parent companies abroad.
services sector, especially the transport sub-sector,
airlines and port management, as well as
knowledge-based activities in the form of MSC-
related investment and electronic data processing
industries. In 2003, 219 regional facilities for
foreign- and local-owned companies were
established, encouraged by investment incentives
provided by the Government. Of these, 12 were
operational headquarters (OHQs), 37 regional
offices, 32 international procurement centres (IPCs),
134 representative offices and 4 regional
distribution centres (RDCs).
Foreign interests in the manufacturing sector
continued to remain high, with larger new FDI
inflows into electrical and electronics and
petroleum-related industries. Inflows were also
broad-based into food processing, industrial
refrigeration and printing industries as well as
high-end aerospace industry.
Malaysian direct investment abroad remained
large, albeit at a moderately lower level, at RM5.2
billion in 2003 (2002: -RM7.2 billion) after several
major overseas acquisitions in 2002. Investment
abroad was mainly to diversify and reinforce
principal activities in Malaysia. Notably, the scope of
investment has become increasingly broad-based. A
large share of overseas investments was channelled
into both the oil and gas and services sectors,
followed by the manufacturing sector. In the oil and
gas sector, Malaysia continues to operate through


47
The Malaysian Economy in 2003
Recent Trends in Foreign Direct Investment in Malaysia
Introduction
Foreign investments continue to account for about one-third of total private investment in Malaysia.  The
trend in gross FDI has remained stable since 2000 after a moderation during the Asian financial crisis. This
stability is largely due to existing multinational companies (MNCs) expanding and diversifying their
operations, with funding mainly from retained earnings. The pattern of FDI flows has also changed in
favour of the higher value-added services sector, as the services sector is transformed and accounts for a
larger share of GDP
. As the services sector tends to be less capital intensive, the scale of the gross value of
new flows tends to be smaller while the value-added and contribution to growth is higher.
The Government continues to ensure that policies remain supportive of attracting new foreign
investments and that Malaysia remains a place of choice for companies seeking opportunities in the Asian
region. Policy initiatives include a series of Investment Guarantee Agreements (IGA), tax and non-tax
incentives, sequential sector liberalization, improving administrative processes and the delivery system of
the public sector and lowering the overall cost of doing business. Equally important is the commitment to
sound macroeconomic policies.
Definition, Methodology and Compilation of FDI Data
In the compilation of FDI statistics in the balance of payments, Malaysia adopts international standards in
terms of definition, methodology and measurement. FDI, based on the IMF’s Balance of Payments Manual,
Fifth Edition, is defined as “....foreign holdings of at least 10% ownership in the enterprise with a lasting
interest”.
Actual FDI flows are reported in the financial account of the balance of payments, released on a quarterly
basis by the Department of Statistics, Malaysia (DOS). DOS data refers to actual investments that have
taken place in Malaysia in all sectors. This data differs from the data on applications and approvals
released on a quarterly basis by the Malaysian Industrial Development Authority (MIDA), which records
mainly investments in the manufacturing sector and covers investors who have applied for the various tax
incentives. MIDA’s data also does not cover investments in the oil and gas sector.
Data in the financial account of the balance of payments covers all the three components of FDI, namely
equity capital, reinvested earnings and other capital (mainly inter-company loans). In addition to the
quarterly survey by DOS, Bank Negara Malaysia maintains the Cash Balance of Payments (CBOP) Reporting
System. Under this system, Bank Negara Malaysia is able to provide data on actual FDI flows on all cross-
border transactions between residents and non-residents which are effected through the banking system,
inter-company accounts and overseas accounts.
While the CBOP data does not capture the retained earnings by existing foreign enterprises in Malaysia
(since there are no cross-border transfers through the banking system), it provides a good indicator on the
trends of new FDI flows. The CBOP data is also available on a more timely basis, with a six-week lag.
Recent FDI Trends in Malaysia
On a gross basis, FDI continues to be sustained at a high level of about RM18-20 billion in recent years
(Graph 1). Inflows of FDI have contributed to the establishment of new industries and products,
introduction of new processes and production technology, the growth of support services, research and
development and access to new markets.
FDI flows during the post-crisis period remained stable as MNCs with operations in Malaysia continued to
reinvest their retained earnings to expand, upgrade and diversify their production lines, in spite of the
increased competition from low-wage economies in the region. Reinvested earnings accounted for nearly
half of gross FDI for the period 1998 - 2002 (Graph 2).


4.H-48
48
Graph 1
Gross FDI Flows (1990-2002)
Gross FDI (LHS)
Source: Department of Statistics, Malaysia; Bank Negara Malaysia's estimates
Gross FDI as % GDP (RHS)
%
25
20
15
10
5
0
90
92
91
94
93
96
95
98
99
97
00
01
02
12
10
8
6
4
2
0
RM billion
Graph 2
Gross FDI Components
Source: Department of Statistics, Malaysia; Bank Negara Malaysia's estimates
Other capital
Equity capital
1993 - 1997
1998 - 2002
Reinvested earnings
31%
29%
46%
28%
26%
40%
Graph 3
Gross FDI by Sector
Source: Department of Statistics, Malaysia; Bank Negara Malaysia's estimates
Manufacturing
Oil & Gas
1993 - 1997
1998 - 2002
Others (mainly services)
66%
13%
21%
38%
38%
24%
As a share of GDP
, gross FDI has been sustained at 6% in the post-crisis years, compared with an average
of 8% in the mid-1990s when FDI flows peaked. This was the result of two major developments:
•
Between 1990 and 2002, the capital investment per employee (CIPE) in the manufacturing sector has
increased by 66%, indicating a discernible trend towards higher value-added and high-technology
projects and the employment of highly skilled manpower. However, in recent years (2001 - 2003), the
CIPE in the manufacturing sector has declined as the bulk of increased investment was mainly
from the expansion, upgrading and diversification of existing projects. Going forward, the
growth in CIPE is likely to be sustained following the Government’s efforts to promote investment in
new high-growth sectors such as biotechnology and the agro-based industry.
•
As a higher share of FDI flows are targeted at the higher value-added services sector and knowledge-
based activities, FDI inflows tend to be lower per investment project. The value of FDI in services
has tended to be on a smaller scale and low in import content but having a larger multiplier impact on
income and employment. FDI in the services sector usually includes new technology and brings in
specialised expertise that contributes towards raising productivity.  The structural change in FDI flows is
consistent with the transformation of the Malaysian economy towards services as another engine of
growth and the move towards a knowledge-based economy.
Changing pattern of FDI flows
This trend, however, does not mean that FDI flows into the manufacturing sector have become less
significant. FDI inflows into the manufacturing sector remain high, but the rapid growth of new inflows
into other sectors has led to a relative decline in its share to 38% in 1998 - 2002, compared with 66% in
1993 - 1997 (Graphs 3 & 4). Both services and oil and gas sectors have experienced a significant increase
in their share of FDI flows, accounting for 38% and 24% respectively in 1998 - 2002.


49
The Malaysian Economy in 2003
FDI in services is increasingly broad-based, extending beyond the financing, insurance and business
services sub-sector into other major sub-sectors such as wholesale and retail trade and hotels, transport
and communications as well as utilities. In the financial sector, a number of foreign banks have set up
their treasury, back-office and data processing operations in Malaysia to facilitate their group operations in
this region. Malaysia already hosts a number of regional facilities for both foreign and local companies. As
of end 2003, the Government has approved 1,695 regional facilities for foreign- and local-owned
companies. Of these, 71 are operational headquarters (OHQs), 473 regional offices, 141 international
procurement centres (IPCs), 1,006 representative offices and 4 regional distribution centres (RDCs).
In the IT sector, Malaysia’s IT hub, the Multimedia Super Corridor (MSC), has continued to expand. By
February 2004, there were 283 foreign companies operating in the MSC, accounting for 29% of the
MSC-status companies that employed more than 20,000 knowledge workers. To continue to attract
greater foreign participation, the Multimedia Development Corporation, the MSC administrator, has
offered a generous package of financial incentives. MSC-status companies also enjoy privileges in terms of
administrative ease to source capital and borrow funds globally.
FDI in Regional Perspective
Regionally, with the exception of Hong Kong China and Singapore, Malaysia ranks ahead of many
regional economies in terms of inflows of FDI despite declining FDI flows to emerging economies
Graph 5
FDI as at end-2002: stock (bar) and flow
as % GDP (line)
300
Stock, %GDP
Flow, %GDP
250
200
150
Singapore
Thailand
Malaysia
P
.R.China
Indonesia
Korea
100
50
Note: HK figures were exaggerated by inflows redirected to P
.R.China via
Hong Kong China by Chinese Taipei investors as well as P
.R.China's
'round-tripping capital' (UNCTAD)
Source: UNCTAD
0
266
143
20
15
10
5
0
-5
1994
1995
1996
1997
1998
1999
2000
2001
2002
59
36
32
24
15
9
5
HK
Spore
Msia
China
Indo
Thai
Phil
Korea
India
Graph 4
FDI in Services
Source: Cash BOP Reporting System, Bank Negara Malaysia
Wholesale & retail trade and hotels
Financing, insurance and  
business services
1999
2002
Transport and
communications
Utilities
1%
0%
2%
20%
79%
5%
42%
51%


4.H-50
50
(Graphs 5 & 6). The high presence of MNCs in Malaysia is testimony of the advantages Malaysia can offer
in the global production or marketing chain. Based on the US data, the US non-bank MNCs have achieved
a higher rate of return on their investment in Malaysia (5.6%), compared with an average of 3.5% in the
Asian economies in 2000.
The UNCTAD World Investment Report 2003
listed Malaysia as one of the top ten
economies that had defied the global FDI
slowdown in 2002. Similarly, the A.T.Kearney
FDI 2003 report stated that Malaysia has
enhanced its attractiveness as a destination
for FDI, by improving to 23rd position
(previous: 42nd) in the overall FDI confidence
index. More specifically, Malaysia is in the
top ten positions for FDI in primary industries
as well as improving its standing in sectors
such as electronics, mining, petrochemical,
stone/glass and chemicals/plastics sectors
and consultancy.
FDI Policies
Malaysia’s strength in fundamentals such as trade openness, legal protection of patents, low tax
rates, commitment to market pricing, a highly educated workforce, an efficient and diversified
financial system for raising long-term capital, strong corporate governance, well-developed
infrastructure and a wide array of tax incentives continue to be recognised as strong points in
attracting FDI. While previous policies were more broad-based in nature, incentives have been
repackaged and are increasingly customized and tailor-made for specific investors and industries.
There are three broad philosophies governing policies specific to FDI:
•
Tax and non-tax incentives to promote specific industries;
•
Sequential liberalization of sectors in terms of market access, regulations governing employment
of expatriates, equity ownership and relaxing rules and regulations; and
•
Improvement in the administrative processes and minimize costs of establishing and
operating a business enterprise in Malaysia.
Within this framework, there are a wide range of measures that are specific, targeted and,
most importantly, benefit investors. Further, as the investment framework is goal-oriented
rather than incentive-oriented, incentives are regularly fine-tuned to meet investor needs
through the existing mechanism for consultation between the Government and the MNCs.
This is acknowledged by the 2003 World Competitiveness Yearbook, which ranked Malaysia as
second best in the world in terms of firms’ perception of the ability of the Government to adapt
policy to changes in the economy. In addition to fiscal and other specific incentives, the sequential
sector liberalization measures offers new opportunities to foreign investors, in both the goods and
services sectors.
Graph 6
Top 10 Developing Economy FDI Recipients  
in 2002
US$ billion
Source: UNCTAD
P
.R.China
Brazil
Hong Kong
China
Mexico
Bermuda
Singapore
India
Malaysia
Cayman
Islands
Kazakhstan
10
53
17
14
14
9
8
3
3
3
3
0
30
20
50
60
40


51
The Malaysian Economy in 2003
The Government has adopted a holistic approach to lower the cost of doing business as well as to
encourage efficiency and technological enhancement through strategic alliances with foreign
investors in key economic sectors. The Government also recognizes the importance of forging closer
links between indigenous small and medium enterprises (SMEs) and the large foreign-owned
companies. Thus, the current policy emphasis on developing a strong and vibrant SME sector should
be viewed as complementary efforts to attract FDI. By broadening the indigenous industrial base, the
economy stands to gain by spreading the benefits of FDI more equitably. At the same time, foreign
investors will have access to high quality goods and services that are provided by the domestic
economy at low cost. Going forward, a balanced growth strategy involving the synergy between
domestic- and foreign-owned companies will equip the country to respond effectively to an
increasingly competitive global environment.
joint ventures in exploration and extraction. During
the year, Malaysia’s investments in the oil and gas
sector were channelled mainly into the ASEAN and
selected African countries.
In the services sector, overseas investments were
made mainly in the utilities, transportation, retail and
travel-related sub-sectors. There were also some
investments by companies in the construction
industry following their success in bidding for large
infrastructure, roads and highway projects abroad.
While the share of the manufacturing sector in
overseas investment is smaller, investments were
broad-based across sub-sectors, ranging from
electrical and electronics, and textiles to high value-
added activities such as petroleum-related
manufacturing and aerospace industry. Several
multinational companies from the electrical and
electronics industry in Malaysia have also invested
abroad, mainly through the extension of inter-
company loans to their subsidiaries in lower-cost
countries.  Malaysia’s investment abroad has
continued to yield positive results. Profits and
dividends accrued to Malaysian companies from their
investments abroad increased to RM2 billion in 2003
(2002: RM0.7 billion).
Portfolio investment turned around to record a net
inflow of RM4.2 billion in 2003 (2002: -RM6.5
billion). In the first half of the year, portfolio
investment recorded a net outflow of RM1.3 billion
as sentiments in the regional markets were
dampened by uncertainties over the global economic
outlook due to geopolitical tensions in the Middle
East and SARS. Nonetheless, the net outflow was
significantly lower compared with the first and
second half of 2002.
The sharp increase in portfolio investment of RM5.5
billion in the second half of the year reflected
improving investor confidence following news of
better growth and more favourable prospects for
the Malaysian economy. The bulk of the portfolio
inflows was channelled into the equity market,
following the sovereign upgrade by a rating agency
in October.
The other investment account recorded a
significantly higher net outflow of RM20.5 billion
in 2003, mainly due to the reversal from a net
drawdown of external debt in 2002 to a large net
repayment in 2003. Meanwhile, net outflows by
the private sector continued to moderate for the
fourth consecutive year. The official sector
recorded a large net repayment of RM11.2 billion
in 2003, in line with the Government’s prudent
external debt strategy and commitment towards
fiscal consolidation. Taking advantage of the
favourable global interest rate regime, the
Government also prepaid and refinanced some
loans, thereby reducing its debt servicing cost.
Similarly, the Non-financial Public Enterprises (NFPEs)
also recorded a higher net repayment as their
earnings capacity improved during the year.
In 2003, other investment by the private sector,
comprising mainly borrowing and lending as well as
placement and withdrawal of deposits by the
banking and non-bank private sector with unrelated
counterparties, improved markedly to record a lower
net outflow of RM9.3 billion (2002: -RM15.1 billion).
Significantly lower net outflows were recorded by the
non-bank private sector while the banking sector
sustained a smaller net inflow. The net borrowing of
foreign currency by the banking sector, albeit lower,
continued to reflect the arbitrage opportunities as
interest rate differentials remained in favour of
Malaysia. Similarly, there were lower outflows in the
non-bank private sector due largely to lower trade
credits extended by Malaysian exporters to importers


4.H-52
52
abroad, representing a shift in exporters’ decision to
take advantage of the current favourable monetary
and financial environment.
External Debt
Prudent external debt management strategy
remained an integral part of macroeconomic policy
in 2003. Malaysia continues to maintain an active
external debt management strategy, which
incorporates the guiding principles that minimise
risk with balanced currency and maturity profile.
Corporations sourcing external funds for operations
in Malaysia are generally required to utilise the
funds for productive activities that will generate
foreign exchange income. This will provide a
natural hedge for debt servicing. They are also
encouraged to raise loans with longer maturity,
while short-term borrowings by the non-bank
billion). The increase in external debt reflected
mainly a small net borrowing by the private sector
and the exchange revaluation loss, arising from the
weakening of the US dollar. External debt of the
public sector, comprising the Federal Government
and NFPEs, declined in 2003 due to significantly
higher net repayment and prepayment. The external
debt to GNP and exports of goods and services
ratios improved further to 50.7% and 40.4%
respectively (2002: 55.3% and 44.3% respectively).
Accordingly, the overall debt service ratio (excluding
prepayments) declined to 6.1% in 2003 (2002:
6.7%). Of significance is that the share of short-
term debt to total debt continued to remain low,
accounting for only 18.4% of total external debt.
The ratio of short-term debt to international
reserves also improved further, to account for
20.2% of reserves (end-2002: 24.4%).
External debt remained stable at a manageable level. Higher
repayments and moderate new borrowings by the public sector
resulted in a lower share of public sector debt to total debt.
private sector to finance long-term investment is
discouraged. Prudential regulations to achieve
these objectives have been effective in keeping the
nation’s external debt low and its risk profile
balanced.
In 2003, total external debt outstanding increased
marginally by 0.9% to RM187.2 billion (US49.3Theoutstandingmediumandlong−termexternaldebtwassustainedatRM152.8billion(US40.2
billion) at the end of 2003 (2002: RM153.6 billion).
Amidst lower drawdown (-12.1%), repayment of
medium and long-term loans increased significantly
by 25.1%. For the first time since 1992, the public
sector recorded a large net repayment of RM11
billion (2002: +RM4.7 billion), reflecting net
repayments by both the Federal Government (-RM3.7
billion) and NFPEs (-RM7.3 billion). Meanwhile, the
private sector debt turned around to register a net
borrowing of RM3.1 billion (2002: -RM4 billion).
Nevertheless, after taking into account an exchange
revaluation loss of RM4.1 billion following the
appreciation of major currencies, particularly the euro
and yen against the US dollar, and a reclassification
of a domestic foreign currency loan raised previously
from an offshore bank in the Labuan International
Offshore Financial Centre into an external loan, the
medium and long-term loans declined only
marginally by RM0.8 billion.
In 2003, short-term external debt (maturity of one
year or less) rose by RM2.4 billion to RM34.5 billion
(US9.1billion),reflectinglargelytheincreaseinexternalborrowingbythebankingsector,particularlyinthesecondquarter.Theincreasewasattributedmainlytothehedgingactivitiesofbanksinrelationtotrade−relatedtransactions.Towardsyearend,asforeigncurrencydepositsatcommercialbanksroseTable1.24OutstandingExternalDebt20022003pRMUS
RM
US$
million
million
million
million
Total debt
185,643
48,853
187,250
49,276
Medium and long-term 153,587
40,418
152,788
40,207
Short-term1
32,055
8,436
34,462
9,069
As % of total debt
17.3
17.3
18.4
18.4
As % of international
reserves
24.4
24.4
20.2
20.2
As % of GNP
Total debt
55.3
55.3
50.7
50.7
Medium and long-term
debt
45.8
45.8
41.4
41.4
As % of exports of
   goods and services
Total debt
44.3
44.3
40.4
40.4
Medium and long-term
debt
36.6
36.6
32.9
32.9
Debt service ratio (%)
6.7
6.7
6.1
6.1
1 Excludes currency and deposits held by non-residents with resident banking
institutions.
p Preliminary
Source: Ministry of Finance and Bank Negara Malaysia


53
The Malaysian Economy in 2003
during the fourth quarter, banking institutions began
to wind down the interbank foreign borrowings that
were  taken to cover the forward sales of foreign
exchange by exporters.  Meanwhile, short-term
borrowings by the non-bank private sector,
comprising mainly revolving credits, overdraft
facilities and term loans, declined marginally in 2003.
The decline was due mainly to the repayment of
these facilities by several large companies, particularly
from the oil and gas sector.
The bulk of the medium and long-term debt
continued to be denominated in US dollars (stabilised
at 77% as at end 2003), as settlements for trade and
investment were mainly in US dollars. The appreciation
of the yen and euro in 2003 has therefore led to only
a small exchange revaluation loss equivalent to 2.6%
of the total medium and long-term debt. In 2003, the
share of yen denominated debt declined marginally to
13% (2002: 14%) due partly to a bullet payment of a
yen denominated loan by the Federal Government,
while that of the euro increased marginally to 5%
(2002: 4%). The remaining 5% of the debt was
denominated in other international currencies,
including the pound sterling, Swiss franc and
Singapore dollar.
Public sector external debt: The outstanding
external debt of the public sector declined by RM3.8
billion to RM96.8 billion (US$25.5 billion), as at end
2003, reflecting higher repayment by both the
Federal Government and NFPEs. Consequently, the
share of the public debt to total external debt
declined to 51.7% (2002: 54.2%). During the year,
the Federal Government maintained its practice to
source its funding requirements mainly from
non-inflationary domestic sources.
In 2003, three main strategies were undertaken by
the Federal Government to manage its external
debt. Firstly, the Federal Government did not rely on
new borrowings from the international capital
market, despite the nation’s low debt position.
Thus, the Government’s gross external borrowing
declined significantly by RM7.3 billion (US1.9billion)toRM3.1billion(US0.8 billion) in 2003.
Secondly, the Government increased its repayments,
including the prepayments of external loans, to
RM6.9 billion (2002: -RM2.4 billion). During the
year, the Government prepaid two external loans,
namely a Floating Rate Note due 2005 and a
syndicated loan due 2005/07, which together
amounted to RM1.6 billion. Thirdly, taking
advantage of the tighter margins arising from
improved credit position and investor confidence,
the Federal Government refinanced a number of its
more costly term and syndicated loans. In January, a
¥1.4 billion term loan due 2006 was raised at Libor
+ 57.5 basis points to refinance the 3.17% ¥4.1
billion term loan due 2006. In March, the
Government refinanced a US$250 million and ¥54
billion dual currency syndicated loan at a lower
margin of Libor + 38 basis points (previously Libor +
125 basis points).  Nevertheless, after taking into
account a reclassification of a domestic foreign
currency loan into an external loan and the
exchange revaluation loss during the year, the
outstanding external debt of the Federal
Government increased marginally to RM37.3 billion
or US$9.8 billion (2002: RM36.3 billion).
0
20
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
40
60
80
100
120
140
160
180
200
RM billion
0
10
20
30
40
50
60
70
%
Graph 1.42a
Outstanding External Debt
Federal Government
NFPEs
Private sector
Short-term1
Debt/GNP (RHS)
1 Excludes currency and deposits held by non-residents with resident banking 
 institutions
0
5
10
15
20
25
30
RM billion
0
1
2
3
4
5
6
7
8
%
Graph 1.42b
Debt Servicing
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Interest payment
Repayment
Debt service ratio (RHS)


4.H-54
54
Reflecting Malaysia’s strong fundamentals, the interest
spread on Malaysia’s benchmark securities narrowed
further in 2003. The spread on Malaysia’s Global Bond
due 2011 narrowed to 36 basis points at the end of
2003 (end-2002: 145 basis points).  Similarly, the
spread on the Global Bond due 2009 narrowed
steadily in 2003 to 85 basis points at
end-2003 (end-2002: 183 basis points). During the
year, Standard & Poor’s raised its long-term foreign
currency sovereign credit rating on Malaysia to A-
from BBB+ and assigned a stable outlook to the rating
on 7 October 2003. Meanwhile, Moody’s Investor
Service, Fitch and Japan Credit Rating Agency Ltd. also
reaffirmed the respective sovereign ratings for
Malaysia. In addition, Rating And Investment
Information Inc. upgraded Malaysia’s long-term
foreign currency rating to A- from BBB+, with a stable
outlook on 30 January 2004. On 6 February 2004,
Moody’s also changed the outlook for Malaysia’s
foreign currency ratings to positive.
The NFPEs’ external debt declined further to RM59.6
billion in 2003 (US$15.7 billion; 2002: RM64.3 billion).
The low interest rate environment and continued
strengthening of the NPFEs’ earnings performance
have allowed the NFPEs to streamline their debt
position. The NFPEs recorded a higher net repayment
of RM7.3 billion (2002: -RM3.3 billion), reflecting
significantly larger repayments, including the
prepayment and refinancing of several higher cost
loans. These repayments (-RM12.4 billion), including
the settlement of several large loans, were effected
mainly by NFPEs in the oil and gas, transportation and
telecommunication sectors.  Inflows of external
borrowing had also increased to RM5.2 billion (2002:
RM3.7 billion). These loans were raised mainly to
finance capital investment and overseas investment as
well as for refinancing of more costly loans.
Private sector external debt: Private sector debt
(including short-term debt) continued to account for a
significant share of Malaysia’s external debt, at 48.3%
of total debt in 2003 (2002: 45.8%). The private
sector medium and long-term external debt increased
by 5.6% to RM55.9 billion (US$14.7 billion) as at end-
2003. During the year, the larger drawdown of
external debt, amounting to RM12.7 billion (2002:
RM9.7 billion) was mainly by investment holding
companies and companies in the manufacturing and
plantation sectors. These funds were mainly to finance
capital expenditure and overseas investment.
Meanwhile, repayments by the private sector declined
to RM9.6 billion in 2003 (2002: RM13.7 billion). While
the medium and long-term external debt is marginally
higher, the overall risk remains low as the bulk of
private sector external debt has a natural hedge. Most
of these loans were used to finance productive export-
oriented activities with foreign exchange revenue to
service the debt.  In addition, about two-thirds of the
private sector external borrowing were sourced by
non-resident controlled companies from their
shareholders or related companies abroad. These loans
were generally provided on flexible terms, including
longer maturity and at concessionary interest rates.
In addition to the existing published detailed
information on external debt, Malaysia has
subscribed to the new IMF Special Data
Dissemination Standard (SDDS) on external debt
since 30 September 2003. The new SDDS external
debt data requirement is consistent with the
framework for international investment position
statistics in the fifth edition of the Balance of
Payments Manual. Under the new template of
external debt data, currency and deposits held by
non-residents with resident banking institutions were
included in the coverage of external debt. While
Bank Negara Malaysia has adopted this coverage for
external debt in the SDDS templates, for the time
being, publications by Bank Negara Malaysia will not
include currency and deposits held by non-residents
with resident banking institutions. Instead, the Bank
will continue to show this item as part of external
liabilities of the banking system in its monthly
statistics. However, to be consistent with the new
SDDS format, adjustment to the external debt tables
in all Bank Negara Malaysia’s publications will be
made during the course of 2004.
International Reserves
The international reserves held by Bank Negara
Malaysia comprises gold and foreign exchange
holdings, IMF reserves position and holdings of
1999
Yield Spread
2000
2001
2002
2003
Graph 1.43
Spread of Sovereign Bonds and Selected NFPE 
Bond Over US T-bills
Global bond (2009)
Global bond (2011) 
Petronas bond (2006)
0
50
100
150
200
250
300
350
400
450
F A J A O D F A J A O D F A J A O D F A J A O D F A J A O D


55
The Malaysian Economy in 2003
Special Drawing Rights (SDR). In 2003, net
international reserves increased by RM39.1 billion, or
US10.3billion,toarecordlevelofRM170.5billionorUS44.9 billion as at end-2003. This is the largest
annual increase in the last decade. The significant
build-up in international reserves over the course of
2003 reflected the more robust economic activities,
improved export performance and inflows of foreign
direct investment and portfolio investment.
As at 15 March 2004, reserves increased further to
RM194.9 billion or US$51.3 billion. The level of
international reserves is sufficient to finance 7.8
months of retained imports and to cover 5.2 times
the short-term external debt.
More significant is that the international reserves
held by the Bank are fully usable and
unencumbered. There are no foreign currency loans
with embedded options, and no undrawn,
unconditional credit lines provided by or to other
central banks, international organisations, banks
and other financial institutions. Bank Negara
Malaysia also does not engage in options in foreign
currencies vis-à-vis the ringgit.
In 2003, foreign exchange inflows were largely
generated by the sharp increase in trade surplus as
well as early repatriation of export earnings in view
of interest rate differentials that were in Malaysia’s
favour. The accumulation of reserves was also due to
sustained inflows of foreign funds for direct
investment as well as into the equity market. The net
outflows of portfolio funds in the first half of the
year due to geopolitical uncertainty and the SARS
outbreak reversed in the second half of the year as
economic performance strengthened and the
corporate earnings outlook improved. The increase in
reserves also reflected the net revaluation gains
during the year.
The increase in reserves during the year occurred
amidst higher outflows arising from larger payments
for imports of goods and services and repatriation of
profits and dividends underpinned by stronger
economic activities. There was also a higher
repayment of external loans by the public sector,
including settlements of several large loans by the
The net reserves increased to US$51.3 billion as at 15 March 2004,
and reflected the more robust economic activities, improved
export performance and inflows of foreign direct investment and
portfolio investment.
Table 1.25
Net International Reserves
As at end
Change
                                           2001
2002
2003
2003
RM million
SDR holdings
487.8
585.0
685.0
100.0
IMF reserves position
3,193.5
3,315.5
3,652.0
336.5
Gold and foreign
exchange
113,542.3 127,515.1 166,139.3 38,624.2
Gross International
Reserves
117,223.6 131,415.6 170,476.3 39,060.7
Less Bank Negara
Malaysia external
liabilities
20.7
21.9
23.8
1.9
Net International
Reserves
117,202.9 131,393.7 170,452.5 39,058.8
US$ million equivalent
30,842.9
34,577.3
44,855.9 10,278.6
Months of retained
imports
5.1
5.4
6.8
Reserves/Short-term
external debt (times)
4.9
4.1
4.9
NFPEs in 2003. The outflows in terms of overseas
investments by Malaysian companies, especially in
the oil and gas sector, while remaining high, have
yielded returns in the form of profits and dividends
and interests earned amounting to RM2 billion in
2003 (2002: RM0.7 billion) and generated export
revenues from new markets.
Malaysia’s reserves also yielded revaluation gains
arising from quarterly adjustments of the reserves in
all quarters of 2003 as a result of the appreciation of
the major currencies against the US dollar during the
year. Net revaluation gain for the year amounted to
2003
RM billion
2002
Months/Times
Graph 1.44  
Net International Reserves (End-month)
Net international reserves, RM billion (LHS)
Import cover (RHS)
Reserves/short-term external debt (RHS)
D 
J
F
M
A
M
J
J
A
S
O
N
D
120
130
140
150
160
170
180
0
1
2
3
4
5
6
7
8


4.H-56
56
RM11.9 billion or US$3.1 billion, compared with the
net revaluation gain of RM6.6 billion or US1.7billionin2002,exceedingtherevaluationlossin2001(−RM4.1billionor−US1.1 billion) and 2000
(-RM5.3 billion or -US$1.4 billion).
In managing the reserves, a prudent approach is
adopted to achieve the objectives of ensuring
capital preservation and liquidity while optimising
returns. The reserves, which comprise gold and
major foreign currencies, are well diversified.
Malaysia, as a member of the IMF, can hold reserves
with the Fund in the form of SDR, through
participation in the Operational Budget. Under the
Operational Budget, the Fund invites member
countries which are viewed as ‘strong’ and have
surpluses in their balance of payments to make
resources available to members which are facing
balance of payments difficulties. In return, the
contributing members agree to receive a claim on
the Fund (termed as the reserves position with
the IMF) that can be drawn in the event of a
balance of payments need.
During the year, reflecting Malaysia’s strength in the
balance of payments and gross reserves position,
Malaysia was included in the IMF’s Operational
Budget. This was reflected in an increase in the net
purchase of SDR5 million, resulting in an increase in
Malaysia’s net creditor position with the IMF, and
the consequent increase in Bank Negara Malaysia’s
Table 1.26
International Reserves for Selected Regional
Economies
Reserves
Reserves
Reserves
Reserves
as at
in months
as cover
as cover
Country
end-2003, of imports
of short-
of total
(US$
term
external
billion)
external
debt*
debt*
Chinese Taipei
206.6
19.5
4.6
3.4
Hong Kong China
118.4
21.9
0.5
0.3
Indonesia
36.3
13.4
n.a.
0.3
Korea
155.4
10.4
2.6
1.0
Malaysia
44.9
6.8
4.9
0.9
Philippines
16.9
5.2
2.7
0.3
P
.R. China
403.3
11.7
6.0
2.2
Singapore
96.3
9.0
n.a.
n.a.
Thailand
42.1
6.8
3.7
0.8
* Except for Malaysia, external debt data refers to amount outstanding as at
end 3Q 2003.
n.a. Not available.
Source: National authorities; Asian Development Bank
reserves position. In ringgit terms, the reserves
position with the IMF increased by RM336.5 million
at the end of 2003. Meanwhile, the receipts of
remuneration from the IMF resulted in Malaysia’s
SDR holdings increasing by SDR8 million to SDR121
million at the end of 2003.
Bank Negara Malaysia releases information on the
international reserves position and the statement of
the Bank’s assets and liabilities on a fortnightly basis
with a one-week lag. The Bank also fulfils the IMF’s
SDDS requirements of publishing the reserves data
template at end-month with a one-month lag. The
SDDS template not only covers detailed information
on international reserves, but also includes the
release of forward-looking information on the size,
composition and usability of official reserves and
In managing the reserves, a prudent approach is adopted to
achieve the objectives of ensuring capital preservation and
liquidity while optimising returns.
other foreign currency assets, and the future and
potential (contingent) inflows and outflows of
foreign exchange of the Federal Government and
the Bank over the next 12 months.
Flow of Funds
The economy registered a higher resource surplus of
RM50.8 billion or 13.7% of GNP in 2003 (2002: a
surplus of RM30.5 billion or 9.1% of GNP). In terms
of balance of payments, the higher resource surplus
reflected higher exports over imports following
improved external demand in the second half of the
year. While exports grew strongly by 8.6% (2002:
6.6%), imports rose at a slower pace of 5.4%
(2002: 6.5%). From the perspective of the country’s
saving-investment gap, the higher resource surplus
reflected the significantly higher net savings
position of the private sector. The inter-sectoral flow
of funds between various sectors of the economy
for the year is shown in Tables 1.27 and 1.28.
The disposable income of the public sector
increased by 5.9% to RM120.2 billion in 2003.
However, this higher disposable income was offset
by higher public consumption and investment
expenditure arising from the government’s efforts to
sustain economic activity in the face of adverse
external developments in the first half of 2003.
Consequently, the resource surplus of the public
sector was marginally higher at RM10 billion in
2003 (2002: RM9.8 billion). The resource surplus
reflected entirely the surpluses from the NFPEs of


57
The Malaysian Economy in 2003
Table 1.27
Flow of Funds: 2002
Domestic Economy
Public
Private
Banking
Sector
Sector
System
RM billion
Disposable Income
-325.0
113.5
211.5
0
Consumption
209.5
-50.0
-159.5
0
Investment
83.8
-53.7
-30.1
0
Change in Stocks
1.3
-1.3
0
Exports of Goods and Non-Factor Services
415.0
-415.0
0
Imports of Goods and Non-Factor Services
-348.9
348.9
0
Net Factor Payment Abroad
-25.1
25.1
0
Net Transfers
-10.6
10.6
0
Non-Financial Balance
0.0
9.8
20.7
0.0
-30.5
0
Foreign Financing
Direct Investment
4.9
-4.9
0
Net Foreign Borrowings
4.7
-27.9
23.2
0
Net Change in Foreign Assets
Bank Negara Malaysia
-14.2
14.2
0
Banking System
6.3
-6.3
0
Domestic Financing
Change in Credit
11.5
27.7
-39.3
0
Change in Money Supply, M3
-31.6
31.6
0
Net Borrowings from Non-Bank Sector
-26.1
26.1
0
Net Errors and Omissions
-19.9
15.5
4.4
0
Sum
0
0
0
0
National
Accounts
Sum
Rest of
the
World
Table 1.28
Flow of Funds: 2003
Domestic Economy
Public
Private
Banking
Sector
Sector
System
RM billion
Disposable Income
-360.1
120.2
239.9
0
Consumption
223.7
-53.9
-169.8
0
Investment
87.1
-56.3
-30.8
0
Change in Stocks
-1.5
1.5
0
Exports of Goods and Non-Factor Services
450.6
-450.6
0
Imports of Goods and Non-Factor Services
-367.9
367.9
0
Net Factor Payment Abroad
-22.6
22.6
0
Net Transfers
-9.3
9.3
0
Non-Financial Balance
0.0
10.0
40.8
0.0
-50.8
0
Foreign Financing
Direct Investment
4.2
-4.2
0
Net Foreign Borrowings
-11.2
-12.8
24.0
0
Net Change in Foreign Assets
Bank Negara Malaysia
-39.1
39.1
0
Banking System
7.7
-7.7
0
Domestic Financing
Change in Credit
12.9
32.4
-45.3
0
Change in Money Supply, M3
-48.5
48.5
0
Net Borrowings from Non-Bank Sector
-11.7
11.7
0
Net Errors and Omissions
-27.8
28.2
-0.4
0
Sum
0
0
0
0
0
National
Accounts
Rest of the
World
Sum


4.H-58
58
RM24.7 billion, which helped offset the resource
gap of the general government of RM14.7 billion.
The bulk of the resource gap of the general
government was financed through net domestic
borrowings (RM12.9 billion). Government
borrowings and the resource surplus of the NFPEs
were utilised to make a net repayment of foreign
borrowings of RM11.2 billion, while RM11.7 billion
was transferred to the private sector during the
year.
The resource surplus of the private sector increased
twofold to RM40.8 billion or 11% of GNP in 2003
from RM20.7 billion or 6.2% of GNP in 2002.
Higher disposable income of RM239.9 billion during
the year (2002: RM211.5 billion) following
continued strong growth in economic activity,
enabled the private sector to increase consumption
expenditure (6.5%). At the same time, private
investment expenditure turned around (2.4%), the
first positive growth since 2000. The resource
surplus of the private sector together with net
inflows of FDI (RM4.2 billion), net borrowings from
the banking system (RM32.4 billion) and net
transfers from the public sector (RM11.7 billion), led
to a larger increase of resources amounting to
RM89.1 billion (2002: RM79.4 billion) being
available to the private sector.
A sizeable pool of resources available to the private
sector was placed with the banking system,
resulting in a net placement of deposits of RM48.5
billion. Some of the excess resources were also
utilised for repayments of foreign borrowings by the
private sector (RM12.8 billion). For the economy as
a whole, the large current account surplus and
continued inflows of FDIs, were more than sufficient
to accommodate these outflows. Consequently, the
net international reserves of BNM rose by RM39.1
billion to RM170.5 billion as at the end of 2003.


Monetary and Fiscal
Developments 
60-61
Monetary Policy in 2003
61
White Box: Monetary Policy Statement
62-68
Monetary Developments in 2003
68-69
Exchange Rate Developments
69-77
Fiscal Policy and Operations


4.H-60
60
MONETARY POLICY IN 2003
In 2003, Bank Negara Malaysia maintained an
accommodative monetary policy to support
growth. The assessment at the beginning of the
year was that the economy was operating below
potential. In an environment of the near absence
of demand pressures and excess capacity in many
sectors, inflation was forecast to remain low in
2003 with the output gap positive. The
accommodative monetary policy therefore
reinforced fiscal policy and other measures aimed
at promoting domestic economic activities. The
low inflation and stronger fundamentals provided
the flexibility to the Central Bank to maintain this
accommodative monetary stance. During the year,
efforts were also intensified to improve access to
financing to the private sector, in particular to the
Small and Medium Enterprises (SMEs).
With low and stable inflation, monetary policy remained
accommodative to support economic growth.
The monetary framework in 2003 continued to
operate under a pegged exchange rate regime.
The ringgit remained fixed at RM3.80=US$1, an
arrangement that has been in place since
September 1998. In 2003, the ringgit remained
close to its fair value and has been well supported
by strengthened economic fundamentals.
During the year, the policy rate of Bank Negara
Malaysia, the 3-month intervention rate, was
reduced once on 21 May. Interest rate policy in
the first quarter was based on two
considerations. First, the cumulative reductions in
interest rates by 600 basis points since 1998 had
resulted in lower interest rates and ample
liquidity. Liquidity conditions in the banking
system created competitive pressures on banks to
price loans at below the quoted base lending
rates. The lower lending rates had been effective
in raising demand for credit. Amidst stable
employment and higher incomes, supported by
higher commodity prices and strong performance
in selected export sectors, the prevailing
accommodative monetary policy reinforced fiscal
policy in sustaining domestic demand. Growth in
domestic demand was reflected in the further
expansion in monetary aggregates and bank
lending indicators during the first quarter.
Stronger expansion was also seen in loans
extended to small businesses.
Second, an important consideration to leave the
policy rate unchanged in the first quarter was to
provide a reasonable return to savers. In an
environment of ample liquidity, maintaining a
reasonable return to savers continued to remain
an important consideration. During this period,
consumer and business sentiment was affected by
the uncertainties from tensions prior to the Iraq
war and subsequently, greater uncertainty
following the outbreak of the Severe Acute
Respiratory Syndrome (SARS) in April. The stance
of monetary policy in early 2003 was therefore
aimed at balancing the need to promote
consumption and investment while maintaining a
reasonable real rate on savings.
Towards mid-2003, however, developments in the
regional and global economies indicated
increased risks on the growth prospects.
Economic and financial indicators showed that the
global economic recovery was slower than
expected, with growth in the United States
remaining well below trend in the first half-year
due to subdued investment. Deflationary
concerns and continued financial market
volatilities pointed to a more modest recovery for
the global economy for 2003. The dampened
global outlook and the implication of SARS on a
number of sectors threatened to weaken
domestic demand and increase the downside risks
to economic recovery in Malaysia. Given this, on
21 May, Bank Negara Malaysia reduced the policy
rate by 50 basis points to 4.5% as a pre-emptive
move to mitigate the effects of a more adverse
external environment on the domestic economy.
The impact of SARS on economic recovery was
expected to be transitory. Its impact was primarily
on the services sub-sectors of tourism, transport
and retail services. To ease the burden on the
affected industries and workers in these sectors,
other measures were implemented, including a
Special Relief Guarantee Facility of RM1 billion
Monetary and Fiscal Developments


Monetary and Fiscal Developments
4.6.3-61
61
and special relief for housing loan repayments to
workers in these sectors. These specific measures
were part of the overall package introduced on
21 May, to address the impact of SARS on the
economy as well as to stimulate further structural
changes. Implementation of the measures
including the reduction in interest rates, as a
comprehensive package was designed to give
maximum impact to the package.
These coordinated policy measures promoted and
reinforced a stronger recovery in the domestic
economy in the second half-year when global and
regional growth gained momentum. A number of
positive developments on the global front lent
further support to domestic policies. The reduction
in geopolitical uncertainty in the Middle East and
the abatement of SARS resulted in markedly
strengthened domestic consumer and business
sentiment in the third quarter. More favourable
trends emerged in the third quarter, with indicators
that the global economic growth was
strengthening. Growth in the United States in the
third quarter, picked up to well above trend
following the recovery in investment and a build-up
in inventory. On the domestic front, lower interest
rates, amidst improving sentiment, led to stronger
demand for credit. Demand for financing, which
moderated in May on uncertainties of the effects of
SARS, recovered strongly since June. Monetary
indicators for the second half-year also expanded at
a stronger pace, reflecting stronger demand for
liquidity. Overall, the accommodative monetary
policy reinforced other policies to contribute to
stronger growth in output. For the year as a whole,
real GDP growth strengthened to 5.2%, with the
growth momentum into 2004 sustained. Inflation
has continued to remain low at 1.2% while core
inflation, that is inflation due to demand pressures,
was lower at 0.6%.
Monetary Policy Statement
An important development during the year was the issuance of the Monetary Policy Statement (MPS)
by Bank Negara Malaysia at pre-determined intervals. On 27 August 2003, Bank Negara Malaysia
issued its first MPS together with the announcement of the second quarter GDP data. The second
and third MPS was issued at the release of the third quarter GDP data on 19 November 2003 and the
fourth quarter GDP data on 25 February 2004.
The MPS is a forward looking statement, outlining the monetary policy stance in the near term and
the rationale for the policy thrust. The objective of issuing this statement is part of the overall
strategy to provide greater understanding of the monetary policy objectives and measures in light of
a more complex and dynamic environment. In particular, it would help anchor expectations on
growth and inflation. Signalling the Bank’s policy intent through direct communication is aimed at
increasing the understanding and appreciation of money market participants, and thereby, facilitate a
more rapid transmission of the policy rate in the pricing of credit and longer-term rates, and thus
enhance the overall efficiency of the monetary transmission mechanism. The MPS is released four
times a year and would coincide with the release of Malaysia’s quarterly GDP performance. Between
the fixed scheduled dates, additional press statements would be issued if a policy change is
warranted.
The issuance of the MPS is part of the ongoing process to enhance market understanding of the
Bank’s financial and economic assessments, operations and policy objectives. Since 1998, in a drive to
ensure symmetric information to the public, the Bank has disseminated a wider range of information,
which included among others, on-line information on its daily liquidity forecasts and money market
operations. Over the years, there has also been significant enhancement of the coverage of
information available through the Bank’s website, and reduction in the time lag of data releases to
the public.


4.H-62
62
MONETARY DEVELOPMENTS IN 2003
In 2003, low interest rates, ample liquidity and a
strengthened banking sector supported stronger
economic activity. Funds available in the banking
system increased during the year as a result of the
expansionary fiscal operations and stronger
balance of payments position. The underlying
ample liquidity continued to result in competitive
pricing of loans to selected sectors.
the average lending rate (ALR) declined further,
and at end-year was 39 basis points lower than
the end-2002 level. While the BLR of finance
companies declined by 55 basis points, the ALR of
finance companies, nevertheless, declined by a
larger magnitude of 64 basis points as fixed rates
on hire purchase for passenger cars had been on
a declining trend. The lower hire purchase rates
were due to greater competition for loans in the
passenger car market.
Monetary conditions remained supportive of economic expansion.
Low interest rates, ample liquidity and a strengthened banking
sector contributed to increased financing to the private sector.
Following the 50 basis point reduction in the
policy rate in May, the lending rates of banking
institutions declined further. The commercial
banks reduced their Base Lending Rate (BLR) by
39 basis points. As the component of lower cost
new loans increased relative to the existing loans,
Deposit rates declined by a smaller margin, with
the one to 12-month fixed deposit rates of the
commercial banks declining by 20-30 basis points.
Notwithstanding the reduction in nominal deposit
rates, the real rates of return (end year nominal
rates of return less inflation rate) on deposits with
Table 2.1
Interest Rates and Liquidity
2000
2001
2002
2003
2003
At end period (%)
Change (%)
3-month Intervention Rate
5.5
5.0
5.0
4.5
-0.5
Interbank rates
Overnight
2.77
2.76
2.71
2.72
0.01
1- month
3.05
2.97
2.99
2.99
0.00
Base lending rate (BLR)
Commercial banks
6.78
6.39
6.39
6.00
-0.39
Finance companies
7.95
7.45
7.45
6.90
-0.55
Average lending rate (ALR)
Commercial banks
7.46
6.67
6.50
6.11
-0.39
Finance companies
11.14
10.24
9.75
9.11
-0.64
Fixed deposit rates
Commercial banks
3-month
3.48
3.21
3.20
3.00
-0.20
12-month
4.24
4.00
4.00
3.70
-0.30
Finance companies
3-month
3.52
3.22
3.20
3.00
-0.20
12-month
4.27
4.01
4.00
3.68
-0.32
Savings deposit rates
Commercial banks
2.72
2.28
2.12
1.86
-0.26
Finance companies
3.44
2.94
2.65
2.18
-0.47
Average during the period (%)
Change (%)
Nominal interest rate differential
Malaysia - United States
-3.32
-0.49
1.31
1.66
0.35
Malaysia - Singapore
0.73
1.31
2.23
2.27
0.04
At end period (RM billion)
Change (RM b)
Resource surplus (+)/gap (-)1
73.7
67.4
76.2
105.8
29.6
Adjusted resource surplus (+)/gap (-)2
36.1
20.8
24.6
45.8
21.2
At end period (%)
Change (%)
Loan-deposit ratio
84.3
85.9
84.9
80.9
-4.0
Financing-deposit ratio3
92.3
95.7
95.1
91.7
-3.4
1
Deposits less loans.
2
Deposits less loans and holdings of private debt securities.
3
Includes holdings of private debt securities.


Monetary and Fiscal Developments
4.6.3-63
63
commercial banks were higher at end-2003, at
0.66% for savings deposits (at end-2002: 0.42%)
and ranging from 1.8% for the 3-month fixed
deposit to 2.5% for the 12-month maturity (1.5%
and 2.3% at end-2002). Savings and fixed deposits
of individuals increased by 8.8% in 2003 and as a
share of GDP, remained stable at 57% at end-2003.
Following significantly improving cash flows, total
deposits of businesses increased significantly, by
14.9%, and as a share of GDP, rose to 46.9% at
end-2003 (at end-2002: 44.4%).
By international standards, lending rates in Malaysia
remained competitive, and the spread between
lending and deposit rates was among the lowest.
Low interest rates, amidst higher disposable income,
particularly in the second half-year, led to stronger
demand for financing by the private sector from
both the banking sector and the capital market to
finance consumption and business expansion. In
addition, a larger amount of funds was also raised
by businesses in the PDS market to restructure and
refinance debts, to strengthen their balance sheets
and to prepare for future investment opportunities.
Cumulatively, loans disbursed by the banking
system for working capital, trade financing and
fixed investment, and funds raised in the capital
market increased by 9% compared with the
previous year. While the banking system remained
the main source of finance for the economy, there
was further diversification in the sources of
financing. Loan disbursements by the banking
system which rose by 7.3%, accounted for 89.7%
of total gross financing in 2003 while funds raised
from the capital market rose at a stronger rate of
BLR-CB 
ALR-CB 
BLR-FC 
ALR-FC 
Graph 2.1 
Lending Rates: Commercial Banks and 
Finance Companies
J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N D
1998
1999
2000
2001
2002
2003
5
6
7
8
9
10
11
12
13
14
15
16
%
    6.00
6.11
6.90
9.11
Graph 2.2 
International Comparison of Interest Rates as at end-2003
Spread between Lending and Deposit Rates
2.53
2.91
3.00
3.31
4.63
4.96
4.85
4.93
5.91
8.75
0
2
4
6
8
10
United Kingdom
Malaysia
United States
Thailand
Singapore
Korea
Philippines
Chinese Taipei
Hong Kong China
Indonesia
Prime Lending Rates
4.00
4.25
5.00
5.63
6.00
6.50
7.04
9.34
9.35
18.00
0
2
4
6
8
10
12
14
16
18
20
United States
Hong Kong China
Singapore
Malaysia
Thailand
Chinese Taipei
United Kingdom
Korea
Philippines
Indonesia
%
%
11.9%
31.9%
5.8%
9.8%
Annual growth
9.0%
200
250
300
350
400
450
500
550
1999
2000
2001
2002
2003
RM billion
Graph 2.3 
Private Sector Gross Financing through the 
Banking System and the Capital Market 
Loans disbursed
PDS issued
Equity issued


4.H-64
64
26.6% to account for a small share of 10.3% of
financing to the private sector.
The success of the measures to promote growth and
depth in the PDS market was reflected in the rising ratio
of PDS outstanding as a percentage of GDP to 34.7% at
end-2003, while the ratio of bank loans to GDP trended
down to 120.9%. This is a significant development
compared to the 1998 level (PDS at 16.5% and banking
system loans at 147.2% of GDP respectively). In 2003,
businesses with strong credit profiles took advantage of
the low interest rate environment to lock in their funds in
long-term PDS. As a result, gross PDS financing increased
significantly by 60.5% during the year (-15.4% in 2002).
With the expansion of the PDS market, banking
institutions have also increased indirect financing of
the business sector through holdings of PDS,
accounting for approximately 7% of the loan base.
On a net basis, banking system outstanding loans
and holdings of PDS increased by 5.9%. The greater
diversification in financing sources and the focus on
promoting domestic sources of growth has led to a
shift in the profile of banking system loans. In
particular, with measures undertaken to enhance the
contribution of SMEs in the domestic economy and
the drive to promote private consumption growth,
banking institutions have accorded emphasis on
SMEs and the household sector.
Efforts by Bank Negara Malaysia to strengthen the
SME financing infrastructure have been important in
providing adequate and cost-effective funding to
support the growth of SMEs. Reflecting this,
outstanding loans to SMEs grew strongly by 10% in
2003 to reach a record high of RM82 billion. This
amount represented 38.4% and 17.3% respectively
of business and total loans outstanding. Meanwhile,
disbursements to SMEs amounted to RM87.1 billion.
Financing of SMEs via the special funds has expanded
significantly. As at end-2003, RM5.3 billion had been
approved to more than 14,000 borrowers,
representing an increase of 58.5% for the year as a
whole. Meanwhile, disbursements amounted to
RM4.1 billion, an increase of 82.9% over the
previous year. Excluding both the Special Relief
Table 2.2
Banking System1: Loan Indicators
During the year (RM billion)
Annual growth (%)
2000
2001
2002
2003
2001
2002
2003
Total
Loan applications
208.8
190.6
217.2
227.6
-8.7
14.0
4.8
Loan approvals
134.8
125.6
137.6
152.7
-6.8
9.5
11.0
Loan disbursements
360.7
373.5
411.6
441.7
3.5
10.2
7.3
Loan repayments
347.1
365.4
402.7
430.5
5.3
10.2
6.9
Change in loans outstanding2
21.2
16.1
19.8
21.8
3.9
4.6
4.8
Businesses
Loan applications
n.a.
n.a.
135.3
124.9
n.a.
n.a.
-7.7
Loan approvals
79.1
63.5
68.5
77.2
-19.7
7.9
12.7
Loan disbursements
270.2
270.4
282.0
303.4
0.1
4.3
7.6
Loan repayments
269.4
276.8
275.8
299.6
2.8
-0.4
8.6
Change in loans outstanding2
2.0
-5.6
-3.1
-5.1
-2.5
-1.4
-2.3
SMEs
Loan applications
n.a.
n.a.
n.a.
44.5
n.a.
n.a.
n.a.
Loan approvals
n.a.
n.a.
n.a.
25.7
n.a.
n.a.
n.a.
Loan disbursements
n.a.
n.a.
n.a.
87.1
n.a.
n.a.
n.a.
Change in loans outstanding2
2.9
4.0
…
7.4
5.7
…
10.0
Other businesses
Loan applications
n.a.
n.a.
n.a.
80.4
n.a.
n.a.
n.a.
Loan approvals
n.a.
n.a.
n.a.
51.5
n.a.
n.a.
n.a.
Loan disbursements
n.a.
n.a.
n.a.
216.4
n.a.
n.a.
n.a.
Change in loans outstanding2
-0.9
-9.6
-3.1
-12.5
-6.1
-2.1
-8.7
Households
Loan applications
n.a.
n.a.
81.9
98.5
n.a.
n.a.
20.2
Loan approvals
53.1
59.2
66.9
72.0
11.5
13.0
7.6
Loan disbursements
76.0
87.0
105.1
114.5
14.5
20.8
8.9
Loan repayments
65.1
71.5
83.7
94.1
9.9
17.0
12.4
Change in loans outstanding2
17.1
23.1
26.2
26.2
14.8
14.7
12.8
1 Includes Islamic banks.
2 The annual growth is for loans outstanding at end-period.
n.a.  Not available.


Monetary and Fiscal Developments
4.6.3-65
65
Guarantee Fund (SRGF) and the Rehabilitation Fund
for Small Businesses (RFSB), which were recently
introduced in 2003, the allocations for the remaining
four funds have been fully utilised, with a utilisation
rate of 109.7%. With the Central Credit Reference
Information System (CCRIS) in place, banking
institutions have been able to accelerate loan
processing and assess the viability of SMEs, given the
comprehensive and current credit profiles of all
borrowers available in the system.
Almost half the loan disbursements were channelled
to large businesses in the main sectors of the
economy, namely the manufacturing, wholesale and
retail trade; agriculture; and finance, insurance and
business services sectors. New loan approvals and
loan disbursements to large businesses were
significantly higher in the second half-year.
Nevertheless, there was a decline in outstanding
loans of large businesses. Better corporate health
and improving cash flow positions led to a greater
reliance on internal funds, and less on bank
borrowings to fund business activities. In addition,
the bulk of loans disbursed were primarily for short-
term working capital purposes. As a result, the high
level of disbursements was matched by a similar
volume of repayments, which resulted in a neutral
effect on loans outstanding.
Table 2.3
Special Funds for SMEs administered by Bank Negara Malaysia
RM million
%
Type of Fund
Allocations
Approvals Disbursements Repayments
Loans
Utilisation
Ratio of undrawn
Outstanding
Rate2
portion to approvals
As at end-2003
Fund For Food
1300.0
1410.8
1298.8
600.8
698.0
108.5
7.9
New Entrepreneurs Fund 2
1150.0
1077.2
806.7
36.1
770.6
93.7
25.1
Fund For Small and Medium Industries 2
2000.0
2284.9
1588.4
177.9
1410.4
114.2
30.5
Bumiputera Entrepreneurs Project Fund
300.0
437.7
361.5
269.1
92.4
145.9
17.4
Special Relief Guarantee Facility1
1000.0
40.3
0.0
0.0
0.0
4.0
100.0
Rehabilitation Fund for Small Businesses
800.0
0.0
0.0
0.0
0.0
0.0
0.0
Total
6550.0
5250.9
4055.4
1083.9
2971.4
80.2
22.8
Change since end-2002
Fund For Food
0.0
115.1
174.4
152.8
23.5
New Entrepreneurs Fund 2
650.0
425.0
480.9
26.6
454.2
Fund For Small and Medium Industries 2
1350.0
1236.0
1078.2
124.3
953.7
Bumiputera Entrepreneurs Project Fund
0.0
121.0
104.1
122.7
-18.5
Special Relief Guarantee Facility1
1000.0
40.3
0.0
0.0
0.0
Rehabilitation Fund for Small Businesses
800.0
0.0
0.0
0.0
0.0
Total
3800.0
1937.4
1837.6
426.4
1412.9
1
This is only a guarantee fund.
2
As a percentage of total loans approved to the fund’s total allocations.
2002
2003
Graph 2.4 
Loan Disbursements by Sector: Value and Share
Others
(RM107 b; 26%)
Passenger
cars
(RM26 b; 6%) 
Credit cards
(RM25 b; 6%)
Residential
property
(RM30 b; 7%) 
Finance,
insurance and
business services
(RM24 b; 6%) 
Construction
(RM30 b; 7%)
Wholesale and retail
trade, restaurants
and hotels
(RM65 b; 16%)  
Manufacturing
(RM105 b; 26%)
Manufacturing
(RM110 b; 25%)
Wholesale and
retail trade,
restaurants and
hotels
(RM70 b; 16%)  
Construction
(RM28 b; 6%)
Finance,
insurance and
business
services
(RM37 b; 8%)  
Residential
property
(RM36 b; 8%) 
Credit cards
(RM31 b; 7%)
Passenger
cars
(RM25 b; 6%) 
Others
(RM106 b; 24%)


4.H-66
66
On an outstanding basis, bank lending to the
household sector expanded at a high annual rate of
12.8% in 2003. The low interest rates and
competitive financing packages offered by banking
institutions continued to stimulate demand for loans
from households, with the bulk of credit channelled
towards the purchase of residential property. In the
residential property market, the value of loan
applications increased by 24.8% while loan
disbursements were higher by 20%.
Credit card spending, as reflected by loan
disbursements, grew at a rate of 20%. Outstanding
balances on credit cards increased by 15.5%
(2002: 19.5%) to RM12.2 billion, representing 2.6%
of total loans outstanding at end-year (at end-2002:
2.3%). While credit card spending on goods and
services continued to increase, households are not
over leveraged. Total overdue balances amounted to
14.1% of outstanding credit card balances at end-
2003, which was lower than the average over the
previous five years of 14.6%. Similarly, balances
overdue for more than 3 months were relatively
contained at 4.4% compared to the average over the
previous five years of 7.2%.
On the whole, as the majority of household loans
were relatively long-term in nature, the continued
growth in these loans has led to an increase in the
share of household loans as a percentage of total
loans outstanding to 48.8% at end-2003 (at end-
2002: 45%) and as a percentage of GDP, to 58.9%.
These percentages are similar to those recorded
among regional countries, and lower than those
registered in several of the advanced economies.
While the household debt exposure has become a
cause for concern in some countries, indicators
suggest that the Malaysian household balance sheet
has remained strong and debt servicing is sustainable
with the potential for further expansion in
consumption growth. Underpinning the resilience of
the household balance sheet, is the high savings rate,
increasing disposable income, a stable property
Table 2.4
Banking System1: Loans Outstanding
Annual change
% share of
2002
2003
total loans at
RM billion
end-2003
Banking system loans, of which
extended to:
Business enterprises
-3.1
-5.1
45.1
Individuals
26.2
26.2
48.8
By sector:
Agriculture, hunting, forestry
and fishing
-0.1
-1.1
2.2
Mining and quarrying
-0.3
0.1
0.2
Manufacturing
-1.2
-0.2
12.9
Electricity, gas and water supply
1.6
-1.7
1.1
Wholesale and retail trade,
restaurants and hotels
1.0
2.1
8.3
Broad property sector
10.8
14.7
39.8
   Construction
-1.7
-2.7
6.2
   Purchase of residential property
14.2
16.2
24.6
   Purchase of non-residential
property
…
1.1
6.1
   Real estate
-1.6
…
2.9
Transport, storage and
communication
-0.4
1.0
2.3
Finance, insurance and
business services
-2.5
-0.6
6.2
Consumption credit
12.0
8.9
18.8
  Of which:
Credit cards
1.8
1.6
2.6
Purchase of passenger cars
9.6
6.5
13.0
Purchase of securities
0.2
-1.7
4.2
Purchase of transport vehicles
-0.5
0.3
0.7
Community, social and
personal services
-0.3
-0.7
1.0
Others
-0.4
0.9
2.3
Total loans outstanding 2
19.8
21.8
100.0
1
Includes Islamic banks.
2
Includes loans sold to Cagamas.
Numbers may not add-up due to rounding.
4
6
8
10
12
14
1999
2000
2001
2002
2003
3
5
7
9
11
13
15
RM billion
%
Overdue balances
Share of balances overdue for more than 3 months 
to total balance (RHS)
Share of overdue balances to total balance (RHS)
Current balances
Graph 2.5
Banking System: Outstanding Credit Card
Balances (at end-period)
Cash advances
% of cash advances to total transactions (RHS)
Purchases
5
10
15
20
25
30
35
1999
2000
2001
2002
2003
RM billion
0
2
4
6
8
10
12
14
16
18
%
Graph 2.6
Banking System: Credit Card Transactions


Monetary and Fiscal Developments
4.6.3-67
67
market, an improvement in the stock market as well
as stable labour market conditions. As a leverage
indicator, the ratio of household deposits to loans
remained at greater than one, demonstrating that
households continued to accumulate wealth. Lower
lending rates have also been instrumental in
sustaining households’ financial net worth and the
capacity of the sector to service debt. With falling
rates, interest payments incurred on new loans have
been lower and refinancing activity has also
increased, allowing consumers to pay down earlier
higher cost loans.
The non-performing loans (NPLs) of the household
sector has also remained manageable. As a
proportion of total household loans, the gross NPL
ratio for the sector declined to 8% at end-2003
(12.2% at-end 1998 and 8.5% at end-2002). In
particular, the gross NPL ratio for the purchase of
residential property remained unchanged at 8.7%.
The default rate on credit card loans, an emerging
concern in some economies, had declined to a level
less than one-third the rate registered at the height
of the financial crisis in 1998.
Bank Negara Malaysia’s efforts to improve the
financial infrastructure to facilitate bank lending
have also ensured that banking institutions assign
appropriate risk evaluation in lending to this
sector, thereby maintaining the quality of
household debt. In particular, the implementation
of risk-based measures included setting up CCRIS
and effecting credit card guidelines. To facilitate
the assessment of risks across non-bank credit
institutions, such as charge card companies, the
information in CCRIS is also extended to these
institutions, with the necessary “firewalls” to
protect customer information. These risk
management measures have enhanced the
capacity of lenders to extend loans without
creating unnecessary vulnerabilities in the real and
financial sectors.
In tandem with higher financing by the banking
system, broad money, M3, expanded at a faster
annual rate of 9.7% at end-2003 (at end-2002:
6.7%). The growth in M3 was also due to stronger
external operations arising from a higher trade
surplus, sustained foreign direct investment and
higher portfolio inflows; as well as expansionary
Government operations. Growth in M3 was broadly
consistent with nominal demand during the year.
In terms of components, transaction balances,
consisting of currency in circulation and demand
deposits, grew strongly by 14.6% at end-2003 (at
end-2002: 10.3%), in line with higher consumption
spending, higher turnover of the KLSE CI, and
improved business activity. Among broad quasi-money
0
50
100
150
200
250
1997
1998
1999
2000
2001
2002
2003
RM billion
0
2
4
6
8
10
12
14
%
Graph 2.7
Banking System: Loans to Households
(at end-period)
Total household loans
Share of household NPLs to total loans (RHS)
Share of household NPLs to household loans (RHS)
0
2
4
6
8
10
12
14
16
M1=14.6
M1=14.6
M3=9.7
M3=9.7
M2=11.1
M2=11.1
%
Graph 2.8
Money Aggregates: Annual Growth
J
F M A M J
J
A
S
O N D J
F M A M J
J
A S O N D
2002
2003
Table 2.5
Broad Money, M3
Change (RM billion)
2002
2003
M3
31.6
48.5
Currency
1.8
2.2
Demand deposits
6.7
11.2
Broad quasi money
23.1
35.1
Fixed deposits
12.6
17.1
Savings deposits
5.6
5.6
NIDs
3.6
2.0
Repos
2.5
8.0
FX deposits
-1.2
2.4
Determinants of M3
Net claims on Government
11.5
12.9
Claims on private sector
27.7
32.4
Loans
19.3
21.7
Securities
8.4
10.7
Net external operations
1.2
19.5
Bank Negara Malaysia
7.6
27.1
Banking system
-6.3
-7.6
Other influences
-8.9
-16.3


4.H-68
68
Developments in the ringgit foreign exchange
market were driven mainly by the depreciation of
the US dollar and the consequent realignments in
the currencies of most major and several regional
economies. Throughout the year, the US dollar was
mainly affected by concerns over the large US
current account deficit and the positive interest rate
differentials in favour of other major economies.
The corresponding adjustments to the US dollar
were seen mainly in major currencies, including the
Australian dollar, the Canadian dollar and the euro,
which appreciated by 32.7%, 21.7% and 20% in
2003. The yen and pound sterling appreciated to a
lesser degree of 11% and 11.1% respectively.
Given the pegged exchange rate regime, the ringgit
depreciated against the euro (-16.7%), the pound
components, the increase was mainly in terms of
fixed deposits and to a lesser extent, repos. The
increase in fixed deposits was primarily in the 9-12
month maturity and was spread out during the
year, reflecting to some extent, the desire of
depositors to hold fixed deposits as an asset class.
In contrast to the previous year, business deposits
recorded the biggest increase and were mainly short-
term fixed deposits. The stronger financial position of
corporations was in line with improving profitability
and cash flow, higher trade surplus and faster
repatriation of export proceeds. Meanwhile, higher
personal disposable income and financial wealth of
households sustained the growth in deposits of this
sector, which grew at a stronger rate in 2003
compared to the previous year.
Amid considerable volatility in international currency markets,
the ringgit peg continues to provide a stable and predictable
environment to promote trade and investment as well as
supporting the structural changes in the Malaysian economy.
EXCHANGE RATE DEVELOPMENTS
In 2003, the system of a fixed exchange rate for
ringgit at RM3.80 to US$1 was maintained with
strengthening economic fundamentals. The fixed
exchange rate regime has been in place for the sixth
year since it was introduced in September 1998.
Amidst volatility in the foreign exchange markets
and debates on effects of the volatility of major
currencies on the ringgit peg, the ringgit continues
to fulfil its intended objective of supporting the
expansion of trade and investments in Malaysia.
Table 2.6
Movement of the Ringgit
RM to one unit of foreign currency1
Annual change (%)
Change (%)
1997
1998
2002
2003
2002
2003
End-June ’97-
2 Sep.’98 -
End-June2
Sept. 23
End-Dec.
End-Dec. 2003 End-Dec. 2003
SDR
3.5030
5.1177
5.1474
5.6264
-7.3
-8.5
-37.7
-9.0
US2.52353.80003.80003.80000.00.0−33.60.0S
1.7647
2.1998
2.1887
2.2342
-6.2
-2.0
-21.0
-1.5
100 yen
2.2088
2.7742
3.2020
3.5546
-9.6
-9.9
-37.9
-22.0
Pound sterling
4.1989
6.3708
6.0924
6.7678
-9.5
-10.0
-38.0
-5.9
Swiss franc
1.7368
2.6450
2.7386
3.0632
-16.9
-10.6
-43.3
-13.7
Euro4
–
–
3.9811
4.7783
-15.4
-16.7
–
–
100 Thai Baht
9.7470
9.3713
8.8096
9.5947
-2.4
-8.2
1.6
-2.3
100 Indonesian rupiah
0.1038
0.0354
0.0425
0.0449
-14.1
-5.3
131.4
-21.1
100 Korean won
0.2842
0.2827
0.3197
0.3180
-9.8
0.5
-10.6
-11.1
100 Philippine peso
9.5878
8.8302
7.1462
6.8431
3.1
4.4
40.1
29.0
1
USratesaretheaverageofbuyingandsellingratesatnoonintheKualaLumpurInterbankForeignExchangeMarket.RatesforforeigncurrenciesotherthanUS are cross rates derived from rates of these currencies against the USandtheRM/US.
2
End-June 1997 represents pre-Asian Financial Crisis levels.
3
Ringgit was fixed at US$1 = RM3.8000 on 2 September 1998.
4
The euro began to be traded on 4 January 1999 (EUR 1= RM4.5050).
sterling (-10%) and the yen (-9.9%), along with the
US dollar in 2003. The ringgit depreciated to a
lesser extent against most regional currencies in the
range of 2 – 8%. Against the Korean won and the
Philippine peso, the ringgit appreciated. The ringgit
remained stable against the Chinese renminbi and
the Hong Kong dollar, as these currencies are also
pegged to the US dollar.
Despite considerable volatility in the foreign
exchange market, the pegged exchange rate regime
has remained sustainable with the ringgit close to


Monetary and Fiscal Developments
4.6.3-69
69
STG
Euro
US$
100 Yen
Graph 2.9 
Exchange Rate of the Malaysian Ringgit 
against Major Currencies
(Weekly average)
Ringgit fixed at US1=RM3.80RM/foreigncurrencyRM/foreigncurrency32456782345678MJSDMJSDMJSDMJSDMJSDJSDM199819992000200120022003758595105115DJFMAMJJASONDJFMAMJJASONDJFMAMJJASOND200120022003758595105115Index(Dec.2000=100)Index(End−month)PesoS
Rupiah
Won
Baht
Graph 2.10
Exchange Rate of the Malaysian Ringgit 
against Selected Regional Currencies
Note: An increase in the index represents an appreciation of the currency
 
against the ringgit.
•
Impact on overall external debt and debt
servicing due to the ringgit depreciation had been
manageable, given that only 23% of Malaysia’s
total external debt is denominated in currencies
other than the US dollar.
Under these circumstances, the ringgit peg, on
balance, continues to provide significant advantages
to the overall economy. The stability of the exchange
rate has been effective in improving the longer-term
competitiveness of the Malaysian corporate sector by
creating incentives for structural adjustments to
increase productivity, thereby enhancing the country’s
future growth prospects.
FISCAL POLICY AND OPERATIONS
The Government presented on 20 September 2002 a
moderately expansionary budget for 2003. The fiscal
deficit was, therefore, budgeted at 4% of GDP
, lower
than the fiscal deficit of 5.6% in 2002. The
Malaysian economy was expected to strengthen in
2003, benefiting from the recovery in the major
industrial countries and stronger growth in the
region, with the sustained growth in intra-regional
trade. The private sector was envisaged in the Budget
to play a larger role in sustaining domestic-driven
growth. Private sector investment was projected to
return to positive growth due to expected
improvement in the financial position of
corporations, following the structural adjustments
undertaken since the crisis, emerging business
opportunities in selected sectors as well as the
improved business environment. A major thrust of
the 2003 Budget was, therefore, designed to provide
the enabling environment and incentives to revitalise
the private sector to resume its role as the main
engine of growth. Policies in the Budget thus focused
on the enhancement of the supportive incentives to
promote private sector ventures, especially into new
growth areas.
The 2003 Budget contained both expenditure
allocation and tax incentives to generate higher
growth in the promoted sectors. In terms of budget
allocation, emphasis was given towards enhancing
the quality of education and upgrading manpower
skills. The tax incentives included the reduction in
corporate tax for small- and medium-scale
enterprises (SMEs) from 28% to 20% for chargeable
income of up to RM100,000 and tax incentives for
manufacturers of machinery and auto parts makers
to promote high value activities in the manufacturing
sector. At the same time, an option was introduced
its fair value. There are no signs of the ringgit being
misaligned. On the domestic front:
•
Inflation and unemployment remained low;
•
Current account surplus in the balance of
payments remained at sustainable levels;
•
Continued increase in reserves throughout 2003;
•
External debt has been kept at manageable
levels with low debt servicing to export ratio;
and
•
Highly capitalized banking system with further
improvements to asset quality ratios.
On the external front, developments were benign
on Malaysia’s exchange rate regime:
•
Depreciating with the US dollar had benefited
exports, offsetting the impact on imports;
•
Depreciation had a minimum impact on
imported inflation since the ringgit did not
depreciate against the US dollar and imports
denominated in currencies other than the
US dollar accounted for only a small share of
total imports. In addition, the share of imported
components in the CPI basket remained small,
at about less than 10%; and


4.H-70
70
for pioneer status holders to qualify for reinvestment
allowance if their Pioneer Status were surrendered
for cancellation. For the agriculture sector, various
incentives were introduced for consolidation of
smallholdings, cultivation of rubber wood trees,
deep-sea fishing, food processing and modernisation
of poultry farming.
The actual outturn of fiscal deficit for 2003 was
5.3% of GDP
, due mainly to counter-cyclical
expenditure to support growth. Revenue
performance was strong in 2003 with higher
proceeds from the sale of Government’s shares in
selected public listed companies. During the year, the
Government unlocked some of its assets to optimise
returns from its ownership of high-value assets and
to achieve greater flexibility in fiscal management. At
savings rate amidst ample liquidity in the banking
system, the Government financed its fiscal deficit
through non-inflationary domestic sources. Given the
low interest rate environment, new issues of MGS
with maturities of 5 and 10 years were raised at
coupon rates ranging between 3.702-3.917% and
between 4.24-4.41% for those with maturity of 15
years. As part of prudent debt management, the
Government exercised vigilance on its external
indebtedness. Recourse to external borrowings was
limited to drawdown of loans committed earlier and
refinancing of several loans at lower cost, thereby
reducing future debt servicing obligations.
The Federal Government debt amounted to 48.2%
of GDP as at end-2003 while the debt servicing
remained low at 14% of operating expenditure or
Fiscal policy remained supportive of growth in 2003. While
budgetary operations remained expansionary, fiscal management
focused at ensuring a balance between sustaining the near-term
growth and achieving fiscal consolidation.
the same time, such exercise would provide the
opportunity towards gradual increases in the “free
float” and liquidity of companies with large
Government shareholdings and thus benefit trading
in the Malaysia Securities Exchange Berhad.
Higher-than-expected expenditure in 2003 was due
mainly to the increased expenditure to minimise the
spill-over effects from the less favourable global and
regional developments in the first half of 2003. An
Economic Package amounting to RM7.3 billion was
aimed at containing the adverse impact from tensions
in the Middle East and the outbreak of Severe Acute
Respiratory Syndrome (SARS) in the region.
The positive impact of the Economic Package
measures coupled with other factors including low
interest rates, high commodity prices and improved
cashflow position of companies, strengthened
aggregate domestic demand. Together with the
recovery in external demand, the private sector’s
contribution to economic growth rose to 2.5
percentage points in 2003 (0.4% in 2002). Stronger
consumption spending and recovery in external
demand supported higher investment activities.
Private sector investment turned around to register
the first positive growth since 2000.
While fiscal expansion contributed to GDP growth, it
did not exert pressure on domestic consumer prices
and interest rates. Taking advantage of the high
2.7% of GDP
. Similarly, external debt of the Federal
Government declined in 2003 to 9.5% of GDP (2002:
10.1%), enhancing Malaysia’s external position.
Consolidated Public Sector
In 2003, the consolidated public sector registered a
slightly smaller overall deficit of 0.4% of GDP
. The
improved position emanated from better revenue
performance of the general government and the
non-financial public enterprises (NFPEs) as well as
lower development expenditure of the NFPEs.
Development expenditure of the general government
was higher mainly to finance the Economic Package
introduced in May 2003 to mitigate the adverse
impact of global economic uncertainties and regional
health threat on domestic economic activities.
Federal Government Finance
The Federal Government registered an overall deficit
of 5.3% of GDP in 2003 (2002: -5.6%), higher than
the 4% targeted in the 2003 Budget. The larger-
than-planned deficit was due to higher counter-
cyclical expenditure as well as proactive response to
the risk of a private sector pull-back due to global
political uncertainties and SARS. The threat of
global slowdown in the first half of the year
prompted the Government to implement stronger
expansionary measures to sustain the growth
momentum. Despite the higher fiscal deficit, the
total debt of the Federal Government remained
manageable at 48.2% of GDP as at


Monetary and Fiscal Developments
4.6.3-71
71
end-2003. Debt servicing expenditure also
remained low in terms of operating expenditure
and GDP. External debt to GDP ratio declined in
2003 as the bulk of financing was raised from
non-inflationary domestic sources.
In 2003, Federal Government revenue increased by
11.1% to RM92.8 billion, accounting for 23.7% of
GDP. The better revenue performance was due to
significantly higher non-tax revenue, which
accounted for a larger share of total revenue (30%).
Higher receipts were registered in almost all
components; investment income, licence and
permits, petroleum royalties and service fees . In
particular, investment income was higher due to
proceeds from the sale of the Government’s shares
in selected public listed companies. The
Government disposed of some of its assets to
optimise returns from the ownership of high-value
assets and achieve a greater flexibility in fiscal
management.
Collection from taxes declined slightly by 2.9%
(-RM2 billion), mainly attributable to lower receipts
Table 2.7
Consolidated Public Sector Finance
2002
2003e
2004f
RM million
General government1
Revenue
96,763
110,408
109,389
Operating expenditure
75,450
84,809
88,538
Current surplus of general
government
21,312
25,600
20,850
Current surplus of NFPEs2
45,324
44,627
41,890
Public sector current
surplus
66,637
70,227
62,741
% of GDP
18.5
17.9
15.0
Net development expenditure
69,125
71,951
66,687
General government
36,828
43,727
37,563
NFPEs
32,297
28,225
29,124
Overall balance
-2,488
-1,725
-3,946
% of GDP
-0.7
-0.4
-0.9
1
Comprises Federal Government, state governments, statutory bodies
and local governments.
2
Refers to 35 NFPEs in 2003 and 2004.
e Estimate
f
Forecast
Source: Ministry of Finance, state governments and non-financial public
enterprises
Table 2.8
Federal Government Finance
2002
2003p
2004r
RM million
Revenue
83,515
92,804
89,966
Operating expenditure
68,699
75,224
79,642
Current account
14,816
17,580
10,324
% of GDP
4.1
4.5
2.5
Net development expenditure
35,069
38,508
29,084
Gross development
expenditure
35,977
39,353
29,960
Less: Loan recoveries
908
845
876
Overall balance
-20,253
-20,928
-18,760
% of GDP
-5.6
-5.3
-4.5
Sources of financing:
Net domestic borrowing
6,076
23,250
–
Gross borrowing
18,000
41,850
–
Less: Repayment
11,924
18,600
–
Net foreign borrowing
8,019
-3,709
–
  Gross borrowing
10,465
3,144
–
  Less: Repayment
2,446
6,853
–
Special receipts
62
0
–
Realisable assets1 and
adjustments
6,096
1,387
–
Total
20,253
20,928
–
1
Includes changes in Government’s Trust Fund balances.
A positive (+) sign indicates a drawdown in the accumulated realisable assets.
p Preliminary
r
Revised
Source: Ministry of Finance
Graph 2.11
Federal Government Finance
Federal Government Debt
Debt as 
% of GDP
Overall balance as
% of GDP
0
20
40
60
80
100
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003p
RM billion
Current account
Revenue
Operating expenditure
Gross development expenditure
-80
-60
-40
-20
0
20
40
60
80
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003p
-8
-6
-4
-2
0
2
4
6
8
Overall balance
(RHS)
Domestic debt
External debt
Debt level remained
manageable
-5.3%
p Preliminary


4.H-72
72
from income taxes and sales tax on petroleum
products. The collection of tax revenue was affected
by the negative impact of geopolitical developments
and the outbreak of SARS on business activities.
Other contributory factors included tax incentives
and exemptions introduced in the 2003 Budget and
measures introduced in the May Economic Package.
These tax initiatives included the reduction of the
tax rate from 28% to 20% on chargeable income
of up to RM100,000 for small and medium-scale
companies and the suspension of income tax
instalment payments for travel agencies beginning 1
June to 31 December 2003. Additionally, the lower
company income tax collection was due to the
implementation of the current year tax assessment
system in 2000 and self-assessment system in 2001.
As companies overpaid income taxes during the
transition period, these were set off against tax
expenses in 2003. Meanwhile, petroleum
income tax rose by 10.9% due mainly to higher
crude oil prices.
Import and excise duties collected were higher
reflecting the stronger aggregate domestic demand.
Other indirect taxes collected, namely sales and
service tax, were lower. In particular, the lower sales
tax was due to the higher tax exemption for
petroleum products. In 2003, a higher tax exemption
was provided to oil companies to stabilise the retail
prices of petroleum products. The weighted average
price of Malaysian crude oil was higher at US30.30perbarrelin2003,comparedwithUS25.24 per
barrel in 2002. The decline in service tax collected
(-7.9%) was mainly the result of tax exemption. In
the restaurants and hotels sub-sector, the exemption
Table 2.9
Federal Government Revenue
2002
2003p
2002
2003p
RM million
Annual change (%)
Tax revenue
66,860
64,891
8.7
-2.9
% of GDP
18.5
16.6
Direct taxes
44,351
43,016
5.4
-3.0
Income taxes
42,237
40,690
5.2
-3.7
Companies
24,642
23,990
18.6
-2.6
Petroleum
7,636
8,466
-22.5
10.9
Individuals
9,889
7,984
4.8
-19.3
Others
69
251
-1.4
263.5
Real property gains tax
319
264
40.7
-17.1
Stamp duties
1,732
2,008
5.0
15.9
Others
63
53
-26.2
-15.9
Indirect taxes
22,509
21,875
16.1
-2.8
Export duties
803
1,157
-7.3
43.9
Import duties
3,668
3,919
14.9
6.9
Excise duties
4,745
5,031
14.9
6.0
Sales tax
9,243
7,965
25.7
-13.8
Service tax
2,214
2,038
14.9
-7.9
Others
1,836
1,765
-4.5
-3.8
Non-tax revenue
16,655
27,913
-7.9
67.6
Total revenue
83,515
92,804
5.0
11.1
% of GDP
23.2
23.7
p Preliminary
Source: Ministry of Finance
Graph 2.12 
Composition of Federal Government Revenue, 2003 (% share)
Direct taxes
46.4%
Companies
25.9%
Petroleum
9.1%
Excise duties
5.4%
Export duties
1.2%
Import duties
4.2%
Others
1.9%
Service tax
2.2%
Sales tax
8.6%
Individuals
8.6%
Others
2.8%
Non-tax revenue 
30.1% 
Indirect
taxes
23.6%
Total Revenue:  RM92.8 billion
on service tax was granted for the period June-
December 2003. In the 2003 Budget, courier services
and selected professional services provided to
companies within the same group were given
tax exemption.
The expansionary budgetary operations and the
Government’s Economic Package implemented in
May to support growth and strengthen further the
long-term productive capacity of the economy


Monetary and Fiscal Developments
4.6.3-73
73
resulted in gross expenditure rising by 9.5% to
RM114.6 billion.
Operating expenditure, which accounted for two-
thirds of total Federal Government expenditure,
increased by 9.5% to RM75.2 billion. The total wage
bill, which was the largest component of operating
expenditure (29%), was higher, due to the
implementation of the Malaysian Remuneration
System as well as the payment of monthly critical
allowances for doctors and medical staff arising from
the outbreak of SARS. While debt-service charges
increased, their share to operating expenditure was
contained at 14% (2002: 14.1%).
Outlays on supplies and services were higher due to
measures introduced to enhance productivity and
efficiency (increased expenditure for professional
services and small repairs and maintenance). Other
transfer payments were higher due mainly to grants
and transfers to Government agencies for
development and maintenance purposes. Payment
for subsidies in 2003 was lower. As part of the
Government’s policy to reduce the subsidy on
petroleum products, the retail prices of petrol, diesel
and liquefied petroleum gas (LPG) were raised by two
sen with effect from 1 March.
During the year, gross development expenditure
rose by 9.4% to RM39.4 billion. The bulk of the
outlays were extended to the social and economic
services sectors (80%).
As in the past, the thrust of expenditure was on
human resource development. In 2003, education
and training expenses continued to be the largest
component of development expenditure (26% of
total). Expenses were channelled mainly towards
constructing and upgrading schools, matriculation
centres, polytechnics and other institutions of
higher learning as well as for computerisation
programmes and the acquisition of teaching aids.
Meanwhile, the construction of new hospitals as
well as upgrading existing hospitals and rural and
health clinics were the main factors accounting for
the increase in spending for health. Expenditure on
housing was also higher as the Government
continued to implement housing programmes for
public sector personnel and the lower income
group. The Government also increased spending on
social and community services, mainly for youth
programmes, small projects in new local housing
estates, development work carried out in Putrajaya
and Cyberjaya and acquisition of vehicles for
community work.
In the economic services sector, a higher amount
was spent on transportation, mainly in constructing
new roads and bridges, upgrading existing roads
and improving and increasing the capacity of the
railroad system, ports and airports. Spending under
the trade and industry sub-sector was focussed on
the provision of infrastructure facilities, promotion
of small and medium-sized industries (SMIs),
industrial research and technological development
and promotion of tourism. Under the Economic
Package announced in May, a total of RM500
million was allocated to development financial
institutions (DFIs) as equity to support their efforts
in financing small businesses. Outlays on agriculture
and rural development remained high, reflecting
flood- mitigation projects and the continuous
modernisation programme involving the building
and upgrading of infrastructure facilities such as
rural roads, the water supply network and
electrification.
The increase in expenditure for general administration
was largely to cater for ICT development in various
Government agencies to further improve the quality
and delivery of services. Spending for defence and
internal security was mainly under the modernisation
programme for the armed forces and police.
Federal Government total debt outstanding
increased by 14.4% to RM188.8 billion or 48.2% of
GDP as at end-2003. Higher borrowings from the
domestic market resulted in domestic debt
outstanding rising to RM151.5 billion as at end-2003
Table 2.10
Federal Government Operating Expenditure by
Object
2002
2003p
2002
2003p
RM million
% share
Emoluments
20,242
21,721
29.5
28.9
Supplies and services
11,269
13,968
16.4
18.6
Asset acquisition
968
1,409
1.4
1.9
Debt service charges
9,669
10,546
14.1
14.0
Pensions and gratuities
5,134
5,870
7.5
7.8
Subsidies
3,677
2,679
5.4
3.6
Other grants and transfers1
15,949
16,324
23.2
21.7
Other expenditure2
1,791
2,706
2.6
3.6
Total
68,699
75,224
100.0
100.0
% of GDP
19.0
19.2
1
Includes grants and transfers to state governments as well as public agencies
and enterprises.
2
Includes grants to international organisations, insurance claims and gratuities
and others.
p Preliminary
Source: Ministry of Finance


4.H-74
74
or 38.6% of GDP (35.7% of GDP). The bulk of
Government’s financing requirements (93%) was
financed from domestic sources. Recourse to external
borrowings was limited to the drawdown of loans
while several external loans were refinanced to take
advantage of tighter spreads arising from Malaysia’s
improved ratings. Overall, the prevailing low interest
rate environment enabled the Government to raise
funds at low cost and hence, minimised future debt
servicing. The regular issue of Government securities
in the domestic market also facilitated the
development of a more reflective benchmark yield
curve while deepening the domestic bond market.
In 2003, total gross borrowings of the Federal
Government amounted to RM45 billion, compared
with RM28.5 billion in 2002. The higher gross funds
raised was to finance both the fiscal deficit as well as
to roll-over maturing debt. Net borrowings of the
Federal Government rose to RM19.5 billion, from
RM14.1 billion in 2002. As revenue was more than
adequate to finance operating expenditure, the net
funds raised were used only to finance development
expenditure. During the year, the Treasury Housing
Loans Fund recorded a net borrowing to meet the
higher demand for housing loans by civil servants.
The high domestic savings rate, coupled with ample
liquidity in the banking system, allowed the Federal
Government to raise funds required from the
domestic market, without crowding out private
sector. Malaysian Government Securities (MGS) with
maturities of 5 and 10 years were issued at coupon
rates ranging between 3.702-3.917% (3.15-
4.053% for funds raised in 2002) and between
4.24-4.41% for those with a maturity of 15 years.
There were no issues of 15-year MGS in 2002.
During the year, the Federal Government floated
twelve issues of MGS totalling RM39.9 billion by
open tender through principal dealers and private
placements and raised a single issue of the
Government Investment Issues (GIIs) amounting
to RM2 billion. The Government reopened eight
of its existing conventional issues to increase their
respective issue sizes and enhance liquidity in
order to develop the secondary market. The
Table 2.11
Federal Government Development Expenditure
by Sector
2002
2003p
2002
2003p
RM million
% share
Defence and security
4,333
6,026
12.0
15.3
Economic services
12,433
13,799
34.6
35.1
Agriculture and rural
development
1,364
1,621
3.8
4.1
Trade and industry
3,474
3,463
9.7
8.8
Transport
5,401
7,354
15.0
18.7
Public utilities
1,808
920
5.0
2.3
Others
387
442
1.1
1.1
Social services
18,043
17,704
50.2
45.0
Education
12,436
10,194
34.6
25.9
Health
1,503
2,684
4.2
6.8
Housing
1,808
1,928
5.0
4.9
Others
2,296
2,897
6.4
7.4
General administration
1,168
1,824
3.2
4.6
Total
35,977
39,353
100.0
100.0
% of GDP
10.0
10.0
Numbers may not add up due to rounding.
p Preliminary
Source: Ministry of Finance
Table 2.12
Federal Government Debt Outstanding
Annual change
At end-
2002
2003p
2003p
Nominal value in RM million
Domestic debt
7,284
22,803
151,483
Treasury Bills
0
0
4,320
Government Investment
   Issues
1,000
2,000
7,000
Malaysian Government
   Securities
6,100
21,250
130,800
Treasury Housing Loans
   Fund
1,180
2,628
9,363
Market loans
-996
-3,075
0
External debt
11,955
1,001
37,284
Market loans
10,992
-485
28,189
Project loans
963
1,486
9,095
Total
19,239
23,804
188,767
% of GDP
48.2
p Preliminary
Source: Ministry of Finance
Graph 2.13 
Federal Government Outstanding Debt 
as at end-2003p (% share)
External debt 
accounted for only 
19.8% of the total 
Federal Government 
debt
Treasury Bills
2.3%
Total debt : RM188.8 billion
 Domestic : RM151.5 billion 
 External : RM37.3 billion
Government Investment Issues 
3.7%
Malaysian
Government
Securities 
69.3%
Housing loan 
5.0%
p Preliminary
Domestic debt


Monetary and Fiscal Developments
4.6.3-75
75
issuance of Treasury Bills (TBs) facilitated the
roll-over of maturing bills. MGS issued continued
to be absorbed mainly by provident, pension and
insurance funds (76% of the outstanding MGS),
while the ownership of GIIs and TBs was mainly
dominated by the banking sector (94% and 76%
of the respective amounts outstanding). After
taking into account repayments, the net domestic
borrowing of the Federal Government as at end-
2003 amounted to RM23.3 billion.
To contain the cost of debt servicing and
minimise exposure to external risks, the
Government kept its external debt level low in
2003 by prepaying and refinancing some of its
existing loans. In this regard, new external
borrowings were limited to project loans
committed earlier. A total of RM1.7 billion was
drawn down from bilateral sources, especially
from Japan under the New Miyazawa Initiative,
as well as multilateral sources. In line with its
prudent debt management philosophy, the
Government refinanced a number of its existing
term and syndicated loans to take advantage of
the tighter spreads. In January, a ¥1.4 billion
Term Loan due 2006 was raised at Libor + 57.5
basis points to refinance the 3.17% ¥4.1 billion
Term Loan due 2006. In March, the Government
refinanced a US$250 million and ¥54 billion dual
currency syndicated loan at a lower margin of
Libor + 38 basis points (previously, Libor + 125
basis points). Another dual currency syndicated
loan amounting to US$1.25 billion and ¥11.6
billion was rolled over in December with a
tighter spread of 33 basis points (from 52 basis
points). The Government also prepaid two of its
external loans during the year, namely a Floating
Rate Note due 2005 and a syndicated loan due
2005/07 totalling US$433 million. Overall, the
Federal Government registered a net repayment
of RM3.7 billion in 2003. During the year, the
reclassification of a domestic syndicated foreign-
currency loan raised in the Labuan International
Financial Centre as external debt and exchange
revaluation loss, led to a slightly higher external
debt. However, with the Government’s restraint
on recourse to external borrowings and the
prepayment exercise, the share of external debt
outstanding to GDP declined to 9.5% of GDP
(10.1% of GDP in 2002).
The debt servicing expenditure remained within
prudent levels. Debt charges as percentage of
operating expenditure, revenue and GDP were
kept low at 14%, 11.4% and 2.7% respectively
in 2003 (2002: 14.1%, 11.6% and 2.7%
respectively). The external debt service ratio of
the Federal Government also remained low at
1.3% in 2003 (2002: 1%) while foreign exposure
declined to account for 20% of the total debt
outstanding (2002: 22%). Proactive and sound
debt management enabled the Government to
avoid a bunching of repayments. As at end-2003,
about 60% of loans outstanding had a remaining
maturity exceeding three years and most were at
fixed interest rates, reducing exposure to
fluctuations in interest rates.
State Governments
Based on preliminary estimates, the consolidated
financial position of state governments recorded
a small overall deficit of 0.6% of GDP in 2003.
While the revenue performance remained strong,
operating and development expenditures
increased during the year. The overall deficit was
financed by Federal Government loans and the
drawdown of accumulated financial assets of the
state governments.
During the year, the higher consolidated state
revenue was derived from state sources. The higher
commodity prices, particularly for crude oil and crude
palm oil, had a positive impact on the states’ own
sources of revenue through petroleum royalty and
sales tax on crude palm oil. Meanwhile, receipts from
Table 2.13
Holdings of Federal Government Domestic Debt
2002
 2003p
2002
 2003p
 Nominal value in
% share
RM million
Treasury Bills
4,320
4,320
100.0
100.0
Insurance companies
65
67
1.5
1.6
Banking sector
3,744
3,266
86.7
75.6
Others
512
986
11.8
22.8
Government Investment
Issues
5,000
7,000
100.0
100.0
Insurance companies
320
390
6.4
5.6
Banking sector
4,680
6,611
93.6
94.4
Malaysian Government
Securities
109,550 130,800
100.0
100.0
Social security and insurance
institutions
85,325
99,260
77.9
75.9
of which:
Employees Provident
Fund
72,980
84,678
66.6
64.7
Insurance companies
9,313
11,597
8.5
8.9
Banking sector
14,629
19,008
13.4
14.5
Others
9,597
12,532
8.8
9.6
Numbers may not add up due to rounding.
p Preliminary


4.H-76
76
the Federal Government were sustained to assist
the states in providing infrastructure, utilities and
other essential amenities. The increase in operating
expenditure reflected mainly higher payments for
emoluments following the implementation of the
Malaysian Remuneration System for public sector
employees, as well as the acquisition of assets to
facilitate higher efficiency in the delivery of
services. A major portion of the higher
development expenditure was on expanding and
upgrading public utilities, housing, agriculture and
on rural development as well as for industrial
development.
Non-Financial Public Enterprises
Preliminary estimates of the consolidated financial
position of the 35 NFPEs indicated a higher overall
surplus position (4.4% of GDP). The improvement
was due to higher revenue and lower development
expenditure with the completion of several big
projects and the reprioritisation of planned
projects.
The higher consolidated revenue of the NFPEs
reflected increased earnings from oil and gas-
related services, utilities and agriculture-based
sectors. These sectors benefited from stronger
economic activities and higher commodity prices,
especially for crude oil. Significant earnings were
also recorded from overseas operations. Higher
operating expenditure was due to increased raw
material costs, especially crude oil and fuel, and
measures taken to improve services, including the
upgrading of technology.
The capital outlay of the NFPEs was channelled
towards expanding capacities, both at home and
abroad. Petroliam Nasional Berhad continued to
invest in exploration and production projects in
Malaysia and overseas, namely in Egypt, Sudan
and Vietnam. The bulk of expenditure was also for
Production Sharing Contracts within Malaysia.
Other projects included the final stage construction
of MLNG Tiga Plant and on-going building of
liquefied natural gas and petroleum tankers. In the
case of Tenaga Nasional Berhad, expenditure was
mainly for generation capacity and transmission
Table 2.14
Consolidated State Government Finance
2002
2003e
2004
Budget
RM million
Revenue
8,341
8,787
9,676
State sources
6,239
6,729
7,120
Federal grants
and transfers
2,102
2,058
2,556
Expenditure
5,090
6,009
6,397
Current surplus
3,251
2,778
3,278
% of GDP
0.9
0.7
0.8
Net development expenditure
3,772
4,973
4,595
Gross development
expenditure
4,161
5,503
4,756
Less:  Loan recoveries
389
530
161
Overall balance
-520
-2,196
-1,316
% of GDP
-0.1
-0.6
-0.3
Sources of financing:
Federal loans
752
773
496
Realisable assets1
-231
1,423
821
Total
520
2,196
1,316
1
A positive (+) sign indicates a drawdown in the accumulated realisable
assets.
e Estimate
Source: State governments
Table 2.15
List of NFPES, 20031
1
1st Silicon (Malaysia) Sdn. Bhd.
2
Bintulu Port Sdn. Bhd.
3    Cement Industries (Sabah) Sdn. Bhd.
4    Central Spectrum (M) Sdn. Bhd.
5    Felda Agricultural Services Sdn. Bhd.
6    Golden Hope Plantations Bhd.
7    Indah Water Konsortium Sdn. Bhd.
8    Keretapi Tanah Melayu Bhd.
9    Kontena Nasional Bhd.
10   Kuching Port Authority
11   Kulim (Malaysia) Bhd.
12   Kumpulan Guthrie Bhd.
13   MA (Sepang) Sdn. Bhd.
14   Malaysia Airline System Bhd.
15   Malaysia Airports Sdn. Bhd.
16   Marconi (Malaysia) Sdn. Bhd.
17   Multimedia Development Corporation Sdn. Bhd.
18   Northport (Malaysia) Bhd.
19   Penang Port Sdn. Bhd.
20   Penerbangan Malaysia Bhd.
21   Petroliam Nasional Bhd.
22   PPES Works (Sarawak) Sdn. Bhd.
23   Rakyat Berjaya Sdn. Bhd.
24   Sabah Energy Corporation Sdn. Bhd.
25   Sabah Ports Sdn. Bhd.
26   Sarawak Electricity Supply Corporation
27   Sebor (Sabah) Sdn. Bhd.
28   Sergam Bhd.
29   Silterra Malaysia Sdn. Bhd.
30   Sinora Sdn. Bhd.
31   Syarikat Prasarana Negara Bhd.
32   Telekom Malaysia Bhd.
33   Tenaga Nasional Bhd.
34   TH Plantations Sdn. Bhd.
35   UDA Holdings Bhd.
1
List of NFPEs for monitoring and reporting purposes was revised in 2003.
NFPEs are defined as companies in which the Government has an equity of at
least 51 per cent and sales turnover of at least RM100 million or having a
significant impact on the economy, including large borrowing needs and
capital expenditure.


Monetary and Fiscal Developments
4.6.3-77
77
network. Major expenditure included the
construction of the Port Dickson Phase 1
Combined Cycles Power Plant and the East-West
Grid Interconnection in Sabah. A large share of the
development expenditure of Telekom Malaysia
Berhad was focussed on upgrading and expanding
capacity to improve the telecommunication
infrastructure and services. Projects undertaken
included the underwater cable network connecting
the Asia Pacific region, Phase VI of the Digitaline II
project to facilitate data transmission for
businesses and the Government Corporate
Information Network Superhighway to support
various information technology-related
applications for businesses.
Table 2.16
Consolidated NFPEs Finance1
2001
2002
2003e
RM million
Revenue
105,075
126,562
149,970
Current expenditure
65,392
80,951
104,556
Current account
39,683
45,611
45,414
% of GDP
11.9
12.6
11.6
Development expenditure2
24,033
32,297
28,225
Overall balance
15,651
13,313
17,188
% of GDP
4.7
3.7
4.4
1
Refers to 35 NFPEs in 2003.
2
Includes grants from the Federal Government.
e Estimate
Source: Ministry of Finance and non-financial public enterprises




80-85
The International Economic Environment
85-96
Malaysia Economy in 2004
89-91
White Box: Liberalisation and Simplification of
Foreign Exchange Administration Rules
96-97
Monetary Policy in 2004
98
Fiscal Policy in 2004
99-100
Financial Sector Policy in 2004
101-102
White Box: Report on SME Development Framework
Outlook and Policy


80
THE INTERNATIONAL ECONOMIC ENVIRONMENT
Developments in 2003
The global economy strengthened considerably in
2003, led by the United States (US). Growth has also
been synchronised across major industrial economies,
with the recovery in Japan and Europe adding
support to global growth. Growth in 2003 was
characterised by two distinct phases, with the first
half-year dampened by uncertainties related to the
Iraq war and the Severe Acute Respiratory Syndrome
(SARS) outbreak in Asia. Since mid-2003, however,
revival of growth in Japan and euro zone and
stronger growth in the US led to a better-than-
expected global growth of 3.2% for the year.
Expansionary fiscal and accommodative monetary
policies in the advanced economies and Asian
countries supported growth. At the same time, the
sources of growth have broadened from
consumption-led to include an upturn in investment
and inventory rebuilding.
The global recovery was accompanied and supported
by improvements in international trade and financial
markets. World trade grew by 3.5-4.5% in 2003,
largely attributable to import demand from developing
countries. Reflecting the rising global demand, the
international prices for non-oil primary commodities
rose during the year. In the financial markets, major
equity markets rallied, supported by rising investor
confidence and improved corporate financial
positions. The lower cost of capital amidst sustainable
demand led to a revival in the global investment cycle.
During the year, the global foreign exchange markets
were dominated by the significant weakening of the
US dollar due to the concerns on the widening US
fiscal and current account imbalances. In Asia, there
was strong expansion in domestic demand resulting in
a significant increase in intra-regional trade.
In the US, the pace of recovery gained strong
momentum in the second half to register a growth of
5.8% (first half: 2.1%). Despite weak labour market
conditions, household spending remained an
important driver of growth, with consumption
increasing strongly by 4.9% in the second half-year.
While the tax cuts provided a significant stimulus,
spending also benefited from the low interest and
mortgage rates as well as rising household wealth
from renewed strength in the stock market. More
important, business spending on equipment and
software recovered following productivity-driven
increases in profits and improved corporate balance
sheets. Latest data showed real GDP sustaining its
growth momentum to expand by 4.1% in the final
quarter of 2003. Overall, the growth was well
supported by positive contributions from
consumption, investment, exports and inventory
increases.
Growth in Japan picked up in the second quarter of
2003 and accelerated in the fourth quarter, led by
strong growth in exports from rising regional trade
and recovery in investment spending. The euro area
recovered gradually, supported by fiscal spending and
improvement in net exports. In the United Kingdom
(UK), growth remained resilient, underpinned by both
private and public consumption.
Outlook and Policy
Table 3.1
World Economy : Key Economic Indicators
Real GDP Growth (%)
Inflation (%)
2002 2003e
2004f
2002 2003e
2004f
World Growth
3.0
3.2
4.1
–
–
–
World Trade
2.9
3.5 - 4.5 5.0 - 6.0
–
–
–
Major Industrial
Countries
United States
2.4
3.1
3.9
1.6
2.1
1.3
Japan
-0.4
2.7
2.0
-0.9
-0.3
-0.6
Euro Area
0.9
0.4
1.6
2.3
2.0
1.6
United Kingdom1 1.7
2.3
2.3
2.2
2.8
2.5
East Asia
6.2
6.2
6.6 - 6.8
1.3
1.8
2.4 - 2.7
Asian NIEs
4.5
2.9
5.0 - 5.2
0.8
1.2
1.4 - 1.5
Korea
6.3
2.9
5.2
2.7
3.5
3.0
Chinese Taipei
3.6
3.2
4.7
-0.2
-0.3
0.4
Singapore
2.2
1.1
3.5 - 5.5 -0.4
0.5
0.5 - 1.5
Hong Kong China2 2.3
3.3
6.0
-3.0
-2.6
-1.0
The People’s
Republic of
China
8.2
9.1
8.3
-0.8
1.2
3.0
ASEAN3
4.0
4.5
4.9 - 6.0
5.3
3.8
3.0 - 4.3
Malaysia
4.1
5.2
6.0 - 6.5
1.8
1.2
1.5
Thailand
5.4
6.7
6.3 - 7.3
0.7
1.8
1- 2
Indonesia
3.7
4.1
4.0 - 5.0 11.9
6.6
4.5 - 6.5
Philippines
4.4
4.5
4.9 - 5.8
3.1
3.4
4.0 - 5.0
1 Refers to retail price excluding mortgage interest.
2 Refers to composite price.
3 Includes Singapore.
e Estimate
f Forecast
Source:
International Monetary Fund, Datastream,
OECD Economic Outlook, National Sources


Outlook and Policy
81
In the Asian region, despite geopolitical
uncertainties and the negative impact of SARS in the
first half of 2003, regional growth was sustained at
6.2%, twice the global average. The main impetus to
growth emanated from exports, driven mainly by the
upturn in the global electronics cycle and sustained
favourable prices for non-oil primary commodities
reinforced by strong domestic demand. In tandem
with improvements in the global economic
environment, the trade momentum accelerated in
the second half, resulting in a doubling of the export
growth rate to 18.6% for the year (2002: 9.5%). Of
significance, intra-regional trade accounted for about
half of the regional economies’ export growth, with
exports to the People’s Republic of China (P
. R.China)
accelerating by 33%.
Global prospects have improved, supported by reinforcing and
broad-based growth across major industrial countries.
During the year, regional growth was reinforced by
the underlying strength in domestic demand,
supported by accommodative monetary and fiscal
policies. In several countries, economic stimulus
packages that were introduced to mitigate the
impact of SARS led to the broad recovery in private
consumption and travel-related industries in the
second half of the year. Of importance, financial
indicators in the region improved during the year.
Bank balance sheets strengthened while corporate
sector debt levels were lower and external debt
positions improved. The improved assessment of
credit risk in the region in 2003 was reflected in the
raising of ratings for P
. R. China, Indonesia, Malaysia,
Singapore and Thailand by international credit rating
agencies.
Among regional countries, growth continued to be
led by P. R. China, with a strong expansion of 9.1%,
followed by Thailand and Malaysia at 6.7% and
5.2%, respectively. While growth was higher in Hong
Kong China, the growth of the Asian Newly
Industrialised Economies (NIEs) as a whole slowed
down to 2.9% (2002: 4.5%), due mainly to a
contraction in private consumption in Korea and the
adverse impact of SARS on the economies of
Singapore and Chinese Taipei.
Prospects for 2004
The outlook for the global economy has become
increasingly optimistic, following the strong upturn in
the second half of 2003. Amidst improved prospects,
most growth projections have been revised upwards.
For 2004, world output and world trade are
projected to grow at a faster pace of 4.1% and
5-6%, respectively. The Asian regional economies’
share in global trade has also increased. Measured in
terms of the share of world exports of goods and
services, the region’s share has increased from 16.3%
in 1994 to 19.6% in 2002. Favourable export
performance, continued growth in private
consumption and expansion in investment are
expected to lead to higher growth for the Asian
regional economies in 2004.
Amidst a low inflation environment, the growth
momentum in the US is expected to be supported by
expansionary monetary and fiscal policy that have
been in place for some time, as well as productivity
gains, investment and inventory rebuilding. Growth
in the euro area is expected to recover gradually as
expansionary fiscal policies continue to be adopted in
major euro area economies. While the economic
recovery in Japan is affected by long-term structural
problems, deflationary pressures have begun to ease
and signs of sustainable recovery have emerged since
the second half of 2003. In the UK, economic growth
is expected to remain resilient, underpinned by public
and private consumption.
Industrial Countries
In 2004, growth of the US economy is expected to
remain strong and more broad-based, with real GDP
Annual change 
(%)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
US
Japan
Euro
UK
Graph 3.1
Major Industrial Countries: Real GDP Growth  
(2003-2004) 
2003e
2004f
3.1
3.9
2.7
2.0
0.4
1.6
2.3
2.3
e  Estimate
f  Forecast


82
growth strengthening to 3.9% from 3.1% in 2003.
Consumption growth is expected to continue, albeit
at a more moderate pace as benefits of mortgage
refinancing and tax cuts abate. Investment is
expected to provide a higher contribution to growth
although excess capacity still remains in certain
sectors of the economy. The upturn in equipment
and software spending is expected to lead
investment growth. Gains in corporate profits and
capacity expansion are expected to stimulate
business expenditure, while expected inventory
rebuilding from decade low levels is expected to add
to growth.
In the euro area, real GDP is expected to expand by
1.6% in 2004. Domestic demand has remained
subdued due to weak labour markets and
uncertainties related to social welfare reforms.
However, the low interest rate environment coupled
with rising real disposable income should provide
some impetus for growth. In addition, investment
activity is expected to recover owing to
improvements in global demand and further
Recovery in Japan is expected to be sustained. Major
contributory factors are the robust exports, stronger
investment activity supported by improved business
confidence, corporate profitability as well as
increased consumption arising from personal income
growth and more stable employment conditions.
Deflationary conditions and long-term structural
weaknesses in the corporate and banking sectors are
still being addressed.
Inflation is expected to remain benign in major
industrialised countries in 2004. While inflation is
projected to remain low at 1.3%, higher global crude
oil prices could exert upward inflationary pressures,
particularly in the US. Meanwhile, in the euro area,
the stronger euro would contribute to offsetting the
impact of higher crude oil prices. Despite improving
growth prospects, deflationary pressures are
expected to remain in the Japanese economy.
Overall, for 2004, oil prices are expected to remain
marginally higher than the OPEC band (US$22-28
per barrel), attributable mainly to rising demand in
inventory rebuilding. Despite improvements in
business confidence, growth in Germany is expected
to remain modest due to weak labour market
conditions and moderate private consumption
growth. While euro area exports are expected to
grow further with strengthening global demand, a
sharp and sustained appreciation of the euro could
adversely affect exports, corporate profitability and
growth. Sustainable recovery in the euro area would
largely be dependent on a revival in domestic
demand.
In UK, the economy is expected to remain resilient as
the global economic recovery becomes more
entrenched. Growth is estimated at 2.3%, growing
above trend in 2004. Investment is expected to
recover with increased corporate profitability, while
fiscal expenditure is expected to rise modestly.
Consumption is expected to continue to grow, but at
a more moderate pace with the slowdown in growth
of disposable income. Recovery of export growth will
be influenced by exchange rate movements and
demand conditions in the euro area. While house
prices have been rising at a rapid rate, recent
increases in borrowing costs are expected to mitigate
further price increases.
tandem with the strengthening of global growth. In
February 2004, OPEC announced that with effect
from 1 April 2004, the production ceiling will be
lowered by one million barrels per day, given a
projected supply surplus in the second quarter of the
year due to seasonally low demand. Also,
uncertainties in oil production, particularly in Iraq,
and positive investor sentiments on the commodities
market, are expected to contribute to price increases.
East Asian Economies
Prospects are for growth in the Asian region to be
stronger between 6.6-6.8% in 2004. The majority
of regional countries are expected to register faster
growth, with P
. R. China leading growth in the
region. Overall, regional growth is expected to be
broad based, with both external and domestic
demand providing the impetus to faster growth.
On the external front, growth is expected to benefit
from the further strengthening of the electronics
upcycle. Besides demand for consumer electronics,
which was the main factor for growth of
semiconductor sales in 2003, higher business
spending on IT replacement and a revival of
investment are projected to enhance sales. On the
Growth momentum to continue in US, with recovery gaining
strength in Japan and Europe and growth in Asia to be driven by
recovery in investment.


Outlook and Policy
83
supply side, the industry is expected to register
strong capacity expansion, particularly in equipment
investment, which was last seen during the
electronics upturn in 2000. With capacity utilisation
above 90% in 2003, investment in equipment and
machinery is forecast to increase by 36-42% on an
annual basis in 2004 (2003: 12.4%). The rise in
investment activity during the year is envisaged to
emanate from stronger foreign direct investment
year. Reflecting efforts to diversify the economy, a
key measure taken in recent years by most regional
countries is to spearhead investments in the services
sector. Of importance, domestic investments through
the promotion of small and medium enterprises
(SMEs) are expected to pick up during the year.
Consonant with higher growth, most regional
countries are forecast to record fiscal improvements.
For 2004, the global outlook is biased on the upside,
with stronger recovery in demand. Growth is
expected to be supported by continued expansion in
consumption and private investment and the
strengthening of the labour market in the US and the
positive impact of tax and labour market reforms in
Europe. Hence, prospects for regional growth in Asia
remain favourable.
In 2004, real GDP growth of the Asian Newly
Industrialised Economies (NIEs) as a group, is
expected to strengthen to 5-5.2%, underpinned by
robust export performance and a pick up in domestic
demand.
In Korea, real GDP is projected to register growth of
5.2% in 2004. Exports would remain the main driver
of economic expansion. Tax incentives, increased
investment expenditure, and measures to improve
labour-management relations as well as nurture
2003
Annual change (%) 
Graph 3.2
Regional Countries: Real GDP Growth
2004
0
2
4
6
8
10
P.R. China
Korea
Hong Kong China
Chinese Taipei
Singapore
Thailand
Philippines
Indonesia
Malaysia
9.1
5.2
6.0
4.7
3.2
3.3
2.9
1.1
4.5
4.1
5.2
6.7
3.5~5.5
6.0~6.5
4.0~5.0
4.9~5.8
6.3~7.3
8.3
Higher and broad based regional growth in 2004, with expansion
in exports, consumption and investment.
inflows and the further strengthening of regional
production networks. Therefore, intra-regional trade
is expected to continue expanding.
On the domestic front, private consumption is
expected to strengthen further in 2004, supported
mainly by rising disposable incomes and low interest
rates in most regional countries. With the exception
of Korea, lending to the household sector in most
other regional countries remains below pre-crisis
levels, implying the potential for further expansion.
The impact of the bird flu on economic growth
would be marginal as the livestock industry accounts
for a small share of GDP
, ranging from 0.1% in Japan
to 15% in Cambodia. A key development during the
year is the expansion in investment activity, which
began to pick up in the second half of 2003. The
benefits of past restructuring of the corporate sector
have led to higher profitability as well as increased
bank lending and equity capital, all of which are
expected to enhance investment activity during the
SMEs are expected to lead to the improvement in job
prospects. Hence, private consumption is expected to
improve in the second half of the year.
Growth in Hong Kong China is forecast to pick up
further in 2004 to reach 6%, the highest in four
years. A boost to economic expansion is expected to
emanate from the Closer Economic Partnership
Arrangement (CEPA) with P
.R.China, which came into
effect on 1 January 2004. The agreement, covering a
wide range of goods and the opening up of 17
services sectors, is the first extensive bilateral FTA in
the region. Further strengthening of the domestic
economy and strong demand from P
.R.China would
support employment and the services sector
including the tourism and financial sectors.
Led by investment and exports, growth in Chinese
Taipei is expected to be higher at 4.7%. Higher
investment spending is forecast for the year, due to
government expenditure on construction projects


84
and a rebound in private investments in the
manufacturing sector. In line with the strengthening
of the global electronics upcycle, exports are poised
to benefit from the country’s competitive advantage
in contract manufacturing, namely in wafer
fabrication, notebooks and consumer electronics.
In Singapore, growth is expected to strengthen in
the range of 3.5-5.5% in 2004, attributable mainly
to the recovery in global IT spending. A revival in
consumer demand is projected to emanate mainly
from positive sentiments arising from improvements
in labour market conditions and the low interest rate
environment.
The ASEAN economies as a whole is expected to
expand at a faster pace of 4.9-6% in 2004, with
higher contribution from the domestic and external
sectors. Within the group, Thailand is forecast to
record the strongest growth in output, with growth
of 6.3-7.3%. Following rising capacity utilisation,
faster investment growth is expected, with the bulk
of investments comprising private sector investments
in the manufacturing sector, and reinforced by public
sector infrastructure projects.
In the Philippines, real GDP growth is projected to
expand by 4.9-5.8%, attributable mainly to higher
electronics exports. Continued strong overseas
remittances as well as favourable farm output are
expected to contribute to growth in private
consumption. Growth in Indonesia is expected to
increase between 4-5%, with private consumption to
remain as the primary source of growth. With
increased access to financing at lower interest rates
amidst declining inflation, private consumption is
expected to register a sustained rise.
P
. R.China is forecast to register the highest growth
of 8.3% in 2004. While exports and private
consumption are expected to increase, investment
expenditure is expected to moderate in line with the
government’s policy to achieve a more balanced and
sustainable growth.
In 2004, inflation in the regional countries is
expected to remain low between 2.4-2.7%. Inflation
in the Asian NIEs as a group, however, is expected
to increase marginally to between 1.4-1.5%. In
Korea, inflation is projected to moderate, reflecting a
stabilisation in food and oil prices and receding
demand pressures. In all other NIEs, consumer prices
are forecast to trend upwards, attributable to the
pick up in general economic activity. While
deflationary pressures are expected to ease in Hong
Kong China, a turnaround is forecast for Chinese
Taipei, with price increases in 2004, compared with
price declines registered in the last two years.
Meanwhile, inflation in the ASEAN countries as a
group is expected to remain stable in the range of
3-4.3% in 2004. In Indonesia, price pressures are
projected to subside further, with slower growth in
wages amidst excess capacity conditions. In contrast,
inflation in the Philippines is estimated to increase
further, reflecting rising demand pressures as
economic growth strengthens. In Thailand, modest
price pressures are forecast, arising from continued
buoyant domestic demand conditions.
Interest Rates and Exchange Rates
In 2003, the major industrial countries continued to
maintain accommodative monetary policies. Weak
economic conditions, particularly in the first half of
the year, led several major central banks to reduce
interest rates.
In the US, the Federal Reserve Board (Fed)
reduced interest rates by 25 basis points on 25 June
2003 following heightened risk of deflation. The
Fed’s actions had brought the Federal funds rate to
1.0%, its lowest level in more than 40 years, and
marked a cumulative reduction of 550 basis points
since the Fed began its easing cycle in early 2001. By
end-year, however, amidst a stronger recovery in
growth, the threat of falling inflation had receded.
Meanwhile, signs of economic weakness in the euro
zone especially in early 2003 prompted the
Rate,%
Graph 3.3 
Major Industrial Countries: Official Interest Rates
United Kingdom
(Base lending rate)
United States
(Fed funds Rate)
Euro area
(Repo rate)
Japan
(Overnight rate)
0
1
2
3
4
5
6
7
1999
2000
2001
2002
2003
2004
2.00
4.00
1.00
0.0


Outlook and Policy
85
European Central Bank to reduce rates by 25 basis
points in March 2003 and a further 50 basis points in
June 2003. Consequently, the benchmark repo rate
declined to 2%, reflecting a cumulative 275 basis
point reduction since May 2001 to counter the
slowdown in the euro area.
In the UK, the Bank of England (BOE) eased its base
lending rate twice by 25 basis points in February and
July 2003 on concerns about the downturn in the
manufacturing sector and that domestic and external
demand would be lower than earlier anticipated.
However, with the sharp increases in house prices
and rapid growth in consumer loans seen in the
second half-year, the BOE raised rates in November
2003 and again in February 2004, mainly to
constrain the pace of household debt accumulation.
Meanwhile, in Japan, with official short-term interest
rates virtually at zero, the Bank of Japan continued
to engage in quantitative easing measures
throughout 2003 to inject liquidity into the banking
system in order to counter deflation and lend support
to the economic recovery.
For the remaining part of 2004, while growth has
gathered momentum, excess capacity still exists in
the global economy. Excess capacity in the industrial
sector and high unemployment in the labour markets
are reflective of output gaps. Thus, despite rising
commodity prices, inflation levels remain subdued in
many economies. Nonetheless, in some countries,
house price increases and excessive credit growth
have surfaced to influence the stance of monetary
policy. Overall, the timing and magnitude of
monetary policy actions would depend on country-
specific factors, including the strength of economic
growth, inflation trends and developments in the
currency and financial markets.
In the foreign exchange markets, the US dollar
depreciated further against all major currencies in
2003, extending its decline, which began in early
2002. Consequently, by end-2003 the US dollar
depreciated further by about 20% against the euro
and about 11% against both the Japanese yen and
pound sterling. Underlying the depreciating trend
has been the pressure from a widening current
account deficit and declining capital inflows into US
dollar assets. Against the backdrop of a weaker US
dollar, the euro appreciated in 2003 and ended the
year at a record high of E1=US$1.2595. This trend
continued into early 2004, with the dollar
weakening further against the other major
currencies.
MALAYSIAN ECONOMY IN 2004
The Malaysian economy is expected to strengthen
further in 2004, building on the strong growth
momentum in the second half of 2003 and
brighter prospects for global growth in 2004. Real
GDP is expected to expand by 6-6.5% (2003:
5.2%), underpinned by stronger domestic demand
and reinforced by more favourable external
demand. Growth will mainly be private sector-
driven, while the public sector gradually
consolidates. The growing consumer and business
confidence since the second quarter of 2003,
strengthened economic fundamentals and the
positive impact of pro-growth fiscal and monetary
measures are expected to mutually reinforce robust
consumer spending and the upturn in private
investment activities.
The projections for growth in 2004 are based on a
stronger global economic growth of 4.1% and led
by synchronised recovery across all regions, an
upturn in the global electronics cycle and firm prices
for crude palm oil and crude oil. With the growth in
Asia stronger than the global average, Malaysia is
also expected to benefit from the continued
expansion in intra-regional trade. The expectation of
the stronger pace of growth is also premised on the
strength and dynamism of the private sector
performance, especially the strength of the upturn
in domestic investment. Evidence of higher new
investments and capacity expansion are indicative
that the recovery in economic growth is sustainable.
Euro, Sterling
Yen
US$/£
US$/Euro
¥/US$
Graph 3.4
Movement of the US Dollar against Major
Currencies
0.80
1.00
1.20
1.40
1.60
1.80
2.00
2000
2001
2002
2003
2004
100
105
110
115
120
125
130
135
140
1999


86
While possible downside risks remain, the strong
underlying fundamentals will provide strong
foundations for economic resilience and future
growth.
While the external environment has improved
significantly, Malaysia will continue to fine-tune the
strategies to strengthen the domestic sources of
growth to reduce vulnerability to external risks and
strengthen economic resilience. Hence, while
continuing to promote exports and foreign direct
investment, greater focus has been directed at
enhancing the contribution of domestic
consumption and investment to growth.
Private consumption has become an important
component of the economy. Measures to promote
domestic consumption have resulted in a higher
share of private consumption to GDP (46.4%; 1999:
43.6%). However, the share of private consumption
to GDP is relatively low compared to other countries
in the region, which have higher shares of between
Meanwhile, private investment is expected to be an
increasingly important driver of growth. Several
measures have been implemented recently to
enhance the contribution of investment to growth,
particularly investment by the SMEs. The SME sector
Graph 3.5
International Comparison - Household Debts1 
(% of nominal GDP, 2003)
Thailand
Singapore
Malaysia
Hong Kong China
Korea
Australia
Japan
Euro Area
Canada
UK
US
58.9
0
20
40
60
80
100
%
1 Financial liabilities of households with the banking system
Real GDP to expand by 6-6.5% in 2004, underpinned by stronger
domestic demand and reinforced by robust external demand.
Private sector will lead growth, while the Government continues
to provide a supportive environment.
will continue to be developed and integrated into the
mainstream of industrial and technological
development to actively support the domestic
industries. This will strengthen the inter-linkages in
the economy and contribute towards the
development of a more vibrant domestic economy.
In this regard, the key strategies in the 2004 Budget
reinforced the measures in the Economic Package to
strengthen the domestic sources of growth and to
facilitate the private sector to assume its lead role as
the engine of growth. The thrust of the 2004 Budget
strategies focused on providing a supportive
environment for private sector initiatives, while
gradually cutting back public expenditure. Towards
this end, various tax and non-tax incentives were
directed at enhancing domestic sources of growth in
niche areas, with continuing emphasis on the services
sector (especially private education, health and
tourism), developing SMEs as a key growth catalyst,
and agriculture as the third engine of growth.
Additional incentives were provided to encourage
manufacturers to move up the value chain to
undertake higher value-added activities such as
research and development. Measures also continue
50-70% of GDP. In terms of the average propensity
to consume (APC), Malaysia’s APC is also lower
(within the range of 0.45-0.49 in the last five years)
compared with that of the other countries in the
region (above 0.55). Thus, given the steady income
levels and the high savings rate, there is potential to
further enhance the contribution of domestic
consumption to growth, without increased risks to
the economy.
As at end-2003, household debt to GDP accounted
for 58.9% (end-2002: 56.8%). This level remains
comparatively low compared with other countries.
The debt service burden accounted for only 16.4%
of GDP. Including credit card repayments, the ratio
would be 24%. While household debt has
increased, the repayment capability of households
has continued to improve. This is reflected in the
continued decline in the household NPLs to 8% as
at end-2003, from 8.5% as at end-2002. The ability
of the household sector to service their debts is also
reflected in the sustained increase in disposable
income and accumulation of savings. Household
deposits, as a percentage of GDP, remained high at
66.6% at end-2003 (end-2002: 67.3%).


Outlook and Policy
87
to focus on enhancing the country’s efficiency and
productivity and overall competitiveness to enable
Malaysian companies to compete globally. These
include incentives directed at reducing the cost of
doing business and increasing innovation through
higher research and development activities.
Reflecting the gradual fiscal consolidation, the
Government’s fiscal deficit is expected to narrow to
4.5% of GDP in 2004 from 5.3% in 2003. With
inflation remaining subdued, monetary policy in
2004 would continue to be directed at sustaining the
growth momentum. The current low interest rate
environment will remain to reinforce the private
sector-led growth. In this regard, efforts would
continue to focus on improving the flow of credit to
sectors with growth potential, particularly the SMEs
and to new growth areas. In addition to the banking
system, new avenues are also being developed to
increase the SMEs’ access to capital market funding.
In 2004, growth would also be supported by higher
productivity. Given the infrastructure in place and
efforts to improve skills to better leverage on
technology, productivity is expected to increase. An
important factor that would enhance productivity is
the efficiency of the delivery system for public sector
services. In this regard, Bank Negara Malaysia further
liberalised the foreign exchange rules as part of its
continuous effort to reduce regulatory cost and
improve overall efficiency of both businesses and
banking institutions. The changes are to achieve
three main objectives:
•
To promote efficiency and risk management;
•
To facilitate management of funds and risk
diversification; and
•
To deepen the capital market.
Domestic Demand
The positive factors that supported domestic
demand in 2003 are expected to continue to drive
the growth momentum in 2004. The pace of
growth of private investment, which had turned
positive in 2003, is expected to accelerate this year,
with a more significant contribution to growth.
Private consumption would strengthen further. The
growth enhancing effects of fiscal policy and low
interest rates will continue to support private sector
activities.
Growth would also be reinforced by the
improvement in external demand with the
strengthening of the economies of Malaysia’s main
trading partners. While a more robust growth of
exports is anticipated, the contribution from net
exports to growth would be modest as a stronger
increase in imports is expected with the recovery in
private investment and stronger economic
expansion. Against this backdrop, the private sector
is expected to resume the lead role, with its
contribution to growth doubling from 2.5
percentage points in 2003 to 4.9 percentage points
in 2004. Reflecting the policy of fiscal consolidation,
public expenditure would show a modest decline.
Growth in private consumption, which displayed
resilience in 2003, is expected to strengthen to
8.1% in line with growing consumer confidence.
The propensity to consume would be further
enhanced by continued firm commodity prices,
Table 3.2
Real GDP by Expenditure (1987=100)
2003p
2004f
Annual change (%)
Domestic Demand1
4.8
5.0
Private sector expenditure
4.3
8.7
Consumption
5.1
8.1
Investment
1.1
11.5
Public sector expenditure
5.5
-1.3
Consumption
7.9
4.2
Investment
3.6
-5.7
Net exports of goods and services
20.5
0.8
Exports
6.3
12.1
Imports
5.0
13.3
Gross Domestic Product
5.2
6.0 - 6.5
1
Excluding stocks.
p
Preliminary
f
Forecast
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Table 3.3
Contribution of Demand Components to Real
GDP Growth
2003p
2004f
% point of
contribution
Domestic Demand1
4.3
4.5
Private sector expenditure
2.5
4.9
Consumption
2.4
3.7
Investment
0.1
1.1
Public sector expenditure
1.8
-0.4
Consumption
1.1
0.6
Investment
0.7
-1.0
Change in stocks
-1.1
1.5
Net exports of goods and services
2.0
0.1
Exports
6.9
13.3
Imports
4.9
13.2
Gross Domestic Product
5.2
6.0 - 6.5
Note: Figures may not necessarily add up due to rounding.
1
Excluding stocks.
p
Preliminary
f
Forecast
Source: Department of Statistics, Malaysia and Bank Negara Malaysia


88
higher export earnings, the low interest rate
environment, stable job market and the positive
wealth effect of higher equity prices. The  income
levels of households are also expected to increase in
line with the improvement in business conditions
and productivity gains. The stimulus measures
already in place would continue to filter through
with positive effects on consumer spending
capacity. The reduction in EPF contribution by
employees would continue to enhance the
disposable income of individuals in the first half-
year. In addition to the improving income levels, the
high savings rate would also provide the support for
higher spending capacity.
gas sector is expected following the discovery of
deep sea oil and for ongoing exploration work by
the oil companies.
New investment activities are also expected in the
new growth areas in the information and
communications technology and shared services
sub-sectors (such as operational headquarters and
back-room operations) with the additional
allocation of funds under Malaysian Venture
Capital Management (MAVCAP), the expansion of
Multimedia Development Corporation’s role as a
one-stop agency for selected services sectors and
the additional incentives for operational
Robust external demand, improved cash flow position of
companies, higher capacity utilisation and low interest rates will
reinforce and strengthen the pace of private investment, while
firm commodity prices and stable job market continue to drive
private consumption.
Private investment is expected to expand at a
stronger pace of 11.5% in 2004 as the rise in
private capital spending gains further momentum
due to more positive business sentiment, improved
corporate cash flow positions and high capacity
utilisation rates. The IT replacement cycle would also
lead to increases in investment in equipment and
software. Private sector capital formation would be
supported by higher capital outlay, particularly in
the manufacturing, oil and gas and services sectors.
Investments would also be supported by a steady
inflow of new foreign direct investment and
reinvestment.
Positive developments in the manufacturing sector,
including the markedly higher approvals of
manufacturing projects by the Ministry of
International Trade and Industry (MITI) and high
capacity utilisation rates are expected to drive
investment activities in the sector. A contributory
factor is the additional tax incentives given to local
companies to reinvest in the production of
machinery and equipment and heavy industries.
Investment in the construction sector would be
sustained, mainly from the development of several
residential housing projects as well as ongoing
privatised road projects. In addition, large capital
spending would emanate from other major
infrastructure projects in the transport and utilities
sub-sectors such as building of new power plants,
expansion of port facilities and development of
water projects. Higher investment in the oil and
headquarters. Meanwhile, investment in the
agriculture sector is expected to be sustained with
the measures announced in the Economic Package
and the 2004 Budget to promote large-scale mixed
farming and further modernise the agriculture
sector.
In 2004, a modest decline in public sector
expenditure is expected. The public sector, while
gradually consolidating, would remain supportive
of growth. Public sector consumption is
budgeted to increase moderately by 4.2% due to
increased spending on supplies and services to
improve the quality and delivery of public services.
Meanwhile, public investment would be reduced
by 5.7% to a more sustainable level in 2004
following the accelerated implementation of
development projects in 2001-2003. Although
development expenditure would decline, its impact
on growth would be compensated by private
sector expenditure, which has a larger multiplier
impact on the economy. Also, increased efficiency
in expenditure allocation and improved
effectiveness in the delivery of Government
services would generate positive multiplier effects
on private sector activities. More importantly, the
Federal Government’s development expenditure
will be mainly channelled to projects and
programmes with strong linkages and value added
potential, including infrastructure facilities,
agriculture and rural development as well as
education and human resource development.


Outlook and Policy
89
Liberalisation and Simplification of Foreign Exchange Administration Rules
Malaysia maintains a liberal foreign exchange administration system. Within this liberal system,
approval requirements for inflows and outflows are mainly prudential in nature to ensure financial
stability. Regulations are implemented in a transparent and pragmatic manner. Foreign exchange
administration regulations are also applied where appropriate to prevent any recourse to the Malaysian
banking system for money laundering and terrorism financing.
In line with the policy of gradual and progressive liberalisation of the financial sector, liberalisation and
further simplification of several major foreign exchange administration policies aimed at enhancing the
business environment as well as efficiency and competitiveness of business operations in Malaysia
were made effective from 1 April 2004. These changes form part of Bank Negara Malaysia’s (the
Bank) on-going initiatives towards contributing to the deepening of the capital market and enhancing
efficiency of the regulatory delivery system.
(i)
Rules Affecting Reporting of Foreign Exchange Transactions
While maintaining the requirement for exporters to repatriate receipts arising from export of goods
(export receipts) when contractually due, which must not exceed six months from the date of export,
the rules on reporting of such transactions are being abolished or simplified to reduce the
administration cost to businesses.
•
completion of Forms P (for payments abroad) and R (for receipts from abroad) by residents was
discontinued since 1 January 2004. Information as contained in Forms P and R is being
provided by the remitting or receiving banks to the Bank through an on-line system.
•
In simplifying business operations, the reporting requirement to the Bank is further relaxed
effective 1 April 2004. The requirement for submission of annual reports for export of goods by all
exporters is abolished. Only exporters with annual gross exports exceeding RM50 million need to
submit quarterly reports. The process for submission of such reports is being simplified further. The
reporting mechanism will be designed taking into account business operations of companies.
(ii)
Foreign Currency Accounts of Residents
Rules on maintenance of foreign currency accounts (FCA) are liberalised further following the
relaxation implemented in April 2003. The liberalisation of limits for companies is aimed at enhancing
the cash flow management for supporting value chain expansion in Malaysia. Rules on FCA of
individuals are also relaxed to provide flexibility in the management of income and saving.
•
Effective 1 April 2004, the overnight export FCA limit for Approved Operational Headquarters is
increased further to USD100 million from USD70 million.
•
The overnight limits for export FCA of other resident exporters are also raised. The revised limits,
based on the average monthly export receipts are as follows -
Average monthly export
Overnight limits
receipts
(USD million)
Exceeding RM100 million
100
Exceeding RM50 million up to RM100 million
60
Up to RM50 million or for new exporters
30
•
In addition, resident exporters are given the option to merge their export and non-export FCA in
accordance with overnight limits imposed on export FCA.


90
•
Resident companies with domestic borrowings may also open FCA for non-export receivables
(receivables other than from export of goods) to retain such receipts with onshore licensed banks
with no overnight limit. For resident companies that do not have domestic borrowings, they may
also maintain non-export FCA with licensed offshore banks in Labuan, but up to an aggregate
overnight limit of USD500,000.
•
In the case of resident individuals, FCA remains permitted to facilitate education and employment
 overseas. However, effective 1 April 2004, the limits for these FCA are increased from
USD100,000 to up to an aggregate overnight limit of USD150,000 each with onshore licensed
banks and licensed offshore banks in Labuan.
•
Resident individuals with funds abroad (no conversion from ringgit) may maintain non-export FCA,
onshore or offshore, including licensed offshore banks in Labuan, without any limit.
•
Resident individuals in Malaysia who have foreign currency funds are free to invest in any foreign
currency products offered by onshore licensed banks.
(iii)
Ringgit Credit Facilities to Non-Residents
Rules on lending in ringgit to non-residents are liberalised effective 1 April 2004 to facilitate non-
resident businesses in Malaysia. This liberalisation does not impact current rules on non-
internationalisation of ringgit:
•
To enhance access to ringgit funds for business requirement in Malaysia, all permitted ringgit
lending limits for various purposes, by banking institutions to a non-resident (excluding
stockbroking company, custodian bank and correspondent bank) are consolidated into one
aggregate limit and raised to RM10 million.
The non-resident may use the ringgit credit facilities for any purpose in Malaysia, excluding for
financing or refinancing the purchase or construction of immovable properties.
•
Effective 1 April 2004, residents (banks and non-banks) may extend ringgit credit facilities in
aggregate up to three property loans to a non-resident to finance or refinance the purchase or
construction of immovable properties in Malaysia, excluding the purchase of land only.
Prior to 1 April 2004, only financial institutions and employers may extend property loans to a non-
resident.
•
In the case of non-resident stockbrokers or custodian banks, onshore licensed banks are now
allowed to extend up to an aggregate overnight overdraft facility of RM200 million (RM10 million
previously) to facilitate settlement for purchase of shares listed on Malaysia Securities Exchange
Berhad.
(iv)
Investment Abroad by Resident Individuals
•
Effective 1 April 2004, to provide flexibility for better management of funds, resident individuals
employed or staying abroad with own foreign currency funds may invest in any foreign currency
assets, including those offered by onshore licensed banks and licensed offshore banks in Labuan.
(v)
Investment Abroad by Domestic Institutions
•
For greater geographical diversification and in simplifying approval process, unit trust
management companies may, effective 1 April 2004, invest abroad up to the full amount of


Outlook and Policy
91
Net Asset Value (NAV) subscribed by non-residents and up to 10% of the NAV per fund
subscribed by residents. Different funds of a unit trust management company or of different
companies may also be pooled to benefit from economies of scale when investing abroad. Such
investments abroad are required to be in compliance with the Securities Commission’s prudential
guidelines.
•
Insurance companies and takaful operators may also invest abroad up to 5% of their Margin of
Solvency (MOS) and up to 5% of their total assets respectively. In addition, insurance companies
and takaful operators may also invest abroad up to 10% of the NAV of investment-linked funds
that they market. These investments are required to be in compliance with prudential insurance
and takaful regulations issued by the Bank Negara Malaysia.
•
Fund/asset managers may invest abroad up to the full amount of investments by their non-
resident clients and up to 10% of investments by resident clients. These funds may be pooled to
benefit from economies of scale when investing abroad. Such investments are required to be
based on the mandate of their clients and in compliance with the Securities Commission’s
prudential guidelines.
(vi)
Issuance of Bonds Denominated in Ringgit by Multilateral Development Banks and
Foreign Multinational Corporations
To deepen the development of the domestic bond market, Multilateral Development Banks (MDB),
where Malaysia is a member, and foreign multinational corporations (MNC) may, based on the
merits of each case, issue ringgit-denominated bonds in Malaysia.
(vii) Forward Foreign Exchange Contracts
Effective 1 April 2004, rules on hedging are liberalised to facilitate overall economic management
of currency risks as follows:
•
MDB and MNC issuers of ringgit-denominated bonds, will be allowed to enter into forward foreign
exchange contracts with onshore licensed banks to hedge their currency risks.
•
Similarly, non-resident investors subscribing to these ringgit-denominated bonds issued by MDB
and MNC can also enter into forward foreign exchange contracts with onshore licensed banks to
hedge their currency risks arising from the investment in these ringgit-denominated bonds.
•
Forward sales by residents of any foreign currency receivables for ringgit with onshore licensed
banks or approved merchant banks can now be undertaken up to the tenure of the underlying
transaction as long as the transaction is supported by firm underlying commitment to receive such
currency (previously foreign currency receivables, other than export receipts, could be sold forward
up to 12 months only).
•
Residents may also enter into forward foreign exchange contracts to sell foreign currency yet to be
received for another foreign currency with onshore licensed banks and approved merchant banks
up to the tenure of the underlying transactions.
•
Resident companies may temporarily retain up to the amount of foreign currency receipts received
earlier than the maturity date of the forward foreign exchange contract in their onshore FCA,
pending maturity of the forward foreign exchange contract.
•
Residents may enter into interest rate swaps with onshore licensed banks, approved merchant
banks and licensed offshore banks in Labuan.


92
0
5
10
15
20
25
1998
1999
2000
2001
2002
2003
RM million
Graph 3.7
Manufacturing Sector: Overseas investment and 
Approved Foreign Investment in Malaysia
Overseas investment
Approved foreign investment in Malaysia
Source: Ministry of International Trade and Industry 
 
Bank Negara Malaysia
Sectoral Outlook
On the production side, growth is expected to be
supported by stronger performance across all sectors,
except agriculture and construction. The
manufacturing and services sectors are expected to
remain as the main drivers of growth. The agriculture
sector is also projected to expand although at a more
moderate pace following the strong performance in
2003. Growth in the construction sector would be
moderate amidst weaker civil engineering activities.
In the manufacturing sector, ongoing structural
shift has become more evident as the sector’s
Table 3.4
Real GDP by Sector (1987=100)
2003p
2004f
Annual
change (%)
Agriculture
5.5
2.6
Mining
4.8
5.5
Manufacturing
8.2
10.2
Construction
1.9
1.5
Services
4.1
5.2
Real GDP
5.2
6.0 - 6.5
p Preliminary
f Forecast
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Broad based growth across sectors benefiting mainly from
strengthening global electronics cycle, higher trade and tourist
arrivals, as well as firm commodity prices.
competitive advantages adjust from labour-intensive
to higher technology-driven manufacturing
processes. Greater efficiency in the use of resources is
being realised through manufacturing companies
operating more at a regional level, as seen in the
relocation of some of the more labour-intensive
industries to lower-cost countries. Key indicators such
as the contribution of the manufacturing sector in
terms of value added and employment, flows of
investment as well as the retrenchment trend clearly
suggest that the manufacturing sector continues to
remain resilient.
The recent trend in overseas investment is a
reflection of Malaysian companies seeking greater
synergy based on locational advantages.
Consequently, notwithstanding the investments
abroad, the share of the manufacturing sector in
terms of value added (GDP) and total employment
have remained significant at 31% and 28%
respectively in 2003. Employment in the
manufacturing sector continues to expand, while
retrenchments have moderated further in 2003.
While retrenchments due to relocation accounted
for one-fifth of total retrenchments in the
manufacturing sector, it only amounted to 0.2% of
total employment in the manufacturing sector for
the period 2001-2003. Furthermore, new jobs
created by approved foreign investment in the
manufacturing sector (2003: 77,182 workers)
have outpaced the retrenchment in the sector
(2003: 14,967 workers). More importantly, outflows
of overseas investment in the manufacturing sector
(2003: RM2.3 billion) remain small compared
with approved FDI in the sector in Malaysia
(2003: RM15.6 billion).
% share
Graph 3.6
Manufacturing Sector: Share of Value Added  
and Employment 
15
20
25
30
35
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
Employment
Value added
Source: Department of Statistics, Malaysia
 
Economic Planning Unit


Outlook and Policy
93
As part of the efforts to expedite the structural shift,
promotion of manufacturing-related services was
intensified with the establishment of the
Manufacturing Related Services Division in both MITI
and MIDA. Consequently, there was an increase in
the number of applications received and approvals in
2003 for the establishment of OHQs, IPCs, RDCs and
regional offices (Table 3.5). Going forward, the
manufacturing sector will continue to move away
from labour-intensive production and give greater
emphasis to higher value added production with
knowledge-based labour of higher productivity
and skills.
Value added in the manufacturing sector is projected
to pick up further to 10.2% in 2004 (2003: 8.2%),
supported by the pick up in the global electronics
industry and improved domestic demand. Of
significance, the global semiconductor industry is
expected to strengthen, supported by broad-based
expansion across all geographical regions and
products. This is premised on expectations of a
strong increase in the global semiconductor capital
and investment spending of 27.9% in 2004 (2003:
5.7%). Most industry experts are more optimistic on
the prospects for the industry and have revised
upward their growth forecast for 2004. In the recent
dialogues between Bank Negara Malaysia and the
private sector, manufacturers in the electronics sector
in Malaysia also expressed a more optimistic outlook
for the industry in 2004.
Latest indicators suggest an upturn in the global
semiconductor cycle. Global semiconductor sales,
which have been expanding since the latter part of
2002, have strengthened sharply to register a growth
of above 20% in the last quarter of 2003. In the US,
shipment and sales of semiconductors have risen
strongly, while the book-to-bill ratio has improved to
above one since the fourth quarter of 2003. The
unfilled orders of electronic products and
communication devices in the US have also risen
steadily since early 2003.
Growth in the electronics industry would be driven
mainly by the wireless and PC markets, due to rising
demand for wireless applications as well as the PC
replacement cycle, as companies invest again
following their huge spending prior to the Y2K period.
This would be further augmented by the growth in
the consumer electronics products segment as
demand for new technology and multi-functional
devices such as camera phones, PDAs and DVDs gains
momentum.
Consonant with the pick up in the global electronics
industry and the spillover effects on the chemical
products industry, growth in the export-oriented
industries is projected to expand at a more rapid rate
of 13.8% (2003: 11.9%). Similarly, growth in the
domestic-oriented industries is expected to strengthen
to 8.3% (2003: 6.1%), due to improved demand for
motor vehicles and construction-related materials.
The services sector is expected to expand at a faster
rate of 5.2%, reflecting higher expansion across most
sub-sectors. Growth would be supported by higher
trade and tourism activities and improved consumer
spending. Of significance, growth in the wholesale and
retail trade, hotels and restaurants sub-sector is
expected to pick up. Similarly, growth in the transport,
storage and communications sub-sector is expected to
trend higher in line with the robust expansion in trade,
increased number of business and leisure passengers as
well as the expected strong growth in the cellular
segment of the telecommunications industry mainly
induced by new innovations. With the expected
increase in bank lending and other financial and
business services activities, the finance, insurance, real
estate and business services sub-sector is expected to
record a stronger growth in 2004. The services sector
will also be supported by the rapid expansion in new
growth areas, such as the shared services industry,
namely call centres, data centres, operational
headquarters, regional distribution centres and
international procurement centres, as well as specialised
types of ICT services.
The agriculture sector is expected to expand further,
albeit at a more moderate pace of 2.6% in 2004 as
growth in the major commodities, particularly palm oil
and rubber, is expected to moderate following the
double-digit growth in 2003. While yields are likely to
remain strong amidst sustained high prices for palm oil,
increased production would emanate mainly from the
expansion in mature areas. Rubber production is
forecast to increase to above 700,000 tonnes, with the
bulk of the increase contributed by the smallholdings
Table 3.5
Approved Manufacturing-related Services
2000
2001
2002
2003
End-Period
Operational Headquarters (OHQs)
41
50
59
71
International Procurement
Centres (IPCs)
55
78
109
141
Regional Distribution
Centres (RDCs)
-
-
-
4
Regional Offices
357
404
436
473
Representative Offices
673
783
872
1,006
Source: MIDA


94
sector, as continued high prices are likely to induce
increased tapping activity. Within the other
agriculture group, production of selected
commodities is expected to increase, led by cocoa
(24.3%) and livestock (6.5%). Growth is also
expected to emanate from some of the food crops,
such as vegetables and fruits, reflecting the efforts by
the Government to increase domestic food crops
production through the Permanent Food Production
Park scheme. Meanwhile, paddy production is
estimated to be higher on account of wider usage of
high yielding paddy seeds.
Growth in the mining sector is expected to
strengthen to 5.5% in 2004, led by higher gas
output. The new Malaysian Liquefied Natural Gas
(MLNG) plant is expected to operate at a higher
capacity utilisation to meet the increased demand.
Meanwhile, production of crude oil (including
condensates) is expected to remain stable at 733,000
barrels per day (2003: 736,000 bpd).
Growth in the construction sector is envisaged to
increase at a moderate rate of 1.5%, due to lower
activity in the civil engineering sub-sector following
the completion of several infrastructure projects by
both the Government and the private sector.
Meanwhile, activities in the residential sub-sector is
expected to remain strong in view of the increase in
new housing starts during the first nine months of
2003, as well as ongoing work on projects under
construction. Demand for residential property,
especially for affordable housing, would remain
favourable, encouraged by the incentives granted
under the Economic Package, especially the stamp
duty exemption, tax relief and the waiver on the real
property gains tax until the first half of 2004.
Meanwhile, activity in the non-residential sub-sector
is expected to remain subdued, although on an
improving trend, as the average occupancy rates for
office space and retail complexes have stabilised
since the third quarter of 2003.
Prices and Employment
Inflation is expected to remain low at 1.5% in 2004,
while core inflation is estimated at 1%. Adequate
capacity, increasing competition and low inflation
abroad are expected to keep domestic inflation
benign.
In line with the stronger GDP growth in 2004, overall
growth in employment is also expected to
strengthen with encouraging growth in new job
opportunities. Consequently the unemployment rate
is expected to improve to about 3.4%. Meanwhile,
efforts would continue to be focused on improving
the quality and productivity of labour to ensure
workers are constantly prepared to meet challenges
associated with structural changes taking place in the
economy, in particular with regard to enhancing skills
in the higher value added manufacturing-related
services as well as services-led and knowledge-led
growth areas.
Balance of Payments
The balance of payments is expected to remain
strong in 2004, with a sustained high current
account surplus, reflecting the continued large
surplus in merchandise trade and improvement in the
services account. The current account of the balance
of payments is expected to remain large at 12.7% of
GNP in 2004 despite the projected stronger growth
in imports (15.4%). Strong export growth (11.1%),
underpinned by the systemic upswing in global
demand, is expected to contribute to a large surplus
in the trade account. The impetus to this growth
stems from the strong expansion in manufactured
exports (12%), in particular electronics exports, and
continued growth in agriculture exports. The
continued high level of agriculture and mineral
exports, which have low import content, will provide
further support to the large trade surplus.
In tandem with the pick up in global
semiconductor demand and expanding intra-
regional trade, growth in manufactured exports
is expected to strengthen further to 12% in 2004
(2003: 8.2%), with higher exports from both
electronics and non-electronics products. Exports
of electronic products would expand at a more
rapid rate of 14.7%, underpinned by increased
demand for PC, wireless products and consumer
electronic products such as DVDs and digital
cameras. Similarly, non-electronics exports are
1.5
1.0
0
1
2
3
4
5
6
1998
1999
2000
2001
2002
2003
2004f
Annual change (%)
CPI Inflation
f Forecast
Core Inflation 
Graph 3.8
Consumer Prices


Outlook and Policy
95
expected to increase further by 9.2%, reflecting
expansion in exports of rubber products, chemicals,
paper and pulp products, and furniture and parts.
Notwithstanding the strengthening external demand,
export prices would continue to remain subdued due
to global competition.
Exports of commodities, comprising agriculture and
minerals, are expected to moderate to 5.5% in 2004,
following two successive years of strong export
growth averaging above 20%. Agriculture export
earnings are projected to grow by 8.8% in 2004,
supported by high prices and increases in volume.
Palm oil and rubber exports will be the main
contributors, accounting for almost 70% of total
agriculture exports. Export prices of major agriculture
commodities are expected to remain high due to
favourable global demand amidst continued supply
shortages of some commodities, especially during the
first half-year. Of significance, export price of palm oil
is projected to remain strong, averaging RM1,650 per
tonne given the expected shortage in global supplies
of major oilseeds, especially soybean oil. Similarly,
rubber prices are expected to record a higher average
of 385 sen per kilogramme in line with expectations
of continued strong pick up in global rubber
Table 3.6
Balance of Payments
2003e
2004f
2003e
2004f
RM billion
US$ billion
Goods
97.7
96.4
25.7
25.4
Trade account
81.1
76.5
21.4
20.1
Exports (% change)
11.5
11.1
11.5
11.1
Imports (% change)
4.8
15.4
4.8
15.4
Services
-15.0
-11.9
-4.0
-3.1
Balance on goods and services
82.7
84.5
21.8
22.2
Income
-22.6
-24.7
-6.0
-6.5
Current transfers
-9.3
-9.8
-2.4
-2.6
Current account balance
50.8
50.0
13.4
13.2
(% of GNP)
13.7
12.7
13.7
12.7
Financial account
-12.1
-3.2
Errors and omissions
0.4
0.1
of which:
Exchange revaluation gain
11.9
3.1
Overall balance
39.1
10.3
e Estimate
f
Forecast
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Sustained balance of payments position with continued large
current account surplus and long-term capital inflows. Trade
surplus to remain large due to strong expansion in electronics
exports and continued growth in agriculture exports.
demand, particularly from the tyre manufacturers. In
addition, the upliftment of import quotas by
P
.R.China, effective January 2004 in line with their
commitments under the WTO, would lend further
support to the international rubber market.
Exports of minerals are projected to grow
marginally by 1.8%, as the higher receipts from LNG
would be largely offset by the sharp decline in crude
oil exports. Despite the relatively high crude oil prices
of US$28.50 per barrel, prices would still be lower
than in 2003. Malaysian crude oil prices would be
broadly in line with trends in the global oil markets in
2004, which would be characterised by a more
balanced demand and supply situation. Strict
management of oil supplies by OPEC members
would also influence global oil prices during the year.
Meanwhile, LNG exports are projected to remain
strong, expanding by 15.3%. The MLNG Tiga plant
would be operating at a higher capacity to
accommodate the increased demand.
Import growth is expected to emanate mainly from
higher imports of intermediate goods (15.5%),
consonant with forecast of stronger production and
exports in the manufacturing sector, in particular the
electronic segment. Capital imports are expected to
make a strong recovery (12.7%) in line with the
revival in investment activity. Higher capital goods
imports are mainly for capacity expansion in the
manufacturing, oil and gas, the airlines and shipping
sectors. The stronger growth in consumption imports
would reflect the projected higher consumer
spending. The higher growth would also reflect the
low base in consumption imports in 2003 due to the
impact of SARS.
The large surplus in the goods account will be more
than adequate to finance the net payments in the
services, income and current transfers accounts. The
services account deficit is envisaged to narrow to
3% of GNP, reflecting mainly the expected
improvement in performance of the tourism sector.
Earnings from the export of education and
healthcare services are expected to be higher with
improved quality of services and closer collaboration
between the Government and the private sector in
export promotion. Port earnings are expected to


96
increase in line with the increase in transhipment
cargo, while freight income is expected to improve
following the capacity expansion by Malaysian
shipping companies and airlines. The higher
volume of trade and increases in freight rates are
also expected to lead to higher payments for
transportation. Gross receipts in the other services
account are expected to increase in line with the
increasing trend in export of ICT products and
services such as software and business process
outsourcing services. The tax incentives for
Operational Headquarters and International
Procurement Centres and the widening of the
range of activities to include research and
development, design, marketing, distribution,
quality control, testing, labelling and packaging
that can be undertaken in free industrial zones or
licensed manufacturing warehouses are expected
to encourage higher export of value added
services.
The income account deficit is projected to be
sustained at 6.3% of GNP, reflecting higher profits
and dividends accruing to multinational companies
(MNCs) from their investments in Malaysia. The
projected larger outflow in investment income is
due to the strong export performance by the
electronics industry as well as other export-
oriented industries. Given the favourable
international outlook, profits and dividends
accruing to Malaysian companies investing abroad
are also expected be on an upward trend.
The financial account is expected to improve on
the back of continued long-term capital inflows,
especially higher foreign direct investment (FDI). As
reflected in higher approvals granted by MITI in
2003, FDI inflows are expected to remain sizeable
with the implementation of major projects in the
manufacturing sector. The bulk of the FDI in the
manufacturing sector is expected to be in the form
of reinvestment by the MNCs for capacity
expansion in view of the strong upturn in
electronics demand as this sector was already
operating at near full capacity in 2003. The
services sector is expected to continue to be a
major recipient of new FDI inflows, especially in
areas such as logistics, distribution and
manufacturing-support services in view of the
strong linkages between the growth of
manufacturing and services sectors. Meanwhile,
foreign investment in the oil and gas sector are
likely to pick up on prospects of more
joint-venture agreements with the national
oil company.
Malaysia’s overseas investment is likely to remain
significant. These overseas investments will
continue to be broad-based and channelled into
the oil and gas, services and manufacturing
sectors. These funds are likely to be targeted at
both developing and developed countries in the
form of acquisitions and new investments to
provide greater synergy to their operations in
Malaysia.
MONETARY POLICY IN 2004
Prospects for the global economy in 2004 have
turned more favourable. Against the more broad-
based growth in the industrial countries and
stronger regional economies, the Malaysian
economy is expected to grow at a faster pace of
6-6.5% in 2004. The firm recovery in export
demand would further reinforce sustained growth
in domestic demand. The increasing level of
consumer and business confidence should lead to
stronger private sector activities and further
consolidation in fiscal expenditure. Notwithstanding
rising aggregate domestic and external demand,
Table 3.7
Exports and Imports
2003p
2004f
RM billion
Gross exports
398.9
443.3
(% change)
11.5
11.1
Manufactures
327.0
366.3
(% change)
8.2
12.0
of which:
Electronics
167.6
192.3
(% change)
6.3
14.7
Electrical products
55.9
60.8
(% change)
1.9
8.7
Chemical & chemical products
21.2
23.6
(% change)
23.3
11.3
Minerals
29.8
30.3
(% change)
33.1
1.8
Agriculture
33.7
36.7
(% change)
28.1
8.8
Gross imports
317.7
366.8
(% change)
4.8
15.4
Capital goods
43.5
49.0
(% change)
0.7
12.7
Intermediate goods
233.0
269.1
(% change)
6.4
15.5
Consumption goods
18.9
22.6
(% change)
1.1
19.9
p Preliminary
f
Forecast
Source: Department of Statistics, Malaysia and Bank Negara Malaysia


Outlook and Policy
97
the existence of excess capacity and ongoing
capacity expansion allow for the increase in
demand and output to be met without creating
pressures on supply and prices.  Conditions of
continued low inflation provide flexibility for
monetary policy in 2004 to continue to be
supportive of the stronger growth momentum.
With the investment cycle in its early stage, a low
interest rate environment remains important to
reinforce the private sector-led expansion, while
providing flexibility for fiscal consolidation and
strengthening growth.
Inflation risks for Malaysia remain low, as the
economy is operating in an environment of excess
capacity. Stronger economic expansion in 2004 is
expected to narrow the output gap in some sectors
money market.  As in 2003, the Bank will rely on
market-determined instruments and direct
borrowings in its conduct of liquidity operations.
The overall policy thrust is to ensure a stable and
predictable environment to support business
expansion.  Over and above this, the objective of
monetary policy will also aim at improving the
efficient flow of credit to productive investments in
sectors and industries that have the potential to
raise the overall output and competitiveness of the
Malaysian economy.
Going forward, risks and uncertainties remain. The
twin deficits in the US and global current account
imbalances continue to pose risks, such as
disruptive global capital flows and exchange rate
volatilities causing large changes in relative prices
With low inflation and growth in early cycle, the thrust of
monetary policy in 2004 will continue to be directed at sustaining
the growth momentum. The low interest rate environment will
continue to provide support for private sector-led expansion.
while new investments will add on to output
potential.  With stronger recovery in demand and
the return of business confidence, signs of a revival
in business investment have emerged, with the
expansion in capacity taking place in sectors
experiencing high capacity utilization.  Meanwhile,
intense competition in the product market has
induced producers to increase efficiency in the use
of capital, labour and technology to contain costs.
The intense competitive pressure has moderated
wage increases while driving high productivity
growth.  Overall, stepped up capital investment
and ongoing productivity improvements together
with low inflation abroad would contribute to
sustaining low inflation.  The absence of
inflationary expectations has accorded greater
flexibility for interest rates to continue to remain
low to ensure growth is soundly entrenched.
Stronger economic growth, a large surplus in the
current account of the balance of payments and
some capital inflows create challenges for the
Central Bank to manage liquidity to maintain
stable conditions in the money market.  New
liquidity is expected to emanate from the strong
export performance and continued inflows of
long-term capital. Given these expansionary
influences on domestic liquidity, monetary
management in 2004 will actively balance excess
liquidity to maintain stable conditions in the
that affect the pace and spread of global economic
recovery. Global growth in the short term is still
heavily dependent on the growth in the US despite
stronger growth in the Asian region. These factors
could affect the consumer and business sentiments
and disrupt the momentum of global and regional
growth. The challenge to monetary policy
therefore would be to respond proactively to
emerging signals of impending developments in
the macroeconomic conditions. In this regard,
Malaysia enjoys a high degree of freedom for
flexible responses and more importantly, monetary
policy continues to have significant room to
manoeuvre to cushion the impact of possible
adverse external circumstances on domestic
economy.
The Monetary Policy Statement (MPS), which was
first released in August in 2003, will continue to
be issued on a quarterly basis together with the
announcement of the GDP data. This is part of the
Bank’s continuing effort to provide comprehensive
information to the public on the Bank’s policies.
The issuance of the MPS would provide a direction
of the Bank’s policy intent and thus contribute
towards stable and efficient conditions in the
financial markets.  It represents another
mechanism to fulfil its objectives of maintaining
monetary and financial stability to achieve
sustained long-term growth.


98
FISCAL POLICY IN 2004
The 2004 Budget was formulated at a time when the
outlook for the global growth was improving and
domestic private sector demand gaining strength.
Prospects of improved business and consumer
confidence were expected to pave the way for the
public sector to moderate its expansionary influence
and the private sector to take the lead in driving
growth. The Budget strategies announced on 12
September 2003, therefore, aimed at enhancing the
macroeconomic fundamentals and ensuring a more
broadly balanced economic structure with new
domestic economic activities contributing towards
sustainable longer-term growth. The thrust of the
Budget strategies, therefore, focused on facilitating
the private sector to assume its lead role as the
engine of growth, while engineering a gradual cut-
back in expenditure.  Against this background, the
overall financial position was budgeted to register a
smaller deficit of RM13.8 billion or 3.4% of GDP in
2004, after factoring in the potential net revenue loss
arising from the tax changes introduced in the 2004
Budget.
In a recent review of the 2004 Budget, it was
estimated that tax revenue collection for 2004
projected in the Budget could be on the high side,
given the lower actual tax collection for 2003.
Notwithstanding the downward revision in revenue
collection, it was deemed appropriate to maintain the
Federal Government development expenditure
(excluding contingent reserves) as budgeted in
September 2003. Development expenditure was
already scaled down to be significantly lower, a decline
of 21.1% to RM30 billion from estimated expenditure
of RM38 billion in 2003.  With the revision to revenue,
the fiscal deficit for 2004 is expected to be 4.5% of
GDP
, against the fiscal deficit of 5.3% registered in
2003.  While the pace of deficit reduction is more
gradual, the objective of fiscal consolidation remains
on track. Given the ample liquidity in the financial
system, the bulk of financing would continue to be
raised from the domestic market with no risk of
crowding out private sector financing. Recourse to
external borrowings will be determined mainly by the
need to establish international market presence and
for benchmarking purposes.
While development expenditure would be lower,
emphasis would be on improving productivity and the
delivery systems of the government to reduce the cost
of doing business and to support private sector
investment and initiatives.  Development expenditure
during the year would be targeted at enhancing the
longer-term productive capacity and competitiveness
of the economy.  The changing composition of fiscal
spending is expected to generate higher multiplier
effects on the economy. Given these strategies, the
decline in public sector demand is projected to be
marginal in 2004 (-0.4%), while private sector
demand is expected to show a stronger growth. The
private sector is expected to contribute 4.9 percentage
points to real GDP growth.
In terms of budget allocation, emphasis would
continue to be given towards enhancing the quality of
education and manpower skills. Special attention
would be directed towards modernising and nurturing
the agriculture and rural sectors to position them as
significant growth-generating sectors of the economy.
Priority would also be placed on the implementation
of programmes to improve the socio-economic well-
being of Malaysians, especially those in the lower
income group.
The 2004 Budget measures contained wide-ranging
tax and non-tax incentives directed at accelerating
growth in new growth industries; reducing the cost of
doing business; and increasing innovation through
higher research and development activities to enhance
the ability of companies to compete internationally. In
order to promote private sector activities, focus
continued to be placed on the development of small
and medium-sized enterprises (SMEs). Measures
implemented included raising the threshold for
chargeable income subjected to a corporate tax rate
of 20% from RM100,000 to RM500,000,
establishment of a SMEs debt restructuring committee
and enhancement of the size of micro-credit schemes
by RM1 billion. Other measures proposed to spur
further domestic-led growth included various schemes
to more aggresively promote Malaysian products,
establishment of a one-stop agency to promote the
services sector and tax incentives and financing
schemes to further modernise the agriculture sector
and promote investments in related downstream
activities.
The 2004 Budget also contained various tax
measures to reduce the cost of doing business.
Measures included allowing deduction on
entertainment expenses incurred in sales promotions;
reducing or abolishing import duties of selected
goods such as computer batteries, wooden and
plastic goods; as well as reducing or abolishing
export duties on several agricultural produce and
commodities.


Outlook and Policy
99
FINANCIAL SECTOR POLICY IN 2004
The policy thrust in 2004 will continue to focus on
building capacity of domestic financial institutions
and enhancing the resilience and stability of the
financial sector while ensuring that all sectors of the
economy continue to have adequate access to
financing. Attention is also given to strengthening
the framework for consumer protection and
promoting greater consumer awareness on banking
and insurance products and services.
The benchmarking exercise, initiated in 2000, which
enables banking institutions and insurance companies
to measure their performance by highlighting
operational and strategic opportunities as well as areas
for strategy building and skill enhancements will be
further refined.  Regular dialogues with the board and
senior management of banking institutions will
continue to be held to discuss on performance, trends
and issues that may have impact on the
competitiveness and overall strength of their
respective institutions. Another area of focus is on
improving the service quality of the banking
institutions and insurance companies. The findings
from the nationwide customer satisfaction survey that
was conducted in 2003 will be discussed with the
industry and strategies at the industry and institutional
level will be formulated to elevate quality of service.
It is also expected that a number of domestic
commercial banks will merge with their finance
company subsidiaries with the coming into force of
the amendments to the Banking and Financial
Institutions Act 1989 allowing for such mergers.
Domestic banking groups could improve operational
efficiency by reaping higher economies of scale and
enhance access to banking and finance companies
business nationwide. The framework for creation of
investment banks is also expected to be finalised in
2004. The framework would enable the investment
banks to undertake the whole range of capital
market activity under one entity, including equity
brokerage business.
Initiatives to strengthen the capacity of domestic
banking institutions will be complemented by
enhancement to prudential regulations as well as a
more comprehensive surveillance infrastructure.  On
the prudential front, efforts would be focused on the
formulation of a comprehensive framework to
regulate and supervise group structures involving
financial conglomerates as well as to improve
capability and expertise of the banking institutions
and the supervisors to meet the challenges in
implementing the new Basel Capital Accord. The
surveillance infrastructure will be enhanced to
provide early warning signal on any imbalances in the
financial sector.
As the banking sector remains the main source of
financing in the economy, initiatives would be taken
to further improve access to financing by all
segments of the economy. Focus would be towards
strengthening existing infrastructure to enhance
access to financing by the SMEs. Initiatives to
encourage consumer activism and enhance the
consumer protection framework would remain a
priority. The Financial Mediation Bureau (FMB),
would be established during the year. This is a one-
stop centre to provide customers with avenue of
legal redress against all financial institutions to deal
with their grievances on banking institutions,
insurance companies, development financial
institutions under Bank Negara Malaysia supervision
and payments system operators. A framework to
improve the level of transparency and disclosure on
all retail financial products offered by the banking
institutions to facilitate a more effective and well
informed decision making by customers would be
introduced during the year. To further strengthen
the consumer protection framework in an
increasingly market-oriented financial system, the
legislation that will introduce a deposit insurance
system in Malaysia is expected to be tabled before
Parliament in 2004.
Bank Negara Malaysia is also mandated to ensure
that the payment systems and instruments in the
country are safe and efficient and that there is
continued public confidence in the use of payment
instruments.  This would entail mitigating risks in the
financial system, promoting efficiency of the
payment systems, enhancing security features of
payment systems and instruments as well as
exercising oversight over such systems and
instruments. In addition, Bank Negara Malaysia will
encourage and educate consumers to avail
themselves of the wide variety of electronic payment
facilities and products in line with the move towards
a cashless society.
In the Islamic banking sector, key policy thrusts in
2004 will continue to focus on enhancing the
effectiveness and efficiency of the Islamic banking
system as an enabler of economic growth and
development. The policy thrusts in 2003 to
strengthen the financial infrastructure, enhance the


100
regulatory framework, strengthen the Shariah and
legal infrastructure as well as enhancing intellectual
capital development and consumer awareness will
continue to be pursued in 2004. In the development
of the financial infrastructure, the window
institutional structure of banking institutions
participating in the Islamic Banking Scheme would be
further strengthened to provide for the effective
regulation of Islamic banking operations based on its
unique characteristics.  The Islamic banking
landscape will also be transformed with the issuance
of up to three new Islamic banking licences to
foreign financial institutions in 2004.
To enhance the effectiveness of the Shariah
governance framework, Guidelines on the Shariah
Committee for Islamic banking institutions would be
introduced to delineate the roles and responsibilities,
qualifications and the terms of appointment of the
Shariah advisory body at Islamic banking institutions.
To support the sound and progressive development
of the Islamic banking industry, initiatives in
strengthening the legal infrastructure would continue
to be pursued in 2004. These initiatives include
expanding the scope of arbitration framework for
Islamic banking and finance cases, the review of the
Islamic Banking Act 1983 to strengthen the legal
framework for Islamic banking operations and the
finalisation of tax issues on Islamic banking and
finance under the Law Review Committee to accord
a neutral tax treatment between Islamic financial
products and conventional financial products.
Promoting financial soundness and building financial
resilience of the Islamic banking system will be
emphasised through the refinement of prudential
regulatory standards to incorporate specific features
of Islamic banking and enhancing market depth
through the introduction of variable rate financing
mechanism and the mudharabah and musyarakah
implementation framework as well as the
development of an Islamic reference rate.
Policy thrusts for development financial institutions
(DFIs) will be guided by the strategic directions set
out in the Financial Sector Masterplan.  The focus of
policy is to strengthen further the foundation on
which DFIs can operate efficiently and effectively,
through building the capacity of the DFIs and
providing the enabling environment for the DFIs to
operate efficiently and effectively. Emphasis will be
accorded towards ensuring DFIs remain committed
and focussed on mandated roles, to increase the
responsiveness of DFIs to the developmental
requirements, especially of the SMEs and identified
priority sectors. In addition, current initiatives to
enhance the capability and capacity of DFIs as
specialised institutions in providing advisory services
to their targeted clients, in particular, SMEs, would
continue in 2004.  This will be complemented with
initiatives to strengthen the risk management
practices of the DFIs.
Financial sector policies in 2004 will continue to
focus on strengthening the resilience, stability,
efficiency and effectiveness of the financial system to
ensure that the financial sector continues to play an
effective role in supporting economic growth as well
as meeting the nation’s social objectives. Efforts are
focussed not only on the creation of a sound and
resilient financial sector but also on capacity building
of the financial sector to elevate it to a higher level of
performance, efficiency and excellence.


Outlook and Policy
101
Report on SME Development Framework
In October 2002, an Inter-Ministry SME Steering Committee was formed to take forward the
recommendations by Bank Negara Malaysia contained in its report, Proposed Comprehensive Framework
for the Development of Small and Medium Enterprises (SMEs). The proposed framework outlines
recommendations for the creation of an enabling environment for development of SMEs across all
sectors of the economy. The proposals are aimed at strengthening the infrastructure for SME
development, building the capacity of the SMEs and improving their access to financing towards
increasing their capacity to contribute to the economy.
Strengthening the Infrastructure for SME Development
Since its inception, the Steering Committee has conducted assessments on the existing infrastructure
for SME development. The underlying objective was to identify areas of resource duplication among the
various Government ministries and agencies, and to address gaps in the existing infrastructure for SME
development. This undertaking involved: -
•
A review of the roles and responsibilities of the ministries and agencies involved in SME
development;
•
An assessment on the need to form a central coordinating body for SME development;
•
An evaluation of the feasibility of enacting an SME Law to coordinate efforts for SME development.
For greater focus and enhanced coordination, the Steering Committee proposed that a permanent
institutional framework be established in order to enhance the Government’s capacity and ability to
continuously promote the development of competitive and resilient SMEs across all sectors. Having a
formal structure dedicated to the development of SMEs would result in greater synergies and
synchronisation of efforts among the various stakeholders involved in SME development, while ensuring
that SME development issues across all sectors are appropriately identified and addressed.
Following the Steering Committee’s presentation of its recommendations to the Cabinet Committee for
National Competitiveness, the Government will establish a National SME Development Council. The
SME Council will function as the highest policy-making body to chart the future direction and strategies
for SME development and will be chaired by the Prime Minister. Membership to this high-level SME
Council will comprise Ministers from stakeholder ministries, as well as appointed representatives of
private sector organisations involved in SME development, with Bank Negara Malaysia serving as the
Secretariat.
Bridging the Gap
To further enhance the coordination and comprehensiveness of SME development, the Steering
Committee has embarked on several initiatives to address the gaps in the current infrastructure for
SME development: -
•
Establishment of a standard definition for SMEs across all sectors. Currently, the definition of an
SME varies amongst the various Government ministries and agencies based on their respective
criteria. Standardising the definition of SMEs within the national context will enable effective policy
setting to target sectors within the economy, facilitate the provision of technical assistance and
improve the channeling of financial benefits and other incentives under various policies. It allows for
the physical identification of SMEs at the micro-level, encourages the formation of SME associations
at the macro-level, and facilitates better articulation of the problems and prospects of the sector.
The standardisation of definition of SMEs will also support the collection of relevant and comparable
SME data for database-building purposes.


102
•
Establishment of a comprehensive national SME Database. The absence of a central database with
relevant SME and entrepreneurship statistics makes it difficult to gauge the present stage of SME
development, their operating conditions, financial viability and developmental needs. To cultivate
the potential of SMEs as a source of endogenous growth, and to facilitate informed policy decision-
making with regard to SME development, SME policymakers need to be able to measure, monitor
and evaluate the performance and contribution of SMEs to the nation’s overall economic growth
process. The availability of a comprehensive national SME Database will greatly assist in the process
of monitoring and evaluating the level of SME development, determining their development needs
and providing critical input for the formulation of development policies.
•
Formulation of a coordinated framework for the marketing and promotion of SMEs across all
sectors. The emphasis is on the overall marketing and promotion of SMEs in terms of products,
services, and the SMEs themselves. SMEs also need special assistance in the areas of product
development and improvement, design, packaging and branding of their products. The formulation
of a comprehensive and coordinated framework will ensure the efforts of the various stakeholders
are concerted towards assisting SMEs to penetrate new markets, increase awareness on branding
and intellectual property, enhance business networking, linkages and strategic alliances between
SMEs and other larger firms.


The Financial Sector
104-107
Sources and Uses of Funds of the Financial System
107-119
Management of the Banking System
110-111
White Box: The International Center for Leadership in Finance
119-122
Supervisory Activities
122-127
White Box: Banking Measures Introduced in 2003
128-140
Performance of the Banking System
141-149
White Box: Financial Sector Masterplan
150-151
White Box: The Proposed Deposit Insurance System in Malaysia
152-157
Other Financial Institutions
157-172
Financial Markets
164-165
White Box: Key Capital Market Measures in 2003
172-178
Developments in Payment and Settlement Systems
173-175
White Box: Payment Systems Act 2003
178-180
Malaysia’s Anti-Money Laundering and Counter Financing of 
Terrorism (AML/CFT) Programme 


104
SOURCES AND USES OF FUNDS OF THE
FINANCIAL SYSTEM
Total assets of the financial system expanded
significantly by 12.1% to RM1,564 billion in 2003 in
line with the improvement in overall economic
performance. As a share of GDP
, total assets of the
financial system increased to 399% of GDP
(2002: 386%).
Assets of both the banking system and the non-
bank financial intermediaries (NBFIs) expanded in
2003. Total assets of the banking system increased
by 13.2% (2002: 6.8%), while assets of the non-
bank financial intermediaries (NBFIs) grew by 8.4%
(2002: 8.6%). The bulk of the increase in assets
within the banking system was due to the stronger
growth in assets of the commercial banks. This
reflected mainly the increase in deposits with other
financial institutions (19.5%), investment in
securities (15%) and loans and advances (7.2%).
The growth in assets of the NBFIs was driven
principally by an expansion in the assets of the
provident, pension and insurance funds (+RM30.5
billion), which accounted for 65.1% of the increase
in the total assets of NBFIs.
During the year, the bulk of new resources was
contributed by deposits placed with the financial
The Financial Sector
Bank Negara Malaysia
12.8%
Commercial banks
40.3%
Finance companies
9.1%
Merchant banks
2.8%
Discount houses
1.9%
Development financial institutions
5.1%
Other financial intermediaries
5.8%
Life insurance funds
4.1%
General insurance funds
1.1%
Provident, pension
and insurance funds
22.2%
Other provident and pension funds
3.0%
Employees Provident Fund
14.0%
p Preliminary 
Graph 4.1
Assets of the Financial System as at end-2003p (% share)
Total Assets: RM 1,564.0 billion
institutions and contributions to the provident,
pension and insurance funds. Deposits mobilised by
the financial institutions grew at a higher rate of
11.8% in 2003, compared with 6% in 2002. The
banking institutions (comprising commercial banks,
finance companies, merchant banks and discount
houses) continued to be the largest mobiliser of
deposits in 2003, accounting for 71.1% of the
increase in deposits raised by the financial system in
2003 (2002: 83.5%) and 81.4% of total
outstanding deposits of the financial system as at
end-2003 (2002: 82.6%). The strong deposit
growth was due to improved economic conditions,
which resulted in higher disposable income and
financial wealth of households and business
enterprises.
In terms of holders, deposits were mainly held by the
non-financial private sector (comprising individuals
and business enterprises), which accounted for
71.2% of the total outstanding deposits as at end-
2003 (79.6% as at end-2002). The deposits of this
group grew by 16.6% in 2003, with higher deposits
by individuals (47.2% of total outstanding deposits).
In 2003, deposits of business enterprises also
increased significantly by 14.6% (2002: 2.7%), while
deposits by individuals grew at 7.7% (2002:6.9%).
As in previous years, fixed deposits continued to
account for the bulk of the increase in deposits


105
The Financial Sector
placed by the non-financial private sector, with
holders continuing to exhibit preference for
deposits with shorter maturities, given the smaller
Table 4.1
Assets of the Financial System
Annual change
As at
end-
2002
2003p
2003p
RM billion
Banking system
58.5
122.2
1,046.7
Bank Negara Malaysia
 12.5
38.6
200.8
Commercial banks1
33.2
66.7
629.6
Finance companies
8.9
11.3
142.0
Merchant banks
0.3
2.8
44.1
Discount houses
3.6
2.8
30.2
Non-bank financial intermediaries
42.6
46.8
517.3
Provident, pension and insurance
funds
27.0
30.5
347.7
Employees Provident Fund
15.2
18.0
220.2
Other provident & pension funds
4.5
1.5
46.2
Life insurance funds
6.7
9.8
64.1
General insurance funds
0.6
1.2
17.2
Development financial institutions2
11.1
6.7
79.1
Other financial intermediaries3
4.5
9.6
90.5
Total
101.1
169.0
1,564.0
1 Includes the Islamic banks (since 1999).
2 Includes Bank Simpanan Nasional (National Savings Bank), Bank Kerjasama
Rakyat Malaysia Berhad, Bank Pertanian Malaysia, Malaysian Industrial
Development Finance Berhad (MIDF), Borneo Development Corporation,
Sabah Development Bank Berhad, Sabah Credit Corporation, Export-Import
Bank Malaysia Berhad, Bank Pembangunan dan Infrastruktur Malaysia
Berhad, Bank Industri dan Teknologi Malaysia Berhad, Malaysia Export Credit
Insurance Berhad, Credit Guarantee Corporation Malaysia Berhad (CGC) and
Lembaga Tabung Haji (Pilgrims’ Funds Board).
3 Includes unit trusts run by Amanah Saham Nasional Berhad (ASNB) and
Amanah Saham Mara Berhad, cooperative societies, leasing and factoring
companies, venture capital companies and housing credit institutions
(comprising of Cagamas Berhad, Borneo Housing Mortgage Finance Berhad
and Malaysia Building Society Berhad).
p Preliminary
interest differentials between short- and longer-term
deposit rates.
Contractual savings with provident and pension
funds, as well as contributions to insurance funds,
continued to be one of the major sources of funds
for the financial system, expanding by 8.3% to
account for 19% of the total funds mobilised by the
financial system as at end-2003. Meanwhile, capital
and reserves of the financial system increased by
17.8% in 2003 (2002: +10.2%), reflecting
mainly improved financial performance of the
banking institutions.
The increase in the total resources of the financial
system in 2003 was invested mainly in loans and
advances and securities. Total loans and advances
grew by RM40.4 billion or 7.2% in 2003
(2002: RM35.2 billion or 6.7%). This development
was due mainly to increased demand from the
household sector, as reflected by the higher
demand for loans for the purchase of residential
property and consumption credit. In addition,
financing available to SMEs was also higher during
the year, with outstanding loans increasing by
Graph 4.2
Sources and Uses of Funds of the Financial  
System as at end-2003p (% share)
14.7%
10.0%
19.0%
10.6%
5.7%
25.2%
38.3%
3.1%
1.1%
45.4%
14.4%
1.9%
0.4%
10.2%
Capital and reserves
Currency
Deposits
Borrowings
Funds from other financial institutions
Pension, provident and insurance funds
Other liabilities
Currency
Deposits with other financial institutions
Bills
Loans and advances
Securities
Gold and foreign exchange reserves
Other assets
USES
SOURCES
p Preliminary 
Total: RM1,564.0 billion
Table 4.2
Sources and Uses of Funds of the Financial
System
Annual change
As at
end-
2002
2003p
2003p
RM billion
Sources:
Capital and reserves
12.6
24.0
158.8
Currency
1.8
2.3
29.4
Deposits
 36.3
74.8
709.4
Borrowings
9.7
3.1
48.0
Funds from other financial institutions1
2.3
18.0
88.9
Insurance and provident funds
23.0
22.7
297.1
Other liabilities
15.5
24.1
232.4
Total
101.2
169.0
1,564.0
Uses:
Currency
0.3
-1.1
6.3
Deposits with other financial
institutions
13.9
36.7
224.6
Bills
2.7
-2.2
16.7
Treasury
1.6
-2.1
3.5
Commercial
1.1
-0.1
13.2
Loans and advances2
35.2
40.4
600.8
Securities
24.0
51.2
393.4
Malaysian Government
0.9
19.9
124.3
Foreign
0.5
0.3
3.5
Corporate
21.2
32.3
259.0
Others
1.4
-1.3
6.6
Gold and foreign exchange reserves
14.0
38.6
166.1
Other assets
11.1
5.4
156.1
1 Includes statutory reserves of banking institutions.
2 Excludes loans sold to Danaharta.
p Preliminary


106
10% on annual basis, the highest growth
registered since July 2001.
Investment in securities by the financial system
continued to expand in 2003, recording a significant
increase of 15% in 2003 (2002: 7.5%). The bulk of
Table 4.3
Non-Financial Private Sector Deposits1 with the
Financial System2
Annual change
As at
end-
2002
2003p
2003p
RM billion
Deposits3 with:
Commercial banks
16.1
37.3
355.2
Finance companies
3.0
0.2
64.1
Merchant banks
0.2
2.4
13.9
Discount houses
3.2
2.3
10.7
Bank Simpanan National
0.7
0.2
8.3
Others4
0.1
6.6
29.9
Total
23.3
49.0
482.1
Demand deposits
5.9
13.5
77.5
Fixed deposits
9.5
17.8
300.0
of which:
Up to 1 year
15.5
14.3
258.1
More than 1 year
-6.0
3.5
41.9
Savings deposits
5.8
11.3
75.4
NIDs5
0.5
0.3
2.7
Repos6
1.6
6.1
26.5
1 Refers to deposits placed by business enterprises (excluding NFPEs) and
individuals.
2 Excludes provident and pension, insurance and unit trust funds.
3 Refers to demand, savings and fixed deposits, negotiable instruments of
deposits and repos.
4 Includes development financial institutions, cooperative societies and housing
credit institutions.
5 Refers to negotiable instruments of deposits.
6 Refers to repurchase agreements.
p Preliminary
Graph 4.3
Non-Financial Private Sector Deposits with the Financial System as at end-2003p (% share)
p Preliminary 
By Institutions
Total Deposits: RM482.1 billion
By Types of Deposits
Total Deposits: RM482.1 billion
Finance companies
13.3%
Merchant banks
2.9%
Discount houses
2.2%
Bank Simpanan Nasional
1.7%
Others
6.2%
Commercial Banks
73.7%
Demand deposits
16.1%
Savings deposits
15.6%
NIDs
0.6%
Repos
5.5%
Up to 1 year
53.5%
More than 1 year
8.7%
Fixed deposits
62.2%
the increase was in equities and reflect improving
optimism and opportunity for high returns in the
equity market. Provident, pension and insurance
funds continued to be the main investors in
securities, accounting for 51.4% of the increase in
investments in securities. Meanwhile, gross holdings
of gold and foreign exchange reserves also recorded
a significant rise of RM38.6 billion or 30.3% in 2003
(2002: RM14 billion or 12.3%), on account of larger
foreign exchange inflows generated from the large
trade surplus, short and long-term capital inflows,
and unrealised revaluation gains on reserves.
Table 4.4
Direction of Credit1 to the Non-Financial Private
Sector
Annual change
As at
end-
2002
2003p
2003p
RM billion
Loans and advances
20.8
31.2
563.1
Agriculture
0.0
-0.4
13.6
Mining and quarrying
-0.2
0.1
1.1
Manufacturing
0.1
0.9
55.8
Construction and real estate
-1.5
4.4
80.9
Purchase of residential properties
17.1
16.8
147.8
Retail, wholesale, restaurants
and hotels
2.3
-0.3
21.0
Transport, storage and
communications
1.3
0.5
14.7
Business services
-2.6
1.7
21.6
Consumption credit
0.1
10.1
96.4
Purchase of shares
0.1
-1.7
19.3
Others
4.1
-0.9
90.9
Investments in corporate securities
48.1
2.1
259.0
Total
68.9
33.3
822.1
1 Excludes credit to non-financial public enterprises.
p Preliminary


107
The Financial Sector
p Preliminary 
Graph 4.4
Direction of Credit to the Non-Financial Private Sector as at end-2003p (% share)
Total Credit: RM822.1 billion
Mining and quarrying 0.1%
Agriculture 1.7%
Manufacturing 6.8%
Construction and real estate 9.8%
Purchase of residential property 18.0%
Retail, wholesale, hotels and restaurants 2.6%
Transport, storage and communications 1.8%
Business services 2.6%
Consumption credit 11.7%
Purchase of shares 2.3%
Others 11.1%
Investment in  
corporate securities
31.5%
Loans and advances
68.5%
MANAGEMENT OF THE BANKING SYSTEM
The thrust of banking policies in 2003 continued to
focus on enhancing the efficiency and
competitiveness of the domestic banking institutions
while reinforcing the resilience of the banking system
to preserve financial stability. Policies implemented
over the years to restructure and strengthen the
banking system, supported by improved economic
performance contributed to the strengthening of the
banking system in 2003. The risk weighted capital
ratio of the banking system remained above 13%
throughout 2003, while non-performing loans were
on a declining trend. This had enabled the banking
enhancing the foundations and environment for the
banking institutions to efficiently deliver quality
products and services, encouraging greater innovation
and maintaining financial stability. An important
strategy was to ensure that the banking system
continued to be a facilitator of growth, particularly in
providing financing and other ancillary services to the
small and medium enterprises (SMEs).
Progress of Financial Sector Restructuring
The financial sector restructuring that started during
the Asian financial crisis is virtually completed.
Following the closure of Corporate Debt
The design of banking policies in 2003 was aimed at enhancing
the foundations and environment of the banking institutions to
efficiently deliver quality products and services, encouraging
greater innovation and maintaining financial stability.
system to effectively support economic activities.
New loan approvals and disbursements expanded
strongly by 11.2% and 7.2% respectively, while total
outstanding loans grew by 4.8% in 2003. Overall,
financing provided by the banking system through
extension of loans and its holdings of private debt
securities expanded at an annual rate of 5.9%.
The completion of financial restructuring and stronger
balance sheets have enabled the banking institutions
to focus on harnessing their operational efficiency and
meeting the needs of their customers. In this regard,
the design of banking policies in 2003 was aimed at
Restructuring Committee in August 2002, another
important landmark in the financial sector
restructuring process in 2003 was the winding-down
of the operations of Danamodal Nasional Berhad on
31 December 2003, five years after its establishment
in 1998. During its operations, Danamodal injected a
total of RM7.6 billion into 10 banking institutions
affected by the Asian financial crisis, significantly
lower than the initial budget allocation of RM16
billion. Danamodal has recovered RM6.6 billion of
the capital investment, while the remaining RM1
billion capital in one institution is expected to be fully
divested in 2004. Prior to the winding-down,


108
Danamodal had redeemed its entire RM11 billion
5-year zero-coupon unsecured redeemable bonds on
21 October 2003. As at end-2003, Danamodal had
remaining assets of RM2.2 billion.
The timely establishment of Danamodal ensured the
success of the overall resolution of banking sector
problems arising from the Asian financial crisis. The
funds injected by Danamodal helped to increase the
capital of weak but viable banking institutions. With
the improved capital position, coupled with
operational restructuring, these institutions were
able to resume their lending activities. Danamodal’s
early action and strict adherence to the “first-loss”
principle where the existing shareholders absorbed
all the losses before the recapitalisation, has kept
the total cost of recapitalisation low, at
approximately 0.2% of GDP.
Danaharta, which completed acquiring non-
performing loans (NPLs) from the financial sector in
2001, has made significant progress in its recovery
operations. Of the RM52.4 billion adjusted loan rights
acquired in its portfolio, Danaharta expects to recover
RM30.6 billion over its lifespan, which translates into
an overall expected recovery rate of 58%. As at
end-2003, RM22.4 billion or approximately 73% has
been collected, of which RM19 billion has been
converted into cash, whilst the rest are still in the form
of non-cash assets, namely restructured loans,
securities and properties. The remaining expected
recoveries totalling RM8.2 billion is still pending
implementation of the respective recovery strategies.
In 2003, Danaharta has cumulatively distributed
recoveries amounting to RM13.4 billion in cash and
66,472,441 units of securities to the Government and
36 financial institutions. The distribution to the
financial institutions is done in respect of the 80:20
surplus recovery sharing agreement between the
financial institutions and Danaharta.
Given the progress of its operations and the
commendable recovery rate achieved, Danaharta
has paid in full, its RM1.3 billion loans from
Khazanah Nasional Berhad and Employees’
Provident Fund by June 2003, earlier than
scheduled. In addition, Danaharta has also
successfully redeemed the first two tranches of
zero-coupon bonds with a total face value of RM2.6
billion on 31 December 2003. The remaining 13
tranches, with a total face value of RM8.5 billion,
would be maturing in every subsequent quarter up
to 31 March 2005. As at end-2003, Danaharta has
cash and cash equivalents amounting to RM5.9
billion. With its existing financial position and the
remaining assets to be recovered, Danaharta is in
the position to redeem its remaining bonds of
RM8.5 billion without having to call upon the
Government guarantee.
Thrust of Policy Measures in 2003
The main thrust of policy measures in 2003 was the
continuation of efforts to strengthen the capability
and capacity of domestic banking institutions. In
particular, efforts to enhance the efficiency and
competitiveness of domestic banking institutions
were further intensified during the year, with
particular focus on harnessing human capital in the
banking institutions. These initiatives were
complemented by measures taken to safeguard
financial stability.
Given the importance of financing in ensuring
sustainable and balanced economic growth, the
thrust of policy in 2003 was also to ensure that all
sectors of the economy had adequate and continued
access to financing. Towards this end, policies were
directed at facilitating access to credit by developing
the financial infrastructure to meet the financing
needs of various sectors of the economy, particularly
the SMEs which are important in generating
domestic investment and growth. In addition, a
microfinancing programme with an extensive
outreach was established during the year for
microenterprises.
The growing sophistication of the financial markets
and products requires consumers to have greater
Table 4.5
Danaharta: Loan Recovery as at 31 December 2003
Adjusted loan
Expected
rights acquired1
recovery rate
(RM billion)
(%)
Acquired Managed Acquired Managed
NPLs
NPLs
NPLs
NPLs
Plain loan restructuring
2.2
5.5
62
87
Settlement
2.7
6.7
89
78
Schemes of arrangement
2.9
6.9
66
77
Schemes under Special
Administrators
2.5
2.9
51
35
Foreclosure
9.9
4.5
28
46
Others
1.7
3.0
60
53
Legal action
0.2
1.0
-
-
Total
21.9
30.5
49
66
Overall
52.4
58
1
Comprising total loan rights acquired of RM47.7 billion and accrued interest
of RM4.7 billion.
Note: Total may not add-up due to rounding.
Source: Pengurusan Danaharta Nasional Berhad.


109
The Financial Sector
awareness and understanding of banking products
and services, so that they can make well-informed
financial decisions. In this regard, the framework for
consumer awareness and protection was further
strengthened in 2003. The work on this area is
aimed at laying the foundation for a more
competitive operating environment and where
banking consumers will be able to make well-
informed decisions and be fully responsible for their
decisions.
Enhancing Domestic Capacity
In a more competitive environment, domestic banking
institutions need to be aware and understand the
drivers of performance to meet consumer demands in
an effective and efficient manner. More importantly,
the banking institutions need to be in a position to
provide high quality services at competitive prices to
benefit the overall economy. Against these objectives,
Bank Negara Malaysia continued to accord priority
towards strengthening the capability of domestic
banking institutions as well as improving the efficiency
of the overall banking system. After three years, the
capacity building efforts is showing positive results,
with the domestic banking institutions improving not
only their financial performance but equally important,
their quality of services and product innovativeness as
well as increasing usage of technology in delivering
products and managing risks.
To gauge the level of service quality of the banking
institutions, Bank Negara Malaysia implemented a
4-year programme to assess the requirements,
expectations and satisfaction level of consumers on
the quality of the products and services provided by
banking institutions and insurance companies. As
part of the programme, a nationwide survey was
conducted in 2003 involving 5,000 banking and
insurance customers, comprising individuals, SMEs,
large corporations and multinationals. The survey
covers various aspects of banking products and
services, both conventional and Islamic banking, as
well as insurance and takaful products and services.
The analysis of the survey result will provide a
snapshot of the current level of customers’ needs
and satisfaction, and highlight the areas for
improvement to enhance the level of customer
service in the banking and insurance sectors.
The domestic banking groups are also concentrating
on maximising the benefits of consolidation,
particularly through rationalising and streamlining
their internal operations and improving operational
efficiency. This had led to the offering of a broader
range of financial products and services to meet
various customer needs under one roof. Towards this
end, an important policy initiative in 2003 was the
amendment to the Banking and Financial Institutions
Act 1989 to allow the merger of commercial bank
and finance company within a domestic banking
group into a single legal entity. This single entity will
hold two licences, one to carry on banking business
and the other to carry on finance company business.
This change in the legal framework provides an
opportunity for the banking groups to further
improve their group structure and rationalise their
operations, and thus enhancing their efficiency.
As a service provider, the banking institutions rely
significantly on human intellectual capital. At the top
level of the management, highly skilled senior
managers are vital to drive the strategic direction and
position the banking institutions to maximise
opportunities presented by the continuously evolving
financial landscape. At the same time, staff with
appropriate skills at all levels of the institution is
necessary to implement the business strategies as
well as realise the improvements in business
processes and systems. As the business environment
and consumer demands are constantly evolving,
continuous upgrading of skills of staff is necessary.
Recognising this, Bank Negara Malaysia initiated two
important measures to provide avenues for
continuous learning for the banking institutions to
utilise in order to strengthen the competency of their
staff. The establishment of the International Centre
for Leadership in Finance (ICLIF) was aimed at
achieving this objective, to accelerate the
development of skilled leaders of financial institutions
and corporations. Towards this end, ICLIF is working
with renowned international business schools and
leading institutions to provide executive management
programmes tailored to developing leadership
capability and leaders in the financial services sector.
Equally important is the need to provide an avenue
for the other levels of staff in the banking
institutions to continuously upgrade their skills and
expertise in the face of evolving financial market
conditions. Increasingly, staff in banking institutions
need to possess specialised skills, particularly in the
areas of risk management, credit assessment and
system development. Towards this end, work has
been initiated to reposition the Institut Bank-Bank
Malaysia (IBBM) to continuously meet the learning
needs of the middle managers, executives and non-
executives of banking institutions. In addition,


110
The International Centre For Leadership In Finance
The financial sector has a vital role in promoting growth and economic transformation towards a more
diversified economic structure. These aspirations on the financial sector formed the main thrusts of the
Financial Sector Masterplan (FSMP), a ten-year plan that was launched in 2001 to develop a more resilient,
competitive and dynamic financial sector with best practices that supports and contributes positively to the
growth of the economy. In the first phase of the FSMP
, efforts are focused on enhancing the capability and
capacity of the domestic financial institutions to face the challenges in the changing and more demanding
economic and financial environment. This is vital in ensuring that the domestic financial institutions become
more innovative, technology-driven and strategically more focused, and able to compete effectively and
efficiently, thereby remaining relevant and meeting the changing needs of the economy.
As the financial services sector becomes increasingly more complex and competitive, financial institutions
need to make the necessary adjustments to become more productive and innovative in order to meet the
greater demands from businesses and individuals and remain competitive. In this respect, the quality of
human resource and leadership capability in the financial sector becomes increasingly crucial in defining
the success of the institutions. The training needs of middle management and staff of financial
institutions are well served by learning institutions such as Institut Bank-Bank Malaysia (IBBM) and
Malaysian Insurance Institute (MII). To complement this, there is a critical need for avenues for leaders and
senior management of financial institutions to pursue continuous training, particularly in strategic and
leadership management, and thereby drive the strategic direction of the institutions and transform the
institutions into high-performing organisations. For this, requisite leadership skills for the changed
environment require continuous learning. This includes having the ability to create a culture of high
performance within the organisation to drive the institution towards excellence and contribute towards
the long-term growth of the institution and the financial sector as a whole. The leadership needs to be
able to identify and capitalise on new emerging opportunities so that they can adapt rapidly to changes
and maximise on the opportunities presented by the changing environment. This was the motivation for
developing the infrastructure for high-level training for top management of organisations to create a high
quality human resource pool of top management for the financial sector and corporations.
Bank Negara Malaysia established the International Centre for Leadership in Finance (ICLIF) with the
objective of providing a focused and coordinated approach towards the development of world class leaders
in the financial and business sectors in Malaysia and the region. ICLIF was officially launched on 28 October
2003 and is established as a company limited by guarantee with a trust fund of RM500 million
(USD132 million), whereby the income generated from the fund will be utilised to finance the operations of
ICLIF. The establishment of ICLIF represents one of Bank Negara Malaysia’s contributions in providing an
avenue for top management of financial institutions and corporations to seek continuous learning whilst
having the opportunity to network, participate in shared learning experiences and able to form strong
alumni contacts. In this connection, the mandate for ICLIF is to develop excellence in leaders with regional
insights by providing learning opportunities and experience through effective development programmes.
ICLIF also strives to serve the needs of the financial institutions in the region and thus, complements efforts
in promoting Malaysia as a regional training centre of excellence for the financial services sector.
As ICLIF aims to accelerate the development of intellectual capital and managerial capabilities of senior
management of financial institutions and corporations, it adopts a multi-disciplinary approach and offers
programmes on strategic management as well as those that are relevant across the whole spectrum of
the financial services industry, covering banking, insurance and Islamic financial industry. ICLIF aims to
take a proactive approach in identifying the needs of the industry, which then serve as input in designing
the programmes. ICLIF’s planned programmes are divided into three broad categories:


111
The Financial Sector
•
Structured executive management programmes, in the areas of strategic management, customer and
marketing management, people management, business technology and knowledge management,
and risk management;
•
Seminars and workshops on topical issues, as well as providing a platform for the top management of
financial industry and corporations, regulators and academicians to discuss current economic and
financial issues; and
•
Specialised programmes in Islamic financial services and other specialist areas.
A distinctive feature of ICLIF is the strategic alliances it has formed with renowned international business
schools and learning institutions to provide programmes that are adapted to the regional context and to
the needs of the financial industry and corporations. Through these partnerships, ICLIF has entered into
arrangements with a number of international business schools to design and deliver structured executive
management programmes at ICLIF. The strategic partners provide the resource persons for the
programmes while ICLIF provides the necessary infrastructure and facilities. This approach will enable the
participants to have access to high quality management programmes at reasonable cost and thereby
provide greater opportunities for the leaders from the financial and corporate sectors to benefit from
world-class knowledge sharing and networking.
As part of achieving these objectives, ICLIF has developed a unique leadership competency model to
analyse and understand competencies that are necessary towards the development of excellent
corporate leaders in the regional context. These skills and behaviours will form the foundation in the
design and delivery of ICLIF’s leadership development learning programmes. One of these programmes
is the Global Leadership Development Program (GLDP), which is ICLIF’s flagship programme. The GLDP
represents ground-breaking design in terms of an executive education programme by drawing faculty
from leading learning institutions and consultants, which enables ICLIF to combine the best ideas and
thoughts on the various key leadership issues and concerns. These participating institutions and
consultants are the Peter F. Drucker Graduate School of Management-Claremont Graduate University,
Marshall School of Business-University of Southern California, Stanford Graduate School of Business
and Tower Perrins. The GLDP primarily focuses efforts on developing the best leaders across industries
by combining an optimal mix of theory and practical application in its leadership development
techniques. The programme also provides an opportunity for the participants to strengthen their
networking circle and participate in shared learning experiences and discussions with leaders of other
organisations. The GLDP will be held twice a year and comprise three parts, with Part 1 and 2
conducted in Malaysia while Part 3 comprises a focused two-week study programme to the United
States of America to provide a unique experience for the participants to be exposed to the best
learning institutions and corporate organisations in the United States of America. The first GLDP was
held from 9 to 13 February 2004 and attended by 20 top management of financial institutions and
corporations in Malaysia and from the region.
ICLIF is governed by its own Board of Directors, with the Governor of Bank Negara Malaysia as its
Chairman. In addition to the Board of Directors, ICLIF also has an Advisory Council, comprising eminent
persons from Malaysia and abroad, to provide strategic direction on training matters and the
development of high quality programmes. It evaluates the learning needs of the financial services and
corporate sectors in the region in developing programmes that meet the objectives of ICLIF.
The establishment of ICLIF aims to reinforce the notion that investments in human capital, including the
pursuit of leadership excellence, is a continuing process in this ever-changing environment. ICLIF will
therefore be focused on making positive contributions towards developing excellent leaders and become
a regional centre of excellence for leadership training in finance.


112
IBBM, as a training provider, aims to complement
professional institutes, universities and management
consultancy firms. Thus, to remain effective as a
premier training provider for the financial sector,
IBBM is giving priority to two broad areas, namely
provision of focused training and accreditation,
particularly in the specialised areas, and to act as an
effective training adviser to the banking institutions.
To achieve this objective, IBBM has developed
several broad strategies, which include building a
new education and qualification portfolio,
improving the institutional structure to support
future requirements and building capacity to deliver
specialised courses.
Another initiative pursued to strengthen the
banking institutions is the setting up of investment
banks. Policy proposals have been developed with a
view to place the new institutions in a stronger and
more competitive position vis-à-vis the regional and
global players. At the same time, a prudential
regulatory framework is being formulated, taking
driven by the low interest rate environment and
improved economic outlook, was effectively met by
the banking institutions.
There has been a marked shift in the lending
pattern of the banking institutions to the household
sector and small businesses. The share of loans to
the household sector has increased from 33.4% at
end-1997 to 48.7% at end-2003. This shift in
lending pattern has supported the growth in private
consumption and has positive spillover effect on the
other sectors of the economy. From the financial
stability perspective, the shift towards high-volume
low-value loans also diversifies the distribution of
credit risks within the banking system, minimising
the potential occurrence of large losses stemming
from the failures of a few large borrowers. At the
same time, Bank Negara Malaysia is mindful that a
continuous build up in household debts that is not
accompanied with an increase in the level of
household income could affect the sustainability of
the debt servicing capacity of the household sector
To promote endogenous sources of growth, attention was
directed at providing improved access to financing by SMEs.
into consideration existing regulations, the different
nature of the new institution and international
regulatory frameworks for comparable institutions.
This includes the envisaged structure for the
investment banks and their permissible activities.
Central to this is defining the appropriate capital
and liquidity frameworks that seek to converge the
manner in which risks are measured under the
existing frameworks. The capital and liquidity
frameworks are being formulated to best reflect the
nature of risks to be undertaken by the new
institution in order to give a fair representation of
the solvency position and risks undertaken by
investment banks.
Ensuring Continuous Access to Financing
With policy priority being accorded to generate
domestic sources of economic growth, access to
financing is critical to promote and sustain both
private consumption and investment. As the banking
system remains the largest provider of funds in the
economy, policy initiatives during the year were
directed at ensuring that the lending activities of the
banking system were supportive of economic growth
as well as facilitating access to financing to all sectors
of the economy. Indeed, the increased demand for
loans from both the household and businesses,
with destabilising effects on the banking system.
Bank Negara Malaysia has in place a surveillance
mechanism to monitor the banking system’s
exposure to the household sector and the debt
servicing capacity of the household sector. The
exposure to the household sector has thus far
remained within prudential levels. With rising
income levels, the household sector in Malaysia has
continued to accumulate net financial savings, as
reflected in higher accumulation of deposits against
debt accumulation. In addition, while the level of
NPLs for the household sector has increased, the
NPL ratio has remained at manageable levels.
Equally important is the ability of the banking
institutions to manage these risks. Since the crisis,
the banking institutions have enhanced their risk
management infrastructure and capabilities to
better cope with the changing risk profile of their
assets. This was further reinforced with the
availability of complete positive and negative credit
information of all borrowers in the banking system
on a real time basis provided by the Central Credit
Reference Information System.
In line with the policy priority of strengthening the
support to SMEs to promote endogenous sources
of growth, particular attention was directed at
providing improved access to financing by SMEs.


113
The Financial Sector
Although the Government, through various
ministries and agencies, have established various
financing schemes, it was evident that the
awareness among SMEs of these schemes was
low. To address this, Bank Negara Malaysia
established the SME Special Unit in May 2003 to
assist SMEs to obtain information on the various
financing schemes available to them and to
provide financial advisory services. In addition, the
SME Special Unit also assists in facilitating SMEs
in their loan application process. As at end-2003,
the Unit has received 1,789 enquiries from SMEs,
of which 82% were enquiries on sources of
financing, whilst the remainder was related to
problems on access to financing and requests for
loan restructuring. While the Unit strives to assist
viable SMEs, SMEs themselves need to ensure
satisfactory financial records are maintained to
facilitate the process.
One of the problems faced by SMEs is the existing
NPLs, which constrained their ability to obtain
new loans despite having on-going and viable
businesses. Bank Negara Malaysia has, therefore,
established a small debt resolution mechanism in
October 2003 to support viable SMEs that are
constrained by NPLs by facilitating loan
restructuring with their banks. A Small Debt
Resolution Committee (SDRC) has been
established to undertake independent
assessments on the viability of the businesses,
and propose the loan restructuring and assess
new financing requirements of the affected SMEs.
This mechanism is open to SMEs with on-going
businesses that have aggregate NPLs of not more
than RM3 million. As the debt restructuring may
involve new financing, Bank Negara Malaysia has
established the Rehabilitation Fund for Small
Businesses with an allocation of RM800 million.
As part of the efforts to enhance access to
financing, the Fund for Small and Medium
Industries 2 (FSMI2) and the New Entrepreneurs
Fund 2 (NEF2) were increased further. In 2003,
Bank Negara Malaysia provided additional
allocations of RM1.35 billion for FSMI2 and
RM650 million for NEF2. Consequently, the total
allocation of these two Funds increased to RM2
billion and RM1.15 billion respectively. Apart from
setting up special funds, Bank Negara Malaysia
also required the banking institutions to set their
lending targets to SMEs. Where the individual
institutions’ targets were deemed insufficient,
appropriate targets were imposed.
In addition, banking institutions have also
undertaken various initiatives to support SMEs in
obtaining financing. These initiatives include the
establishment of dedicated SME units, provision
of financial advisory services and display of client
charters. The display of the client charter by all
banking institutions enhances the efficiency of
loan approval process by disclosing the necessary
documentation for submission to the banking
institution to support the loan applications,
eligibility criteria, definition of project viability,
and duration taken by a banking institution to
process the loan application. Banking institutions
are also required to inform applicants of reasons
for their loans being rejected. Bank Negara
Malaysia monitors the compliance of the client
charter through the on-site inspection process.
The unexpected outbreak of Severe Acute
Respiratory Syndrome (SARS) in early 2003 had
adversely affected the tourism and other related
sectors. Two specific measures were introduced to
provide relief to ease the financial burden of
affected businesses and their employees. A
Special Relief Guarantee Facility of RM1 billion
was established in May 2003 to alleviate the cash
flow problems faced by businesses directly
affected by the SARS outbreak. Under the
scheme, affected businesses could obtain working
capital loans from banking institutions, up to an
aggregate amount of RM2.5 million, at low
interest rates. In addition, this was reinforced by
the guarantee facility of up to 80% of these loans
by the Credit Guarantee Corporation Malaysia
Berhad. Banking institutions also provided
financial relief to borrowers in the SARS-affected
industries by restructuring or rescheduling loans
for all types of borrowings and credit facilities. In
the case of employees whose remuneration were
reduced by their employers, banking institutions
extended similar financial relief on the housing
loans taken by the employees.
A significant initiative undertaken in 2003 was
the strengthening of the existing infrastructure
and institutional arrangements to extend the
outreach of financial services to microenterprises.
In February 2003, Bank Negara Malaysia proposed
to leverage on the extensive branch network of
Bank Simpanan Nasional and Bank Pertanian
Malaysia to provide microfinancing. To equip
these development financial institutions with the
necessary best practices and skills to provide
microfinancing, initiatives were undertaken to


114
develop microfinance products, operating
manuals and systems as well as training
programmes for loan officers and branch
managers. Meanwhile, to promote microcredit,
the Government allocated RM1 billion, channelled
through Bank Pertanian Malaysia (RM500 million),
Bank Simpanan Nasional (RM300 million) and
Amanah Ikhtiar Malaysia (RM200 million). Due to
the encouraging response from microenterprises,
the Government announced in the 2004 Budget
an additional allocation of RM1 billion to Bank
Pertanian Malaysia and Bank Simpanan Nasional
to finance microenterprise activities. Bank Negara
Malaysia is also working with the Ministry of Land
and Cooperative Development and Department of
Cooperative Development to strengthen the
cooperative movement as a potential source of
financing for microenterprises and low-income
groups. Efforts are underway to enhance the
infrastructure and regulatory and supervisory
frameworks to achieve this objective.
Promoting Active Consumerism
A vital aspect in the transition towards greater
market orientation is promoting active
consumerism. Consumers can be an important
force to drive the performance and efficiency of
the banking institutions. Towards this, consumers
need to be well informed of the different
products and services offered, and their rights
and responsibilities. There must also be an
effective avenue for consumers to seek protection
and redress. Efforts during the year continued to
focus on increasing consumer awareness and
further strengthening the consumer protection
infrastructure, including ensuring accessibility to
affordable banking services.
for their decisions. However, this does not absolve
the banking institutions from their responsibilities
to ensure that their products deliver what is
promised and that customers will obtain fair value
for their money.
The Consumer Education Programme, which has
now entered into its second year of
implementation, has received encouraging
response from the public. As at end-2003, the
BankingInfo website has received 6.4 million hits
and 1.2 million booklets have been taken up by
the public. During the year, another six booklets
were published, bringing the total number of
consumer booklets published to 18. Two of the
new booklets aim to provide information to assist
SMEs in preparing loan applications as well as the
different types of financing products available.
The other new booklets provide information on
the role and responsibilities of guarantors, the
Credit Guarantee Corporation Malaysia Berhad,
house financing-i and charge cards.
Bank Negara Malaysia is also finalising the
product transparency and disclosure rules. The
objective of such rules is to provide
comprehensive, clear and fair information about
the risks and liabilities of financial products and
services to consumers to facilitate informed
decisions. The disclosure standards focuses on
four main items deemed most essential for
making informed decisions, namely the form and
timing of disclosure, items to be disclosed and
disclosure requirements in advertisements. To
facilitate and reduce the cost of information
search by consumers, Bank Negara Malaysia is
also developing “Comparative Tables” on the
yield and cost of financial products and services
Efforts continued to focus on increasing consumer awareness and
strengthening the consumer protection infrastructure, including
ensuring accessibility to affordable banking services.
As outlined in the Financial Sector Masterplan, an
effective consumer education and protection
framework is being developed to set the
foundation for an environment where ultimately,
banking consumers will need to take greater
responsibility for their financial decisions. Once
the relevant information and risks have been
appropriately disclosed and explained, consumers
must be actively involved in comparing,
examining and deciding on investments or
purchases to be made, and assume responsibility
offered by the banking institutions. These tables
would serve as a one-stop reference centre for
information on the costs and features of financial
products and services offered. Initially, the focus
will be on developing comparative tables on the
commonly offered deposit and credit products.
As consumers become more discerning,
competition will drive banking institutions to
increasingly offer greater product differentiation
and value added services to gain competitive


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The Financial Sector
advantage. Banking institutions are increasingly
leveraging on advances in technology to introduce
and market new products, services as well as new
delivery channels. This dynamic environment will
see the introduction of an increasingly broader
array of financial products and services to
consumers. However, as these innovations require
substantial investments, costs of the more
sophisticated products and services will result in
fees and charges. While this development may be
inevitable, attention has been given to ensure that
the public has access to basic banking services at
minimal cost while the more complex and
sophisticated products and services reflect their
appropriate costs. This is to ensure appropriate
pricing of banking services. In achieving this
objective, a balance is made between providing an
operating environment that promotes innovation
while also taking into account consumer interests.
Therefore, while Bank Negara Malaysia is
committed to a market driven approach to pricing,
this will be undertaken under an environment
where the interests of consumers are also
protected.
In this connection, Bank Negara Malaysia has
initiated work on establishing a framework on
basic banking services, which aims to ensure that
the banking public, especially the low-income
group, would have access to affordable basic
banking services. Under this framework, all
banking institutions would be required to offer a
basic bank account that would provide a
prescribed minimum level of services and
transactions to all Malaysians at minimal cost. The
basic banking services framework is being finalised
for implementation in 2004.
Attention has also been directed at enhancing
dispute resolution mechanisms for consumers to
seek redress. Towards this end, Bank Negara
Malaysia has finalised the structure and operating
framework of the new Financial Mediation Bureau
(FMB), which will commence operations in the first
half of 2004. This new entity will function as a
one-stop centre for the resolution of a broad range
of retail consumer issues raised against the
financial institutions that are regulated by Bank
Negara Malaysia. The enlarged scope of FMB will
provide the public with a prompt and more
effective resolution mechanism. In addition,
regional offices of FMB will be set up to enhance
access to its services nationwide. The expanded
scope of operations of the new bureau and the
increased maximum quantum of claim awards are
illustrated in the following table:
Elements
Banking sector
Insurance sector
Limit
Nature of dispute
Losses suffered not exceeding
RM100,000
All retail banking complaints except
those involving policies, credit
decisions, quality of service and cases
that have been or are referred to
court. This would include complaints
on the following:
• Personal Loans
• Housing Loans
• Automatic Teller Machine
• Credit Card
• Hire Purchase
• Savings Account
• Current Account
• Fixed Deposits
• Remittances
Claims not exceeding:
• RM200,000 (motor and fire
insurance);
• RM100,000 (others); and
• RM5,000 (3rd party property
damage)
All disputes between policyholders/
claimants and their own or third party
insurers except those involving pricing
of insurance product and
underwriting issues, fraud cases and
cases that have been or are referred
to court.


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Maintaining Financial Stability
The increasingly complex and dynamic financial
activities demand continuous enhancements to the
regulatory and supervisory frameworks to maintain
financial stability. The soundness of the banking
system is important to safeguard the interest of
depositors and ensure that the banking system is
strong and well capitalised to support the growth
process through robust lending activities. In this
regard, due attention continues to be given to
enhance prudential regulations, to ensure that the
regulations are relevant in the face of rapid change in
the financial markets. At the same time, Bank Negara
Malaysia is mindful of the need to ensure that new
regulations would not stifle innovation and
competition amongst players in the financial market.
To further strengthen the regulatory framework, the
Central Bank of Malaysia Act 1958, the Banking and
Financial Institutions Act 1989, the Islamic Banking
Act 1983 and the Takaful Act 1984 were amended in
2003. A new Payment Systems Act 2003 was also
enacted during the year to provide for a
comprehensive legal framework to ensure that the
payment systems are protected from disruptions that
may affect financial stability, and that public
confidence in the payment systems and instruments
is preserved.
Among the key amendments under the Central Bank
of Malaysia (Amendment) Act 2003 are:
•
The enhancement of the regulatory and
supervisory framework for the over-the-counter
Ringgit bond market. This enables Bank Negara
Malaysia to carry out its functions in providing
infrastructure for the Ringgit bond market, which
includes the power to issue regulations necessary
for the regulation and operation of the systems
for the debt securities market;
•
The provision for Bank Negara Malaysia to
promote reliable, efficient and smooth operation
of national payment systems and payment
instruments. This is consequential to the
enactment of the Payment Systems Act 2003,
which provide the regulatory powers of Bank
Negara Malaysia over the designated payment
systems and payment instruments; and
•
The enhancement of the Shariah Advisory
Council of Bank Negara Malaysia [Please refer to
Islamic banking section for details].
Corporate governance practices in the banking
institutions were also enhanced during the year.
Good corporate governance reinforces sound
regulation and supervision. In most instances,
corporate governance forms the first line of defence
against any crisis. For corporate governance to work,
good corporate practices need to be instilled and
embedded in all aspects of the operations and at all
levels within the organisation. Sound corporate
governance would lead to greater responsibility and
accountability of the board and senior management
of the banking institutions. Therefore, the banking
institutions need to be headed by an effective board
with sufficient skills and a high degree of
professionalism. To help achieve this, Bank Negara
Malaysia issued in May 2003 the Guidelines on the
Establishment of Board Committees, Minimum
Qualification and Training Requirement for Directors,
and Definition and Responsibilities of Independent
Directors. The Guidelines set the requirements on the
establishment of three board committees, namely the
nominating committee, remuneration committee and
risk management committee, and the terms of
reference of each of the committee.
The nominating committee is responsible to ensure
that only the most competent individuals who can
contribute and discharge their responsibilities are
appointed to the board and key management
position. Among others, the committee is required to
provide a formal and transparent procedure for the
appointment of directors and chief executive officer,
and a mechanism to assess the effectiveness of
individual directors, the board, chief executive officer
and senior management officers. The remuneration
committee oversees the remuneration matters of
directors and senior management officers. The
committee is responsible for recommending the
remuneration framework for directors, chief
executive officer and senior management officers. It
should ensure that the remuneration framework of
the institution is competitive and consistent with the
institution’s culture, objectives and strategy, and
reflects the responsibilities of board members, chief
executive officer and senior management officers.
The risk management committee is responsible for
overseeing senior management’s activities in
managing credit, liquidity, operational, legal and
other risks, and ensuring that the risk management
infrastructure and process is in place and functioning.
Given the increased complexity of banking businesses
and the heavy responsibilities of the board of
directors, directors need to have the necessary
qualifications and experience to effectively discharge
their duties. In this regard, the Guidelines also focus


117
The Financial Sector
on the required skills and experience for this purpose.
In addition, recognising the critical role of
independent directors in spearheading corporate
governance and upholding independence of the
board, the Guidelines also set out the definition of
independent directors, and their expected roles and
responsibilities. As their primary responsibility is to
protect the interest of minority shareholders and the
general public, independent directors are expected to
provide effective oversight and ensure a strong
independent element on the board. To complement
these measures, the Guidelines on the Appointment
of External Auditor by banking institutions was
issued in August 2003 to mitigate potential conflicts
of interest arising from the long-term relationship
with an external auditor.
The increasingly complex group structures involving
financial conglomerates has called for the
development of a comprehensive regulatory and
supervisory framework for financial conglomerates.
The objective of the framework is to ensure that the
financial health of the financial groups can be
adequately assessed and monitored by supervisors.
Regulation is, therefore, to balance between allowing
group synergy and efficiency, and ensuring that the
activities of the financial conglomerates do not
introduce excessive risks to the financial system.
Towards this end, a concept paper on the
Consolidated Supervision of Financial Conglomerates
was issued in December 2003 with the aim of
formalising and strengthening the existing
infrastructure and regulatory framework for financial
conglomerates. Given the diverse risks associated
with the different activities undertaken by the
different entities within the financial conglomerates,
the proposed framework does not prescribe common
prudential requirements for all entities within the
financial conglomerate. Instead, the framework
emphasises on developing prudential guidelines and
principles to ensure that the financial holding
companies are financially strong and able to lend
support to its subsidiaries.
The framework focuses on five main areas, namely
group structures, corporate governance, risk
management, intra-group exposures and reporting
requirements. On group structures, the framework
outlines the main principles that would form the
basis for financial groups to determine their optimum
group structure, both from a commercial as well as
regulatory perspective. While it is recognised that the
financial groups would organise their group
structures according to their strategies and market
niches, sufficient safeguards need to be in place to
ensure that the group structure does not pose
systemic risk to the banking system. In particular,
regulation is required to ensure minimal transmission
of financial distress from unregulated entities to the
regulated entities within the group, which could
destabilise the banking system. In addition, there is a
need to ensure that the obligation of the
Government in assuring the safety of deposits would
not be extended to other non-depository institutions
within the group. The framework also establishes
basic principles of good corporate governance, which
focuses on the processes and structures used to
manage the business and affairs of a financial
holding company (FHC) and its related entities,
placing greater emphasis on the roles and
responsibilities of the board of directors and
management of the FHC.
As the FHC is expected to provide financial support
to all entities within the group, the framework also
sets out the capital adequacy requirements for the
group. In assessing financial strength of the
conglomerate, Bank Negara Malaysia will focus on
the capital adequacy of the individual banking
institutions on an individual and consolidated basis (if
the institution has subsidiaries), as well as on the
capital adequacy at the group and holding company
level. On risk management, the framework requires
the board of the FHC to establish a Group Risk
Management Committee to oversee the overall
management of the group’s risks, review the senior
management’s control and procedures in managing
these risks, as well as ensuring that remedial actions
are taken. To ensure that all potential sources of
contagion risks, other than cross-selling, are
identified and addressed promptly, the framework
also requires that written policies on intra-group
exposures be incorporated into the risk management
at group level. Subsequently, the FHC is required to
submit periodic reports to Bank Negara Malaysia to
facilitate the continuous assessment of the financial
conglomerate.
Bank Negara Malaysia is also reviewing the current
Guidelines on the Credit Limit to a Single Customer
(GP5) to expand the coverage of exposures to a
single customer to include exposures other than
credit facilities. This exposure would include amongst
others, exposures to holdings of shares and debt
securities, and off-balance sheet items. This revision
would also entail the streamlining of several existing
regulations pertaining to exposures to large
customers into a single comprehensive guideline for


118
easy compliance and reference by banking
institutions.
As banking institutions make greater use of
sophisticated financial instruments, they are
increasingly exposed to higher market risk. In this
regard, a concept paper on the Incorporation of
Market Risk into the Risk Weighted Capital Ratio
(RWCR) was issued in mid-2003 to principally assess
the impact of incorporating market risk into the
RWCR. The study indicated that the RWCR of the
banking system would decline marginally by 0.12
percentage points, with all banking institutions
maintaining a RWCR of more than 8%. Among the
banking institutions, merchant banks exhibited the
largest decline in their RWCR primarily due to their
principal activities in the capital market. Following a
series of discussions with the Market Risk Industry
Working Group, the framework was further refined
and the second concept paper was issued in January
2004. Among the significant changes made to the
framework include the definition of trading and
banking books, treatment on holdings of securities
resulting from debt/loan restructuring, and valuation
of illiquid papers. Banking institutions are required to
assess the quantitative impact of the revised
framework by February 2004.
The market surveillance also detected incidences of
unhealthy trading practices in the domestic bond
market. To preserve market integrity, banking
institutions were reminded to tighten their risk
management practices. The lack of transparency and
information gap in the over-the-counter bond market
is one of the factors that contributed to the
occurrence of irregular trading. To address the
information gap and lack of transparency, Bank
Negara Malaysia is working with the Securities
Commission to enhance the infrastructural
development of the bond market. These measures
include electronic trading platform to improve price
discovery mechanism and the automation and
integration of trade-related processes to allow for
further improvements in operational efficiency.
On the international front, work on the New Basel
Capital Accord or Basel II continued to be the focus of
the Bank for International Settlements (BIS). Following
the issuance of the second consultative paper in
January 2001 and after consultation with the global
financial industry, BIS issued the third consultative
paper (CP3) in April 2003. Among the main changes
in CP3 include a lower risk-weight for residential
mortgages, recognition of “past due” loans with
significant levels of provisioning, the introduction of an
alternative “Standardised” approach for operational
risk at supervisory discretion, and fine-tuning some of
the elements of the Internal Ratings Based (IRB)
approach. Before issuing CP3, the BIS conducted the
third quantitative impact study (QIS3) in October 2002
to gauge the impact of Basel II proposals on minimum
capital requirements. The results of QIS3, which was
released in May 2003, showed marginal increase in
credit risk capital requirements relative to the current
Accord for banking institutions adopting the
“Standardised” approach, while for banking
institutions adopting the IRB approaches, substantial
reductions in credit risk capital requirements were
reported. However, the new operational risk capital
requirement more than outweighed the reduction in
credit risk capital requirements, resulting in an overall
increase in capital for banking institutions adopting
the “Standardised” approach. In comparison, the
minimum capital requirements of banking institutions
intending to adopt the more sophisticated IRB
approach were broadly unchanged. The new rules are
expected to be finalised by mid-2004.
Bank Negara Malaysia has conducted a preliminary
impact study in October 2002 to ascertain the
impact of Basel II on the local banking industry
using the “Standardised” approach. The results of
the impact study indicated that, using the
“Standardised” approach, the RWCR of the banking
system would decline marginally, but still well above
the 8% regulatory requirement. The decline in
RWCR was mainly due to the new operational risk
capital requirements, which more than offset the
increase in the RWCR due to credit risk capital
requirements. In addition, the preliminary survey
findings indicated that unrated corporate loans and
past due loans contributed to the increase in risk-
weighted assets.
In tandem with this impact study, a study was also
undertaken to determine the readiness of domestic
banking institutions to adopt the IRB approach,
which requires banks to use internal ratings to
calculate the capital adequacy requirements. The
main challenge in the adoption of the IRB approach
is the availability of clean or usable data, which is
required to meet the minimum historical 5-year data
requirement. The task of data collection, cleansing
and verification is time-consuming. For some banks,
the recently concluded merger and consolidation
programme and the impending merger between
commercial banks and finance companies may
further complicate this task as the 5-year historical


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The Financial Sector
data could only be developed post-merger to reflect
the current risk profile of the institutions. Data
storage will become a major factor under Basel II as
banking institutions will require data warehouses
with sufficient capacity to cater for the data
intensive IRB systems. To facilitate implementation,
banking institutions will also be required to invest in
staff training to gain the technical expertise to assist
with Basel II implementation.
In the case of banking institutions that already have
internal ratings systems, the challenge is that the
systems are relatively new and the results are
SUPERVISORY ACTIVITIES
The supervisory activities throughout the year 2003
were focused on multi-pronged strategies to further
promote the stability of the banking system in tandem
with the evolving financial industry and increasing
complexities of the financial landscape. These activities
involved on-site examination, off-site surveillance,
market assessment through formal and informal
dialogue sessions with industry players, as well as
further strengthening the capacity building and
assessment methodologies of the supervisors. The on-
site examination and off-site surveillance in supervising
The supervisory activities in 2003 were focused on multi-pronged
strategies to further promote the stability of the banking system.
untested. Some of the banking institutions are also
in the process of upgrading their internal rating
systems to be two-dimensional, covering the
borrower risk as well as the facility risk. Other
expected challenges faced by banking institutions
include being able to fully utilise the capital relief
gained through credit risk mitigation and risk
management techniques under Basel II.
To facilitate the implementation of Basel II in
Malaysia, a Basel II Task Force would be formed to
promote greater consistency and understanding
among banking institutions. The task force,
comprising Bank Negara Malaysia officials and
resource persons from the banking sector will
discuss experiences and build on the best practices
and approaches to capital regulation.
Moving Forward
Significant progress has been achieved in financial
sector restructuring and efforts to strengthen the
resilience and capability of the banking system.
Meanwhile, the Malaysian economy continues to
evolve, with new sources of growth emerging. This,
combined with changes in the global financial
environment will demand greater efficiency,
competitiveness and resilience from the domestic
banking sector. Hence, moving forward, the
strategies aimed at improving the efficiency of the
domestic banking sector while preserving financial
stability will continue to be pursued. At the same
time, given the important role of the banking sector
in promoting sustainable and balanced economic
growth, due emphasis will continue to be given to
ensure that the banking sector remains supportive
of meeting the socio-economic agenda of the
country.
banking institutions continued to be premised on the
risk-based supervisory approach. The overall thrust of
this approach is to identify and assess key risks
encountered by banking institutions and their
capacity to manage these risks. Based on this
assessment, a supervisory plan is formulated for each
banking group, so that supervisory resources can be
optimally allocated in supervising the institutions,
with particular focus on areas of high risk.The
financial and operating conditions of all entities
within a banking group and activities undertaken by
these entities are taken into account to ensure that
these do not adversely affect the performance of the
banking group concerned and pose a systemic threat
to the banking system as a whole.
In 2003, Bank Negara Malaysia conducted 93 on-site
examinations on banking institutions, including the
Islamic banks, as well as development financial
institutions. These examinations covered head offices,
local and overseas branches, bank holding companies
and related companies of banking institutions. The
supervisory scope has also included the examination of
Islamic banking operations and anti-money laundering
measures undertaken by banking institutions. In
addition to the enhanced supervisory scope, Bank
Negara Malaysia has, in recent years, accorded greater
supervisory resources in evaluating banking
institutions’ market and operational risk management
practices, besides credit risk.
To complement the on-site examination of banking
institutions, on-going monitoring of the financial
health of these institutions was conducted through
off-site surveillance. Banking institutions were
monitored closely through regular reporting and
rigorous financial analysis accompanied by periodic


120
stress testing for the early detection of emerging
problems. The off-site surveillance function also
included the review and approval of the financial
accounts of banking institutions to ascertain
compliance with accounting standards and Bank
Negara Malaysia regulations, with particular emphasis
on the adequacy of provisions for impairment of
assets, particularly loans and investments. The off-site
surveillance function has been intensified, to include
credit and fraud surveillance through electronic
information database.
The soundness of banking institutions has been
evaluated based on the CAMELS rating framework
which encompasses the review of a banking
institution’s capital adequacy, asset quality,
management capability, earnings performance, liquidity
and sensitivity to market risk. With the inclusion of the
“sensitivity to market risk” component to the CAMELS
framework in 2003, the Bank has developed a more
structured supervisory framework to assess banking
institutions’ market risk management processes and
modeling techniques. During the year, a measurement
tool kit for market risk was developed to enable bank
supervisors to validate the market risk models used in
banking institutions. An essential element of banking
supervision included the supervision of banking groups
on a consolidated basis. In this regard, the Bank
conducted regular examinations of bank holding
companies as well as related non-banking entities
within the banking groups. These examinations enabled
the Bank to identify sources of vulnerability and assess
the strength and ability of the holding company in
providing financial support to the banking institutions
within the group. It also enabled the Bank to evaluate
the potential impact that other non-bank entities within
the group may have on the banking institutions’
solvency.
In engaging the risk-based supervision approach, Bank
Negara Malaysia implemented a structured risk
assessment framework to evaluate the risk profile of
each banking institution and the adequacy of the
institution’s risk management processes. While banking
institutions have mainly focused on implementing credit
and market risk management, they have also been
moving towards a fully integrated risk management
system, which provides the management with a holistic
view of risk management so that interactions amongst
risks can be identified and managed more effectively. In
this regard, banking institutions have also begun
developing a more structured process in managing their
operational risk. Given that banking institutions are still
in different stages of developing their respective
integrated risk management framework, the Bank
continues its developmental role in monitoring and
evaluating the individual banking institution’s progress
and plans in this area.
In promoting sound corporate governance in banking
institutions, bank supervisors conduct assessments of
the corporate governance practices of banking
institutions to ensure that these practices are indeed
instilled and embedded in all aspects of operations
and at every level of the institutions. A major part of
this assessment is focused on evaluating the
effectiveness of the board of directors who are
ultimately responsible for the overall management of
the banking institutions. The assessment also provides
valuable input for the purpose of approving the
appointment and reappointment of directors.
In line with the Financial Sector Masterplan, an
Enforcement Actions Framework has been developed
to provide a comprehensive and incremental approach
towards enforcing actions to be taken following
supervisory exercise on banking institutions. The first
phase of the framework involving the Informal
Enforcement Actions Framework (IEAF), has been
implemented since September 2002. The IEAF has
facilitated Bank Negara Malaysia in taking pre-emptive
measures not only on banking institutions but also on
related companies of banking institutions to address
emerging weaknesses in a timely and effective manner.
The Bank is working on the second phase where a
Formal Enforcement Actions Framework (FEAF) is being
developed as an extension of the existing informal
framework. Actions under the formal framework will
be taken for institutions with problems or where
informal actions have been unsuccessful in achieving
the desired outcome. While the legal framework is
already in place, the FEAF will refine the mechanism to
make the process more transparent. In addition, in
enforcing pre-emptive measures on a problem banking
institution, the FEAF will incorporate prompt corrective
actions, which will be taken once specified thresholds
for supervisory intervention are triggered.
Another important supervisory area that has been
given greater emphasis since the enactment of the
Anti-Money Laundering Act in 2002, was Bank
Negara Malaysia’s assessment of anti-money
laundering measures taken by banking institutions.
The framework that has been put in place focuses on
five broad functional areas of an institution’s
operations, namely quality of board and management
oversight, comprehensiveness of policies and
procedures, effectiveness of internal controls,


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The Financial Sector
adequacy and accuracy of the management
information system, as well as, quality of the human
resource and availability of training.
As part of the Bank’s supervisory activities, regular
consultative dialogues are held with the board of
directors and management of banking institutions, to
provide an effective forum for two-way
communication on supervisory issues. Through these
interactions, the Bank was better positioned to
evaluate the institutions’ capacity and readiness to
meet impending challenges.
The Bank has also long recognised the importance of
maintaining the integrity of Information Technology
(IT) infrastructure deployed by the banking institutions,
which forms the backbone of all banking operations.
In order to promote a safe and sound IT environment
in banking institutions, to maintain public confidence
and minimise service interruptions, supervisory
attention is given to the Information System (IS)
functions of these institutions through both the on-
site examinations and off-site monitoring mechanisms,
that ensure the adoption of best IT practices and
compliance with regulations. In the year 2003, the
Bank had conducted 18 on-site IS examinations on
banking institutions including overseas branches and
subsidiaries of domestic banking institutions. This is to
ensure relevant controls are in place and appropriate
systems are deployed in their operations particularly
for high risk banking products and services such as
Internet Banking, Mobile Banking, Credit Cards and
Automated Teller Machine.
In an effort to improve the IS supervisory function and
promote supervisory transparency, the Bank has
embarked on several strategic measures in line with
international standards to improve the quality and
effectiveness of its on-site IS examinations. Firstly, a
new IS examination methodology has been developed
and will be fully implemented for all on-site IS
examinations beginning in 2004. The new
methodology provides a more balanced appraisal to
enhance the quality and standard of IS examinations.
It also employs a structured and guided tool for risk
assessment and provides a foundation for IT
benchmarking. Secondly, an enhanced version of the
examination report has been implemented. The Bank
is also developing a new guideline that aims to
strengthen the level of IT management in banking
institutions, which will be enforced in 2004.
In 2003, Bank Negara Malaysia embarked on
upgrading its MS ISO 9002:1994 Quality Management
System certification for the planning and monitoring
of the performance of routine on-site examinations on
banking institutions to MS ISO 9001:2000. The scope
of registration for the new standard was expanded to
include Malaysian banking institutions’ branches and
subsidiaries, operating outside Malaysia and the
incorporation of new quality standards. The new
certification reaffirmed Bank Negara Malaysia’s
commitment to maintain the highest level of
professionalism in undertaking its supervision
responsibilities. In addition, the Bank is also in the
process of obtaining the MS ISO 9001:2000
certification for its on-site IS examinations on domestic
banking institutions.
Recognising the increasing challenges of banking
supervision, Bank Negara Malaysia is committed to
ensure that the knowledge and skills of bank
supervisors are continually enhanced to meet the
demands of an increasingly sophisticated financial
environment. Besides structured training for bank
supervisors, bank supervisors are trained in several
specialised key areas of banking supervision such as
risk modeling and Syariah principles, to keep abreast
with market developments; and function as sources of
reference and capacity building for the Bank. These
measures have further enhanced the capacity of the
Bank to perform its supervisory function in a more
effective manner as well as provide value-add
recommendations to the banking institutions.
With the rapid changes in the financial environment,
particularly with the New Basel Capital Accord, the
Bank is faced with increasing supervisory challenges. As
a pre-requisite for effective supervision, supervisors are
provided with continuous training and exposure to
keep pace with the developments taking place globally
to ensure that Malaysia is at par with international best
practices. In meeting the challenges of the New Accord,
bank supervisors are being equipped with the necessary
knowledge and skills, particularly in effectively
evaluating the more sophisticated methodologies to
determine capital requirements. These initiatives range
from participation in regional and international training
programmes, dialogues with other supervisory agencies
and international bodies on implementation issues and
discussions with the banking industry to facilitate
understanding of their level of readiness towards
implementing the requirements of the New Accord.
In 2003, the Bank continued to strengthen its working
relationship with other domestic and foreign
supervisory agencies to facilitate enhanced co-operation
and information exchange. This collaboration process


122
has been very valuable to the Bank in facilitating its
efforts to undertake effective consolidated supervision
of banking institutions. In this context, Bank Negara
Malaysia carried out nine examinations of overseas
branches and subsidiaries of domestic banks. The
assessment of the financial and general conditions of
these entities was discussed with the respective host
supervisory agencies to identify any common issues of
concern and facilitate their resolution. The Bank also
jointly conducted two examinations on offshore
subsidiaries of domestic banks with the Labuan
Offshore Financial Services Authority (LOFSA).
Bank Negara Malaysia is committed in its role in
preserving the safety and soundness of the banking
system through effective bank supervision. In the
Bank’s pursuit towards this objective, efforts will
continue to be directed at strengthening our
supervisory resources and processes. These efforts
include a more intensive training in specialized areas
of expertise, developing specialists in core banking
operations, closer co-operation with other regulatory
and supervisory agencies, and international bodies, as
well as automation of work processes to achieve
greater efficiency.
Banking Measures Introduced in 2003
Measures implemented in 2003 were aimed primarily at enhancing the efficiency, competitiveness and
soundness of the financial sector. Initiatives were also taken to improve access of businesses, in particular
the small and medium enterprises (SMEs), to financing. Institutional arrangements to strengthen
consumer protection and to increase the awareness of consumers were also introduced.
Measures to Enhance Safety and Soundness
Guidelines on the Establishment of Board Committees, Minimum Qualifications and Training
Requirements for Directors and Definition and Responsibilities of Independent Directors
The Guidelines were issued in May 2003 as part of Bank Negara Malaysia’s continuous efforts to enhance
the corporate governance standards among the licensed institutions. The Guidelines outlined the following:
•
The requirement on the establishment of board committees comprising nominating committee,
remuneration committee and risk management committee, and the terms of reference for each of
the committee. The main objectives of the committees are as follows:
Nominating Committee
To provide formal and transparent procedures for the appointment of directors and chief executive
officer and assessment of effectiveness of individual directors and board as a whole and performance
of chief executive officer and key senior management officers.
Remuneration Committee
To provide formal and transparent procedures for developing remuneration policy for directors, chief
executive officer and key senior management officers and ensuring that compensation is competitive
and consistent with the licensed institution’s culture, objectives and strategy.
Risk Management Committee
To oversee senior management’s activities in managing credit, market, liquidity, operational, legal and
other risks and to ensure that the risk management process is in place and functioning effectively.
•
To ensure that only qualified individuals are appointed to serve on the boards of licensed institutions,
the Guidelines set out the minimum qualifications and continuous learning requirements for the
directors.
•
Recognising the critical role played by independent directors in corporate governance, the Guidelines
also set out the definition of independent directors and their expected roles and responsibilities.
Auditor’s Independence and Appointment of External Auditors
A number of corporate scandals overseas, which involved irregularities in accounting practices, issues on
auditors’ independence and the role of auditors, have raised the concerns of various regulators


123
The Financial Sector
worldwide. In this regard, Bank Negara Malaysia issued Guidelines on the Appointment of External
Auditor by licensed institutions which cover:
•
The imposition of mandatory rotation of engagement partner after a period of 5 years. The
engagement partner relinquishing the assignment would not be allowed to resume the role of audit
engagement partner for the licensed institution until after a period of 5 years has lapsed;
•
Provision of non-audit services by the same audit firm would require the prior approval of the
respective licensed institution’s Audit Committee; and
•
The approval for the re-appointment of external auditors by Bank Negara Malaysia on an annual basis.
There should not be any compromise on auditor’s independence in the interim period before the 5
years rotation requirement takes effect.
Prudential Standards on Asset-Backed Securitisation
Although significant benefits could be derived from securitisation activities, participation of banking
institutions in securitisation activities could potentially increase the overall risk profile of the institutions. In
this regard, Bank Negara Malaysia has issued the Prudential Standards on Asset-Backed Securitisation
Transactions which outline the general risk management framework as well as specific regulatory
treatment relating to asset-backed securitisation transactions undertaken by banking institutions. The
Prudential Standards were issued on 10 March 2003.
Credit Card Guidelines
The Guidelines were issued in March 2003 to all credit card issuers. The Guidelines were intended to
promote active consumerism and consumers’ understanding of credit card usage and protecting their
interest as card users.
The Guidelines specify the minimum requirements on credit card operations that need to be complied
with by all credit card issuers. Among others, the Guidelines set the following:
•
Minimum eligibility criteria on credit card application.
•
RM250 limit as the cardholders’ liability for unauthorised transactions as a consequence of lost and
stolen credit cards.
•
Barring of credit card usage for unlawful activities.
•
The requirement for credit card issuers to undertake prudent credit assessment and verification of
credit worthiness of the card applicants using the Central Credit Reference Information System
(CCRIS) and other sources of credit information.
Migration to Chip-based Automated Teller Machine (ATM)
In an effort to enhance the security of payment cards, banking institutions were required to migrate to
chip-based payment card technology. The domestic banking institutions were required to fully upgrade
their ATM infrastructure to be fully chip-enabled and convert their customers’ ATM card to chip-based by
end-September 2003, and the locally incorporated foreign banks, by March 2004.
Minimum Security Standards for Cheques
A concept paper on the proposed Guidelines on Minimum Security Standards for Cheques was issued to
the banking industry in November 2003. The proposed Guidelines set the minimum standards for security
features on cheques, cheque fraud detection facility, security management in cheque printing and
consumer advice on best practices.
Accounting Treatment of Handling Fees for Hire Purchase Loans (HPL)
To standardise the accounting treatment of handling fees for HPL across the finance company industry, all
handling fees for HPL approved and disbursed after 1 January 2004 by finance companies have to be
expensed off in the period they are incurred. For HPL approved and disbursed before


124
1 January 2004 where the amortisation method had been adopted, finance companies were allowed to
continue amortising the outstanding handling fees. Accordingly, in the event of prepayment or the HPL
turning non-performing, the balance of the unamortised handling fees would be expensed off.
Recognition of Deferred Tax Assets (DTA) and Treatment of DTA for Risk Weighted Capital Ratio
(RWCR) Purposes
In line with MASB 25 which was issued by the Malaysian Accounting Standards Board (MASB), licensed
institutions had to account for all DTA in their financial reports. For RWCR purposes, however, such deferred tax
income or expense is excluded from the computation of Tier-1 capital and calculation of risk-weighted assets.
Concept Paper on Incorporation of Market Risk into the RWCR Framework
In April 2003, the first concept paper (CP1) on the incorporation of market risk into the RWCR Framework was
issued to the industry for comments. CP1 adopted and customised recommendations issued by the Basel
Committee on Banking Supervision (BCBS) according to the environment of the local banking industry.
Following a series of discussions with the Market Risk Industry Working Group, the second concept paper
(CP2) was issued in January 2004. CP2 incorporated significant changes to CP1, in particular on the
following areas:
•
Classification of securities in the trading and banking book;
•
Holdings of securities resulting from debt/loan restructuring;
•
Hedging policy;
•
Underwriting positions; and
•
Valuation of illiquid papers.
CP2 also aims to gauge the level of readiness for incorporation of the revised market risk framework and
assess the quantitative impact of the latest proposal on the financial institutions.
Concept Paper on Consolidated Supervision of Financial Conglomerates
In line with Recommendation 3.26 of the Financial Sector Masterplan (FSMP), Bank Negara Malaysia has
developed a framework for the Consolidated Supervision of Financial Conglomerates. This is to ensure that the
financial health of financial groups may be adequately assessed and monitored by supervisors on a group-wide
basis so as to minimise risks emanating from the financial group that could destabilise the financial system.
A concept paper was issued to the banking industry in December 2003. The proposed framework
outlines the underlying regulatory principles of consolidated supervision. Specific recommendations were
made in five areas, namely group structures, corporate governance, risk management, intra-group
exposures, and reporting requirements.
Implementation of the Anti-Money Laundering Act 2001 (AMLA) Compliance Programme
To combat money laundering activities, banking institutions were required to put in place a
comprehensive compliance programme to comply with AMLA. The compliance programme includes an
effective transaction monitoring system that is implemented at all operations of banking institutions
including the branches and subsidiaries. There should also be regular on-going employee training and
regular independent audit.
Measures to Enhance Competition and Efficiency of the Banking Industry
Guidelines on New Product Approval Requirements
The Guidelines were issued in March 2003 as part of the measures to promote Bank Negara Malaysia’s
regulatory philosophy of "what is not prohibited is allowed" as stated in the FSMP
. The main essence of


125
The Financial Sector
the Guidelines is the replacement of the existing product pre-approval requirements with a simple new
product notification and approval process that is expected to promote greater incentive for banking
institutions to increase their investment in developing more innovative products. The requirements for
greater product transparency and consumers to have access to product information are embodied in the
Guidelines.
Investments Linked to Derivatives
Effective 12 May 2003, banking institutions were allowed to offer additional yield enhancing investment
products linked to derivatives, other than investments linked to Ringgit denominated interest rate
derivatives. Blanket approval was granted to all banking institutions to offer the following additional
investment products linked to derivatives:
•
Investment products linked to interest rate, commodity, equity and fixed income derivatives,
denominated in both Ringgit and foreign currency; and
•
Investment products linked to foreign currency derivatives denominated in foreign currency only.
Nevertheless, banking institutions are required to meet the general conditions when offering investment
products linked to derivatives and comply with all exchange control rules. However, investment products
linked to credit derivatives would still require specific approval from Bank Negara Malaysia.
Amendments to the Central Bank of Malaysia Act 1958 (CBA) and Banking and Financial
Institutions Act 1989 (BAFIA)
Both the CBA and BAFIA were amended to incorporate provisions to support the efforts to develop the
bond market and to enhance competitiveness and efficiency of the banking industry. The amendments
came into force on 1 January 2004 for the CBA and 15 January 2004 for the BAFIA.
The CBA was amended, among others to empower Bank Negara Malaysia to carry out its functions in
providing the infrastructure for the Ringgit bond market, including the power to establish and operate
systems for the bond market and to make the necessary regulations for the operation of the systems.
The BAFIA was amended to provide for the establishment of a banking and finance company, an entity
which will hold two licences, one for banking business and the other for finance company business.
Measures to Improve Access to Financing
Establishment of Bank Negara Malaysia SME Special Unit
As part of the initiatives to enhance access to financing to SMEs, Bank Negara Malaysia established the
SME Special Unit in May 2003 to assist SMEs in the following areas:
•
To provide information on the various sources of financing for SMEs;
•
To facilitate loan application process for SMEs;
•
To deal with problems faced by viable SMEs in accessing financing; and
•
To provide advisory services on other SMEs financial requirements.
The role of the SME Special Unit will be expanded to include:
•
Coordinating, monitoring and evaluating the financing needs of the SMEs;
•
Formulating policies and strategies to enhance access to financing by SMEs;
•
Establishing and maintaining database on SME financing;
•
Enhancing SMEs awareness on various financing sources; and
•
Formulating structured training programmes for SMEs.


126
Additional Allocation for Special Funds for SMEs
As part of efforts to ensure availability of adequate funds at reasonable cost to the SMEs, Bank Negara
Malaysia increased the allocation, twice in 2003 for Fund for Small and Medium Industries 2 (FSMI2) and the
New Entrepreneurs Fund 2 (NEF2) by RM1,350 million and RM650 million, respectively. Consequently, the total
funds available for FSMI2 and NEF2 rose to RM2 billion and RM1.15 billion respectively.
Small Debt Resolution Mechanism
To facilitate the restructuring of non-performing loans (NPLs) of SMEs with on-going businesses and to
assist in their financing requirements, Bank Negara Malaysia established a Small Debt Resolution
Mechanism in November 2003.
Under the mechanism, an 11-member Small Debt Resolution Committee (SDRC) was established to
undertake independent assessment on the viability of the businesses, and propose the loan restructuring
and financing requirements of the affected businesses. The SME Special Unit at Bank Negara Malaysia
serves as the Secretariat to the committee.
This mechanism is open to SMEs with on-going businesses which have aggregate NPLs of not more than
RM3 million with the commercial banks, finance companies, Islamic banks, Bank Pembangunan dan
Infrastruktur Malaysia Berhad, and Bank Industri & Teknologi Malaysia Berhad.
As the debt restructuring process may involve the provision of new financing to the businesses, Bank
Negara Malaysia established the Rehabilitation Fund for Small Businesses with an allocation of
RM800 million. In this regard, eligible businesses may obtain new financing up to RM1.5 million at a
financing rate of 5% per annum for a maximum of 5 years.
With the introduction of this new mechanism, the existing restructuring and financing mechanisms under
Tabung Pemulihan dan Pembangunan Usahawan, and Tabung Pemulihan Industri Kecil dan Sederhana
were discontinued.
Access to Financing by Priority Sectors
As in previous years, Bank Negara Malaysia continued to place due emphasis on lending by the
commercial banks and finance companies to the priority sectors, namely the Bumiputra community, SMEs
and purchase of low and medium cost houses. Targets set were based on various factors taking into
consideration the capacity of the respective institutions.
Establishment of a Special Relief Guarantee Facility for Severe Acute Respiratory Syndrome
(SARS) Affected Businesses
As part of the Economic Package announced by the Government in May 2003 to assist businesses
affected by the SARS outbreak, Bank Negara Malaysia established the Special Relief Guarantee Facility
with an allocation of RM1 billion in the form of guarantee fund provided through the Credit Guarantee
Corporation Malaysia Berhad (CGC).
The salient features of the Facility are as follows:
•
The Facility is implemented through all commercial banks, Islamic banks, finance companies, Bank
Pembangunan dan Infrastruktur Malaysia Berhad and Bank Industri & Teknologi Malaysia Berhad;
•
The maximum loan amount allowable under the facility is RM2.5 million for a maximum tenure of 2
years;
•
The financing rate is capped at 3.75% p.a for the first year and not more than the 3-month KLIBOR
rate plus 1 percentage point for the subsequent year; and
•
CGC will guarantee 80% of the loans taken from the implementing institutions.


127
The Financial Sector
Financial Relief Provided by Banking Institutions to Borrowers in SARS-affected Industries
In response to the SARS outbreak, banking institutions were also requested to formulate appropriate
rescheduling or restructuring schemes to reduce the financial burden of borrowers whose businesses and
cash-flows were affected by the SARS. The rescheduling/restructuring programme should be
implemented on a pre-emptive manner.
To facilitate this measure, the requirement stipulated in the Guidelines on Classification of Non-
Performing Loans and Provisions for Sub-Standard, Doubtful and Bad Debts that requires banking
institutions to obtain specific approval from Bank Negara Malaysia to reschedule a performing loan
account more than once within a 2-year period, was waived.
Measures Related to Consumerism
BankingInfo
To promote greater financial literacy among the public and enhance public understanding of the roles
and functions of the different segments in the financial system, Bank Negara Malaysia launched the
Consumer Education Programme (CEP), known as "BankingInfo" in January 2003.
In summary, BankingInfo aims to:
•
Disseminate information on features of banking products and services, including the rights and
responsibilities of consumers and financial institutions in a clear and simple manner;
•
Promote public understanding on the role and functions of the different segments in the financial
system;
•
Alert consumers on illegal transactions and financial scams;
•
Provide information on basic financial management and importance of savings and financial planning; and
•
Provide consumers with information on how they can seek redress in the event that they have
suffered monetary losses.
To date, 18 booklets have been introduced and are available at all branches of banking institutions.
Information on BankingInfo is also available at the Internet website www.bankinginfo.com.my.
Formation of Financial Mediation Bureau (FMB)
In line with Recommendation 3.37 of the FSMP
, a concept paper on the Formation of the Financial
Mediation Bureau (FMB) with the objective of expanding the current role of both the Banking Mediation
and Insurance Mediation Bureaus was issued in April 2003.
The members of FMB will comprise:
•
Commercial banks, finance companies, merchant banks, and Islamic banks;
•
Development financial institutions regulated under the Development Financial Institutions Act 2002;
•
Payment systems operators and issuers of designated payment instrument under the Payment
Systems Act 2003; and
•
Insurance companies, Takaful operators and Malaysian Nasional Reinsurance Berhad.
The formation of the FMB is expected to facilitate the financial institutions in enhancing their customer
service level and would cover a broad range of retail consumer complaints against all financial institutions
regulated by Bank Negara Malaysia.


128
PERFORMANCE OF THE BANKING SYSTEM
Overview
The financial position of the banking system in 2003
was strong. The key financial indicators of the
banking system remained favourable with no signs of
vulnerabilities. The level of capitalisation was high,
non-performing loans (NPLs) declined whilst
profitability improved. Amidst ample liquidity and
continued recovery in business and consumer
sentiments, the banking institutions registered strong
lending activities. The strong performance of the
banking system was characterised by:
•
High level of capitalisation attributable to higher
profit and capital injections;
•
Ample liquidity in the financial system throughout
the year;
•
Strong resumption in lending activities driven
primarily by lending to the small and medium
enterprises, and household sector;
•
Higher profitability due to higher net interest
income, lower provisioning and high recoveries;
•
Narrowing of interest margins as competition
continued to exert downward pressure on
lending rates amidst a more stable return on
deposits;
•
Improvement in NPLs. There was a decline in new
NPLs, whilst recoveries and reclassifications to
performing accounts remained strong; and
•
Exposure to market risks remained within
prudential levels.
Profitability
Against the backdrop of improving economic
conditions, gross operating profits of the banking
system increased by 7% to RM11.8 billion in 2003,
driven primarily by higher net interest income.
Commercial banks and finance companies posted
growth in gross operating profits of 7.7% and 9.7%
respectively, while those of merchant banks declined
by 18.5%, mainly due to lower net interest income
and income generated from fee-based activities.
Total loan loss provisions of the banking system
declined by 4% during the year, attributed mainly
to higher recoveries which grew by 10.1% or
RM384.8 million. The improved economic
conditions and debt restructuring exercises
undertaken over the years had strengthened the
debt servicing capacity of borrowers, thus
contributing to the higher recoveries. The decline in
loan loss provisions, coupled with the higher gross
operating profits, resulted in the preliminary
unaudited pre-tax profits to increase by 10.2% to
RM10.3 billion in 2003. Consequently, the return on
equity of the banking system increased to 17.1%,
whilst the return on assets was 1.4%.
Given the strong competition in the loan market and
greater disintermediation from the capital market,
interest income from loans and financing declined
marginally by 1.1% in 2003. However, this was offset
by higher interest income earned from debt securities
held and lower interest-in-suspense. By type of
institution, the commercial banks and finance
companies recorded increases in net interest income
of 6.4% and 5.9% respectively in 2003. The net
interest income of merchant banks declined by
7.7%, a trend that has been prevalent for a number
of years as merchant banks started to shift their
business focus from traditional fund-based activities
to fee-based activities.
Although fee-based income grew strongly by 9.9%,
as a percentage of total assets, it remained stable at
0.5%. Fee-based income from loan and financing
activities rose by 11.8%, in tandem with the growth
in lending activities. Nevertheless, fee-based income
Table 4.6
Banking System1: Income and Expenditure
For the calendar year
2002
2003p
Annual change
RM million
%
Interest income net of
interest-in-suspense
35,481
37,420
1,940
5.5
(Interest-in-suspense)
5,578
4,752
-826
-14.8
Less: Interest expense       17,763
18,673
910
5.1
Net interest income
17,718
18,748
1,030
5.8
Add: Fee-based income
3,314
3,642
328
9.9
Less: Staff cost
4,698
4,981
284
6.0
Overheads
5,315
5,614
299
5.6
Gross operating profit
11,019
11,795
776
7.0
Less: Loan loss provisions
5,497
5,276
-220
-4.0
Gross operating profit
after provisions
5,523
6,518
996
18.0
Add: Other income
3,805
3,759
-46
-1.2
Pre-tax profit
9,328
10,278
950
10.2
Of which:
Commercial banks
6,357
6,908
550
8.7
Finance companies
2,379
2,678
298
12.5
Merchant banks
591
692
101
17.0
Return on assets (%)
1.3
1.4
Return on equity (%)
16.3
17.1
Cost to income2 (%)
47.6
47.3
1
Excludes Islamic banks.
2
Only taking into account staff cost, overheads, net interest income and
fee-based income.
p Preliminary.
Note: Total may not add-up due to rounding.


The Financial Sector
129
from loans and financing only accounted for 0.2% of
total outstanding loans, far lower than the average
level recorded by foreign banks of around 0.5%. In
the case of merchant banks, their total fee-based
income declined marginally by 3.1% to
RM327.6 million. This was mainly due to lower
income from corporate advisory and underwriting
activities, which declined by 12.4% and 9.6%
respectively, partly due to lower number of debt
restructuring exercises undertaken in 2003.
The rationalisation efforts undertaken consequent to
the merger programme to improve operational
efficiency have begun to yield positive results, with
gross operating profits per employee improving from
RM125,500 in 2002 to RM134,800 in 2003.
Marketing expenses, however, increased by 7.4% as
banking institutions intensified efforts to enhance
market share. Staff cost per employee also increased
marginally from RM53,500 in 2002 to RM56,900 in
2003 given the better remuneration packages
offered by banking institutions to retain and reward
their staff.
Interest Margin
Reflecting the banking system’s role as the main
provider of funds to the economy, interest income
from loans and financing activities constituted 66%
of gross operating income of the banking system in
2003 (2002: 69%).
Gross interest margin narrowed further in 2003 as
intense competition surrounding the bank lending
activities continued to exert downward pressure on
lending rates amidst a more stable return on
deposits. The gross interest margin, defined as
difference between the average lending rate (ALR)
banking institutions charged on loans and advances
and the rate banking institutions paid on deposits
and borrowed funds (average cost of funds or ACF),
declined by 21 basis points to 3.69 percentage points
for the commercial banks (2002: 3.90 percentage
points). Similarly, the gross interest margins for the
finance companies narrowed to 5.70 percentage
points from 6.08 percentage points at end-2002.
The narrowing of the gross interest margin was due
to the larger decline in ALR, offsetting the marginal
decline in the ACF. At end-2003, the ALR of the
commercial banks stood at 6.11% per annum, whilst
that of the finance companies was 9.11% per
annum (2002: 6.51% per annum and 9.75% per
annum, respectively). The decline in ALR reflected the
50 basis points reduction in the Bank Negara
Malaysia intervention rate in May 2003 that led to a
decline in the base lending rate of 40 basis points.
Notwithstanding the 50 basis points reduction in the
policy rate, the ACF declined by a lower margin (20
and 26 basis points for commercial banks and
finance companies, respectively) as bulk of the
commercial banks’ and finance companies’ funds
comprises mainly fixed deposits, the interest rates of
which declined only marginally.
The lending rates (excluding credit cards) on new
loans approved by the commercial banks averaged
5.59% per annum in 2003. Meanwhile, the average
lending rates on new loans approved by the finance
companies declined by 44 basis points to an average
of 6.64% per annum. During the year, the average
lending rates on newly approved business and SME
loans by the commercial banks declined to an
average of 5.97% per annum and 6.40% per
annum, respectively (2002: 6.16% and 6.55% per
annum, respectively).
The ALR, however, overstates the interest income
earned by the banking institutions as it recognises
the accrued but unearned interest on non-
performing loans (NPLs)  (that is interest-in-suspense
or IIS) even though the banking institutions continue
to incur costs on funds that are borrowed, mainly
deposits, to finance these loans. In addition, the
banking institutions also incur administrative costs in
managing and monitoring these loans. Net interest
margin (gross interest margin after adjusting for IIS
and administrative costs) improved marginally for the
commercial banks to 1.31 percentage points (2002:
1.25 percentage points) while the net interest margin
for the finance companies remained at 3.14
percentage points. The improvement was due to
lower IIS and administrative costs. In tandem with
declining NPLs, the amount of IIS declined from
Table 4.7
Weighted Average Lending Rates for New Loans
Approved
Commercial banks Finance companies
Average for the year (% per annum)
2002
2003
2002
2003
Business loans
6.16
5.97
7.46
7.30
of which: SMEs
6.55
6.40
7.40
6.99
Household loans1
4.78
4.81
7.02
6.53
of which:
Purchase of residential
  properties
4.42
4.46
4.49
4.00
Purchase of passenger
  cars
n.a.
n.a
7.16
6.70
1 Excluding credit card loans.
n.a. Not applicable.


130
1.16% to 0.93% of loans for the commercial
banks, and from 1.56% to 1.28% of loans for the
finance companies. In addition, both commercial
banks and finance companies recorded lower
overheads and staff cost of 1.46% of interest-
related assets for the commercial banks and
1.28% for the finance companies in 2003
(2002:1.49% and 1.38% of interest-related assets,
respectively).
With growing competition in the loan market
amongst the banking institutions as well as with
the non-traditional players, the challenge is for the
banking institutions to further improve operational
efficiencies and risk management capabilities. This
is important to sustain their revenue performance
and hence their returns.
Lending Activity
Lending indicators demonstrated increasing trends
during the year despite the outbreak of the as well
Strengthened financial position of banking system enabled
increased financing for private consumption and business
activities.
as the uncertainty regarding the structure of excise
duty on cars. The issuance of new private debt
securities during the year also increased. The
diversification in sources of financing, especially for
the corporate sector, has resulted in a greater
proportion of lending by the banking system being
channelled to the retail customers and small and
medium enterprises, thus supporting the growth in
private consumption and business activity. The pre-
emptive actions by the Government contributed to
mitigate the effects of SARS on the economy. As
consumer and business sentiments recovered,
business activities regained growth momentum
whilst consumer spending increased, thus
stimulating demand for additional financing.
New loan approvals by the banking system
expanded strongly backed by sustained demand. In
2003, the banking system received loan
applications totalling RM220 billion. At the close
of the year, more than 2.2 million applications
amounting to RM151.4 billion were approved by
the banking system, 11.2% higher than the
amount approved in 2002. Averaging at RM12.6
billion a month, this is the highest monthly
average recorded for loan approvals since the
Asian financial crisis, exceeding the level recorded
in 2002. Loan applications rejected amounted to
RM26 billion, or 11.8% of applications received.
Loan disbursements expanded during the year at
an annual rate of 7.2% to amount to RM433.6
billion. With disbursements surpassing repayments,
outstanding loans expanded by 4.8% to RM464.2
billion as at end-2003. The amount of undrawn
loans rose by 3.6% to RM134.3 billion.
Lending to Households
Outstanding loans for the household sector
expanded by 12.5% to RM226.1 billion to account
for 48.7% of outstanding loan portfolio of the
banking system. As in the previous year, the
lending activities were mainly in mortgage
financing, purchase of passenger cars and credit
card loans. Demand for new financing remained
strong, due mainly to the low interest rates, stable
employment conditions and competition among
car manufacturers. This was further boosted with
the various incentives provided by the Government
to house purchasers, including tax relief on interest
payments for first-time house owners who
purchased properties priced between RM100,000
to RM180,000 from developers, a RM600 cash
payment to borrowers in the lower income
category and the stamp duty exemption on loan
Table 4.8
Banking System1: Financing Activities
For the year
2002
2003
Annual
growth
(%)
RM billion
Loan approvals
136.1
151.4
11.2
Loan disbursements
404.3
433.6
7.2
Loan repayments
396.1
422.8
6.8
As at end
2002
2003
Annual
growth
(%)
RM billion
Outstanding loans
 443.0
464.2
4.8
Total banking system financing2
468.9
496.5
5.9
Total financing for the economy3
546.1
600.2
9.7
1
Excludes Islamic banks.
2
Outstanding banking system loans plus private debt securities held by the
banking system.
3
Outstanding banking system loans plus outstanding private debt securities.


The Financial Sector
131
documents for purchases of houses costing not
more than RM180,000. In meeting the demand,
banking institutions offered attractive financial
packages and adopted aggressive promotion
strategies.
Higher applications were received during the year
totalling RM95.8 billion (+19.4%), the bulk of which
were applications to finance the purchase of residential
properties and passenger vehicles as well as credit card
applications. New approvals expanded by 7.4% to
amount to RM71.4 billion at interest rates averaging
between 4.32% and 5.09% per annum for the
commercial banks and between 6.29% and 6.82% per
annum for the finance companies. Approvals for hire
purchase financing and credit cards recorded strong
increases of 15.2% and 14.1%, respectively. Approvals
for house purchases, however, rose only by 2.4% to
RM29.7 billion, mainly for the high-end properties,
which saw a number of new launches during the year.
Similar to the increasing trend in approvals, there was
higher disbursements to the household sector. Totalling
RM113 billion, this was an increase of 8.6% over the
amount disbursed in the preceding year. A notable
trend was the high utilisation of credit card lines during
the year as card-based payments continued to gain
greater acceptance by consumers and retailers.
Utilisation of credit card lines increased by 19.6% to
RM30.4 billion during the year. Despite the high
utilisation, outstanding credit card loans remained a
small proportion of 2.6% of outstanding loans.
Lending to Businesses
Lending to businesses remained encouraging
throughout the year, supporting the stronger
economic activities. The various forms of relief
introduced by the Government to minimise the
effects of SARS had contributed favourably towards
sustaining demand for financing by the private
sector. To complement these measures, the banking
institutions stepped in to reschedule/restructure loans
amounting to RM2.5 billion as well as extended new
facilities for the affected businesses. The
establishment of the RM1 billion Special Relief
Guarantee Facility in May 2003 also enabled
businesses affected by the SARS outbreak to access
new financing at concessionary rates. At end-2003, a
total of RM40.3 million in working capital lines were
extended to 76 borrowers with guarantees totalling
RM32.2 million [Please refer to the Box on Banking
Measures Introduced in 2003 for details].
For the year as a whole, approvals for credit
facilities to businesses increased by 13.5% to
RM76.5 billion, despite a decline of 5.1% in loan
applications. Loan approvals to businesses were
broad-based, with approvals to businesses in the
manufacturing (20.8%), construction (14.5%), and
wholesale and retail (13.3%) sectors accounting for
the bulk of the new credit lines. Notably, approvals
to the wholesale and retail businesses rose by
28.6% to RM10.2 billion, whilst new facilities
granted to hotels and restaurants grew by 83.4%
demonstrating the continued support of the
banking sector for these businesses amidst the SARS
outbreak. Lending rates on new business loans
remained favourable averaging between 5.51% and
6.42% per annum for the commercial banks and
between 6.94% and 7.64% per annum for the
finance companies.
Stronger economic activity led to higher
disbursements to businesses. Disbursements to the
business sectors of RM296.8 billion (+7.6%)
accounted for 68.5% of total loans disbursed by the
banking system. Most of the funds were channelled
to the manufacturing sector (36.3%), and wholesale
and retail trade sectors (22.9%). Disbursements to
these sectors rose by 4.9% and 9.2%, respectively.
While funds utilised by the construction sector were
generally lower during the year, funds utilised by the
general and civil engineering contractors expanded
by 18.1% to RM9.4 billion. At end-2003,
outstanding loans to the business sectors declined
slightly by 2.2% on account of loan conversions into
debt securities and large repayments (+8.4%).
Meanwhile, unutilised business lines declined by
3.6% at end-2003.
Lending to Small and Medium Enterprises (SMEs)
The banking system continued to support the SMEs,
channelling more funds for their activities as
evidenced by the level of new financing extended
during the year. This commitment was further
reinforced by the availability of dedicated SME units
in almost all the commercial banks. For some
institutions, the SME unit undertakes activities
beyond the provision of financing, to include
developmental and support services such as
identifying and structuring financial products and
services to meet the requirements of the SMEs,
conducting training and workshops, and providing
other advisory services such as financial and cash
management.
Disbursements were also exceptionally strong,
constituting 29% (RM86 billion) of total
disbursements to the business sectors. This amount


132
represented an increase of 75.5% over the amount
disbursed in the preceding year. Meanwhile,
outstanding loans to SMEs expanded by 8.8% to
RM80.2 billion, to account for 38.4% of
outstanding business loans at end-2003. During
the year, nearly 75,000 SMEs obtained new credit
facilities totalling RM25.5 billion at favourable
lending rates which averaged between 5.96% and
6.87% per annum for the commercial banks, and
between 6.57% and 7.38% per annum for the
finance companies. This accounted for a third of
total approvals to the business sectors.
In 2003, the allocations for two special funds were
increased twice to meet the increased demand. The
allocation for the Fund for Small and Medium
Industries 2 expanded by RM1.35 billion to
RM2 billion and the New Entrepreneurs Fund 2 by
RM0.65 billion to RM1.15 billion. On aggregate,
Bank Negara Malaysia has allocated a total of
RM5.6 billion for five1 special funds for the SMEs in
the different segments. Of this amount, a total of
RM5.2 billion has been approved as at end-2003.
In tandem with efforts to improve the accessibility
of SMEs to financing, the SME Special Unit was
established in Bank Negara Malaysia in May 2003.
The Unit began its operations focusing on
disseminating information on the various sources
of financing available to SMEs; facilitating loan
application process by SMEs; assisting viable SMEs
facing difficulties in securing financing; and
providing advisory services on their other financial
requirements. In addition, the Unit looks into loan
related problems and complaints from SMEs. As at
end-2003, the Unit has received 1,789 requests for
assistance from the SMEs, of which 82% were
enquiries on information and sources of financing
and on the details relating to the special funds. To
coordinate and further develop access to financing
by the SME sector, the scope of the Unit will be
expanded to be the one-stop centre responsible for
all initiatives on SME financing and financial
services [Please refer to the Box on Banking
Measures Introduced in 2003 for details on the
expanded role of the Unit].
To resolve the NPLs of SMEs, the Small Debt
Resolution Committee (SDRC) was established to
facilitate the restructuring of NPLs of SMEs with
viable on-going businesses. Similar to the
Corporate Debt Restructuring Committee, the
SDRC undertakes an independent assessment on
loan restructuring requests by SMEs.
Complementing the independent assessment by
the SDRC was the setting up of the Rehabilitation
Fund for Small Businesses with an allocation of
RM800 million [Please refer to the Box on Banking
Measures Introduced in 2003 for details].
Loan Profile
The structure of the banking system loan portfolio
has undergone significant changes since the Asian
crisis, in terms of greater proportion of smaller-sized
loans and more diversified customer base as a result
of the greater focus on retail and SME sectors. This
has improved the risk distribution within the
banking system in particular, and the financial
sector in general. The proportion of outstanding
loans below RM100,000 constituted 30.9% of total
outstanding loans as at end-2003. Outstanding
loans of between RM100,000 to RM500,000 grew
by 14% to account for 24.4% of total loans at end-
2003. On aggregate, outstanding loans of below
RM1 million now accounted for 60% of total
banking system loans, as compared to 48% during
the pre-crisis period of 1996.
Banking Institutions and the Bond Market
Net proceeds from new PDS issued by corporations
rose substantially to RM45.8 billion, compared with
RM26.7 billion in the previous year. More than 60%
of the new issues took place in the first half of the
year as the higher bond yields in the second half of
2003 resulted in many corporations deferring their
proposed issuance. At end-2003, outstanding PDS
recorded a strong growth of 30.8% to RM136
billion. Of this amount, 23.7% were held by the
banking system. On aggregate, outstanding
banking system loans and outstanding PDS grew at
9.7% to RM600.2 billion as at end-2003.
Asset Quality
NPLs declined further owing to the favourable
economic conditions. The year saw a decline in
new NPLs, whilst recoveries and reclassifications
to performing accounts were strong. The outbreak
of the SARS impacted the cash flows of some
businesses, particularly those in the tourism-related
industries. The prompt actions from the
Government and the banking institutions,
however, contributed towards averting a
protracted negative impact on the domestic
economy.
1 Fund for Small and Medium Industries 2 (RM2 billion), New Enterpreneurs
Fund 2 (RM1.15 billion), Fund for Food (RM1.3 billion), Bumiputera
Enterpreneurs Project Fund (RM0.3 billion) and Rehabilitation Fund for Small
Businesses (RM0.8 billion)


The Financial Sector
133
Net NPLs based on the 3-month classification
declined by 8.2% to RM38.3 billion as at end-2003.
Consequently, the net NPL ratio improved by 1.4
percentage points to 8.7%. On a 6-month
classification, the decline in net NPLs was more
gradual at 3.1% to RM29.9 billion to account for
6.8% of total net loans at end-2003, compared with
7.4% as at end-2002. The loan loss coverage ratio
also strengthened to 53.9% on the 3-month basis
and 59.1% on the 6-month basis. Including the value
of collateral, the coverage ratio strengthened further
to 157.9% on the 3-month basis and 163.8% on the
6-month basis.
Improvements in the level of NPLs were due to lower
incidence of new NPLs, write-offs of bad loans
coupled with strong recoveries and reclassifications of
NPLs to performing loans. Reflecting the favourable
involving debts totalling RM9.3 billion were
implemented. At end-2003, 14 cases with debts
totalling RM7.3 billion have yet to be implemented.
Total loans in arrears excluding NPLs, remained stable
throughout the year, except for the temporary
increase in June, possibly due to the effects of SARS.
As such, loans in arrears remained almost unchanged
at RM78.1 billion at end-2003. Of this amount,
23.9% were loans in arrears of between 2 and less
than 6 months. During the year, loans in this
category recorded a small decline of RM0.1 billion or
0.6% to RM18.7 billion to account for 4% of gross
loans at end-2003.
Unlike the banking crisis in the late 1980s where the
pace of decline in the NPL ratio was more rapid,
recovery in the NPLs since the Asian crisis has been
more gradual. This was partly due to the more
stringent reclassification rules that were put in place
to prohibit evergreening of loans. In addition, growth
in the outstanding loans post-Asian crisis has been
much slower relative to the periods following the
mid-1980s economic recession primarily due to the
deepening of the bond market.
NPLs for the business sectors declined substantially to
account for 16.2% of total business loans as almost
all sectors recorded improvements. Sectors that
recorded increase in NPLs include the retail trade,
restaurants and hotels (+15.6%), and electricity, gas
0
5
10
15
20
25
30
35
40
45
50
J
F M A M J
J
A S
O N D J
F M A M J
J
A S
O N D
0
2
4
6
8
10
12
14
%
1
  Excludes Islamic banks
Graph 4.5 
Banking System1: Net Non-performing Loans
RM billion
2002
2003
Net NPLs (6-mths)
Net NPLs (3-mths)
Net NPL ratio (6-mths)
Net NPL ratio (3-mths)
Graph 4.6 
Banking System1: Ageing Profile of Loans in 
Arrears 2-<6 months
0
5
10
15
20
25
J
F M A M J
J
A S O N D J
F
M A M J
J
A S O N D
RM billion
1  Excludes Islamic banks
2002
2003
2-<3mths
3-<4mths
4-<5mths
5-<6mths
Enhanced credit assessment infrastructure and practices ensure
banking system exposure to households remain within prudential
level.
economic conditions, the amount of new NPLs for the
year fell by 3.2% to RM24.5 billion. Recoveries and
reclassifications remained strong at
RM22.6 billion in 2003 despite a slight decrease of
3.5%. This was due to high recoveries and
reclassifications of RM23.5 billion recorded in the
preceding year. Lower provisioning requirements
following the declining NPLs, had enabled banking
institutions to write-off RM8 billion of loans in 2003.
During the year, two restructuring schemes under the
Corporate Debt Restructuring Committee (CDRC)


134
and water (+240%). The higher NPLs for these
sectors was due to the effects of SARS and delay in
the implementation of a borrower’s restructuring
scheme respectively. These increases did not pose
any systemic risks as they accounted for only 5%
of banking system NPLs. Gross NPL ratio for both
the manufacturing and construction sectors
declined significantly to 16.5% and 27.8%
respectively following the implementation of the
debt restructuring scheme of a conglomerate.
Nonetheless, outstanding NPLs remained
concentrated in these sectors, constituting 45.5%
of total business NPLs.
NPLs of SMEs also declined by RM0.6 billion to
RM11.7 billion as at end-2003 to account for
14.6% of total loans to SMEs (Jan 2003: 16.4%).
Significant improvement was registered by the
construction sector which experienced a substantial
decline of 55.2% in NPLs since end-January 2003.
About 42.9% of the NPLs of SMEs were loans in
the manufacturing and construction sectors.
Table 4.9
Banking System1: Non-performing Loans and Loan Loss Provisions
As at end
2002
2003
Classification
3-month
6-month
3-month
6-month
RM million
Banking system1
Non-performing loans
69,760.4
57,488.3
63,566.7
53,428.0
General provisions
8,520.1
7,599.8
9,050.7
8,000.3
Interest-in-suspense
9,855.4
9,502.9
9,226.2
8,859.3
Specific provisions
18,149.0
17,150.7
16,014.9
14,696.9
Net NPL ratio (%)2
10.1
7.4
8.7
6.8
Total provisions/NPL (%)
52.4
59.6
53.9
59.1
Commercial banks1
Non-performing loans
47,957.3
40,012.4
44,649.2
37,669.8
General provisions
6,423.7
5,503.0
6,895.7
5,844.6
Interest-in-suspense
6,686.2
6,483.0
6,237.1
6,071.0
Specific provisions
12,970.8
12,392.2
11,737.8
10,845.2
Net NPL ratio (%)2
9.1
6.8
8.1
6.3
Total provisions/NPL (%)
54.4
60.9
55.7
60.4
Finance companies
Non-performing loans
17,345.3
13,487.0
15,713.0
12,939.5
General provisions
1,819.8
1,820.4
1,909.3
1,909.8
Interest-in-suspense
2,621.8
2,485.7
2,536.4
2,346.0
Specific provisions
4,209.6
3,804.2
3,675.4
3,264.6
Net NPL ratio (%)2
11.2
7.6
9.4
7.2
Total provisions/NPL (%)
49.9
60.1
51.7
58.1
Merchant banks
Non-performing loans
4,457.8
3,989.0
3,204.5
2,818.6
General provisions
276.6
276.5
245.7
245.9
Interest-in-suspense
547.4
534.1
452.6
442.3
Specific provisions
968.7
954.4
601.8
587.1
Net NPL ratio (%)2
24.6
20.8
21.5
17.9
Total provisions/NPL (%)
40.2
44.2
40.6
45.2
1
Excludes Islamic banks.
2
Net NPL ratio = {(NPL less IIS less SP) / (Gross loans less IIS less SP)} x 100%.
Note: Total may not add-up due to rounding.
While household sector NPLs increased by
RM0.9 billion, the magnitude remained small. This
largely reflected the higher NPLs for mortgage loans
(+15.6%) and credit cards (+32.1%). However, the
gross NPL ratios for household sector and mortgage
loans improved to 7.9% and 8.6% respectively.
Meanwhile, the gross NPL ratio for credit cards
remained small despite the increase to 4.7%. Higher
NPLs for mortgage loans and credit cards were
however moderated by lower NPLs for the purchase
of transport vehicles which declined by 10.3%. In the
current environment, exposure to the household
sector still remains within prudential levels. In
addition, banking institutions now have real time
access to comprehensive credit information of
borrowers, including retail borrowers, and therefore
the risk of over-indebtedness of the retail customers
is mitigated.
With prospect of stronger economic growth in 2004,
the declining trend in NPLs is expected to continue.
As the growth in outstanding loans is envisaged to


The Financial Sector
135
remain steady and as bulk of the large problem loans
have already been addressed, the magnitude of the
decline in NPL ratio will depend on the strategies
adopted by banking institutions. This is with respect to
the writing-off of legacy NPLs, in particular, where
recovery prospects are limited and with respect to the
recovery efforts by the special loan rehabilitation units
of banking institutions. While risk management
practices have improved, the capacity of the banking
institutions to effectively manage risks, the changes in
the structure of loan portfolio and the nature of risks as
a result of greater focus on retail and SME loans, as well
as the emergence of new growth areas, would
however, necessitate increased resources to monitor the
performance of the smaller-sized loan accounts. Thus, a
more robust and sound risk management framework
would be critical to ensure that the risk management
standards are able to effectively manage these risks at
all times and under all economic conditions.
Liquidity Management
Liquidity in the banking system remained ample
throughout 2003, mainly due to improved export
performance and continued inflow of foreign
direct investments. Bank Negara Malaysia
conducted liquidity operations to absorb the excess
funds through direct borrowings in the interbank
market and issuance of Bank Negara papers. Total
funds absorbed from the banking system rose
Table 4.10
Banking System1: Non-performing Loans by Sector
As at end
As percentage of total
NPL by sector
Change
loans to the sector
2002
2003
2002/2003
2002
2003
RM million
%
Business enterprises
44,598.0
38,806.3
-13.0
18.4
16.2
   of which SME loans
n.a.
11,692.9
n.a.
n.a.
14.6
Households
16,053.4
16,907.3
5.3
8.4
7.9
Others
1,628.6
1,181.2
-27.5
16.8
11.1
Total
62,279.9
56,894.8
-8.6
Agriculture, hunting, forestry and fishing
932.9
749.3
-19.7
8.2
7.3
Mining and quarrying
158.9
143.1
-9.9
16.1
13.2
Manufacturing
12,509.0
9,817.4
-21.5
21.0
16.5
Electricity, gas and water supply
422.5
1,440.7
241.0
6.6
28.7
Wholesale and retail trade, restaurants and hotels
4,316.7
4,577.6
6.0
11.8
11.8
Wholesale trade
1,851.8
1,728.8
-6.6
9.0
8.0
Retail trade
1,202.5
1,407.0
17.0
10.4
11.7
Restaurants and hotels
1,262.4
1,441.8
14.2
27.5
28.9
Broad property sector
26,817.5
25,802.1
-3.8
15.8
14.1
Construction
9,404.6
7,831.4
-16.7
30.5
27.8
Purchase of residential property
8,484.1
9,808.3
15.6
8.7
8.6
Purchase of non-residential property
4,801.3
4,618.0
-3.8
17.9
16.5
Real estate
4,127.6
3,544.5
-14.1
29.9
25.7
Transport, storage and communication
1,406.5
1,139.2
-19.0
14.6
10.8
Finance, insurance and business services
3,105.3
2,328.1
-25.0
10.5
8.0
Consumption credit
2,359.4
2,497.0
5.8
9.5
9.2
Personal use
1,867.6
1,879.0
0.6
13.4
12.9
Credit cards
434.2
573.8
32.1
4.1
4.7
Purchase of consumer durable goods
57.6
44.2
-23.2
15.9
13.3
Purchase of transport vehicles2
3,023.5
2,713.3
-10.3
5.2
4.2
Purchase of securities
4,372.8
3,777.5
-13.6
20.4
19.2
Community, social and personal services
1,226.3
728.3
-40.6
21.6
14.8
1
Excludes Islamic banks.
2
Includes commercial vehicles.
n.a.  Not available.
Note: Total may not add-up due to rounding.
Graph 4.7 
Liquidity in the Banking System in 2003
0
20
40
60
80
100
120
Jan
Feb
Mar Apr
May Jun
Jul
Aug Sep
Oct
Nov Dec
RM billion
2.60
2.65
2.70
2.75
2.80
2.85
% per annum
Bank Negara Malaysia's total intervention
Weighted average overnight money interbank rate (RHS)
Weighted average 1-week interbank rate (RHS)


136
steadily during the course of the first nine months
of 2003, but picked up significantly towards the
last quarter of the year. As at end-2003, the total
outstanding interbank borrowings by Bank Negara
Malaysia and issuance of Bank Negara Bills and
Negotiable Notes amounted to RM95.4 billion as
compared to RM64.7 billion as at end-2002. As a
result of the liquidity operations conducted by
Bank Negara Malaysia, interest rates remained
stable throughout 2003, with the weighted
average overnight interbank rate ranging from
2.71% to 2.81% per annum and weighted
average one week interbank rate ranging from
2.77% to 2.84% per annum.
In terms of liquidity management by the banking
institutions, the banking system as a whole
projected sufficient liquidity to meet any
unexpected withdrawals for a period up to one
month. As at end-2003, the cumulative liquidity
surplus in banking system (excluding the two Islamic
banks) was projected at RM59.7 billion to meet
demands up to one week and RM95.5 billion for
demands up to one month. Commercial banks,
finance companies and merchant banks projected
large surpluses in the 1-month bucket amounting to
21%, 15% and 32% of their total deposit base
respectively.
Interest Rate Risk
A significant portion of the banking system’s assets
and liabilities is interest rate sensitive. To assess the
banking system’s exposure to interest rate risk, the
duration-weighted net position (DWP) approach
was used to estimate the potential impact on
economic value for a 100 basis point shift in interest
rates. The DWP approach generates a larger
potential loss as it attempts to evaluate on a present
value basis all current and future cash flow earnings
of banking institutions’ on- and off-balance sheet
items across each item’s entire life. In 2003, the
banking system’s DWP increased by 9.1% to
Table 4.11
Banking System1: Liquidity Projection as at
31 December 2003
Cumulative
Buffer as
liquidity surplus
% of total
(RM billion)
deposits
1 wk.
1 mth.
1 wk.
1 mth.
Commercial banks
44.4
77.4
12.1
21.0
Finance companies
8.6
12.1
10.4
14.5
Merchant banks
6.7
6.0
35.5
31.5
Banking system1
59.7
95.5
11.4
18.2
1
Excludes Islamic banks.
RM4.6 billion. The increase, however, had minimal
impact on the banking system’s strong capital
position as shown in the table.
For the banking system as a whole, interest rate risk
was concentrated in the more than five years to
maturity bucket, accounting for more than
RM3.1 billion or 68% of total DWP as at end-2003.
However, there was a shift in the interest rate risk
concentration to the shorter term maturity spectrum
in 2003, particularly in the more than one to five
years maturity bucket. There was a significant
increase of RM13.6 billion or 23% in fixed-rate
loans with remaining maturities of one to five years,
while fixed-rate loans with remaining maturities of
more than five years rose moderately by RM3 billion
or 7.2%.
For the commercial banks, the marginal increase of
their DWP of 3.6% to RM2.2 billion as at end-2003
resulted from a higher level of fixed-rate loans in
the more than three years remaining maturity
bucket, which rose by 18.3% in 2003. The higher
level of fixed-rate loans extended by the commercial
banks comprised primarily Islamic housing loans.
Holdings of fixed-rate securities with remaining
maturities greater than two years had also increased
by 23% to RM28.9 billion as at end-2003. Some of
these exposures were offset by increased long-term
funding strategies particularly through the issuance
of long-term notes and the sale of loan assets to
Cagamas.
The finance companies’ higher DWP of
RM200 million in 2003, was mainly attributed to hire
purchase loans. These exposures were partially offset
by long-term fixed-rate funding sourced primarily
from the sale of loan assets to Cagamas. The interest
Table 4.12
Banking System1: Impact of 1% Rise in Interest
Rate on Capital Strength
Duration-weighted net position
As a percentage
Impact on
of Capital base
 Risk Weighted
(%)
Capital Ratio
(percentage point)
As at end
2002
2003
 2002
 2003
2002  2003
Commercial banks
-2,117 -2,194
-4.6
-4.2
-0.9
-0.9
Finance companies
-1,710 -1,911
-16.1
-16.7
-2.2
-2.2
Merchant banks
-392
-499
-8.9
-11.1
-3.2
-3.7
Banking system1
-4,219 -4,604
-6.9
-6.8
-1.3
-1.4
1
Excludes Islamic banks.
Note: Total may not add-up due to rounding.
RM million


The Financial Sector
137
rate exposure arising from fixed-rate hire purchase
loans of the finance companies can be further
mitigated by greater utilisation of Cagamas facilities.
Mergers between commercial banks and finance
companies would also allow such exposures to be
better managed. Simulating the exposures of the
commercial banks and finance companies on the
basis of their impending rationalisation, the impact
on risk-weighted capital ratio (RWCR) was reduced to
1.4 percentage points compared with 2.2 percentage
points if the finance companies operated on a stand
alone basis.
Within the banking system, the merchant banks
registered the highest percentage increase in DWP of
27% in 2003. This was due to the structural
transformation of merchant banking business
towards investment banking activities from the
traditional loan-based institutions. Hence, as the
merchant banking industry runs down its loan books,
the significant increase in its holding of debt
securities with remaining maturities of above one
year contributed to the increase in DWP
. The
merchant banks’ holding of the more than one year
debt securities rose by 25% or RM2.5 billion to
RM12.2 billion as at end-2003. Almost half of the
increase was concentrated in the more than five
years maturity bucket. Although long-term funding
positions to match these exposures remained at
RM3.8 billion, the relatively liquid nature of these
exposures would allow the merchant banks to adjust
the profile of their interest rate exposure accordingly.
In line with the Basel Committee on Banking
Supervision (BCBS)’s recommendation, banking
institutions will be required to incorporate their
market risk into the RWCR framework using the
“Standardised” approach, which include interest
rate and equity risks for trading book positions, and
foreign exchange rate risk for the entire banking
institution’s position. Based on the impact study of
the proposed framework conducted on positions as
at end-2003, the potential loss from exposures to
Graph 4.8
Banking System1: Distribution of Duration-
Weighted Net Position as a Percentage
of Capital Base as at 31 December 2003
No. of banking institutions
Duration Weighted Net Position/Capital Base
1  Excludes Islamic banks
Commercial banks
Finance companies
Merchant banks
>5% - 10%
>10% - 15% >15% - 20%
>20%
0
2
4
6
8
10
12
14
16
18
Up to 5%
Graph 4.9
Banking System1 : Net Interest Rate Position 
Mismatches as at 31 December 2003 
-60.0
-40.0
-20.0
0.0
20.0
40.0
60.0
>1 - 3
mths
>3 - 6
mths
>6 - 12 
mths
>1 - 2 
yrs
>2 - 3 
yrs
>3 - 5 
yrs
>5 - 10
yrs
>10 - 15 
yrs
yrs
Mismatches
(RM billion) 
Tenure range
  Commercial banks
  Finance companies
  Merchant banks
Banking system
1  Excludes Islamic banks
≤1
mth
>15
Table 4.13
Banking System1: Impact of Market Risk Capital Framework on Capital Strength as at 31 December 2003
RM million
of which:
Interest rate
Equities
Foreign
position risk position risk exchange risk
Commercial banks
1,434
972
62
377
-0.3
2.8
Finance companies
71
35
36
n.a.
-0.1
0.6
Merchant banks
828
644
123
14
-2.3
18.4
Banking system1
2,333
1,644
221
392
-0.3
3.4
1
Excludes Islamic banks.
n.a. Not applicable.
Note: Total may not add up due to rounding.
Total market
risk
Impact on Risk
Weighted
Capital Ratio
(percentage
point)
Total market
risk/Capital
base (%)


138
market risk amounted to RM2.3 billion or 3.4% of
capital base, while the impact on the RWCR of the
banking system as a whole was marginal.
Banking institutions’ interest rate risk in their trading
books accounted for over 70.8% or
RM1.7 billion of total market risk, of which 58.9%
and 39% were attributed to the commercial banks’
and merchant banks’ trading activities respectively.
Equities and foreign exchange risks of banking
institutions accounted for approximately 26.3% of
total market risk.
Equity Risk
Exposure of the banking system to equity risk
remained insignificant, with overall outstanding
equity holdings representing only 0.4% of the
banking system’s total assets as at end-2003.
Banking institutions increased their equity
investments by 30.6%, to RM3.5 billion as at
end-2003 from RM2.6 billion as at end-2002. This
was attributed largely to the conversion of loans into
equity as a result of debt restructuring activities.
Investments in quoted shares by the banking
system increased by 19.7% to RM2 billion from
RM1.7 billion during the year while investments in
unquoted shares registered a significantly higher
increase of 50%. These were reflective of the
restructuring activities undertaken by banking
institutions in 2003. As at end-2003, holdings of
unquoted shares accounted for 41.4% of the total
equity investments by the banking system compared
to 36.1% as at end-2002. In addition, banking
institutions’ holdings of quoted shares were
purchased directly from the market, which increased
by RM105 million or 20.3%. Shares held as a result
of underwriting declined by RM80 million or 88.6%,
reflecting the better performance of the stock market
in 2003.
The finance companies registered the highest
increase in the holding of equity investments within
the banking system, that is by RM329 million, of
which 62.7% were unquoted shares. 94.7% of the
increase in the holding of quoted shares by finance
companies was as a result of loans-to-equity
conversion. The same was true for the commercial
banks as a group, where 54.6% of the increase in
equity holdings comprised unquoted shares, and the
25.7% increase in holdings of quoted shares was
almost entirely due to loan conversion and debt
satisfaction.
With respect to the merchant banks, the substantial
decline in equity holdings resulting from
underwriting and loan conversion had offset the
significant increase of 96.7% in quoted shares
Table 4.14
Banking System1: Equity Exposure
Equity2
Equity2 /
Potential
holdings
Capital base
 equity2 loss /
(RM million)
(%)
Capital base
(%)
As at end
2002
2003
 2002
 2003
2002
 2003
Commercial banks
853.8
1,073.3
1.8
2.1
0.1
0.2
Finance companies
429.0
551.7
3.9
4.8
0.3
0.4
Merchant banks
410.7
402.3
9.0
8.9
0.7
0.7
Banking system1
1,693.5
2,027.3
2.7
3.0
0.2
0.2
1
Excludes Islamic banks.
2
Amount of investment in quoted shares.
Graph 4.10 
Banking System1 : Composition of Equity  
Investments
Unquoted 
shares 
36.1%
Unquoted 
shares  
41.4%
Loan 
conversion 
65.0%
Underwriting
0.5%
Debt satisfaction  
3.8%
Market purchase  
30.7%
As at 31 December 2003
As at 31 December 2002
Loan
conversion
61.2%
Debt satisfaction  
2.8%
Market purchase
30.6%
 
Underwriting 
5.4%
Quoted shares 
63.9%
Quoted shares
58.6%
 1
  Excludes Islamic banks


The Financial Sector
139
purchased directly from the market during the year.
Collectively, the merchant banks’ equity holdings
were marginally lower in 2003 than in 2002.
Even as the equity holdings of the merchant banks
remained unchanged, they continued to record the
highest level of equity exposure as their holdings
of quoted shares accounted for 8.9% of capital
base as against 2.1% for the commercial banks
and 4.8% for the finance companies as at end-
2003. Individually, most banking institutions had
less than 2% of their capital base exposed to
equity risk.
As at end-2003, the potential maximum loss for
the banking system as a whole was lower at 7.9%
compared to 8.2% in 2002. This was in terms of
equity value based on a 10-day volatility of the
Kuala Lumpur Stock Exchange Composite Index
(KLSE CI) in 2003. Based on the estimated
potential maximum loss of KLSE CI, therefore,
potential loss to the banking system was estimated
to remain at 0.2% of capital base despite the
Equity as % of Capital Base
No. of banking institutions
Graph 4.11 
Banking System1 : Distribution by Equity as a 
Percentage of Capital Base as at 31 December 2003
Commercial banks 
Finance companies 
Merchant banks 
1  Excludes Islamic banks
0
2
4
6
8
10
12
14
16
18
0-<2
2-<4
4-<8
8-<13
13-<20
≥20
increase in the holdings of quoted shares. The
potential loss for the commercial banks and
finance companies remained insignificant, at 0.2%
and 0.4% of their capital base respectively. The
potential loss for the merchant banks was
maintained at 0.7% of the capital base.
Foreign Exchange Risk
The exposure of the banking system to foreign
exchange risk in 2003 remained within prudential
levels. Throughout the year, the net open foreign
currency position (NOP) of the banking system
moved within a narrow range of RM2.2 billion to
RM2.8 billion. As a percentage of the banking
system’s capital base, the NOP registered a decline
from 5.5% as at end-2002 to 4.7% as at end-2003.
The banking institutions remained net foreign
currency forward purchasers in 2003 as exporters
capitalised on the forward premiums which ranged
between 42 to 52 basis points for the one-month
forward rates. However, as the forward premiums
stabilised in 2003, the increase in the amount of
forward contracts purchased by the banking
institutions during the year was sustained at about
the same level as in 2002. Forward foreign currency
contracts purchased by the banking institutions rose
by RM7.2 billion or 53.2% in 2003 compared with
an increase of RM6.7 billion or 98.3% in 2002.
Demand for forward contracts by exporters remained
strong in 2003.
Table 4.15
Banking System1: Foreign Currency Exposure
NOP
NOP/Capital base
(RM million)
(%)
As at end
2002
2003
2002
2003
Commercial banks
2,786
2,574
 5.8
5.0
Merchant banks
73
50
1.6
1.1
Banking system1
2,859
2,624
5.5
4.7
1
Excludes Islamic banks.
J
F
M
A
M
J
J
A
S
O
N
D
2003
-10.0
-5.0
0.0
5.0
10.0
15.0
RM billion
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
% p.a
Graph 4.12 
Banking System1: Components of Foreign 
Currency Exposure
Net open foreign currency position
Net foreign currency swap purchased 
Net open foreign currency assets (including value spot and tomorrow) 
Net outright forward foreign currency purchased 
US TBill secondary market rate (RHS)
3-month avg KLIBOR (RHS)
1  Excludes Islamic banks


140
To manage their forward purchases and
capitalize on the relatively cheaper USD
borrowings, banking institutions increased their
foreign currency liabilities by RM4.3 billion or
10.1% to RM46.7 billion as at end-2003. Banking
institutions, however, reduced their foreign
currency assets by RM3.3 billion to RM40.4 billion
as at end-2003 on account of diminishing returns.
On a net basis, the banking system had a net
foreign currency liability of RM6.3 billion as at end-
2003 as against a net foreign currency asset
position of RM1.2 billion as at end-2002.
The banking system is expected to maintain a net
foreign currency liability position and remain a net
forward foreign currency purchaser in an
environment in which the interest rate differential
between USD and Ringgit is expected to remain
positive resulting in continued favourable forward
premiums.
Capital Strength
The banking sector remained resilient and well-
capitalised, with RWCR and core capital ratio sustained
consistently above 13% and 10% respectively
throughout the year. The capital base of the banking
system increased by RM4.5 billion, of which audited
profits contributed RM1.2 billion, while capital raising
exercises by a number of banking institutions
contributed another RM3.3 billion. These new capital
injections offset the reduction in capital as a result of a
merger of two large commercial banks during the first
half of 2003. In line with higher financing activities, risk-
weighted assets of the banking system grew by
RM28.3 billion or 5.9% to RM506.6 billion at
end-2003.
Graph 4.13 
Banking System1 : Distribution of Net Open 
Foreign Currency Position as at 
31 December 2003
<-10
-10-<-2
-2-<2
2-<5
5-<10
≥10
NOP/Capital Base (%)
No. of banking institutions
Commercial banks
Merchant banks
1  Excludes Islamic banks
0
2
4
6
8
10
12
14
16
In tandem with the higher profits and new issuance
of shares, total Tier-1 capital increased by 2.8% or
RM1.6 billion, to RM59.3 billion as at end-2003.
Nevertheless, a higher increase in the risk-weighted
assets caused the core capital ratio to decline
marginally to 10.7%. Meanwhile, total Tier-2 capital
recorded a stronger growth of 14.4%, following the
issuance of subordinated debt by four banking
institutions, mainly to strengthen their capital
position. Combined with the reduction in
investment in subsidiaries as a result of the merger
of two large commercial banks, the RWCR of the
banking system strengthened further to 13.4%
(end-2002: 13.3%).
The RWCR of commercial banks increased to 13.6%
due to higher capitalisation and reduction in
investment in subsidiaries, while there was a decline
in capital base for merchant banks due to a
significant increase in the holdings of other banking
institutions’ shares by one merchant bank. This,
combined with an increase in risk-weighted assets
of 2.4%, resulted in the RWCR of the merchant
Table 4.16
Banking System1: Constituents of Capital
As at end
Annual
2002
2003
change
RM million
RM million
(%)
Tier-1 capital
57,662.0
59,282.5
1,620.5
2.8
Tier-2 capital
16,756.7
19,174.4
2,417.7
14.4
Total capital
74,418.7
78,456.9
4,038.2
5.4
Less:
Investment in
subsidiaries and
holdings
of other banking
institutions’
capital
11,016.4
10,591.9
-424.5
-3.9
Capital base
63,402.4
67,864.9
4,462.5
7.0
Risk assets:
0%
139,125.1 170,856.6
31,731.5
22.8
10%
15,544.0
16,849.8
1,305.8
8.4
20%
96,968.9 119,938.6
22,969.7
23.7
50%
102,628.2 117,511.0
14,882.9
14.5
100%
406,009.8 422,137.2
16,127.4
4.0
Total risk-weighted
assets
478,272.1 506,565.5
28,293.5
5.9
Risk-weighted
capital ratio (%)
Banking system1
 13.3
13.4
0.1
Commercial banks
13.2
13.6
0.4
Finance companies
12.0
11.3
-0.7
Merchant banks
19.0
18.4
-0.6
1
Excludes Islamic banks.
Note: Total may not add-up due to rounding.


The Financial Sector
141
FINANCIAL SECTOR MASTERPLAN
The Financial Sector Masterplan (FSMP) which was launched in March 2001 sets out the broad strategies
for the development of the financial sector over a ten year period. The end objective is to evolve the
financial system into one which is competitive, resilient and dynamic. Efforts that were undertaken
during the initial stage of the implementation of the FSMP were predominantly directed towards
enhancing the capacity and capability of domestic financial institutions in order to enhance their level of
effectiveness and competitiveness, strengthening the regulatory and supervisory framework, promoting a
safe and efficient payments system as well as developing the framework on consumer education and
protection.
During the first three years of the implementation of the FSMP, a total of 31 out of the 119
recommendations have been fully implemented, with an additional 24 recommendations are being
implemented on a continuous basis. Details of the recommendations which have been fully implemented
are as listed in the accompanying table.
Completed Recommendations
Banking Sector
R3.4
Liberalise restrictions on salaries and staff mobility in the banking industry to enable the industry
to attract the best talent and reward them accordingly
R3.5
Uplift restriction on employment of expatriates to attract the best international talents to meet
the demand for expertise in specific areas of banking
R3.6
Establishment of board committees, namely Nominating, Compensation and Risk Management
Committees to further enhance corporate governance standards
R3.7
Allow group rationalisation through cross-selling of products and consolidation of back-office
processes as well as facilitate the merger of commercial banks and finance companies to further
enhance efficiency and competitiveness
R3.12
Encourage outsourcing of non-core functions to gain greater strategic focus and efficiency
R3.14
Encourage the development of new delivery channels to increase the range of products and
services to further enhance competitiveness
R3.15.1 Introduction of a simpler product notification process to provide incentive for development of
  and
new and innovative products, and outline clear set of guidelines providing criteria for product
R3.15.2  notification and specific product approval requirements
R3.21
Issuance of examination manuals for implementation of risk-based supervision with supervisory
focus on high risk areas and greater attention on weak institutions
R3.28
Allow market forces to shape developments in the payments system to allow greater competition
and increase innovation in payments system
Insurance Sector
R4.1
Remove restrictions on outsourcing to enable insurers to further develop core competencies and
effective business strategies
R4.2
Allow eligible insurers to use the internet as a distribution channel to enhance competitiveness
and efficiency of the insurance industry
R4.6
Relax the restrictions on employment of expatriates to accelerate the development of skills and
expertise in the industry
R4.16
Increase the statutory minimum paid-up capital of insurers to enhance their financial
resilience and to accelerate the consolidation of the industry in order for domestic insurers to
capture the size and scale needed to compete effectively in a more deregulated and
liberalised market
R4.18
Establish board committees with specific responsibilities and enhance disclosure of compensations to
directors and senior management to ensure they act in a manner that will increase shareholder value


142
R4.19
Raise the entry requirements for the agency force to ensure the recruitment of more qualified
and competent agency force
R4.20
Introduce additional compulsory exams as part of continuing education programmes for agents
to upgrade their knowledge and skills
R4.21
Further strengthen performance-based supervision to maintain stability under more deregulated
and competitive market conditions
R4.26
Introduce ‘best advice’ regulations to enhance consumer protection and professionalism in the
sale of life insurance products by insurance intermediaries
R4.27
Strengthen regulations on unfair trade practices to ensure sound business practices and fair
treatment of consumers
R4.29
Allow financial and non-financial institutions to acquire interests in direct insurers to create
business synergies
Islamic Banking and Takaful
R5.3
Build strong management through the establishment of board committees, benchmarking and
employment of experienced and qualified staff
R5.6
Increase the number of takaful operators to accelerate the expansion of takaful industry
Development Financial Institutions (DFIs)
R6.4
Introduce a systematic framework for sourcing funds to ensure the appropriate and adequate
funding for the operations of DFIs.
R6.7
Establish a legislative framework to provide for the regulation and supervision of DFIs to ensure
that DFIs’ policies and objective are consistent with the national policy objectives
Alternative Modes of Financing
R7.2
Establish a RM500 million Venture Capital Fund to increase the availability of Venture Capital
financing and stimulate new ventures
R7.3
Introduce further tax incentives for the Venture Capital industry to promote the growth of
Venture Capital
R7.4
Liberalise the MESDAQ listing requirements to facilitate the exit of Venture Capital companies
from their investments
Labuan International Offshore Financial Centre
R8.3
Adopt a consultative and market driven approach to create a conducive tax and business
environment to enhance the competitiveness and attractiveness of Labuan
R8.6
Strengthen Islamic banking and finance as well as takaful to develop Labuan with a strategic
focus on Islamic products and services
R8.7
Enhance Labuan International Financial Exchange (LFX) to be a one stop financial exchange for
residents and global companies
The recommendations implemented and the various initiatives undertaken during the first three
years of implementation have contributed towards enhancing capacity and capabilities of domestic
financial institutions, as well as providing a robust infrastructure to ensure overall stability of the
financial sector.
BANKING SECTOR
Initiatives that were undertaken during Phase 1 of the implementation of the FSMP were primarily
focused on building the capacity and capabilities of domestic banking institutions to enhance their
competitiveness and building the infrastructure within which the banking institutions operate to promote
the development of a more robust banking system. Attention was also accorded towards creating the
necessary infrastructure for a more market-based consumer protection framework.


The Financial Sector
143
One of the key milestones for Phase 1 of the FSMP is to drive performance improvement. The industry-
wide benchmarking programme which was initiated in 2002 provided banking institutions with a tool to
enable more effective strategic focus and business planning and provided the relative ranking of each
institution in all areas of performance. The benchmarking exercise also enabled Bank Negara Malaysia to
assess the progress of the industry, particularly the performance improvements recorded by the domestic
financial institutions thereby determining the speed of transition and progress.
The domestic banking institutions have steadily recorded improvements over the past three years yielding
desirable results. The consolidation programme has resulted in larger and better capitalised domestic
banking institutions. The average total assets and shareholders’ funds per domestic commercial banks
have more than doubled from RM18.1 billion as at end-1999 to RM44.9 billion as at end-2003 and from
RM1.4 billion as at end-1999 to RM3.8 billion as at end-2003 respectively. The profitability levels have
increased over the past three years. Return on average assets and return on average equity of the
domestic banks have increased from 0.7% and 8.4% in 2001 to 1.2% and 13.4% in 2003 respectively.
Pre-tax profit per employee had also increased significantly from RM50,196 in 2001 to RM108,728 in
2003. The cost to income ratio also declined from 41.2% in 2001 to 40.1% in 2003. Improved
management of the operating costs had stabilised the operating expenses as a percentage of average
assets at RM1.42 per every RM100 of assets over the same time period.
The banking institutions in Malaysia operate in an open environment. Both the domestic and foreign
controlled banking institutions are governed by the same set of legislations and regulations, with the
only remaining restriction on foreign banks being in the area of branching. Foreign controlled banking
institutions nevertheless have a strong presence in the market, accounting for 26%, 27% and 25% of
the commercial banking assets, loans and deposits markets respectively.
Competition has resulted in the narrowing of gross interest margins of commercial banks from
4.14 percentage points in 2001 to 3.69 percentage points in 2003. In this more competitive
environment, the domestic banking institutions have been able to sustain their market share at 80%.
The foreign banking institutions have expanded their loan market share mainly in housing loans. The
domestic banking institutions continue to be the main provider of financing for businesses, particularly
for the small and medium enterprises, where 83% of the loans to this sector were extended by the
domestic banking institutions. The domestic commercial banks have also expanded their market share in
the credit card business, which was previously the domain of the foreign controlled commercial banks to
47% of the market (2000: 43%).
To enhance the level of operating efficiency and allow greater strategic focus on business operations,
banking institutions can now outsource non-core operations to third party service providers. They are
also permitted to rationalise common internal operations such as treasury function and human resource
management. A number of banking institutions also cross-sell products and services within the same
banking group. Strategic alliances between banks and other banking institutions as well as non-banking
institutions have also taken place to further enhance competition and innovation. One example is in the
area of bancassurance and the sale of unit trusts. In addition, domestic banking institutions have also
introduced new services such as wealth management and structured deposit products.
To enhance the delivery of products and services to customers, banking institutions have embraced
innovative technology-based delivery channels such as internet and mobile banking. This widens the
accessibility of banking services and facilitates seamless connectivity in the delivery of financial products and
services to customers through the operation of one-stop financial centres. Efficiency of the banking sector
has also improved, with the average time taken by commercial banks to process housing loan applications
having declined from 4 days in March 2002 to 3.1 days and from 11 days to 9.5 days for new credit card
applications. With greater emphasis on customer relationship, the percentage of customer complaints that
are resolved within 14 days have improved from 82.1% in March 2002 to 87.6% in December 2003.


144
As a result of the significant progress made by the domestic banking institutions, liberalisation of the
system has been brought forward in several areas. While the domestic banking institutions were allowed
to offer full internet banking services beginning 1 June 2000, the locally-incorporated foreign banks were
permitted to offer such services beginning 1 January 2002, earlier than was announced. The requirement
for a non-resident controlled company to source at least 50% of its financing requirements from
domestic banking institutions was also uplifted with effect from 1 April 2003.
A smooth functioning payments system which is efficient and effective is also important. As the
payments technology and the structure of the financial services industry change rapidly, it is necessary to
have a payments system which responds to this new environment. To encourage greater innovation and
competition, Bank Negara Malaysia has shifted its role from being directly involved in the development
process to a more facilitative role, particularly in the retail payments system. Bank Negara Malaysia will
however, continue to ensure that minimum security standards are applied when any new systems are
introduced. The Payment Systems Act 2003 was enacted to facilitate the development of payments
system and to ensure that it is secure and efficient.
An important aspect of stability in the financial system relates to the ability of the system to undergo the
transition to deregulation and increasing competition with no disruption in the level or reliability of
services to customers. The customers also play an important role to drive performance improvement of
the financial institutions. Crucial to this is active consumerism, which can only be attained with the public
having the necessary information and understanding of financial products and services. Towards this, a
10-year consumer education programme was launched to disseminate information to consumers
including information on consumer rights and responsibilities. In addition, efforts have also been put in
place to encourage consumers to pursue formal administrative and legal redress for their grievances.
Banking institutions are required to set up dedicated complaint units to manage complaints received from
customers.
The banking system remains the largest provider of funds to the private sector, providing support to the
various sectors of the economy. In line with the objective to develop a well-diversified financial system
with well-functioning, deep and liquid markets, Bank Negara Malaysia continued to take an active role in
the development of the bond market to meet the changing needs of the Malaysian economy. As a result,
the bond market experienced a rapid growth since the Asian financial crisis. As at end-2003, the size of
the bond market was equivalent to 87.6% of GDP
, compared with 46.9% in 1996. The private debt
securities (PDS) market has emerged as an important source of financing for the private sector since
1998. PDS outstanding represented 34.3% of GDP at end-2003.
To enhance the liquidity in the secondary bond market, the Guidelines on Securities Borrowing and
Lending (SBL) Programme under the Real Time Electronic Transfer of Funds and Securities System were
issued to support trading strategies for principal dealers and enhance the return on bond portfolio
investment for investors. Through SBL, principal dealers (PDs) can now participate as both borrower and
lender, which allow PDs to quote two-way prices more effectively and at the same time able to meet
commitments of their treasury activities. In addressing the captive bond market issue and to promote the
secondary trading, greater investment flexibility was accorded for insurance companies to invest in
Malaysian Government Securities and PDS.
To increase the availability of risk management tools for market participants, more players were
allowed to undertake repo transactions with the licensed financial institutions. The Prudential
Standards on Asset Backed Securities Transactions by Licensed Institutions issued by Bank Negara
Malaysia in 2003 helped in creating greater awareness and participation in securitisation transactions.
Universal brokers have been allowed to participate in fixed income market and thus engage the
services of money-brokers. A broader investor base is an important factor in contributing to liquidity in
the secondary market.


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145
Concerted efforts were also made to develop the Islamic financial markets to meet the demands of
institutional investors such as the issuance of Islamic based Government investment issues and the
development of a risk-free benchmark Islamic yield curve to help in the pricing and trading of Islamic
securities. To further develop the Islamic capital market, the Government had provided incentives such as
tax exemption for expenses incurred on the issuance of Islamic PDS. As a result of these efforts, the
Islamic PDS market has grown significantly. Total outstanding of Islamic PDS stood at RM69.1 billion, or
46% of total PDS outstanding as at end-2003.
Measures that have been put in place over the past three years were implemented to ensure that the
banking system will continue to support sustainable economic growth and to prepare the Malaysian
banking sector for a more liberalised and global operating environment. The strategy for the banking
system on the latter has been one of gradualism. A managed and sequenced deregulation and
liberalisation process is adopted to ensure that financial reforms will be effectively implemented without
destabilising implications on the system.
INSURANCE SECTOR
The recommendations implemented in the first phase of the FSMP are aimed at building the capabilities
of domestic insurers to compete more effectively, strengthening the consumer protection framework and
raising corporate governance standards to further enhance the protection of policyholders and
shareholders value.
The capacity-building initiatives and measures implemented under Phase 1 of the FSMP have brought
about positive developments in the industry over the last three years. Significant progress was achieved in
the consolidation of the industry, particularly in the more fragmented general insurance sector, following
the increase in the minimum paid-up capital requirement for insurers from RM50 million to RM100
million in 2001. A total of 15 mergers and acquisitions involving a total of 28 general insurers (including
four composite insurers) have been successfully completed since 1999. As a result, the average
capitalisation of general insurers strengthened by 54.4% from RM92.2 million in 2000 to RM142.3
million in 2003, improving the competitive position, and therefore better able to take advantage of the
opportunities presented in the more open market environment.
Domestic insurers continued to maintain their dominant position in the general insurance sector, while
also achieving productivity and profitability gains. As at end-2003, domestic insurers accounted for
73.3% of gross general insurance premiums, with the top five domestic insurers collectively controlling
31.8% of the total gross premiums in the industry. Employee productivity rose from RM498,857 in 2000
to RM797,923 in 2003. Overall profitability, as measured by gross premiums generated per employee,
also improved, with domestic insurers sustaining a higher return on equity over foreign insurers (24.7%
as against 20.4% by foreign insurers for the year 2003).
In the life insurance sector, significant attention was directed at developing new growth opportunities to
increase the market penetration, and hence economies of scale. In this respect, domestic insurers secured
a dominant position in bancassurance business, accounting for 76.6% of the total new insurance
premiums generated through banking institutions in 2003. The commitment of domestic insurers to
the development of bancassurance was supported by the encouraging sales of non-credit related
products. Domestic insurers accounted for more than 80% of total non-credit related bancassurance
business in 2003.
As at end-2003, a total of 12 life insurers had been given approval to enter into bancassurance
arrangements with banking institutions. Business generated through this alternative distribution channel
has quadrapled since 2000 to reach RM1,859 million in 2003. Two domestic insurers have successfully
leveraged on the banking distribution network to become market leaders in bancassurance, with a
combined market share of 36% of total bancassurance premiums generated in 2003. Bancassurance


146
currently accounts for more than 38% of total new life business premiums in the market and has been a
major factor contributing to the higher penetration of life insurance business in Malaysia which increased
from 31.5% in 2000 to 36.4% in 2003.
Domestic life insurers succeeded in making further inroads in investment-linked business, which has
emerged as a new growth area. The market share of investment-linked business attributed to domestic
insurers has increased progressively from 16% in 2001 to 27.9% in 2003, contributing to a higher overall
new business growth rate of 31.5% achieved by domestic life insurers in 2003, compared with 19.4%
registered by foreign insurers.
The capacity building initiatives under Phase 1 of the FSMP also introduced a more flexible operating
regime aimed at enabling domestic insurers to innovate, develop expertise and enhance efficiency
levels. In this respect, the transfer of expertise to domestic insurers was facilitated by a more flexible
policy on the appointment of expatriates. As at end-2003, a total of 42 expatriates were employed in
the insurance industry to provide technical support in the areas of information technology,
underwriting, actuarial and agency development. In the more flexible operating environment, an
increasing number of insurers also leveraged on effective outsourcing strategies to lower costs while
delivering higher service quality to their customers.
As at end-2003, more than 30 insurers were engaged in outsourcing arrangements, primarily in back-end
support functions related to management information systems, data processing and customer service
support. Consumer access to insurance was also made more convenient with approval given to 18
insurers to provide insurance over the internet, including eight insurers which are now able to offer
motor insurance policies on-line through an interactive website. The process improvements enabled by
these developments resulted in an overall improvement in the efficiency levels of domestic insurers.
Domestic life insurers registered a lower expense rate of 34.2% in 2003 (2000: 36.8%), while the
combined management expense ratio of domestic general insures improved to 24% in 2003 (2000:
24.4%).
Notwithstanding the positive developments in the industry, domestic players with significant overall
market share have yet to emerge in the life insurance sector.  In the transition to the second phase of the
FSMP which envisages a level playing field between domestic and foreign players, the focus of policy will
continue to be directed at developing domestic insurers, in particular life insurers, to consolidate
domestic strengths in the penetration of alternative distribution channels, promote further innovation
and facilitate strategic alliances.
The implementation of specific measures under Phase 1 of the FSMP to promote greater market
discipline and strengthen corporate governance will support further performance improvements by
domestic insurers. Enhanced disclosure requirements and the implementation of a comprehensive
consumer education programme will empower consumers to make informed decisions on their choice of
financial products and services which in turn, will serve as a strong incentive for improved product and
service offerings by insurers. The strengthened corporate governance framework underpinning these
initiatives will also serve to ensure that the board of directors posses the appropriate qualifications and
experience to enable them to provide effective strategic direction to insurers in the more challenging
environment. These measures supplement the changes being made to the regulatory framework and
constitute important elements of a comprehensive approach to develop a robust, stable and dynamic
insurance sector.
ISLAMIC BANKING AND TAKAFUL
The Islamic banking and takaful sector strengthened and expanded significantly during the first phase of
the FSMP. The Islamic banking market share increased to account for 9.7% (2000: 6.9%) of total assets,
10.4% (2000: 7.4%) of total deposits and 10.3% (2000: 5.3%) of total financing of the banking system.


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147
The takaful sector also expanded rapidly to constitute 5.7% (2000: 3.9%) of total assets and 6.0%
(2000: 3.9%) of total contributions of the insurance industry. Phase 1 also witnessed significant progress
being achieved in the development of the financial infrastructure for Islamic banking and takaful to
function efficiently and effectively in parallel with conventional banking and insurance.
A significant milestone was achieved in the legal infrastructure development with the assignment of a
dedicated High Court in 2003 to adjudicate all Islamic banking and finance cases. This development,
reinforced by the formation of the Law Review Committee to undertake a holistic review of the present
common law-based legislations will serve to establish an effective legal structure to cater for the unique
nature of transactions in Islamic banking and finance. To complement these initiatives, a preliminary
review of the Islamic Banking Act 1983 and Takaful Act 1984 was also undertaken.
The Shariah advisory structure was also strengthened with the amendment of the Central Bank of
Malaysia Act 1958 which conferred a legal stature to the Shariah Advisory Council at Bank Negara
Malaysia as the sole authority to decide on Shariah matters on Islamic banking and finance that fall
under the purview of Bank Negara Malaysia. Guidelines will be issued to strengthen the structure of the
Shariah Committees at the Islamic banking institutions and takaful operators and to define the
composition, roles and responsibilities of these Shariah Committees. With the guidelines in place, the
overall effectiveness of Shariah governance framework will be significantly enhanced.
The regulatory framework has been enhanced to address the characteristics of Islamic banking and
takaful as well as to strengthen institutional capacity and financial resilience of Islamic banking and
takaful players. The introduction of the standard framework for the computation of the rate of return in
Islamic banking operations in 2001 provided greater transparency in the derivation of the rate of return
to ensure a more equitable distribution of income between the bank and its depositors. The framework
enhanced the capability of Islamic banking institutions to manage volatility in the rate of return more
effectively and to remain competitive relative to the conventional banking institutions. The issuance of
the Guidelines on the Specimen Reports and Financial Statements for Licensed Islamic Banks (GP8-i) in
2003 further increased financial disclosure to promote a more effective role of market discipline.
The capital position and financial resilience of the Islamic banking system strengthened significantly as a
result of the regulatory requirement for conventional banking institutions participating in the Islamic
Banking Scheme (IBS banks) to observe the minimum risk-weighted capital ratio for their Islamic banking
portfolios. The minimum capital requirement of takaful operators would be raised from RM35 million to
RM100 million with effect from 31 December 2004 to position takaful operators at par with
conventional insurers.
The benchmarking programme for performance measurement has also been put in place to enhance the
ability of Islamic banking institutions and takaful operators to assess their relative efficiency and
formulate strategies to improve operational efficiency and to be at par with international best practices.
In the area of corporate governance, the issuance of guidelines on the establishment of board
committees, minimum qualifications and training requirements for directors, as well as the roles and
responsibilities of independent directors in 2003 aim to strengthen the management of Islamic banking
institutions and takaful operators as shareholders play a more active role in overseeing the effectiveness
of the board of directors and management.
The issuance of the Guidelines on the Sell and Buy Back Agreement in 2002 enhanced the capacity of
Islamic banking institutions to better meet their liquidity requirements as part of the efforts to develop a
deep Islamic financial market structure. The variable rate financing mechanism introduced in 2003
provided a competitive tool for Islamic banking players in pricing product offerings to sustain their
competitive position in a dual banking environment and concurrently assist Islamic banking institutions to
effectively manage risks in pricing arising from asset and liability mismatches. The detail implementation


148
framework for mudharabah (profit-sharing) and musyarakah (profit and loss sharing) financing is in the
final stage of completion and is expected to further promote greater diversity in the mode of financing as
the Islamic banking system advances into Phase 2 of FSMP
.
The establishment of the Islamic Banking and Finance Institute Malaysia (IBFIM) in 2002 as an industry-
owned training and research institute was another important progress achieved. IBFIM will spearhead the
development of a pool of knowledgeable and competent Islamic bankers and takaful operators to meet
the requirements of the Islamic financial industry. The organisation of the Islamic Banking and Takaful
Week in 2001 and 2003 as well as the launching of the Consumer Education Programme have also
played an important role in enhancing the level of public literacy in Islamic banking and takaful.
Consumers are now more aware of the characteristics of Islamic banking and takaful, its underlying
Shariah principles and concepts as well as the range of products and services offered by Islamic banking
institutions and takaful operators.
Progress has also been achieved in the development of the institutional infrastructure. Two additional
takaful operators have been licensed. In Islamic banking, a review of the existing “window” institutional
structure of the IBS banks is being undertaken to prepare an enabling structure that can assimilate these
developments and thus strengthen the prudential regulatory and supervisory regime.
As the progress of development has exceeded initial expectations in Phase 1, Bank Negara Malaysia has
brought forward the liberalisation for the Islamic banking sector from Phase 3 to Phase 2, three years
earlier than envisaged by the FSMP
. The liberalisation of the Islamic banking sector will further hasten the
pace of development and strengthen global integration to prepare the enabling environment for Malaysia
to evolve as a regional centre for Islamic banking and finance.
DEVELOPMENT FINANCIAL INSTITUTIONS
In tandem with the strategic directions outlined in the FSMP
, efforts undertaken during Phase 1 of the
FSMP were focused on fostering a pool of efficient and effective DFIs to complement banking institutions
in providing financing to identified priority and strategic sectors in the economy.
During Phase 1 of FSMP
, strategies undertaken were centred mainly on strengthening the
regulatory framework and capacity building of the DFIs. These strategies and initiatives include the legal
infrastructure and policy development to support an orderly and sound development of effective DFIs.
A comprehensive regulatory and supervisory framework to facilitate the overall policy development of
DFIs, especially in strengthening the financial and operational soundness of the DFIs was completed with
the enactment of the Development Financial Institutions Act 2002 (the Act) in February 2002. The Act
provides comprehensive mechanisms to ensure DFIs perform their mandated socio-economic functions.
Following the enactment of the Act, six DFIs were subjected to the regulatory and supervisory framework
embedded in the Act.
The major policy framework on building the capacity of DFIs aimed to ensure that as specialised
development institutions, the institutions would have an effective role in supporting developmental
needs of the nation. The DFIs are required to prepare and submit statement of corporate intent which
highlight the planned business activities, implementation strategies and performance target within the
mandated roles and Government’s development objectives to ensure that DFIs remained focused on
their mandated roles.
Prudential measures, namely, the classification of impaired loans and loan loss provisioning requirement
have been introduced to ensure that the impaired loans and potential losses are identified and recognised
in a timely manner, and loan assets and income are fairly and prudently stated. The maintenance of
minimum liquidity has been introduced to enhance the financial soundness of DFIs. The policy on


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149
minimum capital requirement has been initiated to ensure DFIs have the financial capacity to sustain their
operations. During Phase 1, regular on-site examinations of the six DFIs were conducted to assess the
DFIs’ performance in meeting the mandated roles.
To further equip DFIs as specialised development institutions, measures were undertaken to enhance their
role in providing non-financial services. A joint project with the Japan International Cooperation Agency
and selected DFIs was initiated to enhance the provision of advisory services of these DFIs to SMEs. The
project will  formulate action and implementation plans to enhance the institutional capability, including
human resource skills.
To strengthen corporate governance, guidelines were issued to assist the DFIs and their stakeholders in
instituting effective governance structure and oversight of Board of Directors. The main areas addressed
in the guideline are duties and responsibilities of the board of directors, minimum requirements and rules
governing the appointment of directors and chief executive officers as well as the establishment of board
committees.
Moving forward, measures implemented will continue to be focussed on providing the enabling
environment for the DFIs to operate efficiently and effectively. Strategies in the near term will focus on
institutional development of the DFIs in the areas of risk management and the advisory and consultancy
capability for other targeted customers, besides the SMEs. At the same time, efforts to promote
institutional efficiency of the DFIs through the formulation of performance indicators will also be
intensified to strengthen their financial and operational conditions.
MOVING FORWARD
The measures that have been implemented thus far were aimed towards providing a strong foundation
on which the financial sector will be developed in the future. In addition to the measures that were
implemented in the banking, insurance, Islamic banking and takaful, and development financial
institutions sectors, significant strides have also been recorded in introducing alternative modes of
financing in the domestic financial system. Significant progress has also been made in the development
of Labuan as an international offshore financial centre. On the former, the Government has been in the
forefront in the development of the venture capital (VC) industry, a key step towards transforming
Malaysia into a knowledge-based economy. Initiatives such as the establishment of a one-stop centre for
the VC industry, tax incentives and VC fund will continue to spur development in the industry. With the
rapid recognition and growing demand for Islamic finance, Labuan has strategically promoted itself as an
Islamic financial centre. Supported by the strong onshore Islamic financial sector, Labuan is well
positioned to participate in the growing global Islamic financial market.
As we move forward, further efforts in institutional development will be undertaken, in particular, for the
domestic financial institutions. This will be accompanied by gradual liberalisation, with the balance being
made to ensure that the benefits will be maximised while any destabilising implications minimised. In
addition, a more diversified financial services landscape will emerge with the capital market, insurance
and venture capital having a significant role in the financial sector.


150
The Proposed Deposit Insurance System in Malaysia
In 2003, substantial progress was made towards finalising the features of the proposed deposit insurance
system for Malaysia, thus paving the way for its establishment. The improved strength, competitiveness
and resilience of the banking system following the comprehensive restructuring and capacity building
initiatives support a positive environment for the effective implementation of a deposit insurance system
that will contribute to the stability of the financial system.
As an integral component of the financial safety net, the deposit insurance system will further strengthen
incentives for financial institutions to adopt sound financial and business practices and enhance public
confidence in the financial system by providing explicit protection of deposits. The proposed features
underpinning the Malaysian deposit insurance system fully support these objectives.
In developing the design features, Bank Negara Malaysia has considered various models adopted in other
countries that operate explicit deposit insurance systems, adapting them as appropriate, in order to
achieve a system that will function efficiently, equitably and in a manner that provides the appropriate
economic incentives for all participants within the Malaysian context. Key elements of the proposed
design features include:-
(a) a legislated mandate for the agency responsible for the administration of the deposit insurance
system (hereafter referred to as ‘Agency’). This will ensure clarity of its role and responsibilities within
the financial safety net and provide the basis for the statutory powers to be accorded to the Agency;
The proposed mandate for the Agency is to:-
(i)
administer the deposit insurance system;
(ii)
protect depositors from the loss of their deposits up to the insured limit in the event of a
bank failure;
(iii)
strengthen incentives for sound risk management in the banking industry; and
(iv)
promote or otherwise contribute to the stability of the financial system.
Within its proposed mandate, the Agency will have the role, in certain circumstances, to
undertake the resolution of banking institutions, as may be required based on the assessment of
Bank Negara Malaysia. In this role, the Agency will also be responsible to minimise the costs of
bank resolutions to the financial system, taking into account factors affecting financial system
stability.
(b) compulsory membership for commercial banks (including subsidiaries of foreign banks operating
in Malaysia) and finance companies licensed under the Banking and Financial Institutions Act 1989,
and Islamic banks licensed under the Islamic Banking Act 1983, to accept deposits (hereafter
referred to as ‘member institutions’). This will avoid risks associated with adverse selection whereby
only small and perceived weaker institutions participate in the system. This is important to enhance
the viability of the deposit insurance system;
(c) protection up to the prescribed limit (for eligible deposits) for all depositors of member institutions.
Provisions will be made for the Agency to approve additional financial instruments as being eligible
for deposit insurance to accommodate new types of deposit products that may be introduced in
future. Deposits that are not payable in Malaysia, foreign currency deposits, negotiable instruments of
deposit or other bearer deposits, repurchase agreements and money market placements would not
be insured;


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151
(d) an adequate basic level of protection provided for every depositor’s deposits in each member
institution. Depositors with deposits in more than one member institution will be insured separately
for their deposits in each institution. Joint and trust deposits will also be separately insured, providing
additional coverage within the system for depositors with such accounts. The deposit insurance limit
will be set at a level that is sufficient to protect the vast majority of depositors in full. At the same
time, the deposit insurance limit will retain sufficient incentives for the larger and institutional
depositors to monitor the financial condition of member institutions. This is important to promote
sound financial and business practices, thereby further enhancing financial stability;
(e) equivalent protection for Islamic and conventional deposits which will be separately insured up
to the deposit insurance limit to avoid any competitive distortions between the Islamic and
conventional banking systems. In this respect, extensive consultations have been held with the
National Shariah Advisory Council on elements of the deposit insurance system relating to Islamic
deposits to ensure consistency and compliance with Shariah principles;
(f) annual premiums to be paid by member institutions to the deposit insurance fund to be based on
the institution’s total insured deposits. The annual premiums will be borne entirely by member
institutions and should not result in the imposition of additional service charges, either explicitly or
implicitly, on consumers. The deposit insurance fund may be used to reimburse the depositors of a
member institution that is unable to meet its obligations to depositors or otherwise provide financial
assistance for the resolution of the institution. The annual premiums may be supplemented by
additional premiums imposed on member institutions to cover any loss resulting from the
implementation of resolution schemes; and
An Islamic deposit insurance fund, funded by premiums collected on insured Islamic deposits,
will be separately maintained to ensure that the coverage accorded to Islamic deposits fully
comply with Shariah principles.
(g) the implementation of a differential premium system to determine the premiums payable by each
member institution. Consistent with the Agency’s mandate to strengthen sound risk management
practices among member institutions, financial consequences (through higher premium rates) will be
attached to practices of member institutions that increase the risk of loss to the deposit insurance
system. In line with the basic structure of proven and tested rating systems employed in other
countries, both qualitative and quantitative criteria will be taken into account to determine the
premium category in which a member institution is classified.
It is envisaged that the deposit insurance system will be administered by a separate statutory body
established under an Act of Parliament to accord greater focus and clarity to the fulfilment of the deposit
insurance mandate. The Agency will be supported by an independent board comprising relevant
representatives from the public and private sectors. As separate components of the financial safety net,
appropriate institutional arrangements will also be put in place to facilitate effective co-operation and co-
ordination of actions between Bank Negara Malaysia and the Agency.
Following a consultation process with the banking industry, the deposit insurance system will be
implemented subsequent to the passing of legislation in Parliament, and the establishment of the
necessary infrastructure.


152
Table 4.17
Discount Houses: Sources and Uses of Funds
Annual change
 As at end-
2002
2003
2003
RM million
Sources:
Approved capital funds
300
153
2,443
Deposits
4,834
3,847
23,751
Interbank borrowings
-1,370
-1,169
3,559
Others
-185
-13
448
Total
3,578
2,818
30,201
Uses:
Investment in securities:
2,876
809
24,055
Government debt securities
112
-571
1,329
MGS held
-364
-262
835
Khazanah bonds
-281
123
497
BNM bills
229
16
365
Private debt securities
-104
3,197
14,730
Bankers acceptances
2,754
-2,752
3,237
Negotiable instruments of
deposit
-125
752
848
Cagamas debt securities
471
610
2,168
Others1
-181
-567
882
Interbank placements
1,031
1,921
5,809
Others
-329
87
337
2001
2002
2003
Number of discount houses
7
7
7
1
Includes Danaharta and Danamodal bonds.
Total may not add up due to rounding.
bank industry to decline to 18.4% (end-2002:
19%). In the case of finance companies, the
continued strong demand for hire purchase
financing during the year led to a higher growth in
risk-weighted assets as compared with the
moderate growth in capital base, resulting in the
RWCR declining to 11.3% (end-2002: 12%).
The higher expansion in loans contributed to the
increase in total risk-weighted assets of the banking
system, which grew by 5.9% to RM506.6 billion.
The increase was noted across all risk categories,
especially at the 0% and 20% category.
The increase in the 0% category by 22.8% to
RM170.9 billion, was mainly due to Bank Negara
Malaysia’s liquidity operations. In line with the
higher lending for the purchase of residential
properties, the assets in the 50% risk-weight
category increased by 14.5% to RM117.5 billion.
Risk-weighted assets in the 100% risk-weight
category grew by 4% or RM16.1 billion,
attributable to other loan financing.
Given its strong level of capitalisation, the banking
system is well placed to efficiently and effectively
support economic activities, which augurs well for
the growth of the economy in 2004.
OTHER FINANCIAL INSTITUTIONS
Discount Houses
Amidst ample liquidity in the financial system, total
resources mobilised by the discount houses increased
further during the year by 10.3% or RM2.8 billion
(2002: 15% or RM3.6 billion).  Deposits (primarily in
the form of short-term fixed deposits) continued to
be the main source of funds, increasing by 19.3%
(2002: 32.1%).  With the stronger growth in
deposits, discount houses were able to further wind
down their interbank borrowings, which declined by
24.7% (2002: -22.5%).
There was a marked shift in the allocation of funds
mobilised by the discount houses.  A significant
decline in holdings of banker’s acceptances (BAs),
together with lower holdings of MGS and Khazanah
bonds, were offset by a large increase in holdings of
PDS.  PDS investments increased by RM3.2 billion or
27.7% in 2003 (2002: -RM0.9 billion or -0.9%) as
discount houses took advantage of the low PDS
prices in the second half of the year when market
sentiment turned more cautious on bonds.  The
increase in deposit funds was also placed in the
interbank market. Interbank placements rose by
RM1.9 billion or 49.4%, partly due to the
temporary placement of funds in the interbank
market at the end of 2003 by a discount house,
whose holdings of Danaharta bonds matured at the
same time.
Discount houses continued to expand their fee-
based activities during the year.  The industry
arranged, lead-managed and co-managed the
issuance of PDS worth RM9.8 billion (2002: RM8
billion), while the total amount underwritten
increased to RM2.6 billion (2002: RM1.9 billion) for
31 PDS issues (38 issuances in 2002).
Provident and Pension Funds
Total resources of the 13 provident and pension
funds (PPF) surveyed by Bank Negara Malaysia
increased by 7.9% to RM266.4 billion in 2003.
Accumulated contributions, which accounted for
90.2% of the total resources of the PPF, grew by
9.2% in 2003 (2002: 8.5%). The increment was due
to increases of 16.2% in net contributions and
15.7% in dividends credited to contributors’
accounts during the year. The latter was made
possible by higher investment income in 2003. The
Employees Provident Fund (EPF) remains the largest
PPF, accounting for 82.6% of the total resources of
the PPF.


The Financial Sector
153
The strong increase in net contributions in 2003 was
the result of both higher gross contributions and
lower withdrawals. Gross contributions increased by
1%, due mainly to the increase of 12.4% in the
number of contributors, which more than offset the
reduction in the employee contribution rate to EPF to
9% from 11% for a year, effective June 2003. The
reduction in the employee contribution rate was one
of the measures under the Economic Package
announced by the Government in May 2003 to
stimulate consumption.
Meanwhile, withdrawals declined by 10.5% during
the year due to the significant decline in withdrawals
by pensionable employees under the EPF’s
Pensionable Employees Withdrawal Scheme, which
was launched in 2000. The bulk of these withdrawals
was made in 2001. Withdrawals for investment and
housing purposes, however, increased by 8.7% and
2.1% respectively.
Investment income of the EPF increased by 3.4%
to RM11.1 billion in 2003 due mainly to the
increase in investment income from fixed income
instruments by 3.4%. Investment in fixed income
instruments contributed 77.4% of the total
investment income of the EPF in 2003. In line
with the strong performance of the equity
markets, investment income from equities
(including income from external equity fund
managers) registered the highest increase
(17.1%) among all asset classes in 2003.
Table 4.18
Provident and Pension Funds:  Selected
Indicators
2002
2003p
RM million
As at end-year
Number of contributors (‘000)
18,436
20,718
of which:
EPF
10,335
10,490
SOCSO
7,912
9,997
Accumulated contributions
220,094
240,238
Assets
246,974
266,438
of which:
Investments in MGS
77,387
91,589
During the year
Gross contributions
24,000
24,233
Withdrawals
13,689
12,249
Net contributions
10,311
11,984
Dividends credited
8,117
9,393
Investment income
10,553
12,200
p Preliminary
Source:
Employees Provident Fund, Pension Trust Fund, Social Security
Organisation, Armed Forces Fund, Malaysian Estates Staff Provident
Fund, Teachers Provident Fund and seven other private provident and
pension funds.
Others
Total Assets (RHS)
Equity 
Private Debt
Securities
MGS 
Loans 
Deposits & 
Money Market
Graph 4.14 
Provident and Pension Funds: 
Major Asset Composition
27.9
30.3
31.9
31.3
34.4
13.6
11.7
10.7
12.2
15.8
11.4
11.5
11.6
24.5
25.4
26.2
24.7
23.1
20.4
18.0
16.0
10.7
8.9
8.8
22.9
0
20
40
60
80
100
1999
2000
2001
2002
2003
RM billion
0
50
100
150
200
250
300
% of total assets
Holdings of all asset classes, except deposits and
money market instruments, increased in 2003. Given
the low interest rate environment, the decline in the
holdings of deposits and money market instruments
of PPF was part of an investment strategy to shift
into assets which offered higher returns. In line with
this strategy, the shares of loans and Malaysian
Government Securities (MGS) in total assets of the
PPF rose in 2003. The increase in the PPFs’ holdings
of MGS was also due to the higher issuance of MGS
in 2003. Investments in equities by PPF increased
marginally by 1.6%, while overseas investment
increased by 14.5%. The share of overseas
investment in total assets of the PPF, however,
remained small at 0.3%.
Venture Capital
In 2003, the venture capital (VC) industry continued
to expand as an alternative source of financing to the
economy. As a result of efforts taken by both the
Government and the private sector, the VC industry
recorded further growth in terms of fund size,
number of investee companies, number of venture
capital fund management companies (VCFMCs) and
venture capital companies/funds (VCCs). Total funds
available for VC investment grew by 10.5% to
RM2.1 billion. As at end-2003, investee companies
that received funding from VC sources, increased to
298 companies, with higher net investment of
RM878.7 million.
The Government remained supportive of the
development of the VC industry through the
provision of financing and incentives, which were


154
announced in the Economic Package and the 2004
Budget. The Cradle Investment Programme (CIP), a
programme initiated under the Economic Package
announced in May, was launched with an allocation
of RM100 million and was administered by the
Malaysia Venture Capital Management Berhad
(MAVCAP). The CIP was established in mid-2003 to
provide pre-seed funding and entrepreneurial
support to generate new ideas and innovations by
individuals, research institutes and institutions of
higher learning. As at mid-March 2004, a total
amount of RM1.2 million had been disbursed to
finance 93 ideas and innovations.
MAVCAP continued to offer and subsidise the
“Ignite the Technopreneur Fire” series of workshops
to interested technopreneurs, which was aimed at
addressing issues of entrepreneurship like
technology assessment, commercialisation and
financing. These workshops helped to address
technopreneurs’ concerns on management, human
resources and operations. Another initiative was the
“Three M” (Monday Meeting of the Month)
meeting, which was initiated and sponsored by
MAVCAP and jointly organised with the Malaysian
Venture Capital Association (MVCA). The monthly
forums were aimed at providing the opportunity for
technopreneurs and financiers to interact and
discuss issues of concern. Venture Accelerate 2003
took on a new approach which aimed at
accelerating the development of promising
entrepreneurs into successful start-ups, via a strong
focus on intensive mentoring and skills-building
over a 6-month period. The main objective was to
produce quality entrepreneurs and, in turn,
generate a more vibrant and sustainable
entrepreneurial environment in Malaysia. The
programme was launched on 17 September 2003
and is expected to end in June 2004.
The Venture Capital Consultative Council (VCCC),
which was established in 2002, contributed effectively
in developing further the VC industry. By providing a
consultative forum for both public and private sectors
involved in the VC industry, the VCCC has addressed
several areas of concern, which affected the
development of the industry. Among others, key areas
of improvement attributable to the VCCC were
addressing tax incentive-related issues, streamlining
data collection, ensuring constant dialogues between
the public and private sector involved in the VC
industry and initiating educational programmes.
A greater level of private sector involvement was
reflected in the increased funding for VC
Table 4.19
Key Statistics of Venture Capital Industry
As at end-year
2002
2003
Venture capital funds (RM million)
1,953.1
2,118.1
Net investment1 (RM million)
862.6
878.7
Local sources (RM million)
n.a.
769.0
Foreign sources (RM million)
n.a.
109.6
No. of venture capital companies/
funds
38
43
No. of venture capital fund
management companies
29
31
No. of investee companies
183
298
During the year
2002
2003
Gross investment (RM million)
191.4
227.2
Local sources (RM million)
n.a.
192.5
Foreign sources (RM million)
n.a.
34.8
No. of investee companies
80
115
1
Gross investment less divestment activities.
n.a. Not available.
Source: Securities Commission
Pension and provident
funds
0.1% 
Other private 
sector entities
20.6%
Private individuals
6.3%
Banks
17.6%
Foreign
1.1%
Source: Securities Commission
Insurance companies
0.11%
Graph 4.15
Sources of Venture Capital 
(% share, as at end-2003)
Government
 54.2%
Table 4.20
Investment by Stages during 2003
No. of Investee Companies
115
Business Stage
RM million
% share
Seed capital
        19.9
8.7
Start-up capital
        47.9
21.1
Early stage
        17.2
7.6
Expansion, Growth
        81.4
35.8
Bridge, Mezzanine, Pre-IPO
        20.3
8.9
Management buy-out
        11.7
5.1
Management buy-in
        16.8
7.4
Cashing-out (Secondary purchase)
 …
…
Other types of investment
        12.1
5.3
Total
      227.2
100.0
Source: Securities Commission


The Financial Sector
155
Graph 4.17
Outstanding Investment by Stages (% share)
As at end-2001
As at end-2002
As at end-2003
Source: Securities Commission
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
Other types of investment
Cashing-out (Secondary purchase)
Turnaround
Management buy-in
Management buy-out
Bridge, Mezzanine, Pre-IPO
Expansion, Growth
Early stage
Start-up capital
Seed capital
investments. Contributions from the private sector
rose by 18.9% to account for 45.8% of total funds
raised during the year (38.5% in 2002). VC funds
from foreign sources were small, amounting to
RM109.6 million as at end-2003. Almost 75% of VC
funds from foreign sources were invested in the ICT
and life sciences sectors.
In 2003, private sector initiatives undertaken to
promote VC investment were substantial, with the
total number of investee companies at the start-up
stage remaining high at 21.1% of total VC
investments in 2003. While remaining small, the
cumulative investment in the seed-capital stage also
increased in 2003, reflecting an increase in the risk
appetite within the VC industry. At the same time,
the Kuala Lumpur Stock Exchange (KLSE) provided an
Total Investment: RM227.2 million
Number of Investee Companies: 115
Information and
communication
technology
45.7%  
Life sciences
26.8%
Others
1.5%
Manufacturing
26.1%
Source: Securities Commission
Graph 4.16
Gross Investment in 2003 (% share of total)
Table 4.21
Investment by Sectors
As at end-2003
RM million
% share
Manufacturing:
304.8
34.7
Of which,
Wood and wood products,
including furniture
39.5
4.5
Transport equipment, automotive
components
10.3
1.2
Advanced manufacturing: electronics,
automation systems, electro-optics,
advanced materials
65.3
7.4
Fabricated metal products, machinery
and equipment
19.9
2.3
Electrical and electronic products
(manufacture, assemble)
19.1
2.2
Others
150.7
17.2
Information and communication technology
326.0
37.1
Life sciences
147.3
16.8
Electricity, power generation, gas and water
15.6
1.8
Wholesale, retail trade, restaurant and hotels
5.0
0.6
Education
4.0
0.5
Construction
0.1
0.0
Transport, storage and communications
1.4
0.2
Financing, insurance, real estate and
business services
9.8
1.1
Others
64.7
7.4
Total
878.7
100.0
Source: Securities Commission
effective exit mechanism for VC investments. This
was evident with the higher number of initial public
offerings (IPOs) in 2003, by small companies with
high-growth potential.
During the year, most of the VC investments were
channelled to the new growth sectors of information
and communication technology (ICT), life sciences


156
Table 4.23
Islamic Unit Trusts
2002
2003
2002
2003
Growth (%)
Number of Unit Trust
Management Companies
27
27
17.4
0.0
Number of Unit Trust Funds*
36
50
28.6
38.9
Units in Circulation (billion)
5.8
8.6
35.1
49.1
Number of Accounts
303,000 346,000
13.5
14.2
Net Asset Value (RM billion)
3.2
4.7
32.6
47.8
Net Sales (RM million)
980.4 1,169.9
Ratio of NAV to KLSE Syariah
Index market capitalisation (%)
1.2
1.3
* Refers to funds already launched.
Source: Securities Commission.
and advanced manufacturing. In value terms, the
software, internet services and e-businesses sub-
sector received the highest amount of funding
(21.1% of total), followed by medical and
biotechnology sub sector (15.5%). As at end-2003,
the bulk of total outstanding investments of VCCs
(61.3%) were concentrated in the new growth
sectors of ICT, life sciences and advanced
manufacturing sectors. Investments in other sectors
amounted to RM340.1 million, with the
manufacturing sector (excluding advanced
manufacturing) accounting for 27.3% of total
outstanding VC investments. While domestic VC
funds were mostly invested in the manufacturing
(38.1%), ICT (36.7%) and life-sciences (14.2%),
foreign VC investments concentrated on ICT (39.9%)
and life-sciences (34.8%) only.
Unit Trust Industry
The unit trust industry continued to expand in 2003,
with a larger number of new funds launched and
continued increase in the number of units in
circulation. In line with the significant improvement
in the performance of the KLSE, the net asset value
(NAV) of the industry expanded by 30.5% in 2003.
As a result of the intensified marketing efforts and
the introduction of a greater variety of products by
the unit trust management companies to cater to the
diverse investor needs and preferences, gross sales of
unit trust funds increased by 37.5% in 2003. The
gross sales level remained consistently high
throughout the year. However, due to high
repurchases made during the second half of the year,
net sales were slightly lower compared with 2002.
This development was the result of portfolio
rebalancing exercises by investors in view of the
better performance of the equity market in the third
quarter. In September and October, net repurchase
positions were recorded. Nevertheless, given the
continued favourable sentiments and expectations of
better performance in equity investments, net sales
were recorded in the fourth quarter.
One segment of the unit trust industry that has
grown significantly in recent years was the Islamic
unit trust. In 2003, 14 new Islamic funds were
launched (8 in 2002), bringing the total number of
Islamic funds to 50. The NAV for Islamic funds grew
substantially by 47.8% in 2003. The share of Islamic
funds of total NAV of the unit trust industry rose to
6.7% from 6% in 2002.
In the development of unit trust activities, Bank
Negara Malaysia has liberalised regulations pertaining
to investment abroad by the unit trust industry,
Table 4.22
Unit Trust Industry (Including Islamic Unit Trust
Funds) - Selected Indicators
2002
2003
2002
2003
Growth (%)
Number of Unit Trust
Management Companies
39
36
5.4
-7.7
Number of Unit Trust Funds*
175
217
17.4
24.0
Number of New Funds Launched
26
42
Units in Circulation (billion)
84.5
97.4
18.4
15.2
Number of Accounts (‘000)
10,175
10,221
1.9
0.5
Net Asset Value (RM billion)
53.7
70.1
13.4
30.5
Average Monthly Gross
Sales (RM billion)
1.9
2.6
Average Monthly
Repurchases (RM billion)
1.3
2.1
Net Sales (RM billion)
7.6
6.9
Ratio of NAV to KLSE market
capitalisation (%)
11.1
10.9
* Refers to funds already launched.
Source: Securities Commission.
Gross Sales
Repurchases
Net Sales
Graph 4.18
Unit Trust Industry - Gross Sales, Repurchases 
and Net Sales 
-1,000
0
1,000
2,000
3,000
4,000
5,000
6,000
J
F M A M J
J
A S O N D J
F M A M J
J
A S O N D
2002
2003
RM million


The Financial Sector
157
which would accord flexibility for unit trust
management companies to diversify their portfolio in
order to improve returns to investors. Effective 1 April
2004, unit trust management companies can freely
invest in foreign assets up to 10% of NAV per fund
for funds subscribed by residents, and up to the full
amount of NAV for funds subscribed by non-
residents. Unit trust funds of different companies
may also be pooled to benefit from economies of
scale when investing abroad.
In addition, the Securities Commission also revised
the Guidelines on Unit Trust Funds on 1 April 2003.
Key improvements introduced included greater
flexibility for the issuance of specialised unit trust
products, faster assessment of applications for the
issuance of unit trust products, faster prospectus
registration, streamlining approval process, and
enhancing disclosure and reporting requirements.
FINANCIAL MARKETS
Overview
Increased activities in the money market reflected
higher trading in both interbank deposits and money
market papers. The volume of transactions in the
interbank market increased more significantly with
103.3% in terms of volume, and by 58.5% in terms
of value. In the bond market, low interest and ample
liquidity situation were significant factors that caused
increased trading in the private debt securities (PDS)
market, particularly in the first half-year.
Higher turnover was also recorded in the derivatives
markets with the Crude Palm Oil (CPO) Futures market
emerging as the best performer. The stronger
performance was due to imbalances in the global
vegetable oil market as production of major oilseeds
increased only marginally, while demand, particularly
from India and People’s Republic of China, increased
significantly. Active trading of KLIBOR Futures was
influenced by expectations on the interest rate outlook.
Two new derivatives products, the 3-year and 10-year
MGS Futures contracts, were introduced in 2003.
Total funds raised in the capital market in 2003
were significantly higher, with gross proceeds
amounting to RM105.1 billion, compared with
RM69 billion in 2002. After accounting for
redemptions, net funds raised in the capital market
were significantly higher, amounting to RM54
billion (2002: RM23 billion). Net funds raised
through the PDS market accounted for a majority
share of 69.6% (2002: 13.4%). The Federal
Strengthening economic fundamentals and improved prospects
for the Malaysian economy led to substantially higher trading
activities across all segments of the financial markets.
the shift in market preference towards shorter-term
money market instruments.
In the Kuala Lumpur interbank foreign exchange
market, the average daily volume of transactions
increased during the year due to greater trade and
investment flows, as well as increased hedging
activities to mitigate the impact from greater volatility
in international foreign exchange markets. While
trading activity continued to be dominated by
transactions in the ringgit against the US dollar, the
share of euro and Japanese yen transactions against
the US dollar increased in line with the higher
transactions and hedging needs by market
participants to manage the volatility of the G3
currencies.
Trading activities were also higher in the equity, bond
and exchange-traded derivatives market. The KLSE
Composite Index (KLSE CI) rose by 22.8% while the
average daily trading activities rose significantly by
0
10
20
30
40
50
60
1999
2000
2001
2002
2003
RM billion
Graph 4.19
Net Funds Raised in the Capital Market by the 
Public and the Private Sectors
Public sector
Private sector
Government continued to tap the domestic market
to finance most of its financing requirements, given
the ample liquidity situation. Gross proceeds of
RM41.3 billion were raised, mainly through 13
issuances of Government Securities. The private
sector raised RM58.7 billion from the PDS and


158
Graph 4.20 
Yields of Money Market Instruments
2.50
2.70
2.90
3.10
3.30
3.50
3.70
3.90
4.10
4.30
4.50
J-02
F-02
M-02
A-02
M-02
J-02
J-02
A-02
S-02
O-02
N-02
D-02
J-03
M-03
A-03
M-03
J-03
J-03
A-03
S-03
O-03
N-03
D-03
 Yield (%) 
F-03
3-month T-bills 
1-year MGS
3-year MGS 
5-year MGS
equity markets (RM49.5 billion in 2002). Companies
with strong credit profiles continued to lock-in low
financing costs through the issuance of PDS. There
was also an increase in issuance of asset-backed
bonds as well as convertible bonds, in light of
improving interest in the equity market. The equity
market remained an important source of financing,
especially for small and high-growth potential
companies. The number of IPOs offered on the KLSE
was 58, the highest since 1998 and RM7.8 billion
were raised from these new issues.
The Government remains strongly committed to the
further development of a broad and liquid capital
market. Several measures and initiatives were taken
in 2003 to improve retail investors’ participation and
protection, enhance market liquidity and efficiency,
ease capital-raising exercise and listing policies and
strengthen intermediation in the Malaysian capital
market. Details are contained in the box “Key
Capital Market Measures in 2003”.
Money Market
Increased activities in the money market in 2003
were reflected mainly in higher trading of interbank
deposits. Trading of money market papers increased
marginally.
Activities in the interbank money market in 2003 were
marked by two periods of changing market
expectations. In the first half, trading in the market was
largely influenced by concerns regarding the adverse
impact of increased geopolitical uncertainties on
economic growth following the war in Iraq. The
outbreak of SARS in the region further aggravated this
uncertain environment. As a result, most of the market
players took a view that the existing accommodative
monetary policy stance will remain for an extended
period. Against the background of a low inflation, the
prevailing uncertainty increased the market’s preference
for fixed-income instruments, especially in the higher-
yielding longer dated papers. From January to July
2003, the average monthly MGS volume traded was
higher at RM27.6 billion compared with RM18.1 billion
in the same period of 2002. Nevertheless, the overall
Table 4.25
Money Market1
2002
2003
Volume
Annual
Volume
Annual
(RM
change
(RM
change
billion)
(%)
billion)
(%)
Total money market
transactions
1465.1
-2.4
1538.4
5.0
Interbank deposits
1011.7
-4.1
1084.7
7.2
Money market papers
453.4
1.8
453.7
0.1
Bankers Acceptances (BAs)
51.3
-15.2
37.3
-27.3
Negotiable Instrument of
Deposits (NIDs)
36.7
7.0
43.1
17.4
Malaysian Government
Securities (MGS)
244.1
11.0
231.4
-5.2
Khazanah bonds
15.5
-13.4
18.8
21.3
Treasury bills
8.4
-37.3
9.9
17.9
Bank Negara Bills
54.4
-1.4
71.5
31.4
Cagamas bonds
 29.2
12.7
25.6
-12.3
Cagamas notes
13.8
-25.0
16.1
16.7
1
All data are sourced from the Bond Information and Dissemination System,
except BAs and NIDs which are sourced from money market brokers.
Table 4.24
Funds Raised in the Capital Market
2002
2003p
RM million
By Public Sector
Government Securities (gross)
16,266
41,262
Less Redemptions
8,900
18,600
Less Government holdings
0
0
Equals Net Federal receipts
7,366
22,662
Khazanah Bonds (net)
0
346
Government Investment Issues (net)
738
1,729
Malaysia Savings Bond (net)
464
-9
Net Funds Raised by Public Sector
8,568
24,728
By Private Sector
Shares
13,291
7,772
Debt securities
Issuance (gross)
36,195
50,975
Less Redemptions
34,137
33,189
Equals Net Issues
2,058
17,786
Net Funds Raised by Private Sector
15,349
25,558
Total Net Funds Raised
23,917
50,286
Short-term papers and notes (net)1
-880
3,753
Total
23,037
54,039
1
Refers to Commercial Papers, Cagamas Notes and Medium Term Notes.
p Preliminary


The Financial Sector
159
Graph 4.21
Volume of Traded MGS 
0
5000
10000
15000
20000
25000
30000
35000
40000
J-02
F-02
M-02
A-02
M-02
J-02
J-02
A-02
S-02
O-02
N-02
D-02
J-03
F-03
M-03
A-03
M-03
J-03
J-03
A-03
S-03
O-03
N-03
D-03
RM million
MGS yields remained stable during this period as the
greater demand for the longer dated papers, was offset
by the steady supply of the MGS to the market. During
the first half of the year, net issuance of MGS
amounted to RM13.3 billion.
Nevertheless, the uncertain outlook proved to be
temporary as business activities picked up steadily in
the second half of the year. This prompted market
players to factor-in an expectation for an earlier
turnaround in the interest rate cycle in the near
future. The improving corporate performance amidst
strengthening financial position of corporations and
the better-than-expected GDP growth in the third
quarter, led to a shift in asset allocation towards
equity. The rising perception of market risk resulted
Overnight
1 week
6 months, 12 months and others
Weekend
1-3 months 
Graph 4.22 
Share of Total Volume Traded: Interbank 
Deposits
67.7
67.5
17.0
18.3
4.7
4.7
1.8
0.9
8.6
8.8
0
20
40
60
80
100
% share
2002
2003
Khazanah 
TB
BAs 
NIDs
MGS
BNB 
Cagamas Instruments
2003
2002
% share
100
80
60
40
20
0
2.2
4.1
9.5
8.2
9.2
15.8
51.0
1.9
3.4
8.1
11.3
9.5
12.0
53.8
Graph 4.23 
Share of Total Volume Traded: Money Market 
Instruments
in lower volumes traded in the money market.
Trading in MGS was also relatively subdued during
the period of August to November. This was caused
by concerns over the direction of interest rates
following the upward adjustment in policy rates by
two central banks (Australia and United Kingdom)
and the brighter prospects for the US economy.
These factors contributed to the upward shift in the
MGS term structure, with the yields on the 3-year
and 5-year MGS increasing by 94 and 129 basis
points respectively.
The volume of transactions in the interbank deposit
market also rose significantly in the second half of
2003. Trading on interbank deposits increased by
21.5% (-3.7% during the same period in 2002) in
the second half of 2003 with a shift in the market’s
preference towards shorter-term money market
instruments.
Foreign Exchange Market
In the Kuala Lumpur interbank foreign exchange
market, the average daily volume of interbank
foreign exchange transactions (spot and swap
transactions) increased by 27% compared to 2002,
arising from higher trade and investment flows. The
higher volume of transactions also reflected higher
spot and swap trades following increased activity by
market participants to manage their exposure due to
greater volatility in international foreign exchange
markets. Trading activity comprised mainly trade-
related transactions, as position-taking activity on the


160
ringgit has been contained through the elimination
of the offshore ringgit market and through guidelines
governing the operating framework of banking
institutions.
By composition, the Kuala Lumpur foreign
exchange market continued to be dominated by
transactions in the US dollar against the ringgit,
with the share of such transactions increasing to
81.7% of total transactions in 2003 from 80.8% in
2002. The dominance of US dollar transactions
against the ringgit reflects the significance of the
US dollar in the Kuala Lumpur foreign exchange
market as well as the high usage of US dollars in
the settlement of trade, services and capital
account transactions. A notable development in
2003 was the significant increase in the share of
euro and yen transactions against the US dollar.
The share of Euro transactions against the US
dollar more than doubled, while the share of yen
transactions also increased markedly by 33%.
These increases can be attributed largely to the
higher transaction and hedging needs of market
participants to manage the significant volatility
among the G3 currencies during the course of
the year.
Equity Market
In 2003, the Kuala Lumpur Stock Exchange
Composite Index (KLSE CI) ended the year on a
stronger note, following stronger economic growth
and improved economic outlook. For the year as a
whole, the KLSE CI registered a strong annual
growth of 22.8%, while average daily trading
activities rose significantly by 103.3% in terms of
volume and by 58.5% in value. The higher turnover
was supported by both higher retail and
institutional participation.
The performance of the KLSE in the first four
months was subdued, with sentiments affected
by uncertainties on the global economic outlook.
Market sentiments turned more positive since
May, driven by improved economic outlook,
stronger corporate earnings and significant
progress achieved in corporate restructuring.
2003 
(RM323.6 billion) 
81.7%
4.2%
2.9%
8.7%
2.6%
US/EUROOthersUS/RM
US/SGDUS/YEN
Graph 4.25
Transactions in the Kuala Lumpur Foreign  
Exchange Market by Currency
2002 
(RM270.6 billion)
80.8%
6.5%
1.1%
6.1%
5.5%
Graph 4.24 
Volume of Interbank Transactions in the 
Kuala Lumpur Foreign Exchange Market
0
200
400
600
800
1,000
1,200
1,400
0
200
400
600
800
1,000
1,200
1,400
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
RM billion
RM billion
Spot 
Swap
Total
Note: Data from 2002 onwards is based on the new Ringgit Operations 
 
Monitoring System (ROMS), whereas observations for previous years are 
 
based on transactions of the eight Authorised Dealers
KLSE CI registered its strongest performance since 1999. Increased
domestic participation was evident following the standardisation
of board lot sizes to 100 units.
Policy measures introduced by the Government to
promote capital market developments also
created a more conducive environment for
investors.
The Malaysian Exchange of Securities Dealing &
Automated Quotation (MESDAQ) Market
Composite Index (MCI) was the best performing
index in 2003. The MCI posted a substantial gain
of 82.9% (-5.5% as at end-2002). The strong
performance of the index and higher trading
activities were due to increased new listings of
small but high-growth potential companies. The
Second Board Index also posted a significant gain
of 43.2%, reflecting investors’ preference for


The Financial Sector
161
600
31-Dec
7-Jan
14-Jan
21-Jan
28-Jan
4-Feb
11-Feb
18-Feb
25-Feb
4-Mar
11-Mar
18-Mar
25-Mar
1-Apr
8-Apr
15-Apr
22-Apr
29-Apr
6-May
13-May
20-May
27-May
3-Jun
10-Jun
17-Jun
24-Jun
610
620
630
640
650
660
670
680
690
700
Concerns over uncertainties on global economic outlook
due to increased geopolitical tensions, prior to the war in Iraq
21 May
* Government unveiled
   its Economic Package
* BNM reduced the 3-month
   Intervention Rate by 50 bps
   to 4.5%
12 March
WHO issued a global
alert on the SARS
outbreak
20 March
Invasion of Iraq
11 March
10 new measures to
enhance the capital market
was announced
10 January
Announcement of the
establishment of a new
public sector-owned, fund
management company
29 April
WHO issued a
statement that SARS
was over in many parts
of the region
28 May
Announcement of
GDP growth of 4% for
1Q 2003
26 May
The exercise to
standardise board lot
sizes to 100 units was
implemented
Fears over the outbreak of SARS in
the region
26 June
US Federal Reserve
lowered the Fed
Fund rate by 25 bps
to 1%
Graph 4.26: Performance of the KLSE Composite Index (31 December 2002 - 30 June 2003)
1-Jul
8-Jul
15-Jul
22-Jul
29-Jul
5-Aug
12-Aug
19-Aug
26-Aug
2-Sep
9-Sep
16-Sep
23-Sep
30-Sep
7-Oct
14-Oct
21-Oct
28-Oct
4-Nov
11-Nov
18-Nov
25-Nov
2-Dec
9-Dec
16-Dec
23-Dec
30-Dec
600
620
640
660
680
700
720
740
760
780
800
820
840
Graph 4.27: Performance of the KLSE Composite Index (1 July - 31 December 2003)
2 July
KLSE CI breached
the 700-mark to
703.25
5 August
Bomb explosion
in Jakarta
28 August
Announcement of
GDP growth of 4.4%
for 2Q 2003
4 September
Positive comments on
Malaysia by IMF Managing
Director and expectations
of higher GDP growth for
2004, ahead of the 2004
Budget announcement
22 October
KLSE CI breached
the 800-mark to
805.11
31 October
* Highest point reached
   at 817.12
* Smooth transition
   of leadership
29 October
Listing of largest
IPO in 2003
8 October
Standard & Poor's
upgraded Malaysia's
long-term foreign
currency sovereign
credit ratings from 
BBB+ to A-
28 October
SC announced 
a shorter time-to-
market for IPO to 
13 days from  
25 days 
previously
12 September
2004 Budget announcement
Year end
rally


162
at 0.62 in the third quarter of 2003 (average of
0.61 between the third quarter of 1999 and the
third quarter of 2003). The improvements in
profitability, together with stable leverage and
low interest rates, resulted in stronger debt
servicing capacity of the corporate sector. The
interest coverage ratio, which measures the
number of times a company’s earnings before
interest and tax exceeds its interest expense, rose
to 4.7 times in the third quarter of 2003, its
highest level recorded since the third quarter of
1999.
Encouraged by improved market performance and
more favourable investor sentiments in 2003, a
larger number of smaller firms raised funds in the
KLSE Trading Volume 
KLSE CI
Source: Kuala Lumpur Stock Exchange
Second Board Index 
MCI
Graph 4.28 
Kuala Lumpur Stock Exchange Composite Index, 
Second Board Index, MESDAQ Market Composite 
Index and KLSE Trading Volume 
50
70
90
110
130
150
170
190
210
230
Index (Jan 2002=100)
0
2
4
6
8
10
12
14
16
18
20
Volume (billion units)
Jan-02
Feb-02
Mar-02
Apr-02
May-02
Jun-02
Jul-02
Aug-02
Sep-02
Oct-02
Nov-02
Dec-02
Jan-03
Feb-03
Mar-03
Apr-03
May-03
Jun-03
Jul-03
Aug-03
Sep-03
Oct-03
Nov-03
Dec-03
Table 4.27
KLSE: Performance of Sectoral Indices
2002
2003
Annual change (%)
KLSE Composite Index
-7.1
22.8
EMAS
-4.8
24.4
Second Board
-26.8
43.2
MESDAQ Composite Index
-5.5
82.9
Industrial
0.1
31.3
Consumer Products
0.5
28.8
Industrial Products
-2.5
23.4
Construction
-14.9
24.6
Trading/Services
-6.1
18.3
Finance
-4.7
33.2
Properties
-9.8
38.8
Mining
-5.1
74.8
Plantation
14.7
19.3
Syariah
-7.4
23.2
Technology
-17.9
33.9
Source: Kuala Lumpur Stock Exchange
Table 4.26
Kuala Lumpur Stock Exchange: Selected Indicators
2002
2003
Price Indices:
Composite
646.3
793.9
EMAS
157.3
195.6
Second Board
98.2
140.6
MESDAQ
83.3
152.3
Total Turnover:
Volume (billion units)
55.6
112.2
Value (RM billion)
117.0
183.9
Average Daily Turnover:
Volume (million units)
224.3
456.0
Value (RM million)
471.6
747.5
Market Capitalisation (RM billion)
481.6
640.5
Market Capitalisation / GDP (%)
133.5
163.4
Total No. of Listed Companies:
865
906
Main Board
561
598
Second Board
292
276
MESDAQ
12
32
Market Liquidity:
Turnover Value / Average Market
Capitalisation (%)
23.2
33.4
Turnover Volume / Number of
Listed Securities (%)
24.3
43.4
Market Concentration:
 10 Most Highly Capitalised Stocks1 /
Market Capitalisation (%)
34.0
31.6
Average Paid-Up Capital of Stockbroking
Firms (RM million)
164.2
170.9
1
Based on market transactions only.
Source: Kuala Lumpur Stock Exchange
smaller companies with higher potential for
earnings growth. Listed stocks on the Main Board
saw more moderate price performances across all
sectors.
The strong performance of the equity market was
supported by improvements in earnings outlook
and sound financial health of corporates. From a
sample of 300 listed non-financial corporations
(representing almost 75% of total KLSE market
capitalisation), cumulative profits for the first
three quarters were 54% higher in 2003,
compared with the same period in 2002.
Annualised return-on-equity for the sample rose
to 7.3% in the third quarter of 2003, from 5.4%
in the third quarter of 2002. Stronger corporate
earnings were observed in most sectors as the
impact of the SARS outbreak and geopolitical
uncertainties on businesses in the first half of
2003 was only confined to a few tourism-related
companies.
Other indicators of corporate health also showed
positive developments. Corporate indebtedness
remained stable, with aggregate debt-equity ratio


The Financial Sector
163
Bond Market
Equity Market
Graph 4.29 
Funds Raised by the Private Sector in the 
Capital Market
5,000
0
10,000
15,000
20,000
25,000
30,000
35,000
1999
2000
2001
2002
2003
RM million
Graph 4.30
Performance of Selected Stock Market Indices
(% change from end-2002 to end-2003)
Malaysia KLCI
Dow Jones IA
Korea KOSPI
Singapore STI
Taiwan TWSE
Hong Kong HSI
Nasdaq CI
Indonesia JCI
Thailand SET
Source: Kuala Lumpur Stock Exchange
25.3
22.8
29.2
34.9
50.0
62.8
116.6
32.3
31.6
0
20
40
60
80
100
120
140
(%)
equity market. Total funds raised were, however,
lower at RM7.8 billion compared with RM13.3
billion in 2002 due to the small size of the initial
public offerings (IPOs). The new funds were
mainly raised through IPOs (51%) and rights issues
(29.4%). A total of 58 new companies was listed,
the highest number since 1998. Of this total, 16
Recognising the importance of the capital
markets in raising capital to facilitate growth of
the Malaysian economy, the Government and
relevant authorities introduced new measures to
improve retail investors’ participation and
protection, enhance market liquidity and
efficiency, ease the process for capital-raising
In 2003, 58 new companies were listed on the KLSE, the highest
since 1998. Significantly improved market performance
encouraged smaller companies with growth potential to raise
funds in the equity market.
companies were listed on the Main Board, 22 on
the Second Board and 20 on the MESDAQ
Market. Prices of 52 new listings traded at a
sizeable premium over the offer prices at the end
of the first day of trading, influenced mainly by
widespread investor interests and more active
retail trading activities. The total number of
companies listed on the KLSE was 906 as at end-
2003, the second largest number of listed
companies on a stock exchange after Hong Kong
China in the East Asian region, excluding Japan.
The liberalisation of the listing policy to allow the
listing of Malaysian businesses abroad and
foreign-based businesses with Malaysian
operations resulted in the listing of a large
foreign company on the KLSE. The IPO, which
raised RM2.03 billion, was the largest in 2003.
activities and strengthen intermediation in the
Malaysian capital market. Details of these
measures are contained in the box ”Key Capital
Market Measures in 2003”.
As part of the demutualisation plan, the KLSE
completed on 5 January 2004 its conversion into a
public company limited by shares, from a company
limited by guarantee. The demutualisation was in
line with a recommendation in the Capital Market
Masterplan to enhance corporate, organisation
and governance structures. While there was no
significant diversion of the usual business practice,
KLSE’s stock exchange businesses were transferred
to a wholly-owned subsidiary, Malaysia Securities
Exchange Berhad (MSEB). The demutualised KLSE
became the exchange’s holding company with
plans for listing on the exchange.


164
Key Capital Market Measures in 2003
Capital market measures introduced in 2003 were aimed at improving retail investors’ participation and
protection, enhancing market liquidity and efficiency, easing the process for capital-raising and listing, and
strengthening intermediation in the Malaysian capital market. The key measures were as follows:
Enhancing Investor Participation
•
Effective 17 March, the cap on stamp duty for all securities traded on the Kuala Lumpur Stock
Exchange (KLSE) was reduced to RM200 per contract (previously capped at RM1,000 per contract).
•
On 26 May, the exercise to standardise board lot sizes to 100 units from the previous 1000 units
for all securities listed on the KLSE was completed.
Increasing the Efficiency of the Capital-Raising Process
•
In line with the reduction in the processing time for IPOs to less than three months from the present
six to eight months, the time-to-market period (period beginning from the issue of prospectus to the first
day of listing) was also reduced to 13 days (from 25 days previously), effective 1 December 2003.
•
Beginning 12 March, all corporate proposals which required approvals from both the Foreign
Investment Committee (FIC) and the Securities Commission (SC) would be processed by the
SC only. In cases where the SC’s approval was not required, the approval remained with FIC.
•
On 18 November, a set of guidance notes on share splits for public listed companies was
introduced. Among others, liberalisation included abolishing the requirements for the appointment of
a principle adviser to submit proposals and for the approved share split exercise to be implemented
within three months.
Strengthening Investor Protection and Corporate Governance
•
On 3 June, the SC issued the “Guide on Areas of Compliance and Internal Controls for
Management Companies and Trustees” to assist fund management companies and trustees in
establishing effective internal controls within their respective organisations. The Guide identified key
areas of compliance and internal controls.
Enhancing Restructuring of Distressed Companies
•
On 18 June, the SC issued a set of criteria for delisted PN4 companies to seek re-listing on the
KLSE. The criteria, among others, allowed delisted PN4 companies to seek re-listing without the
requirement for a general public offering, provided that the application was submitted within 12
months from the date of delistment.
•
On 19 November, the SC announced a six-month extension of the deadline for under-capitalised
public listed companies to increase their paid-up capital to at least RM60 million for Main Board
companies and RM40 million for Second Board companies. The new deadline is 30 June 2004.
Liberalisation of KLSE Listing Policies
•
Effective 11 March, the moratorium on the shareholding period for promoters (which includes
original owners and stakeholders of the companies) for all new IPOs/ Reverse Takeovers
(RTO) was reduced from four years to one year.


The Financial Sector
165
•
On 11 March, the SC issued a set of new guidelines to ease the listing process for large
companies. The new guidelines exempted large companies (with a minimum market capitalisation of
RM250 million and after-tax profits of at least RM8 million for the latest financial year) from the three
to five profits record requirement.
•
On 19 September, the SC announced further liberalisation of the Guidelines on Issues/Offer of
Securities to widen the breadth of listings in the Malaysian equity market. The revised listing policy
allowed Malaysian businesses abroad and foreign corporations with Malaysian operations
to list on the KLSE. The companies must also obtain the approval of Bank Negara Malaysia, where
applicable, for the use of proceeds from the issue/offering of securities.
•
Amendments to the share buy-back guidelines were made to allow flexibility for companies to
undertake share buy-back activities. With effect from 7 October, a listed company would be allowed
to appoint up to two stockbroking companies for the purpose of purchasing its own shares or reselling
treasury shares on the exchange.
Strengthening the Role of Intermediaries
•
Effective 9 June, the SC implemented the minimum stockbroking commission rates structure. The
minimum commission rates would only apply to retail trades, while the rates applicable to institutional
and inter-broker trades would remain fully negotiable. The minimum commission rates announced
were as follows:
Category of trade
Minimum rate per contract
Inter-broker and Institutional trades
Fully negotiable
Retail trades valued above RM100,000
0.30%
Retail trades valued up to RM100,000
0.60%
E-broking transactions
Up to 30% discount
•
On 20 November, the SC refined the Capital Adequacy Requirement (CAR) framework for
stockbroking companies. The enhancement was aimed at facilitating the re-engineering of business
models in the stockbroking industry and would enable stockbroking companies to utilise their capital
more efficiently.
•
On 10 December, the SC introduced the Guidelines on the Offering of Structured Products. The
aim was to facilitate universal brokers, merchant banks, commercial banks, including Islamic banks,
and performance-guaranteed Special Purpose Vehicles to issue "structured products" to meet the
needs of an increasingly sophisticated Malaysian capital market.
Further Relaxation on the Uses of PDS Proceeds
•
On 1 August, the SC liberalised rules on use of proceeds from private debt securities (PDS) to
allow such funds to be used to finance the development of hypermarkets. Prior to this, the
"construction of hypermarkets" fell under the definition of the "construction of shopping complexes"
which was previously not allowed to be funded through PDS proceeds.
Enhancing Skills and Professionalism
•
On 1 April, the SC launched the Capital Market Graduate Training Scheme which was aimed at
increasing the pool of graduates with skills and knowledge on the capital market.


166
Bond Market
Total funds raised in the ringgit bond market were
significantly higher in 2003. Gross issuance increased
by 74.8% due to higher issuance by both the public
and private sectors. After netting off redemptions
during the year, total net funds raised in the bond
market amounted to RM42.5 billion (RM10.6 billion
in 2002). As a result, outstanding ringgit bonds rose
by 16.7% to RM319.4 billion, equivalent to 81.5%
of GDP. As corporate borrowers stepped up their net
issuances during the year, the outstanding Private
Debt Securities (PDS) increased by 14.4% to
RM170.2 billion or equivalent to 43.4% of GDP
, and
accounted for 53.3% of total bonds outstanding.
The low interest rate environment and ample liquidity
situation were significant factors influencing the
growth of the PDS market in 2003. Corporations,
particularly those with strong credit profiles
capitalised on the low interest rates through the
issuance of long-term debt securities at competitive
costs. The favourable market conditions, particularly
in the first half of 2003 also prompted corporations
to refinance their existing debt through PDS.
Issuance of Malaysian Government Securities (MGS)
was significant as the Government sourced the bulk
of its financing requirements from the domestic
Graph 4.31
Bonds Outstanding
90
103
117
125
149
113
140
158
149
170
0
50
100
150
200
250
300
350
1999
2000
2001
2002
2003
RM billion
Public sector
Private sector
Graph 4.32
Ratio of Bonds Outstanding to GDP
30
30
35
35
38
38
41
47
41
43
68
71
82
76
81
0
10
20
30
40
50
60
70
80
90
1999
2000
2001
2002
2003
Public sector
Total
Private sector
%
Table 4.28
Funds Raised in the Bond Market
2002
2003p
RM million
By Public Sector
Government Securities (gross)
16,266
41,262
Less Redemptions
8,900
18,600
Equals Net Federal Receipts
7,366
22,662
Government Investment Issues (net)
738
1,729
Khazanah Bonds (net)
0
346
Malaysia Savings Bond (net)
464
-9
Net Funds Raised
8,568
24,729
By Private Sector
Private Debt Securities (gross)
36,195
50,975
Straight Bonds
7,763
27,983
Bonds with Warrants
300
0
Convertible Bonds
2,852
3,177
Islamic Bonds
13,829
8,143
Asset Backed Securities
1,916
3,487
Cagamas Bonds
9,535
8,185
Less Redemptions
34,137
33,189
Private Debt Securities
28,770
28,037
Cagamas Bonds
5,367
5,152
Net Funds Raised
2,058
17,786
Net Funds Raised in the Bond Market
10,626
42,515
Private Debt Securities, excluding
Cagamas (gross)
26,660
42,790
Net Funds Raised in the Bond Market,
excluding Cagamas
-2,110
14,753
Net Issues Short Term Securities,
Commercial Papers / Medium Term
Notes1
-880
3,753
Total
9,746
46,268
1
Refers to Cagamas Notes, Commercial Papers, Medium Term Notes.
p Preliminary
Total funds raised in the ringgit bond market were
significantly higher in 2003. The low interest rate
environment and the ample liquidity situation were the main
factors influencing the growth of the private debt securities
market in 2003.


The Financial Sector
167
market. The ample liquidity situation enabled the
Federal Government to do so without crowding out
the private sector. The Federal Government made
twelve Malaysian Government Securities (MGS)
issuances, with gross proceeds totalling RM41.3
billion. In addition, the size of the Government
Investment Issues (GII) was gradually enlarged to
meet the increasing market demand for such Islamic
instruments. Including net issuances of Khazanah
bonds, the total outstanding public sector bonds rose
to RM149.3 billion, or equivalent to 38.1% of GDP
.
The bond market in 2003 could be dichotomised
into two distinct periods of market developments.
Commencing the year on a strong note, the
underlying market conditions were favourable to
both issuers and investors during the first half-year.
Bond yields trended downwards, influenced largely
by concerns regarding the adverse impact of
increased geopolitical uncertainties on the global
economic outlook. The SARS outbreak further
fuelled market expectations that interest rates
would remain low for an extended period. Demand
for long-dated and higher yielding bonds was high
which resulted in a decline of 10-year MGS yields by
53 basis points and in turn caused the narrowing of
the PDS credit spreads. With the declining yields
and strong demand for debt securities, corporations
increased bond issuances during this period. As a
result, the bulk of the corporate bonds (65.8%)
were issued in the first half-year, with a large
portion of the proceeds being utilised for
refinancing purposes.
Bond yields, however, reversed direction and trended
upwards in the second half-year. Concerns over
geopolitical risks and SARS outbreak proved to be
short-lived. As signs of strengthening economic
growth became evident with market expectations
that interest rate might rise, investors reduced bond
holdings. The rising yields of the US Treasury
securities also influenced the domestic bond yields.
Asset allocation shifted to the equity market
following improved market sentiments in the equity
market. As a result, bond trading activities turned
subdued with a 47.2% reduction in the trading
volume, compared with the first half of the year.
Consequent from the sharp increase in the bond
yields, fund-raising activities through the PDS market
weakened in the third quarter of 2003, as some
impending corporate issues were deferred.
Nevertheless, the weak demand for bonds and the
fall in issuance were temporary. Bond yields stabilised
Jan-03
Feb-03
Mar-03
Apr-03
May-03
Jun-03
Jul-03
Aug-03
Sep-03
Oct-03
Nov-03
Dec-03
2.5
3.0
3.5
4.0
4.5
5.0
%
Jan 03: 
3-year: 3.003 
5-year: 3.101 
10-year: 3.775 
Jun 03: 
3-year: 3.008 
5-year: 3.093 
10-year: 3.532 
4.850
4.278
3.755
 
2.94
Graph 4.33 
Trends in MGS Yields
MGS 3-year
MGS 10-year
MGS 5-year
3-month interbank rates
Graph 4.34
Yield Differentials for 3-year PDS vis-a-vis the 
3-year MGS
Jan-03
Feb-03
Mar-03
Apr-03
May-03
Jun-03
Jul-03
Aug-03
Sep-03
Oct-03
Nov-03
Dec-03
A
0
1
2
3
4
5
6
7
%
BBB
AA
AAA
Graph 4.35 
Utilisation of Proceeds 
2002
2003
54.3
23.5
8.2
44.3
22.7
13.3
13.1
6.6
14.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
Refinancing
Restructuring
Merger and
acquisition
Others
New activities
% of total


168
in December following portfolio rebalancing activities
and strong buying interests of quality papers. The
rebound in issuances in December was partly due to
the corporate issues which were postponed earlier.
The low interest rate environment was the dominant
factor influencing financing decisions of the
corporate sector during the year, as reflected in the
higher bonds issued for refinancing purposes (44.3%
of total bonds issued). The issuers were companies
from the transport, infrastructure, utilities and
construction sectors. The bulk of funds raised for
restructuring purposes was raised by a conglomerate
in the manufacturing sector. During the year, total
funds raised for merger and acquisition purposes
accounted for 13.3% of the total, and were mainly
raised by companies in the utilities and
telecommunication sectors. Meanwhile, funds raised
for new activities were lower and were mainly
channelled to utilities-related infrastructure projects,
the construction sector and, to a smaller extent, the
manufacturing sector. The construction and real-
estate property companies utilised the proceeds
mainly for land acquisition, refinancing and working
capital purposes.
During the year, the bulk of the new issues (52% of
total value) were for tenures between five to ten years,
in response to investors’ preference for short to
medium-end PDS. On average, the issue size for PDS
increased to RM602.5 million per issuer in 2003 from
RM494.7 million per issuer in 2002. Nevertheless, the
maturity profile of the domestic market lengthened
further, with the longest tenure issued reaching 28
years, compared with 26 years recorded in 2002.
In terms of types of instruments, straight bonds were
the most preferred form of debt securities,
accounting for 50.4% of total bonds issued.
Meanwhile, the improved sentiment in the equity
market led to higher issuance of convertible bonds.
In recent years, commercial papers/medium-term
notes gained more prominence, especially for the
purposes of financing working capital requirement.
Table 4.29
New Issues of Private Debt Securities by Sector
Sector
2002
2003p
RM million
% share
RM million
% share
Agriculture, hunting, forestry and fishing
971.9
3.6
993.1
2.3
Mining and quarrying
0.0
0.0
0.0
0.0
Manufacturing
1,776.8
6.7
9,072.4
21.2
Construction
2,174.1
8.2
6,049.7
14.1
Electricity, gas and water supply
1,349.0
5.1
3,410.5
8.0
Transport, storage and communication
9,099.5
34.1
8,603.8
20.1
Financing, insurance, real estate and business services
5,513.8
20.7
8,372.8
19.6
Government and others
4,644.5
17.4
6,288.1
14.7
Wholesale and retail trade, restaurants and hotels
1,130.8
4.2
0.0
0.0
Total
26,660.3
100.0
42,790.4
100.0
p Preliminary
2002
2003
Graph 4.36 
PDS Issues by Tenure
0
10
20
30
40
50
60
1 - 5
5.1 - 10
10.1 - 15
15.1 - 20
20.1 - 28
Years
% of total value
2002
2003
Graph 4.37 
PDS Issues by Type of Instrument
7.8
0.3
2.9
13.8
1.9
9.5
1.8
28.0
0.0
3.2
8.1
3.5
8.2
4.6
0
5
10
15
20
25
30
Straight
Bonds
Bonds
with 
Warrants
Convertible 
Bonds
Islamic 
Bonds
Asset 
Backed
Securities
Cagamas
Bonds
Medium
Term 
Notes
RM billion


The Financial Sector
169
These instruments allowed more flexibility for issuers
to take advantage of the low interest rates in the
shorter term by issuing commercial papers, while
waiting for opportunities to lock-in favourable rates
in the medium-term as and when the yields began to
trend upwards.
A wide range of Asset Backed Securities (ABS) were
issued during the year, which included those backed
by hire-purchase receivables, loans and innovative
issuance of Islamic principle ABS backed by mortgage
assets. In total, there were ten ABS (including one
commercial paper ABS) amounting to RM7 billion,
since the first issuance of ABS in 2001. The ABS
market is expected to develop further, given the tax
incentives announced in 2004 Budget.
Despite a challenging operating environment with
ample liquidity in the banking system, Cagamas
Berhad maintained its position as an active issuer.
In 2003, Cagamas issued 33 issues of debt
securities at a total value of RM17.9 billion
(including 15 short-term Cagamas notes of RM9.7
billion). Most of the Cagamas bond and notes
were issued during the second half of 2003, due
to the rising bond yields which had prompted the
financial institutions to be more active in hedging
their portfolios through the sale of loans and debts
to Cagamas. Taking into consideration the less
favourable market sentiments during the second
half-year, Cagamas spaced out the issuances in
order to ensure an orderly market performance.
Investors’ demand for Cagamas bonds throughout
the year was firm, as evidenced by the weighted
average over-subscription rate of 1.83 times and
2.38 times for Cagamas notes and Cagamas bonds
respectively.
Total trading activities in the ringgit bond market
increased by 11.6% to RM436.8 billion, with
higher activities in the first half of the year. In the
second half-year, trading activities were
concentrated in shorter-end papers, given the
higher risk premium and price volatility of long-
dated papers. The most actively traded papers
were MGS, accounting for 53% of total trading
activities and a liquidity ratio of 1.89 times its
outstanding amount. Demand for corporate bonds
increased, and accounted for 22.6% of the total
trading activities, compared with 14% in the
previous year. Nevertheless, the corporate bond
market remained less liquid, with a liquidity ratio
of only 0.81 times, and trading activities were
centred on bonds with high ratings and good
credit quality.
Graph 4.38 
ABS: Types of Underlying Assets (2001-2003)
Private debt 
securities
9.1%
Loans 
32.7%
Property and 
mortgage 
receivables 
27.2%
Hire purchase 
receivables 
7.3%
Other
receivables 
23.7%
Graph 4.39
Monthly Trading Volume
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
RM million
Jan-03 
Feb-03
Mar-03
Apr-03 
May-03 
Jun-03
Jul-03
Aug-03
Sep-03
Oct-03
Nov-03
Dec-03
Graph 4.40
Turnover of Selected Debt Securities (Jan-Dec 2003)
 Total: RM436.8 billion
Khazanah bonds
4.3%
Government  
Investment Issues 
7.9%
Other unlisted bonds 
20.3%
Danaharta 
2.1%
Danamodal 
4.2%
ABS 
2.0%
Cagamas bonds 
5.9%
Malaysian
Government 
Securities 
53.0%
Listed PDS 
0.2%


170
Rating profiles of long-term debt securities remained
healthy. Both the Rating Agency Malaysia (RAM) and
the Malaysian Rating Corporation Berhad (MARC)
undertook 116 new ratings, with total gross value of
RM41.9 billion. In terms of rating profiles, the issues
were mainly distributed throughout the AAA, AA
and A categories, with the heaviest concentration in
the single A category. During the year, RAM and
MARC conducted 204 rating reviews on the existing
long-term debt securities, of which 161 issues were
affirmations/reaffirmations, 10 issues were upgrades
and 18 issues were downgrades. The higher number
of downgrades were partly due to companies in the
tourism-related sector, whose financial positions were
adversely affected by the outbreak of SARS.
On the international front, market sentiments for the
Malaysia’s foreign currency sovereign bonds and
corporate bonds remained positive due to
expectations of an upgrade in sovereign ratings as
economic fundamentals strengthened. Spreads for
Malaysian sovereign bonds narrowed significantly
during the year. The first Malaysian sovereign Sukuk
bond issue which was listed in Luxembourg Stock
Graph 4.41
Rating Distribution of Outstanding PDS
(As at end-December 2003)
0
5
10
15
20
25
30
35
40
45
AAA
AA 
A 
BBB
BB
B
C
D
% 
Source: RAM and MARC
% of total value
% of total value
% of total issues
Table 4.30
Sovereign Spread Over US Treasury Benchmark
Dec-02
Mar-03
Jun-03
Sep-03
Dec-03
MALAYSIA 09
183
180
123
101
85
MALAYSIA 11
145
150
83
70
36
CHINA 11
61
65
29
28
29
INDONESIA 06
348
288
284
173
185
KOREA 08
110
162
84
69
45
PHILIPPINES 10
478
500
382
343
353
THAILAND 07
108
90
53
18
5
PETRONAS 06
204
198
145
126
117
Source: Bloomberg
Exchange and Labuan International Financial Exchange
in July 2002 was also listed on the Bahrain Stock
Exchange on 24 September 2003. The listing helped
to raise the profile of Malaysia to West Asian investors.
In line with enhancing the development of the bond
market, efforts were taken in 2003 to accord greater
investment flexibility to insurance companies in
investing in debt securities, as well as to provide more
risk management products. In November, Bank Negara
Malaysia increased the insurers’ limits on investment in
secured and unsecured credit facilities which includes
PDS. In addition, the Malaysian Derivatives Exchange
introduced two new products, the 3-year and 10-year
MGS futures, which added more hedging instruments
in the domestic financial markets.
Exchange-traded Derivatives Market
In 2003, higher turnover was recorded for all
exchange-traded derivative products on the
Malaysian Derivatives Exchange (MDEX), except for
trading in the Kuala Lumpur Stock Exchange (KLSE)
Options. Total turnover increased significantly by
55.3% to reach more than two million contracts.
Following the launch of two new products, the 3-
year and 10-year MGS Futures Contracts, which
enhanced risk management opportunities for
investors, the MDEX now offers seven derivative
products.
As in the previous year, the Crude Palm Oil (CPO)
Futures market emerged as the best performer on
the MDEX in 2003. During the year, the price range
for the benchmark 3-month CPO Futures contract
widened to RM622 (2002: RM587), with the highest
daily traded price at RM1,865 per tonne on 9
December.
Graph 4.42 
MDEX: Total Monthly Volume and Month-end  
Open Interest
J
F M A M J J A S O N D J F M A M J J A S O N D
2002
2003
Contracts
Contracts
Total monthly volume
Open interest (RHS)
Source: Malaysian Derivatives Exchange
0
50,000
100,000
150,000
200,000
250,000
300,000
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000


The Financial Sector
171
CPO futures prices began the year on a strong
note, with the monthly prices averaging around
RM1,600 – RM1,635 per tonne before
consolidating in the following months to average
around RM1,300 - RM1,480 per tonne. In the final
Table 4.31
Performance of MDEX Products
Products
Turnover
Factors affecting
performances
2002
2003
2002
2003
Number
Annual
Average
Number
Annual
Average
of lots
change
daily
of lots
change
daily
(%)
volume
(%)
volume
CPO Futures
909,073
89.5
3,666
1,429,959
57.3
5,813
70.6
71.5
KLSE CI Futures
233,863
-18.7
943
331,218
41.6
1,346
18.2
16.6
Open interest position
(as at end-year)
1,346
8,993
KLSE CI Options
1
-99.8
…
0
…
0
…
…
3-month KLIBOR
Futures
64,307
17.1
259
119,659
86.1
486
5.0
6.0
Open interest position
(as at end-year)
21,114
18,977
3-year MGS Futures
n.a
n.a
n.a
781
-
3
n.a
…
5-year MGS Futures
80,419
n.a
324
118,635
32.2
482
6.2
5.9
Open interest position
(as at end-year)
4,860
127
10-year MGS Futures
n.a
n.a
n.a
11
-
…
n.a
…
n.a. Not available.
Source: Malaysian Derivatives Exchange
Share of total
MDEX volume
(%)
• Strong CPO Futures prices.
• Better trading platform
with switch to electronic-
based system in 2002.
• Higher trading with
implementation of cost-
cutting measures.
• Lack of liquidity and
knowledge by participants.
• Higher turnover mainly in
the second half of 2003,
reflected the shift in market
preference from bond
market to short-term
money and interbank
markets instruments.
• Introduced in September
2003.
• Physical bond and bond
futures markets experienced
a correction in July 2003
following expectations over
the direction of global
interest rates.
• Introduced in September
2003.
Graph 4.43 
Crude Palm Oil Futures
J
F M A M J
J A S O N D J
F M A M J
J A S O N D
2002
2003
Lots ('000)
Price 
(RM/tonne)
Lots
Open interest
3-month average futures prices (RHS)
0
30
60
90
120
150
180
0
300
600
900
1,200
1,500
1,800
quarter of the year, CPO prices regained its
strength to record the highest level in four years,
to average around RM1,660 - RM1,790 per tonne.
The strong price performance in 2003 was a
reflection of the imbalances in the global vegetable
oils and fats markets, as the production of major
oilseeds, especially soybean, rapeseed and
sunflower increased marginally, whilst demand
from the major consumers of edible oils had
increased substantially during the year.
Trading activities in the KLSE Composite Index
(KLSE CI) Futures rose significantly in 2003. The
Derivatives Liquidity Ratio (DLR), which represents
the ratio between the turnover value of futures
against the turnover value of underlying KLSE CI
component stocks, increased significantly by
40.3% in 2003. The modification of the contract
size from RM100 to RM50 and the increase in the
tick sizes for the prices of the products effectively
reduced the margin requirements and the cost of
trade and thus encouraged more participation in


172
the market. Trading activities by both domestic and
foreign institutional players accounted for 76% of
total trades.
Total volume of the 3-month KLIBOR Futures
improved significantly following the sharp fall in
bond prices and expectations that interest rates may
increase. The higher turnover, mainly in the second
half-year, reflected the shift in market preference
from the bond market to short-term money market
and the interbank market instruments. Meanwhile,
the total turnover of 5-year MGS Futures registered
an increase of 32.2% amidst expectations on the
direction of global interest rates. Market sentiment
turned cautious in the second half of 2003. Domestic
institutions continued to be the major players in the
MGS and 3-month KLIBOR futures markets.
DEVELOPMENTS IN PAYMENT AND SETTLEMENT
SYSTEMS
Developments in 2003
In November 2003, the Payment Systems Act was
enacted by Parliament and is a landmark
achievement for the Bank as it sets out a
comprehensive regulatory oversight framework,
which is essential in governing the changing
payment landscape. The primary objective of the
Bank is to ensure the security, safety and efficiency of
The primary objective of the Bank is to ensure the security, safety
and efficiency of the payment systems in the country, and that
there is continued public confidence in the use of payment
instruments.
the important payment systems in the country, and
that there is continued public confidence in the use
of payment instruments. Of significance also is the
migration towards the use of advanced technology
such as chip cards to provide safer payment modes.
During the year, domestic banking institutions had
replaced their magnetic stripe ATM cards with the
chip based Bankcard, and with effect from 1
October 2003, all ATM transactions are carried out
using the Bankcard. The Bankcard has three
standard applications, that is, an ATM function, an
e-debit function and the MEPS Cash e-purse. The
locally incorporated foreign banks are expected to
replace their ATM cards with chip based cards by
March 2004. Presently, there has been no report of
any ATM fraud through the use of cloned chip
ATM cards.
In implementing a long-term measure to prevent the
fraudulent skimming of credit cards, the banking
industry is currently conducting an industry wide
Europay-Mastercard-Visa (EMV) chip migration of
their magnetic stripe credit cards. The magnetic
stripe cards are going to be replaced by end-2004,
and upgraded card acceptance devices will be
deployed to accept EMV chip cards by end-2005. As
at end-2003, there were about 243,000 EMV chip
credit cards issued and about 18,000 card
acceptance devices have been deployed to accept
these EMV cards.
In addition to the enhancement of security features
in the payment systems and instruments, technology
also facilitates the development of more efficient
payment modes, compared to paper-based payment
instruments such as cheques. Electronic funds
transfer systems (EFT) are more efficient and faster
than cheque processing systems, as well as, being
more secure and capable of effecting finality of
payment with greater certainty. The Malaysian
Electronic Payment System (1997) Sdn Bhd, has
developed several electronic payment systems, one of
which is the Financial Process Exchange (FPX) which
is targeted to be completed in early 2004. The FPX
will enable users to make online payments to
facilitate electronic commerce transactions using a
multi-bank payment platform.
Due to its many benefits, the promotion of the
migration from paper-based payment instruments to
electronic payments is being accelerated. In
December 2003, this was discussed at the National
Payment Advisory Council, followed by a consultation
exercise with financial institutions. Three broad areas
were proposed for the industry to consider on the
measures that would promote the migration to
electronic payments.
(i)
Financial institutions should offer efficient and
cost effective electronic payments that are accessible
and convenient for their customers to use.
(ii) Strategic incentives including pricing should be in
place to facilitate the investment and
development of the e-payment infrastructure,
and make e-payments widely acceptable.


The Financial Sector
173
Payment Systems Act 2003
Introduction
The Payment Systems Act 2003 (the Act) was gazetted on 7 August 2003 and came into effect on 1
November 2003. The introduction of the Act is in line with the recommendation in the Financial Sector
Masterplan for the adoption of a flexible, proactive and effective regulatory framework for the oversight
of payments system and to increase efficiency in the payment system. The introduction of the Act reflects
the significance of payments system to the country’s economic activities and recognizes Bank Negara
Malaysia as the sole authority responsible for its oversight. An efficient and well functioning payments
system would support the creation of social and economic efficiency and is crucial for the smooth
functioning of the financial markets and in maintaining financial stability. In addition, the smooth
operation of the payments system is also essential for Bank Negara Malaysia to effectively conduct
monetary policy.
The objective of the Act is to ensure the safety and efficiency of the payment related infrastructure, and to
safeguard public interest. The Act provides the legal framework to ensure that the financial system, and
the public’s confidence in the payment systems is well protected. The Act provides the specific legislative
authority for a more comprehensive and effective oversight of the payment system. Banking institutions as
well as non-bank players offering payment systems and instruments would be governed by the Act.
New oversight framework on payment system
The Act was drafted to provide a balanced regulatory framework for the oversight of the payment system
in line with Bank Negara Malaysia’s objective and to promote market innovation. The Act outlines two
different oversight regimes for two types of players namely, the operator of payment systems and the
issuer of designated payment instruments.
Oversight on the operator of payment systems
The Act defines a payment system as "any system or arrangement for the transfer, clearing or settlement
of funds or securities". Several arrangements including the clearing house recognised under the Securities
Industry Act 1983 or clearing house licensed under the Futures Industry Act 1993 are excluded from the
definition of payment system. An operator of the payments system is required to submit documents and
obtain notification from Bank Negara Malaysia. These documents and information are important for the
establishment of a surveillance mechanism that is capable of monitoring developments in the payment
system for the formulation of appropriate policies as and when required. Bank Negara Malaysia is also
empowered to prohibit the operation of any payment system in the event that it is necessary in the
interest of the public, or the operation of such system is detrimental to the reliable, safe, efficient and
smooth operation of the country’s payment systems.
The Act empowers Bank Negara Malaysia to designate a payment system as a designated payment system
(DPS) if such a system poses systemic risks, or if the designation is necessary to protect the interest of the
public. Only fit and proper persons can accept appointment as a director or chief executive officer of an
operator of a DPS. The operation of a DPS would be subjected to closer oversight by Bank Negara
Malaysia, including the requirement to establish good corporate governance. In addition, an operator of a
DPS is required to ensure that adequate operational arrangements are in place to ensure the smooth
functioning of these payment systems. This includes the establishment of rules and procedures setting out
the rights and liabilities of the relevant parties including the financial risks that the parties might incur, as
well as procedures for the management of credit risk and liquidity risk and measures to ensure the safety,
security and operational reliability of the DPS.
To ensure that a DPS can work effectively, it is necessary for all payment and settlement instructions that
are sent through the DPS be considered as final and irrevocable. The Act, therefore, provides that a
payment or settlement instruction sent through a DPS shall be final and shall not be revoked or reversed


174
from the time such an instruction is entered into the DPS. The operator of a DPS is required to establish
rules that determine the point of time that a payment or settlement instructions is deemed as final.
In acknowledging that a DPS may also adopt netting arrangements in order to reduce settlement risks, the
Act gives legislative recognition to any netting arrangements that are entered into, in relation to the DPS,
to avoid any uncertainty with regards to such netting arrangements. The Act provides that netting
arrangements adopted by participants of a DPS as well as finality of payment and settlement instructions
in a DPS prevail over insolvency laws.
Oversight on the issuance of designated payment instruments
The Act empowers Bank Negara Malaysia to designate a payment instrument as a designated payment
instrument (DPI). These are instruments that are widely used or that should be regulated by Bank Negara
Malaysia in the interest of the public. Issuance of a DPI requires the prior approval of Bank Negara
Malaysia. Three payment instruments have been designated as a designated payment instrument, namely,
electronic money, credit and charge instruments.
Similar to DPS, issuers of DPIs are required to implement adequate corporate governance and operational
arrangements to ensure the safety and reliability of these payment instruments. This includes the
requirement to establish measures to ensure prudent management of funds collected from the users of
the designated payment instruments and to ensure that such funds are available for repayment to the
users.
Powers of Bank Negara Malaysia under the Act
Bank Negara Malaysia is empowered under the Act to require an operator of a payment system or issuer
of a payment instrument to be an incorporated company. This requirement may be imposed where the
corporate structure is necessary to provide more permanence, credibility and stature to the entity that will
be required to comply with the Companies Act 1965 as well. To ensure effective supervision and
monitoring of the payment systems in the country, Bank Negara Malaysia may require the operator of a
payment system or the issuer of a payment instrument to submit information on the payment system
operated or the payment instrument issued by them. Other powers conferred by the Act to Bank Negara
Malaysia include: -
i.
Powers of examination
The Act empowers an examiner authorised by Bank Negara Malaysia to examine the premises and
offices, apparatus or documents, of an operator of a payment system or an issuer of a payment
instrument or any other person falling within the purview of the Act.
ii.
Control over DPS
The Act imposes a duty on an operator of a DPS who is insolvent to immediately inform Bank Negara
Malaysia. Bank Negara Malaysia, by order published in the Gazette, may assume control of, or to carry
on, the whole or part of a DPS’s property, business and affairs, as the case may be. Bank Negara
Malaysia may appoint a person to carry out such powers on its behalf by making an application to the
High Court to appoint a receiver or a manager to manage the company.
iii. Investigation, search and seizure
The Act empowers Bank Negara Malaysia to appoint its employee or any person as its investigating
officer for offences under the Act. The investigation officer has the powers of entry into any premise,
search and seize property, apparatus, or documents and search of persons. The Act also empowers
Bank Negara Malaysia to investigate, with the concurrence of the Securities Commission, clearing
houses recognised under the Securities Industry Act 1983 or those licensed under the Futures Industry
Act 1993.


The Financial Sector
175
iv. Offences and enforcement
In order to ensure an effective regulatory regime, the Act includes a schedule of offences that provides
for penalties in the event that identified provisions of the Act are contravened. Offences under the Act
are assigned penalties in accordance with the severity of their potential effects, including systemic and
other risks.
Conclusion
The enactment of the Act serves to strengthen Bank Negara Malaysia’s oversight over payment systems
and instruments. The Act enables Bank Negara Malaysia to identify and monitor systemically important
payment systems and important payment instruments, which will be closely regulated under the Act,
while giving regulatory flexibility to operators of payment systems and issuers of payment instruments to
encourage innovation.
(iii) The financial industry should promote awareness
of the electronic payment options and encourage
consumers to use electronic payments and
instruments by enhancing their confidence in
using these means of payments.
General Payment Profile in Malaysia
In the financial system, Malaysian consumers are
notably heavy users of cheques compared to other
payment instruments. The breakdown by percentage
for the value and volume of non-cash payment
transactions in 2003 is as shown in Table 4.32.
Whilst the banking industry continues to invest
significantly in e-payment infrastructures, cheques
remained a significant payment instrument. In 2003,
cheques accounted for 96.7% of the total non-cash
payment value. Although the value of e-purse
transactions is negligible in terms of total non-cash
payments, its volume accounted for 36.4% of total
non-cash payments in 2003. E-purse transactions in
Malaysia constituted mainly toll payments, where the
Touch ‘n Go contactless card was used. Settlement of
retail related payments were made through the
financial institutions, whereby interbank fund
transfers are mainly undertaken through the real-
time gross settlement system (RENTAS).
Table 4.32
Non-Cash Payments in Malaysia
Value (%)
Volume (%)
Cheques
96.67
34.04
Credit cards
2.48
27.68
Credit transfers (Giro)
0.63
0.24
Charge cards
0.16
1.42
E-purse - Toll payments
0.05
36.40
- Retail
0.00
0.00
Debit cards
0.01
0.22
IFTS Value
IFTS Volume
Volume (million)
Value (RM trillion)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
1999
2000
2001
2002
2003
0
2
4
6
8
10
12
14
Graph 4.44
RENTAS – IFTS Turnover
SSTS Value
SSTS Volume
0
20
40
60
80
100
120
140
1999
2000
2001
2002
2003
0.0
0.2
0.4
0.6
0.8
1.0
1.2
Volume ('000)
Value (RM trillion)
Graph 4.45
RENTAS – SSTS Turnover


176
135
140
145
150
155
160
165
170
175
180
185
1999
2000
2001
2002
2003
0.60
0.70
0.80
0.90
1.00
1.10
1.20
Value (RM trillion)
Volume (million)
Graph 4.46
Volume and Value of Cheques Cleared by 
SPICK Centres 
Value
Volume
In 2003, in terms of value and volume, Interbank
Funds Transfer System (IFTS) saw an increase of
10.9% and 9.1% respectively, while Scripless
Securities Trading System (SSTS) transactions saw a
significant increase of 28.6% and 18.3%
respectively, when compared with 2002.
Efficiency Improvements
Bank Negara Malaysia had introduced several
enhancements to improve RENTAS in 2003. These
include the following:
(i) RENTAS-STP
The ‘Straight Through Processing’ (STP) module
which is linked to the RENTAS system was
introduced to enable all processes in a payment
cycle beginning from payment initiation by
customers to interbank settlement is integrated
electronically. Members are advised to implement
RENTAS-STP to improve the efficiency of their
banking operations. The RENTAS-STP will reduce
human intervention, enabling operational cost
savings and resulting in improved customer
service. Presently, four members have
implemented RENTAS-STP
.
(ii) Intra-day credit enhancement
In August 2003, the RENTAS system was enhanced
to allow intra-day collateral securities to be valued
on the net price basis after taking into account
market price movements, credit rating changes
and margin requirement. This method replaced the
earlier method of calculating the ‘haircut’ which
was based on the nominal value and did not
reflect the fair value of the security. The intra-day
credit enhancement has improved risk
management, as the collaterals are now valued
based on its fair value derived from the current
market prices.
(iii) Enhancement of RENTAS i-LINK
In September 2003, Bank Negara Malaysia
completed Phase 2 of the RENTAS i-LINK
implementation. This system provides a timely
and accurate real-time settlement information,
allows monitoring, enquiring and analysing
information pertaining to management of
liquidity, cash and security positions. With the
implementation of these modules, the RENTAS
members are better able to monitor incoming
and outgoing cash/securities flows, to extend
vital RENTAS data to the front office for value-
added analysis and to prepare management
reports and updating the RENTAS members’
directory online. This has allowed active
management of information by members.
(iv) Universal Brokers (UBs) membership
As a measure to support the development of the
capital market, the UBs were allowed access to
the SSTS modules of the RENTAS system, which
enables them to deal directly in the unlisted debt
securities together with the other members of
the RENTAS system. Since October 2003, two
UBs have been admitted as members.
Payment Instruments and Channels
Cheques
The volume of cheques processed through the three
Sistem Penjelasan Imej Cek Kebangsaan (SPICK)
cheque clearing centres operated by Bank Negara
Malaysia increased marginally by 2.0% from 176.4
million cheques in 2002 to 179.9 million cheques in
2003. The value of cheques cleared, however,
remained at about RM1.1 trillion in both years.
In May 2003, the SPICK-KL (the largest of the
SPICK centres, the others being in Pulau Pinang
and Johor Bahru) was awarded the ISO 9001:2000
certification for another three years, reflecting the
commitment of the Bank towards providing quality
service. During the year, efforts were continued to
further improve the efficiency of SPICK operations,
such as the replacement of the Compact Disc
Production subsystem and upgrading the operating
system to Windows 2000. After the
enhancements, the overall SPICK operation for the


The Financial Sector
177
three centres showed an improvement in
performance with the reduction of clearing time by
an average of 1.5 to 2 hours.
As part of the Bank’s on-going effort to curb cheque
fraud, the Bank had in October 2003 issued a
consultative paper on “Guideline on Minimum
Security Standards for Cheques” to the banking
institutions with the objective of enhancing the
security features on cheques, cheque fraud detection
facilities, security management in cheque printing
and the necessary advise to consumers on best
practices. The Guideline also covers the related
governance processes. Banking institutions will be
required to make the necessary changes to their
work processes and upgrade their systems. The
Guideline will be enforced later in 2004.
In 2003, the number of blacklisted offenders in Biro
Maklumat Cek (BMC) remained constant. As at end-
2003, the number of offenders stood at 49,389,
including 32,408 individuals compared with 48,814
offenders including 32,351 individuals at end-2002.
Account holders, therefore, need to monitor their
account balances carefully and ensure that sufficient
funds are available before issuing cheques, as the
consequences of being blacklisted in the BMC can be
damaging.
Giro
Besides cheques, consumers can also use the Giro
credit transfer to make payments. Giro transactions in
2003 are less significant compared to the cheque
volume and value. Nevertheless, the volume and value
of Giro transactions as at end-2003 had increased
markedly by 114.8% and 57.8% when compared to
end-2002. Details on the credit transfer transactions
via the Giro system are shown in Graph 4.47.
Credit, Charge and Debit cards
The number of credit cards issued by the financial
institutions had increased in the recent three years,
from 2.8 million cards at end-2000 to 5.1 million
cards at end-2003. From 2002 to 2003, the total
value of credit card transactions rose by 16% and
credit card remains as a preferred payment card. The
usage of charge and debit cards was insignificant
compared to credit cards as shown in Table 4.33.
As part of the Bank’s effort to ensure an adequate
level of prudential measure, consumer protection
and consumer education, the Bank had issued a
“Credit Card Guideline” in March 2003. The
requirements in the Guideline among others,
stipulates a RM250 limit for consumers’ liability for
unauthorised transactions, bars credit card usage
for unlawful activities such as illegal online betting,
requires banks to provide an advisory to their
cardholders on the consequences of paying only the
minimum repayment amount and requires the
banking institutions to utilise the Central Credit
Reference Information System (CCRIS) in their credit
evaluation for processing applications.
Electronic Purse - MEPS Cash
Marketing programmes and awareness campaigns
have been undertaken during the year to promote
the use of electronic purse and electronic payment
channels in the country. During 2003, the banking
institutions progressively upgraded their existing card
0
200
400
600
800
1,000
1,200
1,400
2000
2001
2002
2003
Volume ('000) 
Value (RM billion) 
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Graph 4.47
Interbank Giro Transactions
Value
Volume
Table 4.33
Payment Cards
2002
2003
No. of cards
Volume
Value
No. of cards
Volume
Value
(million)
(million)
(RM million)
(million)
(million)
(RM million)
Credit cards
4.4
126.9
25,304.7
5.1
146.3
29,359.9
Charge cards
0.3
7.8
1,860.6
0.3
7.5
1,895.7
Debit cards
n.a.
1.0
74.2
2.8
1.2
87.4
n.a. Not available.


178
acceptance devices on a nationwide basis for
merchants to accept MEPS Cash electronic purse.
More than 12,000 terminals have been deployed at
various merchants by the financial institutions and
third party acquirers. As the MEPS Cash scheme has
only recently been deployed on a widespread basis,
the volume of transactions has yet to reach a
significant level.
Internet Banking
The Internet is becoming an increasingly important
channel for banks to provide banking services to both
individual consumers and businesses. During the year,
an Islamic bank and a locally incorporated foreign
bank began offering Internet banking services, making
the number of banks offering transactional Internet
banking services to 13 as at end-2003. Consumers
and businesses continued to show a growing interest
in using the Internet as a bill payment medium and for
conducting interbank fund transfers.
Accordingly, in their efforts to increase the adoption of
this self-direct channel, the banks have increased the
range of services offered via Internet banking including
free online bill payment services and the ability to transfer
funds to accounts in other banks. With more households
and businesses realising the convenience of Internet
banking, the number of Internet banking subscribers
grew from 1 million as at end-2002 to 1.7 million as at
end-2003. The total value of transactions conducted
through Internet banking by individual consumers had
increased significantly from RM0.9 billion for the quarter
ended 31 December 2002 to RM3.5 billion for the
quarter ended 31 December 2003.
Business Continuity Management
Business Continuity Management is the act of
anticipating incidents that will affect critical functions
and processes in the organisation and ensuring that
it is able to respond to any incident in a planned and
prepared manner. The Business Continuity Plan is the
processes and procedures an organisation put in
place to ensure that essential functions can continue
after and during a crisis. As part of the Business
Continuity Plan, the RENTAS, SPICK-KL and SWIFT
operations has a prescribed plan to ensure that these
services, if disrupted, can be re-established swiftly
and smoothly.
In 2003, monthly testing and several extended live
runs have been carried out to ensure that all
operation staff is familiar with the procedures at the
alternate site. During the testing periods, the Bank
worked closely with member banking institutions to
ensure that operations run smoothly, despite a change
in location. This encourages close co-operation among
the members to ensure that these systems operated
by Bank Negara Malaysia are well supported.
MALAYSIA’S ANTI-MONEY LAUNDERING AND
COUNTER FINANCING OF TERRORISM (AML/CFT)
PROGRAMME
Overview
The global community continues to intensify efforts
to enhance measures to detect and deter money
laundering and terrorism financing. There has been
greater co-operation among national agencies to put
in place the appropriate statutes and continue to
build capacity of personnel involved in implementing
the AML/CFT initiatives.
In Malaysia, Bank Negara Malaysia (the Bank) leads
various law enforcement agencies in combating
money laundering and terrorism financing. The Bank
is the secretariat to the National Co-ordination
Committee to Counter Money Laundering (NCC),
which was established in 2000 to formulate AML/CFT
measures, co-ordinate the implementation of these
measures and to ensure that the national efforts are
aligned with regional and international initiatives.
Representatives of member agencies in the NCC
meet several times a year to co-ordinate their
concerted efforts in fighting money laundering and
in countering terrorism financing. Each NCC member
is responsible to study and report on pertinent AML/
CFT issues to the NCC as well as implement, and
report on the development of, any NCC decision.
UN International Convention for the
Suppression of the Financing of Terrorism
Malaysia is committed to criminalise the financing of
terrorism as called for under the UN International
Convention for the Suppression of the Financing of
Terrorism. Malaysia proposes to accede to the UN
Convention by making appropriate amendments to,
and provide new legislative provisions in, five pieces
of legislation, namely the Penal Code, Criminal
Procedure Code, Subordinate Courts Act 1948,
Courts of Judicature Act 1964 and the Anti-Money
Laundering Act 2001 (AMLA).
Anti-Money Laundering (Amendment) Act 2003
In November 2003, the Parliament passed the Anti-
Money Laundering (Amendment) Act 2003, which
was gazetted as law on 25 December 2003. When
this legislation is brought into force by a Ministerial
order, the short title of the AMLA would be changed


The Financial Sector
179
to “Anti-Money Laundering and Anti-Terrorism
Financing Act 2001”. The amending legislation
extends the Bank’s money laundering reporting
mechanism to include the reporting of suspected
terrorism financing, provides for measures to be taken
for the detection and prevention of terrorism financing
as well as provides for the freeze, seizure and forfeiture
of terrorist property.
Implementation of the Anti-Money Laundering
Act 2001
The money laundering reporting mechanism under the
AMLA covers financial institutions and certain
categories of non-financial institutions, which are
considered to be of higher risk to money laundering or
terrorist financing activities. Our implementation
approach of extending the reach of the law
incrementally ensures that the reporting institutions are
well prepared and able to effectively comply with their
obligations under the AMLA.
Recent AML/CFT Measures under the AMLA
Extending the List of Reporting Institutions
Since the AMLA came into force on 15 January
2002, the requirement to report suspicious
transactions was invoked on banking and Islamic
banking institutions, insurance companies and
takaful operators, money changers and offshore
entities. In 2003, several other categories of
businesses have been included as reporting
institutions. To date, the reporting institutions under
the AMLA are as follows.
Other non-financial institutions that are vulnerable to
money laundering and terrorism financing will be
brought under the AMLA in stages.
Increase Reporting Obligations
The full-fledge reporting obligations under the
AMLA, such as record-keeping, retention of record,
compliance programme and customer identification
requirements have been invoked on the following
institutions:
•
Commercial banks, finance companies, merchant
banks and Islamic banks with effect from 15
January 2003;
•
Discount houses, offshore banks, offshore trust
companies, offshore insurers, reinsurers, insurers,
insurance brokers and takaful operators with
effect from 15 April 2003; and
•
Money changers with effect from 1 October
2003.
The Bank continues to work in collaboration with
these reporting institutions through regular dialogue
sessions to ensure effective implementation of the
AMLA compliance programme. The banking industry
has set up a Compliance Officers Networking Group
(CONG), which meets regularly to discuss AML/CFT
compliance issues at the premises of the Institute of
Bankers Malaysia. Officers of the Financial
Intelligence Unit (FIU) in the Bank attend CONG
meetings by invitation only.
Increase Predicate Offences
In 2003, the number of money laundering predicate
offences has increased from 122 to 150 serious
crimes from 23 pieces of legislation.
Suspicious Transaction Reports (STRs)
As the competent authority mandated by the
Minister of Finance, the Bank receives STRs pursuant
to section 14(b) of the AMLA. Section 14(b) requires
the reporting of suspicious transactions to the FIU in
the Bank. The STRs are analysed and, where
applicable, shared with the relevant enforcement
agencies, which conduct their own surveillance and
investigations into these cases based on the Bank’s
financial intelligence.
Capacity Building
Awareness Programme
The Bank continues to promote awareness among
relevant stakeholders to ensure effective
implementation of the AML/CFT measures. A
nationwide awareness programme for the banks,
including Bank Kerjasama Rakyat Malaysia Berhad,
Table 4.34
Reporting Institutions under the AMLA
Invocation date
Type of Reporting Institution
Number of
Institutions
(as at 31
December 2003)
15-Jan-02
Commercial banks
23
Finance companies
11
Merchant banks
10
Islamic banks
2
15-Apr-02
Discount houses
7
Offshore banks
54
Offshore insurance companies
101
Offshore trust companies
18
Insurance companies
44
Reinsurance companies
10
Insurance brokers
35
Takaful operators
4
1-Jun-02
Money-changers
649
15-Jan-03
Bank Kerjasama Rakyat
Malaysia
1
Bank Simpanan Nasional
1
Lembaga Tabung Haji
1
Pos Malaysia Berhad
1
Genting Casino
1
 Total reporting institutions
973


180
Bank Simpanan Nasional and Lembaga Tabung Haji
were conducted in August-October 2003. Dialogue
sessions with reporting institutions were also
conducted regularly to update and clarify any issues
relating to the development of the AML/CFT
measures.
Training Initiatives
The Bank hosted several workshops to enhance the
knowledge and skills of both domestic and regional
stakeholders in the AML/CFT initiatives. Financial
sector experts from the United States, Australia, the
United Kingdom and international and regional bodies
such as the IMF, the World Bank and the Asia/Pacific
Group on Money Laundering (APG) were invited to
share their experiences and expertise at these
workshops. The international training programmes
organised and hosted by the Bank were:
(i)
The ASEAN Anti-Money Laundering Workshop
2003, held from 28–30 July 2003. The workshop
formulated strategies for the creation of a
comprehensive anti-money laundering regime in
each ASEAN country, which included defining the
core functions of a financial intelligence unit,
identification of the agencies and the role of
enforcement agencies in the AML/CFT framework.
(ii) The Basic Analysis and Suspicious Transaction
Reporting Workshop 2003, held on 25-29
August 2003. The workshop was co-hosted by
the South East Asia Regional Centre to Counter-
Terrorism and the Bank. It focused on techniques
in basic analytical skills on collection, analysis and
sharing of information on suspected money
laundering and terrorism financing submitted by
reporting institutions.
(iii) The APG Typologies Workshop, held from 8–9
December 2003. The workshop was attended by
participants from 34 member and observer
jurisdictions of the APG. The workshop focussed
on the sharing of trends and cases relating to
money laundering and terrorist financing. In
addition, various working groups to conduct in-
depth study on cash couriers, terrorism financing
and corruption related issues were established.
(iv) The APG AML/CFT Assessment Training
Workshop, held on 10–12 December 2003. This
workshop trained the financial sector experts
from the APG member jurisdictions to conduct
assessment based on the IMF/ World Bank
Methodology for Assessing Compliance with
AML/CFT Standards.
Challenges Ahead
The Financial Action Task Force reviewed its 40
Recommendations in June 2003. The revision
extended the reporting entities to designated non-
financial business and professions (DNFBP). The
DNFBP includes real estate agents, dealers in
precious metals, dealers in precious stones, lawyers,
notaries, other independent legal professionals,
accountants and trust and company service
providers. The Bank will invoke the AMLA reporting
obligations on DNFBP in stages taking into
consideration the readiness of these entities. The
Bank recognises that the consultative process with
the DNFBP and the relevant regulatory and
supervisory authorities of the DNFBP as significant
to the successful implementation of the AMLA
reporting obligations.
The amendments to the Penal Code to criminalise
terrorism financing and the amendments to the
AMLA require the development of appropriate
counter-financing of terrorism mechanisms and
procedures to ensure effective implementation of the
UN International Convention for the Suppression of
the Financing of Terrorism. The Bank will work in
collaboration with the NCC members to effectively
implement the new legislative provisions.
Money laundering trends constantly evolve and
hence, necessitate continuous training of law
enforcement personnel to upgrade their knowledge
and skills. The Bank will continue its leadership role in
the fight against money laundering activities.


182-186
Growing Significance of the Islamic Financial System
186-196
Policy Thrust in 2003 
187-189
White Box: Introduction of Islamic Variable Rate Mechanism
190-193
White Box: The Framework of the Rate of Return
193-194
White Box: Guidelines on the Specimen Reports and 
Financial Statements for Licensed Islamic Banks (GP8-i)
196-201
Performance of the Islamic Banking System
The Islamic Financial System


182
GROWING SIGNIFICANCE OF THE ISLAMIC
FINANCIAL SYSTEM
The Islamic financial system has evolved into a viable
and vibrant component of the overall financial
system, complementing the conventional financial
system. The Financial Sector Masterplan (FSMP)
provides clear strategic focus to develop and
promote the expansion of the Islamic banking
system. Against the backdrop of a stronger economy
and strong macroeconomic fundamentals, Islamic
banking activity experienced rapid growth to account
for 9.7% of the total assets of the banking system in
2003 from 6.9% in 2000. The market share of
deposits and financing also increased markedly to
account for 10.4% (2000: 7.4%) and 10.3%
(2000: 5.3%) of the total banking system
important role in mobilising deposits and
providing financing to facilitate growth. The
Islamic banking system is currently represented by
33 Islamic banking institutions, comprising two
Islamic banks and 31 conventional banking
institutions (nine commercial banks, four foreign
banks, seven finance companies, four merchant
banks and seven discount houses) offering Islamic
banking products and services under the Islamic
Banking Scheme. These Islamic banking
institutions offer a comprehensive and broad
range of Islamic financial products and services
ranging from savings, current and investment
deposit products to financing products such as
property financing, working capital financing,
project financing, plant and machinery financing,
hire purchase, education financing and other
The rapid progress of the domestic Islamic banking system,
accentuated by significant expansion and developments in Islamic
banking and finance has become increasingly more important in
meeting the changing requirements of the new economy.
respectively. The rapid progress of the domestic
Islamic banking system, accentuated by significant
expansion and developments in Islamic banking and
finance has become increasingly more important in
meeting the changing requirements of the new
economy.
In Malaysia’s dual banking environment, the Islamic
financial system operates in parallel with the
conventional financial system. The Islamic financial
system encompasses the Islamic banking system,
Islamic money market, Islamic insurance or takaful,
Islamic capital market and the specialised financial
institutions which provide alternative sources of
financing. The intra-dependency of these key
structural components creates a comprehensive
enabling environment for the Islamic financial system
to effectively play its role as an efficient conduit to
mobilise resources and provide financing for
productive economic activity. This structure also
enhances the resilience and robustness of the Islamic
financial system to withstand financial shocks and
contributes to the overall stability of the Islamic
financial system.
•
The Islamic banking system which forms the
backbone of the Islamic financial system plays an
The Islamic Financial System
financing products including trade finance
products. The ability of the Islamic banking
institutions to arrange and offer products with
attractive and innovative features at prices that
are competitive with conventional banking
products, has appealed to both Muslim and non-
Muslim customers, reflecting the capacity of the
Islamic banking system as an effective means of
financial intermediation. The extensive
distribution network of Islamic banking
institutions, comprising 152 full-fledged Islamic
banking branches and 2,065 Islamic banking
counters (offering Islamic banking products), that
is also well supported by an efficient, secure and
effective payment system, has enhanced access
to banking services for the various sectors of
the economy.
•
The existence of an active Islamic interbank
money market is another important component
in the Islamic financial system. Under the
mudharabah (profit-sharing) interbank
investment (MII) mechanism, Islamic banking
institutions are able to raise funds to meet their
short-term funding requirement based on profit-
sharing arrangement. Since its inception in
1994, the volume of MII increased from only


183
The Islamic Financial System
RM0.5 billion in 1994 to RM283.8 billion in
2003. The availability of a broad spectrum of
short and long-term Islamic financial instruments
such as Government Investment Issues (GII),
Bank Negara Negotiable Notes (BNNN) and
Islamic private debt securities as well as the
active trading of these instruments allow Islamic
banking institutions to meet their investment
and liquidity needs. The GII and BNNN are also
among the instruments used by Bank Negara
Malaysia to manage liquidity in the Islamic
banking system. The efficiency of the Islamic
money market is enhanced by the Real-Time
Gross Settlement System (RENTAS) and the Fully
Automated System for Tendering (FAST). RENTAS
facilitates larger value interbank funds transfers
and scripless securities while FAST facilitates the
tendering process for Islamic securities including
government securities, commercial papers and
private debt securities.
•
In the Islamic capital market, funds are raised to
finance long-term infrastructure and
development projects through the issuance of
Islamic private debt securities. The Islamic capital
market reduces over-dependence on the Islamic
banking system for long-term financing and
allows Islamic banking institutions to diversify
part of the risks emanating from asset and
liability mismatches. The existence of the Islamic
capital market plays an important role in
reducing potential source of financial
vulnerabilities and contributes to enhance the
robustness and resilience of the Islamic financial
system, leading to greater financial stability. The
issuance of diverse Islamic financial instruments
ranging from short-term Commercial Papers and
Medium Term Notes to long-term Islamic bonds
facilitates Islamic banking institutions in meeting
their investment and liquidity needs. The
different financial structures of the Islamic
instruments also provide flexibility to issuers in
managing their distinct financing requirements.
Moreover, the Islamic financial instruments
attract a wider investor base, encompassing
both Islamic and conventional institutional
investors, and thereby the funds raised can be
tapped at competitive cost. In addition, the
active participation of Islamic banking
institutions in deal origination, underwriting and
corporate advisory services expands the breadth
and depth of the Islamic capital market,
contributing to increased effectiveness and
efficiency of the Islamic financial system.
The availability of credit ratings by the external
credit rating agencies such as the Rating Agency
Malaysia (RAM) and Malaysian Rating
Corporation Berhad (MARC) enhance price
discovery and efficiency of the market and
facilitate efficient investment and financing
decisions. The efficiency of the Islamic debt
securities market is further augmented by
settlement and tendering systems such as
RENTAS and FAST as well as the Bonds
Information Dissemination System that provides
comprehensive market information on domestic
debt securities.
Table 5.1
Islamic Banking System: Key Data
As at end
Annual
change (%)
2002
2003p
2003p
Number of financial
institutions
35
33
-5.7
Commercial banks
14
13
-7.1
Finance companies
9
7
-22.2
Merchant banks
 3
4
33.3
Islamic banks
2
2
0.0
Discount houses
7
7
0.0
Total assets (RM million)
68,070
82,196
20.8
Commercial banks
29,109
36,824
26.5
Finance companies
12,623
17,875
41.6
Merchant banks
1,430
1,716
20.0
Islamic banks
20,160
20,955
3.9
Discount houses
4,748
4,826
1.6
Total deposits (RM million)
53,306
60,212
13.0
Commercial banks
23,476
26,519
13.0
Finance companies
9,094
10,965
20.6
Merchant banks
684
852
24.6
Islamic banks
16,421
17,584
7.1
Discount houses
3,631
4,292
18.2
Total financing (RM million)
36,718
48,615
32.4
Commercial banks
16,706
22,324
33.6
Finance companies
10,050
15,746
56.7
Merchant banks
804
781
-2.9
Islamic banks
9,158
9,764
6.6
Discount houses
n.a.
n.a.
n.a.
Financing-deposits ratio (%)
68.9
80.7
11.8
Commercial banks
71.2
84.2
13.0
Finance companies
110.5
143.6
33.1
Merchant banks
117.5
91.7
-25.8
Islamic banks
55.8
55.5
-0.3
Discount houses
n.a.
n.a.
n.a.
Number of branches
138
152
10.1
Commercial banks
8
13
62.5
Finance companies
2
7
250.0
Islamic banks
128
132
3.1
Number of counters
2,065
2,065
0.0
Commercial banks
1,335
1,410
5.6
Finance companies
730
646
-11.5
Merchant banks
–
9
–
n.a. Not applicable.
p  Preliminary


184
•
In the Islamic equity market, Islamic institutional
investors participate in capital raising exercise to
finance business expansion of corporations. The
Islamic unit trusts provide investors access to
professional management of funds to maximise
returns on different risk profiles. The
comprehensiveness of the Islamic financial
system creates significant investment
opportunities for both Islamic and conventional
investors in managing their portfolios to meet
financial needs.
•
The takaful industry adds significant synergies to
the overall Islamic financial system. Takaful
operators, particularly in general takaful business,
contribute to mitigate part of the risks of the
banking system emanating from financing
transactions and hence strengthen the resilience
of the Islamic financial system. In the family
takaful business, takaful operators assume an
Shariah framework. The Islamic banks are regulated
and supervised by Bank Negara Malaysia under the
Islamic Banking Act 1983 (IBA), while the conventional
banks participating in the Islamic Banking Scheme (IBS
banks) are regulated under the Banking and Financial
Institutions Act 1989 (BAFIA). Islamic banking
institutions operate under a robust regulatory and
supervisory framework based on international
standards and best practices, at par with conventional
banking institutions. For the IBS banks, the robustness
of the regulatory and supervisory framework includes
the establishment of effective firewalls to ensure that
there is complete segregation between Islamic
banking and conventional banking portfolios in line
with the dictates of the Shariah. This is to preserve the
integrity and confidence in the Islamic banking system.
•
Islamic banks observe the Basel Capital Accord in
maintaining a minimum risk-weighted capital
ratio (RWCR) of 8% and a minimum core capital
The comprehensiveness of the Islamic financial system creates
significant investment opportunities for both Islamic and
conventional investors in managing their portfolios to meet
financial needs.
important role as economic agents that mobilise
long-term savings for long-term investments and
economic growth. The role of takaful operators
as institutional investors has contributed to
stimulate the development of Islamic financial
instruments and consequently adds depth to the
Islamic financial markets.
•
Specialised non-bank institutions offering Islamic
financial products and services such as the
development financial institutions (DFIs) and
Pilgrims Fund Board complement the Islamic
banking system in expanding its reach to specific
strategic economic sectors thereby enhancing the
capacity of the Islamic financial system in its overall
contribution to economic growth and development.
Meanwhile, the existence of ancillary institutions
such as the National Mortgage Corporation
(Cagamas Berhad) contributes to enhance resilience
of the Islamic financial system through securitisation
of the Islamic house financing and Islamic hire
purchase receivables in the portfolios of Islamic
banking institutions.
Ensuring Financial Soundness and Stability
The Islamic financial system operates under a robust
and comprehensive legal, regulatory, supervisory and
ratio of 4%. The IBS banks observe the
compliance to the RWCR framework for the
Islamic banking portfolio in addition to the
compliance on a consolidated basis (for
both Islamic banking and conventional
banking portfolios).
•
To ensure Islamic banks maintain sufficient
liquidity at all times, Islamic banks are required to
observe the liquidity framework. Under this
framework, Islamic banks are required to manage
their liquidity positions in a dynamic manner
through the matching of short-term liquidity
requirements arising from maturing obligations
with maturing assets. In addition, Islamic banks
are required to maintain adequate liquidity
surpluses to be able to sustain unexpected heavy
withdrawals for at least one month. In the case
of the IBS banks, this liquidity framework is
observed on a consolidated basis.
•
Prudent management of the Islamic banking
portfolio is pertinent to protect the interest of
depositors in view of the profit and loss sharing
nature of Islamic banking operations. To inculcate
prudent financing practices, Islamic banking
institutions are required to provide adequate


185
The Islamic Financial System
provisioning for potential deterioration in asset
quality and observe the credit limit to a single
customer and its related corporations.
•
Islamic banking institutions observe the Central
Bank’s guidelines on best practices in credit risk
management and prohibition of financing to
directors, staff and their interested corporations
to prevent abuses, conflicts of interests and
irregular practices.
•
Strong corporate governance is essential to
ensure that Islamic banking institutions are
managed by competent management who are
able to provide the strategic direction for the
institution as well as manage the operations of
Islamic banking institutions in an effective and
prudent manner. Islamic banks adhere to the
Central Bank’s guidelines on corporate
governance pertaining to the appointment of
directors, the structure of the board, limitation
on the number of directorships of directors and
chief executive officers, code of conduct for
directors and employees of banking institutions
as well as guidelines on minimum audit
standards. To further strengthen the corporate
governance structure of Islamic banks,
additional measures were introduced in 2003
requiring Islamic banks to establish a nominating
committee, remuneration committee and risk
management committee to ensure that the
shareholders play a more active role in
overseeing the effectiveness of the board of
directors and management. The guidelines
highlighted the roles and responsibilities of
independent directors, which include inter alia,
to provide effective oversight and enhance the
independence of the board. The guidelines also
specified the minimum qualifications and
training requirements for directors.
•
In the preparation of financial statements,
Islamic banks are required to observe the
Guidelines on the Specimen Reports and
Financial Statements for Licensed Islamic Banks
(GP8-i). The IBS banks disclose their Islamic
banking operations in the Notes to the Accounts
of the principal financial statements as part of
GP8 of the conventional banks. To further
enhance transparency in the derivation of the
rate of return in Islamic banking business,
Islamic banking institutions are required to
observe a standard framework for the
calculation of the rate of return.
•
Another important dimension in Islamic banking
operations is Shariah compliance. Under the IBA,
Islamic banks need to establish Shariah advisory
bodies. Central to these bodies is the Shariah
Advisory Council (SAC) at Bank Negara Malaysia
as the sole authority to decide on Shariah
matters on Islamic banking and financial
business that fall under the purview of the
Central Bank. The SAC at Bank Negara Malaysia
also serves as the ultimate reference for Shariah
ruling in court proceedings on Islamic banking
and finance cases.
•
The Anti-Money Laundering Act 2001 (AMLA)
and guidelines on money laundering and “know
your customer policy” protect the Islamic
banking system from money laundering
activities. AMLA provides comprehensive laws
for the prevention, detection and prosecution of
money laundering, the forfeiture of property
derived from, or involvement in money
laundering and the requirements for record
keeping and reporting of suspicious transactions
by Islamic banking institutions.
•
To reinforce the regulatory framework that has
been established to preserve financial stability,
Islamic banking institutions are subject to a
rigorous supervisory framework. Supervisory
activities emphasise the vigilant monitoring of the
financial condition and soundness of Islamic
banking institutions, the adoption of pre-emptive
strategies to address any adverse trend or
weakness identified and the instilling of best
practices to enhance corporate governance
structures as well as risk management systems.
The supervisory process is premised on a forward-
looking proactive risk-based model encompassing
both dynamic off-site surveillance and on-site
examinations. The off-site surveillance process
includes the review and approval of financial
statements to ascertain compliance with Bank
Negara Malaysia’s guidelines as well as close
monitoring of Islamic banking institutions
through regular reporting and rigorous financial
and non-financial analysis for early detection of
any emerging problems. In 2003, on-site
examinations were conducted on the Islamic
banks, comprising the head offices, local and
offshore branches, based on the CAMELS rating
framework. In addition, stress testing remains an
on-going exercise where the Islamic banking
institution’s current financial condition is
subjected to simulated stress under alternative


186
adverse scenarios in order to detect potential
areas of vulnerability. The results of this stress test
form the basis for the implementation of pre-
emptive actions.
Global Integration of Islamic Financial System
The significant progress achieved by the domestic
Islamic financial system has set the stage for its
integration with the global market place. The
initiatives on the global front to position the Islamic
financial system as a credible component of the
global financial system will contribute to further
strengthen the development of the domestic Islamic
financial system.
•
The establishment of the Islamic Financial Services
Board (IFSB) in Kuala Lumpur to develop
international prudential regulatory standards in
accordance with the distinct features and risks of
Islamic financial institutions will contribute towards
ensuring the soundness and stability of the Islamic
financial system. Since its establishment in 2002,
the IFSB has attracted wide participation. As at
end-2003, the number of IFSB members has
and facilitate efficient liquidity management by
Islamic financial institutions. Malaysia
spearheaded the issuance of the first sovereign
global Islamic sukuk to give impetus to the
development of the IIFM. The global Islamic
bond served as a benchmark and catalyst that
spurred the issuance of subsequent global
Islamic bonds. The development of Islamic
finance as an important niche activity in
Malaysia’s International Offshore Financial
Centre in Labuan complements the development
of the IIFM in the issuance, listing and trading of
foreign currency-denominated Islamic financial
instruments as well as in forging linkages with
other Islamic financial centres to further expand
the global reach of Islamic banking and finance.
POLICY THRUST IN 2003
In tandem with the overall objective of the FSMP to
create an efficient, progressive and comprehensive
Islamic financial system that can contribute
significantly to the effectiveness and efficiency of the
Malaysian financial sector, the Islamic financial policy
The Islamic financial policy thrust in 2003 continued to be directed
at further strengthening the fundamental underpinning
foundations of the Islamic banking system to support the sound
and progressive development of the Islamic banking industry.
increased to 13 full members, three associate
members and 20 observer members. The IFSB has
made progress in developing prudential standards
on capital adequacy and risk management and will
commence preparation of an additional standard
on corporate governance. The participation of the
International Monetary Fund, the World Bank, the
Asian Development Bank and the Bank for
International Settlements in the IFSB will enhance
co-operation towards achieving the common goal
of international monetary and financial stability.
•
The establishment of the International Islamic
Financial Market (IIFM) in 2002 constitutes part
of the overall efforts to strengthen the efficacy
of the Islamic financial system as a component
of the global financial system in achieving
balanced growth and development. The IIFM
provides the infrastructure to facilitate the
mobilisation of foreign capital according to
Shariah principles, stimulate the creation and
trading of Islamic financial instruments, enhance
investment opportunities for global investors
thrust in 2003 continued to be directed at further
strengthening the fundamental underpinning
foundations of the Islamic banking system to support
the development of a sound and progressive Islamic
banking industry. The focus was on strengthening the
institutional financial infrastructure, enhancing the
regulatory framework, strengthening the Shariah and
legal infrastructure as well as enhancing intellectual
capital development and consumer education.
Strengthening Institutional Financial
Infrastructure
Institutional Development
A comprehensive and well-developed financial
infrastructure is key to enhancing the capacity and
effectiveness of the Islamic banking system
premised on its own principles, uniqueness and
characteristics.
•
One feature of a well-developed financial
infrastructure is the diversity of the players,
including the participation of foreign players in
the Islamic financial landscape. Cognisant of this,


187
The Islamic Financial System
Bank Negara Malaysia has brought forward the
liberalisation of the Islamic banking sector. The
presence of full-fledged foreign Islamic banks in
Malaysia will generate spill over effects that will
enhance product diversity, spur financial
innovation and support the overall development
of the Islamic financial system. It will also act as a
bridge between Malaysia and other global Islamic
financial markets, thus providing the enabling
environment for Malaysia to become a regional
hub for Islamic banking and finance.
•
As the domestic Islamic banking industry
progresses into a more advanced stage of
development, significant developments are
shaping the industry’s financial regulatory
infrastructure, both on the domestic and
international fronts.
•
On the domestic front, these included the
emergence of a different set of accounting
standards for Islamic financial business to be
issued by the Malaysian Accounting
Standards Board (MASB) and the introduction
of the Deposit Insurance Scheme.
•
On the international front, the Islamic
Financial Services Board (IFSB) will be issuing
a specific set of prudential regulatory and
supervisory standards to govern Islamic
banking operations globally.
•
Against this backdrop, Bank Negara Malaysia has
conducted a review of the existing “window”
institutional structure of the IBS banks to prepare
an enabling structure that can assimilate these
developments and thus strengthen the prudential
regulatory and supervisory regime.
Risk Management
The enhancement of risk management capabilities of
the Islamic banking institutions is another important
aspect in developing the institutional financial
infrastructure.
•
A variable rate financing product under the concept
of bai’ bithaman ajil (deferred payment sale) was
introduced in 2003 as an instrument to diversify the
financing portfolio of the Islamic financial
institutions from over-reliance on fixed-rate
financing as well as to mitigate the risk associated
with funding mismatch.
•
Moving forward, to complement the bai’
bithaman ajil (BBA) floating rate financing
Introduction of Islamic Variable Rate Mechanism
A significant achievement was made in 2003 in the area of risk management when the first variable
rate financing product was developed for the Islamic banking industry under the concept of bai’
bithaman ajil (deferred payment sale), or in short, BBA. This Shariah-compliant product was structured
by a working group comprising representatives from Bank Negara Malaysia and the industry to enable
the Islamic financial institutions which operate in a dual banking environment to constantly match the
current market financing rate in order to provide matching returns to their depositors, thereby
alleviating any mismatch risk. By doing this, the Islamic financial institutions are able to receive varying
income streams from their financing activities, which will be distributed to the depositors at a more
competitive rate.
The new instrument is an alternative to the existing mode of financing portfolio which is predominantly
fixed-rate in nature. In recent developments, the high leverage on fixed-rate financing became a topical
issue in Islamic banking as there has been an inadequate hedging mechanism through which Islamic
financial assets could grow and be protected from exposure to fluctuations in the financing rate. As at
end-December 2003, total fixed-rate financing accounted for 87.8% of total Islamic financing and a
large proportion of this financing, namely, house and other property financing-i and term financing-i,
were predominantly on a longer term tenure, constituting 58.8% of total Islamic financing, as shown in
Graph 1. (The current method of variable rate financing offered by a few Islamic financial institutions is
impractical as it involves multiple sub-agreements to reflect a change in the rate).
This fixed-rate regime has resulted in a funding mismatch to the Islamic financial institutions because
their long-term financing was funded by short-term bank deposits which can give variable returns. As


188
the banks had locked in their profit rates for the financing over a long period, any upward movement in the
market rates, therefore, may result in the Islamic banking institutions finding it difficult to give a satisfactory
return to their depositors. This is because the constant income stream from the financing is tied to a fixed
profit rate which is relatively lower when compared to a conventional floating rate loan whose rate has risen.
Inevitably, this situation would cause a switching of Islamic funds to conventional funds.
The variable rate financing is designed to mitigate the mismatch risk currently faced by the Islamic
financial institutions by allowing them to vary the profit rate for the financing in order to raise the
deposit rates. As a result, the depositors will obtain satisfactory returns vis-à-vis that in the conventional
banking market, and hence, would not switch their deposits which otherwise could adversely affect the
Islamic banking operation. This new option reduces the vulnerabilities of the Islamic financial institutions
to exposure in market risk in a banking environment where the Islamic banking system and
conventional banking system operate side-by-side.
The variable rate financing is an innovation to the existing BBA financing concept which is fixed-rate in
nature. Under the BBA, the selling price of the asset sold to the customer on deferred terms would be
fixed at a profit rate known as the ceiling profit rate which is higher than the profit rate under the fixed-
rate BBA financing where, in principle, the contractual selling price and instalments would be higher.
However, rebate known as ibra’ (a waiver of right to claim unearned profit) is required to be granted at
every instalment, for example on a monthly basis, in order to reduce the monthly instalments to match
that of the current market level.
As illustrated in Graph 2, the financing is created upon the bank purchasing the asset from the customer for
cash which will be immediately sold back on deferred terms. Computed at a ceiling rate of 12% per annum
as in the example, the selling price (which is higher than under BBA fixed financing) will be agreed upon and
the contractual repayment is to be made in equal monthly instalments of RM2,000 over the agreed period. If
the base lending rate (BLR) plus margin used as benchmark in the pricing calculation is 10% per annum for
the first month, the bank would give a monthly rebate of RM500, which represents the difference between
the ceiling profit rate of 12% per annum and effective profit rate of 10% per annum. If in the fourth month,
the market rate rises to 11% per annum, the bank would then only grant a monthly rebate of RM300.
Graph 1 
Total Financing by Mode of Financing as at end-2003
Other fixed-rate 
financing 
32.6%
Fixed-rate hire 
purchase 
29.0%
Fixed-rate house 
financing 
26.2%
Floating rate 
financing 
12.2%


189
The Islamic Financial System
In practice, the rebate would be varied so that the effective profit rate (ceiling profit rate less rebate)
reflects the fluctuating market financing rate. Accordingly, the bank would be able to raise the
financing rate when there is a rise in market rate, hence, it can give better returns to its depositors. As
such, this justifies the setting of a high ceiling profit rate to buffer any rise in the market rate. However,
if the market rate rises beyond 12% per annum, the effective profit rate would remain at the ceiling
rate. The ceiling rate would provide some comfort to the customer that the effective profit rate would
be capped at that rate.
To govern this mode of financing, such rates are subject to a ceiling profit rate of four percentage point
above the market’s BLR unless supported by findings that the market rate is forecasted to be volatile
and escalating. In setting the effective profit rate, the banks are required to observe the maximum profit
spread of 2.5 percentage point above the BLR. However, as a matter of policy, the effective profit rate
cannot transgress the ceiling profit rate even if the market rate rises above the latter, while any change
to the effective profit rate would need to be communicated to the customer prior to the change.
At maturity, any difference in the amount between the selling price and the total repayments plus the
monthly rebates granted, would be rebated. In addition to the rebates on instalments and at maturity
which have been made mandatory to be included in the financing agreement, rebates must also be
granted in the event of early settlement or redemption, or termination of contract. Bank Negara
Malaysia has allowed rescheduling of the financing (where the period of financing can be extended) if
the bank wishes to grant the option that the effective monthly instalment need not be increased if the
effective profit rate rises, on the condition that the financing agreement contains a rescheduling clause
and the total repayments are not in excess of the original selling price. The computation of capital
adequacy for the BBA variable rate financing will be accorded the same risk-weight as under the BBA
fixed-rate financing.
Currently, this new mode of financing is applicable to house, property and term financing only and
would be extended to other types of financing in due course. Undoubtedly, this new product is
expected to grow significantly as it is a natural hedging product, particularly in view of the risk exposure
issues prevalent in Islamic banking today.
Unearned
profit
Bank’s
purchase
cost
Graph 2
BBA Variable Rate Financing
Financing tenure (e.g. months)
Monthly 
rebates 
granted
Actual 
total
repayments 
= 
purchase 
cost 
+ 
earned 
profit
Profit
rate
(%)
12
11
10
End of tenure
Contractual 
agreement
Ceiling rate
2,000
1,700
1,500
Selling price 
under BBA 
fixed financing
Unearned 
profit
RM
Higher 
selling 
price 
under 
BBA 
variable 
rate
Bank’s 
purchase 
cost
1             2            3             4             5  . . . . .
Monthly rebate given at each instalment 
Effective monthly instalments


190
mechanism, another variable rate financing
product based on the concept of ijarah muntahia
bittamleek (leasing ending with ownership) is
being explored.
Enhancing Regulatory Framework
The growing significance of the Islamic banking industry
requires the development of an effective regulatory
framework to provide the enabling environment to
support the development of the industry.
•
In 2003, Bank Negara Malaysia conducted a
review on the Framework of the Rate of Return.
The purpose was to further strengthen the
methodology for deriving the rate of return to
depositors, whereby the revised framework is to
provide a greater degree of flexibility in the
implementation of the framework.
•
The Guidelines on the Specimen Reports and
Financial Statements for Licensed Islamic Banks
(GP8-i) was issued in August 2003. The objective
was to promote consistency and standardisation
amongst the Islamic banks in complying with the
provisions of the IBA and approved accounting
standards, specifically MASB i-1 and the Shariah
requirements. The Guidelines prescribed the
minimum requirements of the financial statements
that the Islamic banks need to disclose.
•
In the development of accounting standards for
Islamic financial business, the Malaysian Accounting
Standards Board has embarked on the preparation
of standards on leasing (ijarah), deferred payment
sale (BBA) and cost-plus (murabahah) in relation to
the recognition, measurement and disclosure of
these Islamic financial transactions.
The Framework of the Rate of Return
Towards standardising the methodology on the calculation of distributable profits and the derivation of
the rates of return to depositors in Islamic banks, Bank Negara Malaysia introduced the “Framework of
the Rate of Return”. Among others, the objectives of the framework are to: -
(i)
Set the minimum standard in calculating the rates of return;
(ii) Level the playing field and provide the terms of reference for the Islamic banking institutions (IBIs) in
deriving the rates of return; and
(iii) Provide Bank Negara Malaysia with an effective yardstick to assess the level of efficiency of
the IBIs.
Prior to the introduction of the framework, the IBIs adopted various methods in deriving the rates of
return. Such practice has led to large variations in the results and implications. For example, some IBIs
include all types of income in their computation while some exclude certain type of incomes. These
variations have led to the following impediments in terms of: -
(i)
Assessment of the rates of return by Bank Negara Malaysia specifically to ascertain whether the
rates genuinely reflect the true performance of the IBIs or otherwise;
(ii) Regulation and supervision by Bank Negara Malaysia, particularly in assessing the prudence and
fairness in the distribution of profits to the depositors; and
(iii) Assessment by the IBIs of their funding cost, which in turn led to the distortion of rates of return in
the retail and inter-bank markets.
The standardisation of the rates of return was also aimed at addressing the information asymmetry
between the IBIs and the depositors by enhancing the level of transparency and ensuring that
depositors would receive fair returns on their investment. The framework would detail the items, for
example, the income and expense items that need to be reported and incorporated for the purpose of
the calculation. In particular, the calculation table lists the expense items that need to be shared by the
depositors and the bank; and items that are to be solely borne by the bank.
The introduction of the framework is also to effectively support the application of mudharabah (profit-
sharing) contract in Islamic banking deposit-taking activities. Unlike conventional banking, which is


191
The Islamic Financial System
based on a lender-borrower relationship, the mudharabah contract is based on an investor-
entrepreneur relationship. In this system, the depositor assumes the role of capital provider while
the bank assumes the role of the entrepreneur. The depositors’ funds are utilised for financing and
investment activities, and the profits generated from these activities are shared between the
depositor and the bank based on the pre-agreed profit sharing ratio. In the event of a loss, it will
be borne by the depositors. As the bulk of the deposits in Islamic banking are in the form of
mudharabah deposits, it places a higher degree of fiduciary risk on the management of the IBIs to
ensure that the funds are utilised in the most efficient manner, as profits generated from the
financing and investments are distributed to the depositors in the most equitable manner. Towards
this end, the framework was introduced, not only to standardise the methodology for the
calculation of returns, but also to ascertain the actual and fair distribution of income to the
depositors.
The Framework
The Framework of the Rate of Return comprises two main components, that is, the calculation and
distribution tables. The calculation table prescribes the income and expense items that need to be
reported and sets out the standard calculation in deriving the net distributable income. Among the
important items in the calculation table is the provisions. Prior to the issuance of the framework,
the provisions of the banking institutions participating in the Islamic Banking Scheme (IBS banks)
were provided by the conventional banking operations. Under conventional banking operations, the
provisions are solely borne by the bank. However, under the framework, the IBS banks are required
to distinguish their general and specific provisions, in accordance with the mudharabah contract,
whereby the provisions in Islamic banking operations are shared by both the depositors and the
bank.
The calculation table also introduced a new item known as Profit Equalisation Reserve (PER).
The PER is an item that acts as a mechanism to mitigate the fluctuation of rates of return arising
from the flux in income, provisioning and total deposits. This would ensure that the rates of return
of the IBIs remained competitive and stable. The PER is appropriated out of the total gross income
and is shared by both the depositors and the bank.
The second component of the framework is the distribution table. The table sets out the
distribution of the net distributable income, derived from the calculation table among demand,
savings and general investment deposits according to their structures (mudharabah or non-
Table 1
Calculation Table
RM million
Income generated from asset items
(+) Net trading income
(+) Other income
Total gross income
(-) Provisions and income-in-suspense
(-) Profit equalisation reserve
(-) Direct expenses
Net gross income
(-) Income attributable to:
Specific investment account
IBCF/SHF1
Net income
(-) Income attributable to:
Amount due to designated FIs
Islamic negotiable instruments
Net distributable income
1
Islamic banking capital funds/ shareholders' funds.


192
mudharabah), maturities and the pre-agreed profit sharing ratios between the bank and depositors.
Under the framework, Bank Negara Malaysia allowed the IBIs to adopt either the weightage or
without the weightage method, primarily to accord the system capacity of the IBIs.
The IBIs are required to calculate their rates of return on a monthly basis and to declare their monthly
rates of return on a specified date. The following month would be the effective period of the
declared rates of return.
The introduction of the framework has provided the IBIs with a standard approach in deriving the
rates of return and has enhanced the level of transparency. The framework has also improved the
efficiency level of the IBIs given that the rates of return are now reflective of the business acumen of
the IBIs rather than the methodology of deriving the rates of return. The introduction of the PER has
also reduced the volatility of the rates of return of the Islamic banking industry and enabled the IBIs
to manage their portfolio more efficiently. In tandem with the introduction of the framework, the
scope of the statistical submission has been broadened further to provide Bank Negara Malaysia with
an effective measurement tool to assess the efficiency of the IBIs in terms of profitability, prudent
management and fairness.
Bank Negara Malaysia has also undertaken a review of the framework in 2003 to promote capacity
enhancement and efficiency among the IBIs in managing their business operations. While the
foundation of the framework remained unchanged, the revised framework will provide, among
others, flexibility in determining the weightage assigned to each group of deposits, the profit sharing
ratio of investment deposits, the provisioning of PER and the segregation of income from the funds
that are managed under a consolidated fund or managed separately between shareholders’ and
depositors’ funds. The reviewed framework will provide greater flexibility to the IBIs in managing their
portfolios and remain competitive in the market place.
Table 2
Distribution Table
Distributable profits
Depositors’ portion
Type of deposit
ADA1
Weightage
WADA2
RM
%
PSR3
RM
%
Current account
Savings account
GIA4
1-month
3-month
6-month
9-month
12-month
Above 12-month
NDI5
1 Average daily amount of each type of deposit.
2 Weighted average daily amount.
3 Profit sharing ratio agreed by the bank and depositors.
4 General investment account.
5 Net distributable income transferred from Calculation Table.


193
The Islamic Financial System
Guidelines on the Specimen Reports and Financial Statements
for Licensed Islamic Banks (GP8-i)
The Guidelines on the Specimen Reports and Financial Statements for Licensed Islamic Banks or GP8-i was
issued to the Islamic banks (IBs) in August 2003. It sets out the minimum requirements for the presentation
and disclosure of reports and financial statements of IBs. The GP8-i is to be adopted by the IBs for annual
accounts commencing 2004.
The objective of the GP8-i is to provide the basis for presentation and disclosure of reports and financial
statements of the IBs. GP8-i is also aimed at ensuring consistency and comparability of the reports and
financial statements amongst the IBs in complying with the provisions of the Islamic Banking Act 1983,
Companies Act 1965, Shariah requirements and other Bank Negara Malaysia guidelines. As a comprehensive
guideline, GP8-i also incorporated the new requirements of MASB standards, specifically the MASB i-1:
Presentation of Financial Statements of Islamic Financial Institutions. The standard, which came into effect in
2003, was issued to streamline the disclosure and presentation of financial statements of the IBs and the
conventional banks that participate in the Islamic Banking Scheme (IBS banks).
Prior to the issuance of the GP8-i, the IBs observed the various provisions of the Companies Act 1965, the
applicable accounting standards and the Guidelines on the Specimen Financial Statement for the Banking
Industry (GP8) which was formulated to facilitate the conventional banking operations. Some of the
requirements have been modified for the IBs, particularly those under the GP8, to reflect the Islamic banking
operations such as the disclosure on the various Shariah concepts applied in financing.
Salient Features of GP8-i
The salient features of the GP8-i, amongst others, are as follows:
a)
Performance Overview and Statement of Corporate Governance
In promoting good corporate governance, IBs are required to report their performance overview and
corporate governance practices. The performance overview requires the IBs to disclose their review on
performance, measures, business plans and strategies, whilst the statement of corporate governance requires
IBs, among others, to disclose the composition and responsibilities of the Board, internal audit and control
activities and risk management strategies and policies. These report requirements are important in providing
additional information to users in evaluating the performance and conduct of an IB.
b)
Disclosure of Shariah Advisory Board/ Committee and Zakat Obligations
The Shariah Advisory Board or Committee plays an important role in monitoring the compliance of
Islamic banking activities with the Shariah requirements. Given its importance, the IBs are required to
disclose the functions and duties of their Shariah Advisory Board or Committee in monitoring the
activities pertaining to Shariah matters under the Directors’ Report. With respect to the zakat
obligations disclosure, IBs are required to disclose the responsibility towards payment of zakat either on
the business or shareholders or on behalf of depositors.
c)
Report of the Shariah Advisory Board/ Committee
The IBs are required to report the conformity of the IB’s operations with the Shariah principles under the
Report of the Shariah Advisory Board/Committee. The Report, which is akin to the Auditors’ Report, will
enhance the credibility of the IB’s operation in complying with the Shariah principles.
d)
Profit Equalisation Reserves (PER)
PER is a mechanism introduced in the Framework of the Rate of Return to stabilise the rate of return to
depositors. Disclosure of PER would reflect the capability of the IBs in managing the level of profit
distribution to the mudharabah depositors. The IBs are required to disclose their policy on PER as well as
its movement (provision and write-back) during the financial year.


194
Product Approval
•
In tandem with the gradual progression towards
a market-driven regulatory environment, Bank
Negara Malaysia issued the Guidelines on New
Product Approval Requirements for Islamic
Banking Institutions (the Guidelines). These
replace the existing product pre-approval
requirements and came into effect on 2 January
2004. The Guidelines outline the notification and
specific approval process for new products
submitted by Islamic banking institutions.
In formulating the Guidelines, Bank Negara
Malaysia adopted the approach that “what is not
prohibited is allowed” on new Islamic banking
products. This was to provide greater clarity,
transparency and speedy product approval. For a
new product to qualify for automatic approval
(under notification process), the submission to
Bank Negara Malaysia must be made at least 21
days before its launch date. The definition of a
new product has also been widened to include an
existing approved product or service that is
applying a different or a new combination of
Shariah concepts. In addition, the Islamic banking
institutions are required to submit a detailed
explanation on the Shariah concepts used in the
product as endorsed by their Shariah committee.
This is to ensure that a thorough research on the
product has been carried out by the Islamic
banking institutions and thus, would not lead to
any detrimental effect on the customers and on
the stability of the financial system. A new product
that does not qualify for automatic approval
would require specific approval from Bank Negara
Malaysia and may require, among others, the
deliberation of the Shariah Advisory Council of
Bank Negara Malaysia. The Guidelines place
significant emphasis on self-regulation, where the
e)
Classification of Deposits from Customers and Placements from Banks and Other Financial
Institutions
The IBs are required to disclose their deposits into two categories i.e. mudharabah and non-
mudharabah deposits. As the manager of public funds, the disclosure would provide additional
information on the risk profile of the IBs’ deposits portfolio to the public.
f)
Presentation of the Income Statement
Presentation of the Income Statement of the IBs is structured to reflect the nature of the Islamic
banking operation, mainly on the application of mudharabah concept in the deposit-taking activities.
The statement discloses the incomes and expenses that are either shared by the bank and depositors or
solely belonged to the bank.
Islamic banking institutions are required to ensure
consistency of the products introduced with the
Guidelines.
•
In line with efforts to streamline the regulatory
framework of the credit card industry, Bank
Negara Malaysia issued the Credit Card-i
Guideline (the Guideline) in January 2004. This
was an extension to the Credit Card Guideline
issued to the conventional banks in March 2003.
Under the Guideline, the credit card-i can apply
either bai’ inah (sell and buy back arrangement)
or BBA (deferred payment sale) Shariah concept.
Under the bai’ inah concept, the fund for the
cardholder’s spending limit is created upon the
bank buying back the asset from the cardholder
for cash which it previously sold to the cardholder
on deferred terms. Under the BBA concept, the
fund is created upon the bank purchasing the
asset from the cardholder for cash which will be
sold back to the cardholder on deferred basis.
The Guideline also prescribes the treatment on
penalty and fee structure according to the
Shariah principles. In terms of late payment
charges, issuers of credit card-i are allowed to
impose a compensation fee on the defaulters
subject to specific terms and conditions imposed
by Bank Negara Malaysia. The terms and
conditions, among others, prohibit the Islamic
banking institutions from compounding the
compensation fee for late payment and monthly
charges. This provision was intended to protect
the customers as well as to streamline the penalty
structure of credit card-i.
Strengthening Shariah and Legal Infrastructure
One of the pre-requisites for a strong and stable
Islamic banking system is the existence of a


195
The Islamic Financial System
comprehensive Shariah and legal infrastructure. A
strong Shariah framework combined with a sound
legal structure would accelerate the pace of
development and innovation of the Islamic
banking industry.
•
As part of the efforts to strengthen the Shariah
framework for the Islamic financial industry, Bank
Negara Malaysia amended the Central Bank of
Malaysia Act 1958 (CBA) in 2003 to position the
Shariah Advisory Council (SAC) of Bank Negara
Malaysia as the sole authority on Shariah matters
pertaining to Islamic banking and finance that fall
under the purview of Bank Negara Malaysia.
With that stature, the SAC will serve as the
reference point for the court or arbitrator in
dispute resolution that involves Shariah issues on
Islamic banking and finance cases.
•
Consequent to this development, the role of the
Shariah advisory bodies and Shariah consultants at
the Islamic banks, the IBS banks and takaful
companies will be rationalised accordingly. Bank
Negara Malaysia is preparing a comprehensive
guideline on the new structure, roles and functions
of the Shariah committees of the Islamic banks, the
IBS banks and the takaful operators. The guideline
would specify among others, the requirements for
the appointment of the Shariah committee
members. In this regard, the Islamic financial
institutions are required to seek Bank Negara
Malaysia’s approval prior to the appointment of the
Shariah committee members. The duties and
responsibilities of the Islamic financial institutions
would also be outlined in order to assist the Shariah
committee in carrying out its roles and functions
effectively. The guideline is expected to be issued in
the first quarter of 2004.
•
A significant development in respect of legal
infrastructure was the establishment of a
dedicated High Court to adjudicate all muamalat
cases in the Commercial Division of High Court
Kuala Lumpur. In this regard, a directive (Practice
Direction No. 1 of 2003) was issued by the Chief
Judge Malaya to all legal practitioners in the
country to register Islamic banking and finance
cases at both the High Courts and the lower
courts using a special code number. The
establishment of the dedicated High Court for
Islamic banking and finance will expedite the
hearing of Islamic banking and finance cases and
further increase public confidence in Islamic
banking and finance.
•
To complement the court system, Bank Negara
Malaysia has identified arbitration as an
alternative dispute resolution mechanism for
Islamic banking and finance. Arbitration has been
acknowledged as an appropriate dispute
resolution mechanism especially for high-scale
financing facilities to reduce the court process
which can be time consuming. Towards this end,
Bank Negara Malaysia is finalising an
arrangement with an existing institutional
arbitration centre to administer Islamic banking
and finance arbitration.
•
The Financial Mediation Bureau (FMB) has been
established as a single mediation centre for both
banking and insurance, including Islamic banking
and takaful. This Bureau replaces existing bureaus
for the banking and insurance industry. The FMB
is expected to provide speedy and cost-effective
mediation for consumers to redress complaints
on products and services offered by the financial
institutions.
•
In addition to the dispute resolution mechanism,
there is also a need to create a conducive legal
environment to cater for the unique nature of
transactions in Islamic banking and finance. Bank
Negara Malaysia has formed the Law Review
Committee in June 2003, comprising
representatives from the Attorney General’s
Chambers, Ministry of Finance, Malaysian Bar
Council, industry players and legal practitioners.
The Committee will review the existing laws and
make recommendations to the relevant
authorities to enable smooth execution of Islamic
banking and financial contracts. The review
covers tax and stamp duty laws, company laws,
land laws and procedural laws.
Enhancing Intellectual Capital Development and
Consumer Education
The creation of a large pool of talented bankers is
critical for the development of a dynamic and
competitive Islamic banking industry.
•
To achieve this objective, Islamic Banking and
Finance Institute Malaysia (IBFIM) has been
earmarked to spearhead efforts to create the
pool of bankers who are both knowledgeable
and competent in Islamic banking and finance. In
this respect, IBFIM will focus on enhancing its
capacity in three key areas encompassing
education and training, consultancy and advisory
as well as research and publications.


196
•
As part of the objective to elevate consumer
education and awareness in Islamic banking and
finance, the Association of Islamic Banking
Institutions Malaysia, under the auspices of Bank
Negara Malaysia, organised the Islamic Banking
and Takaful Week (IBTW 2003) from 26
September to 2 October 2003. Activities
organised during the week included a three-day
exposition on Islamic banking and finance.
•
In conjunction with the IBTW 2003, Bank Negara
Malaysia, together with participating Islamic
financial institutions, jointly hosted the
production of a television documentary
programme on Islamic banking and finance,
entitled “Kewangan Islam” (Islamic Finance). The
11-episode documentary programme, produced
by a local broadcasting station, portrayed the
development of the Islamic financial system in
Malaysia as well as products and services offered
by the Islamic financial institutions.
To further increase public literacy in Islamic
banking and finance, information booklets were
published on “What is Islamic Banking?” and
“House Financing-i” as part of the Consumer
Education Programme through “BankingInfo”.
The booklets provide consumers with basic
knowledge and understanding on Islamic
banking, the underlying Shariah principles and
concepts, the range of Islamic banking products
and services as well as information on the
mechanics of house financing based on Shariah
principles.
PERFORMANCE OF THE ISLAMIC BANKING
SYSTEM
The Islamic banking industry continued to register
strong expansion during the year with increasing
market share in terms of assets, financing and
deposits of the total banking system. The improved
performance was characterised by strong
capitalisation levels attributable to increases in capital
and profits as well as higher financing activities with
significant growth in financing for the purchase of
transport vehicles and residential property. In
addition, asset quality recorded further improvement
with a declining trend in net non-performing
financing ratio and high financing loss provisions.
Capital Strength
The total capital base of the Islamic banking
institutions increased from RM5.1 billion as at end-
2002 to RM6.8 billion as at end-2003. New capital
injections contributed RM1 billion to the increase in
capital base in 2003 whilst the audited profits
contributed another RM414.6 million. The new
capital injections were due to the participation of a
merchant bank in the IBS and the maintenance of
adequate capital by IBS banking institutions.
In tandem with the new capital injection, total tier-1
capital increased by RM1.4 billion or 31.1% to
RM5.9 billion, while total tier-2 capital recorded an
increase of RM215.9 million following an increase in
general provision for bad and doubtful financing. As
at end-2003, the Islamic banking system recorded a
strong risk-weighted capital ratio (RWCR) of 13.1%
and core capital ratio of 11.4%.
%
RM billion
Graph 5.1
Islamic Banking System: 
Capital Adequacy in 2003
Core capital ratio (%)
Month
Risk weighted 
capital ratio (%)
Capital base
0
2
4
6
8
10
12
14
16
J
F
M
A
M
J
J
A
S
O
N
D
0
1
2
3
4
5
6
7
8
Table 5.2
Islamic Banking System: Sources and Uses of
Funds
Annual change
 As at end
2002
2003p
2003p
RM million
Sources
Capital and reserves
1,269
2,081           6,784
Deposits
6,200
6,906         60,212
Funds from other financial
institutions
271
2,541           6,985
Other liabilities
1,401
2,598           8,215
Total
9,141
14,126         82,196
Uses
Cash
39
15              255
Reserve with
Bank Negara Malaysia
318
321           1,517
Deposits with other financial
institutions
-3,767
1,247           8,982
Financing
8,517
11,897         48,615
Securities
4,014
3,277         22,554
Other assets
20
-2,631
273
p Preliminary


197
The Islamic Financial System
The RWCR of Islamic banks and IBS commercial
banks stood at 11.8% and 14.3% respectively. The
RWCR of the IBS merchant banks as a group
increased from 10.9% to 13.5% due to the increase
in the Islamic banking fund by two merchant banks
amounting to RM80 million as well as the
participation of an additional merchant bank in the
Islamic Banking Scheme. As for the IBS finance
companies, the capital base increased by 33.2% or
RM479 million to RM1.9 billion during 2003.
Meanwhile, the risk-weighted assets expanded by
47.9% or RM4.9 billion to RM15.1 billion, mainly
from hire purchase financing, which resulted in a
marginal decline in the RWCR by 1.4 percentage
point to 12.7%.
Total risk-weighted assets of the Islamic banking
system grew by 24.4% or RM10.1 billion to RM51.5
billion as at end-2003. The increase was seen across
the risk categories except for the 10% category
where there was reduction in interbank placements
with discount houses and Cagamas mudharabah
bonds held. A large increase was recorded in the
100% and 50% risk categories (RM8.3 billion and
RM2.9 billion respectively) due to other financing and
end-financing of residential properties.
Reflective of the strong capital position of the Islamic
banking system in 2003, the RWCR and core capital
ratio of the system remained consistently above 11%
and 9% respectively throughout the year.
Assets
As at end-2003, the total assets of the Islamic
banking sector increased by RM14.1 billion or 20.8%
to RM82.2 billion. A significant portion of the
increase in total assets was attributable to the
growth in total financing of IBS commercial banks
(33.6%) and IBS finance companies (56.7%),
constituting 78.3% of total financing. As in previous
years, a notable trend observed during the year was
the shift of funds from interbank deposits to
investment in securities to secure a higher rate of
return. Investment in securities of RM22.6 billion
accounted for 27.4% of total assets and marked an
increase by RM3.3 billion or 17% during the year. In
terms of market share, the largest portion of Islamic
banking assets remained with the IBS commercial
banks with a share of 44.8%, followed by Islamic
banks (25.5%) and the IBS finance companies
(21.8%). In terms of the growth in assets, IBS finance
companies recorded the highest growth of 41.6%,
followed by IBS commercial banks (26.5%) and
merchant banks (20%).
Financing Activities
Total financing extended by the Islamic banking
system expanded by 32.4% or RM11.9 billion (2002:
30.2% or RM8.5 billion). The growth in financing was
largely attributable to the significant growth in the
financing for the purchase of passenger vehicles and
residential property of 60.8% and 33.3% respectively.
The higher consumer demand was further expanded
by the attractive and competitive financing packages
offered by the Islamic banking institutions. Financing
based on bai’ bithaman ajil (deferred payment sale)
concept remained dominant, constituting 47.7% of
total financing while ijarah thumma al-bai’ (hire
purchase) constituted 27.6%.
Against the backdrop of strong demand from
consumer spending and corporate financing, the
value of financing applications received by the Islamic
banking institutions in 2003 increased by 8.8% to
RM26.3 billion. Responding to the strong demand
for new financing, RM16.7 billion of new financing
was approved during the year, whilst disbursements
posted a growth of 49.5%. Meanwhile, financing
Table 5.3
Islamic Banking System: Direction of Financing
 
Annual change
As at end
2003p
2002
2003p
RM million
Agriculture, hunting,
forestry and fishing
-45.6
267.6       1,861.6
Mining and quarrying
10.5
-11.0            63.5
Manufacturing
807.8
505.6       4,386.8
Electricity, gas and water
-9.9
-284.8          248.9
Community, social and
personal services
-139.2
89.4          303.3
Broad property sector
4,953.2
4,747.0
20,482.7
Real estate
103.5
142.6          811.9
Construction
579.9
 655.3       2,933.5
Purchase of residential
property
3,916.9
3,581.4     14,344.2
Purchase of
non-residential property
353.0
367.7       2,393.1
Wholesale and retail trade,
restaurants and hotels
251.2
410.6       1,797.0
Transport, storage and
communication
61.8
199.5       1,024.3
Finance, insurance
and business services
42.2
661.6       1,933.3
Purchase of securities
62.4
-14.1          920.9
Consumption credit
2,474.5
5,584.9
14,872.1
Credit cards
57.5
95.7          156.2
Personal uses
374.7
575.5      1,637.1
Purchase of consumer
durables
8.1
-9.2
54.1
Purchase of transport
vehicles
2,034.1
4,922.9
13,024.7
Others
47.5
-258.7
720.9
Total
8,516.4
11,897.6     48,615.3
p Preliminary


198
repayments increased by 26.3% during the year. On
average, RM3 billion of financing were disbursed
monthly in 2003, compared with RM2 billion in
2002. Given the favourable economic outlook,
strong capital position and ample liquidity in the
as at end-2003. Islamic financing contributed 7.5%
of the total financing extended by the banking
system to the SMEs as at end-2003 as compared to
4.7% as at end-2002.
Asset Quality
The asset quality of the Islamic banking industry
continued to improve during the year. As at end-
December 2003, the gross and net NPF ratios stood
at 8.6% (2002: 8.9%) and 5.5% (2002: 5.7%)
respectively based on a 6-month classification. The
net NPF ratio of the Islamic banking institutions was
sustained within the range of 5.3% to 5.6%
throughout the year. Financing loss coverage
remained high at 53.7% of total NPF as at end-
December 2003. In terms of absolute amount,
financing loss coverage increased to RM2.4 billion
from RM2 billion in 2002. The income-in-suspense,
general provision and specific provision set aside by
Islamic banking institutions increased by 43.7%,
33.7% and 3.9% respectively during the year.
Overall, the average general provision for Islamic
banking industry stood at 1.9% of total net financing
reflecting the prudent stance of a number of Islamic
Other Islamic 
concepts 
16.0%  
Musyarakah 
0.5%
Murabahah 
6.2%
Istisna' 
0.6%
Ijarah 
1.4%
Bai' Bithaman Ajil 
47.7%
Ijarah Thumma 
Al-Bai' 
27.6%
Graph 5.2
Islamic Banking System: 
Financing Concepts as at end-2003
Given the favourable economic outlook, strong capital position
and ample liquidity in the Islamic banking system, the Islamic
banking institutions are well positioned to sustain the growth
momentum in financing activities in 2004.
banking institutions in setting aside higher provisions
for financing. This was further reinforced through the
separate apportionment of general provision for the
Islamic banking financing portfolio of IBS banks
following the introduction of the standard
framework for the calculation of the rate of return.
Islamic banking system, the Islamic banking
institutions are well positioned to sustain the growth
momentum in financing activities in 2004.
The Islamic banking sector also focused on providing
financing to small and medium-sized enterprises
(SMEs). The total financing provided by the Islamic
banking institutions to the SMEs increased by 77.1%
from RM3.5 billion as at end-2002 to RM6.2 billion
0
2
4
6
8
10
12
14
16
18
%
2000
2001
2002
2003
1 Based on actual classification
Graph 5.3
Islamic Banking System: 
Net Non-performing Financing Ratio1
Islamic banking system
Commercial banks
Merchant banks
Islamic banks
Finance companies
Table 5.4
Islamic Banking System: Financing Activities
For the year
Annual change
2002
2003p
(%)
RM million
Financing approvals
       12,310      16,739
        36.0
Financing disbursements
       24,187      36,162
        49.5
Financing repayments
       20,776      26,241
        26.3
As at end
Annual change
2002
2003p
(%)
RM million
Outstanding financing
       36,718      48,615
        32.4
p Preliminary


199
The Islamic Financial System
The broad property sector continued to account for
the largest share, at 62.3% of the total NPF (2002:
59.7%). The high NPF in the broad property sector
reflected the increase of NPF in the residential
property and construction sectors of RM451 million
and RM174.5 million respectively. In addition, there
was also an increase in NPF in transport, storage and
communication sector of RM108.2 million.
Rates of Return
The rates of return on investment deposits were
influenced by the asset yield, asset quality and the level
of total deposits of the Islamic banking institutions.
During the year, in tandem with favourable financing
growth and asset quality, the rates of return to the
investment account depositors recorded stable
2.00
2.50
3.00
3.50
4.00
J
F
M
A
M
J
J
A
S
O
N
D
Month
(%)
Graph 5.4
Islamic Banking System:
Trend of Rate of Return to Depositors
1-month
3-month
6-month
12-month
Table 5.5
Islamic Banking System: Non-performing Financing and Financing Loss Provisions
As at end
2002
2003p
Classification
Classification
3-month
6-month
3-month
6-month
RM million
Islamic banks
General provisions
209.1
       209.1
       209.1
       170.5
       170.5
       170.5
Income-in-suspense
133.2
       142.2
       133.2
       178.2
       186.9
       178.2
Specific provisions
 395.4
       436.4
       395.4
       406.7
       434.9
       406.7
Non-performing financing
1,396.4
    1,933.0
    1,396.4
    1,575.5
    2,002.2
    1,575.5
Net NPF ratio (%)3
10.1
         15.8
         10.1
         10.8
         15.1
         10.8
Total provisions/ NPF (%)
52.8
         40.8
         52.8
         47.9
         39.6
         47.9
Commercial banks2
General provisions
250.0
       226.5
       247.9
       400.9
       379.7
       300.8
Income-in-suspense
113.0
         78.1
       111.4
       213.3
       130.1
       207.1
Specific provisions
222.4
       222.4
       222.3
       280.3
       284.4
       309.3
Non-performing financing
 1,300.0
    1,604.2
    1,085.0
    1,991.7
    2,274.4
    1,653.7
Net NPF ratio (%)3
 5.9
           7.9
           4.6
           6.9
           8.5
           5.2
Total provisions/ NPF (%)
45.0
         32.9
         53.6
         44.9
         34.9
         49.4
Finance companies2
General provisions
202.2
       202.2
       202.2
       316.7
       316.6
       318.7
Income-in-suspense
129.8
       158.7
       126.3
       150.8
       155.8
       149.8
Specific provisions
279.4
       748.9
       238.3
       274.9
       296.7
       274.5
Non-performing financing
751.5
       919.0
       671.1
       832.3
    1,058.7
       805.1
Net NPF ratio (%)3
3.6
           0.1
           3.2
           2.7
           4.0
           2.5
Total provisions/ NPF (%)
81.4
       120.8
         84.5
         89.2
         72.6
         92.3
Merchant banks2
General provisions
12.2
         12.2
         12.2
         12.1
         12.1
         12.1
Income-in-suspense
15.6
         15.6
         15.6
         20.6
         20.7
         20.6
Specific provisions
33.6
         33.6
         33.6
           5.4
           5.4
           5.4
Non-performing financing
127.7
       127.7
       127.7
       125.6
       128.3
       125.6
Net NPF ratio (%)3
10.4
         10.4
         10.4
         13.2
         13.5
         13.2
Total provisions/ NPF (%)
48.1
         48.1
         48.1
         30.3
         29.8
         30.3
Islamic banking system
General provisions
673.5
       649.9
       671.3
       900.2
       879.0
       802.0
Income-in-suspense
 391.7
       394.6
       386.6
       562.9
       493.5
       555.6
Specific provisions
930.7
    1,441.3
       889.6
       967.2
    1,021.4
       995.8
Non-performing financing
3,575.5
    4,583.9
    3,280.2
    4,525.1
    5,463.6
    4,159.9
Net NPF ratio (%)3
6.4
           7.9
           5.7
           6.4
           8.4
           5.5
Total provisions/ NPF (%)
55.8
         54.2
         59.4
         53.7
         43.8
         56.6
1
Financing classified as NPF based on individual banking institution’s NPF classification policy i.e. 3-month or 6-month classification.
2
Refers to Islamic banking portfolio of conventional banking institutions participating in Islamic Banking Scheme and represents a subset of the figures reported under
the total banking system for commercial banks, merchant banks and finance companies.
3
Net NPF ratio = (NPF less IIS less SP) / (Gross financing less IIS less SP) x 100%.
p Preliminary
Actual1
Actual1


200
movement across the different tenures. The rates for 1-
month and 3-month ranged between 2.56% to 2.72%
and 2.63% to 2.85% respectively. The stable
movement was also influenced by the changes made to
the profit sharing ratio of each deposit tenure and the
existence of the Profit Equalisation Reserve that enabled
Islamic banking institutions to manage the volatility of
the rates.
Profitability
In line with the moderate growth in total financing, the
Islamic banking sector recorded an increase in net
finance income of RM555 million at the operating level.
Notably, the non-finance income of the Islamic banking
sector registered an increase of RM232 million or
46.9%. The Islamic banking sector posted higher profit
before provision that amounted to RM2.3 billion (2002:
RM1.7 billion). After allocating financing loss provisions,
the Islamic banking sector recorded profit before tax for
the calendar year 2003 that amounted to RM977.2
million (2002: RM947.8 million). Despite the increase in
provisions that amounted to RM1.3 billion, a higher
profit before tax was recorded as the increase in finance
and non-finance income more than offset the increase
in provisions. The higher financing loss provisions
charged by the Islamic banking institutions were partly
due to the increase in NPF and Profit Equalisation
Reserve.
Liquidity
There was ample liquidity in the Islamic banking
system throughout 2003. Total deposits recorded a
moderate growth of 13% or RM6.9 billion to reach
RM60.2 billion as at end-2003. The IBS commercial
banks and the Islamic banks accounted for the major
share (73.2%) of total deposits in the Islamic banking
sector (2002: 74.8%). The IBS merchant banks
recorded the highest growth rate in deposits (24.6%)
followed by the IBS finance companies (20.6%).
Investment deposits (general and special) continued
to capture a major portion of the deposits,
accounting for 58.5% of the total. During the year,
savings and demand deposits grew by 26.6% and
19.6% respectively mainly due to the increase in the
retail customer base. In terms of the maturity profile
of general investment deposits, 52.6% of the general
investment deposits continued to be concentrated at
the shorter end of the spectrum, mainly in the one-
to three-month tenure as the incremental return
between the shorter and longer placement tenures
remained small. The average deposit rates remained
stable in year 2003.
In terms of liquidity position, the two Islamic banks
had sufficient liquidity to meet any unexpected
withdrawals for a period of up to one month. This
represented surplus liquidity above the minimum
requirement of 3% and 5% for the up-to one-week
and one-week to one-month time buckets
respectively. The financing-to-deposits (FD) ratio of
Table 5.7
Islamic Banking System:
Deposits by Type and Institution
 
Annual change
As at
end
2003p
2002
2003p
RM
%
RM
%
RM
million
million
million
Demand deposits
2,727
42.2
1,796
19.6  10,980
Islamic banks
834
31.9
693
20.1
4,143
Commercial banks
1,893
49.3
1,103
19.2
 6,837
Savings deposits
1,275
30.7
1,442
26.6   6,866
Islamic banks
308
21.2
190
10.8
 1,952
Commercial banks
897
42.1
1,145
37.8
 4,175
Finance companies
70
12.5
107
16.9
 739
Investment deposits
2,463
7.4
-741
-2.1  35,227
Islamic banks
909
8.9
93
0.8 11,183
Commercial banks
-1,032
-7.6 -2,351
-18.7  10,227
Finance companies
1,419
20.3
614
7.3
 9,019
Merchant banks
7
1.9
213
56.5
 590
Discount houses
1,160
49.2
690
19.6
 4,208
Other deposits
-266
-8.9
4,410
161.6
 7,139
Islamic banks
-5
-4.0
187
157.1
 306
Commercial banks
-314
-12.8
3,148
147.6
5,281
Finance companies
-59
-50.9
1,150 2,017.5
 1,207
Merchant banks
4
1.3
-46
-15.0
 261
Discount houses
108
2,160.0
-29
-25.7
84
p Preliminary
Table 5.6
Islamic Banking System: Income and Expenditure
For the
calendar year
2002 2003p
2003p
RM
RM
%
million
million
Finance income net of
income-in-suspense
3,196
3,870
674
21.1
(Income-in-suspense)
373
306
-67
-18.0
Less:
Finance expense
1,569
1,688
119
7.6
Net finance income
1,627  2,182
555
34.1
Add:
Non-finance income
495
727
232
46.9
Less:
Staff cost
199
229
30
15.1
Overheads
269
384
115
42.8
Profit before provisions
1,654
2,296
642
38.8
Less:
Financing loss & other
provisions
706
1,319
613
86.8
Pre-tax profit
948
977
29
3.1
Return on assets (%)
1.4
1.2
Return on equity (%)
20.2
14.4
p Preliminary
Annual change


201
The Islamic Financial System
the Islamic banking institutions has shown a
favourable trend. The FD ratio increased from 68.9%
as at 31 December 2002 to 80.7% as at end-2003
due to the more rapid increase in the total financing
base compared with deposits during the period.
Islamic Interbank Money Market (IMM)
During the year, liquidity in the IMM was ample. The
excess liquidity, however, was maintained at an
appropriate level following a series of liquidity
operations undertaken by Bank Negara Malaysia.
Apart from using wadiah interbank deposits to
absorb liquidity, the RM2 billion worth of
Government Investment Issues (GIIs) and RM1 billion
in Bank Negara Negotiable Notes (BNNNs) were
issued, which helped stabilise liquidity conditions.
The active management of the surplus liquidity
position through the issuance of government and
Bank Negara Islamic papers has correspondingly
reduced the amount of funds absorbed by Bank
Negara Malaysia through direct acceptance of
wadiah interbank deposits. The average daily amount
outstanding absorbed through wadiah interbank
deposits declined by 61.3% from RM6.2 billion in
2002 to RM2.4 billion in 2003.
The increase in the supply of GII and BNNN
contributed significantly to higher trading in these
instruments. Trading in GIIs recorded an increase of
511.9% (RM30.2 billion) and in BNNNs recorded an
increase of 300% (RM6.6 billion). The increase in the
supply of Government papers has promoted active
secondary market trading in the IMM. In addition,
Bank Negara Malaysia also introduced a new
measure whereby principal dealers are required to
perform the role of market makers for GIIs and
BNNNs. This measure has put in place the price
discovery process to facilitate trading in the primary
and secondary market.
Trading in interbank deposits and other instruments
such as trade bills in the IMM also registered
positive growth. During the year, the mudharabah
interbank investments recorded a moderate increase
of 14.9% totalling to RM283.8 billion (2002:
RM247 billion). Trading of Negotiable Islamic Debt
Certificates (NIDCs) also registered a positive
growth. Islamic banking institutions have intensified
the issuance of Islamic negotiable instruments of
deposit to mobilise longer-term deposits (a maturity
tenure of more than 6 months) by issuing NIDCs.
This initiative spurred active trading of NIDC in the
IMM, which recorded a triple-digit growth of 425%.
However, in absolute terms, the trading of NIDC
remained relatively small. The trading of short-term
trade bills also showed an encouraging growth of
40.3%, from RM24.8 billion in 2002 to RM34.8
billion in 2003, emanating from the increase in
trade financing activities.
0
1
2
3
4
5
6
7
8
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
RM billion
Graph 5.5 
GII - Trading Volume
Trading volume
Month
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Jan Feb Mar Apr May Jun
Month
Jul Aug Sep Oct Nov Dec
Yield %
Average rates 
5-year - 
 3.618 
4-year - 
 3.450 
3-year - 
 3.264 
2-year - 
 3.090 
1-year - 
 2.886
Graph 5.6 
GII - Average Yield to Maturity
Table 5.8
Islamic Interbank Money Market
2002
2003p
Annual change
RM billion
RM billion
%
Islamic Funds
Mudharabah Interbank
Investments*
247.0
283.8
36.8
14.9
Islamic Papers
Government Investment
Issues
5.9
36.1
30.2
511.9
Bank Negara Negotiable
Notes*
2.2
8.8
6.6
300.0
Short-term Trade Bills*
24.8
34.8
10.0
40.3
Negotiable Islamic Debt
Certificates*
0.8
4.2
3.4
425.0
Total
280.7
367.7
87.0
31.0
* Volume transacted through brokers.
p Preliminary
During 2003, the trading of Islamic private debt
securities (IPDS) increased by 59.7% to RM60.7 billion
from RM38 billion in 2002. This higher increase
emanated from new issues of IPDS amounting to
RM8.1 billion, and strong trading sentiments in the first
half of the year. The year 2003 also witnessed the issue
of the first asset-backed securities that were structured
on Islamic principles amounting to RM986 million.




Development
Financial Institutions
204
Introduction
204-208
Policies and Measures
208-220
Performance of Development Financial Institutions


204
INTRODUCTION
Guided by the main strategic directions and road
map for development financial institutions (DFIs) in
the Financial Sector Masterplan (FSMP), continued
efforts were made to further develop the DFIs under
the Bank’s purview in 2003. Policy strategies
undertaken during the year remained focused on
areas related to enhancing the regulatory framework
and capacity building of the DFIs. Several initiatives
formulated in 2002 to further strengthen the
financial soundness and operational structure of the
DFIs were implemented during the year.
Adopting the phased and prioritised approach, a
number of prudential measures were put in place to
enhance the financial and operational soundness of
the DFIs, to ensure efficient and effective
implementation of their mandated roles in the
POLICIES AND MEASURES
Building capacity and capability of DFIs
•
Enhancing advisory capacity of DFIs to SMEs
As specialised institutions mandated to
promote certain identified economic sectors,
DFIs need to complement financing facilities
with non-financing facilities, in particular
advisory and consultancy services to their
targeted customers. To build capacity of the
DFIs in providing advisory services, the Bank
initiated a joint project with the assistance of
the Japan International Cooperation Agency
and selected DFIs to enhance the capacity of
the institution to provide advisory services to
SMEs. The project aims to provide action and
implementation plans to improve the advisory
services provided by DFIs to the SMEs.
Several prudential measures and initiatives were undertaken in
2003 to enhance the financial and operational soundness of DFIs
and to ensure effective implementation of their mandated roles.
economy. These include Guidelines on Liquidity
Requirements, Corporate Governance Standards on
Directorship, Credit Card Operations, and
Classification of Impaired Loans and Provisioning for
Bad and Doubtful Debts. In addition, as part of the
initiatives to further enhance the monitoring of
activities and financial performance of the DFIs, a
computerised reporting system would be
implemented in early 2004.
To further equip the DFIs for their role as
specialised institutions, initiatives on enhancing
advisory capability of DFIs to small and medium
enterprises (SMEs) were commenced in 2003. At
the same time, policy on minimum capital
requirement was initiated to ensure DFIs have the
financial capacity to sustain their operations.
Recognising the wide outreach of selected DFIs, a
programme to enhance access to financing for
micro enterprises was also launched and
implemented by these DFIs. The objective of this
programme is to unlock the potential of the large
number of small businesses in promoting domestic
sources of economic growth.
Monitoring of DFIs’ Activities and Performance
•
Development Financial Institutions Statistical
System
To enhance the ability to measure the
performance of DFIs, accurate information in a
timely manner is important. Towards this end,
the Bank had, in mid-2003, embarked on a
project to develop a computerised reporting
system to capture and generate statistical data
on DFIs. The system known as the Development
Financial Institutions Statistical System or DFISS,
will collect relevant information from DFIs via
online. To address the uniqueness of each DFI,
the DFISS will capture both generic and specific
information relating to their businesses.
•
Supervisory Activities
The Bank adopts a two-pronged risk-based
supervisory approach encompassing regular on-
site examinations and off-site surveillance. With
the risk-based approach, supervisory attention
and resources were directed to areas that pose
higher degree of risks. Supervisory efforts were
Development Financial Institutions


Development Financial Institutions
205
primarily concentrated on ensuring that the
DFIs were operationally and financially sound.
The on-site examinations by the Bank on the DFIs
in 2003, inclusive of their subsidiaries, have
enabled the Bank to assess the operating
conditions and financial positions of the DFIs. As
a result of these examinations, measures have
been taken to promote the efficiency and
effectiveness of individual DFIs. Capital adequacy
was also assessed to ensure sustainability of the
DFIs in performing their mandated roles.
The on-site examinations had in addition, focused
on building institutional capacity and placing
sound infrastructures in the DFIs. In this regard,
emphasis was placed on instilling best practices in
corporate governance structures and risk
management systems. The importance of
corporate governance cannot be over-
emphasised for the overall health of the DFIs, as
it would ensure accountability and provide
incentives for the Board and management to put
in place effective risk management systems. As
part of establishing the effectiveness of the
Board, an essential ingredient in corporate
governance, interviews were conducted with the
directors of DFIs to promote understanding of the
roles and responsibilities as well as the
commitment of the directors to the development
of the institutions. As most DFIs were involved in
lending activities, DFIs were also required to give
attention to discipline in risk management,
especially in credit risk management. The DFIs
were strongly encouraged to have in place a
comprehensive risk management system with
appropriate management oversight to identify,
measure, control and monitor risks with emphasis
on the uniqueness of the targeted sectors. Data
integrity and information technology capacity
were also assessed to ensure safe and sound
information technology operations in supporting
the DFI’s business activities.
To complement the on-site examinations, on-
going off-site surveillance was undertaken to
regularly monitor the financial health of the DFIs
for early detection of any problems arising in
these institutions. This included rigorous analysis
of financial data, ratios and trends concerning
the important areas of capital adequacy, asset
quality, management, earnings performance and
liquidity position. For a more effective and
consultative supervisory process, arising from the
examination of the DFIs, the Bank also conducted
and engaged in dialogues and meetings with the
Board of Directors and management of the DFIs
to discuss issues following the supervisory
findings.
Achievement of the DFIs’ mandated roles was
also assessed particularly as these DFIs were
established as specialised development financial
institutions to achieve national socio-economic
and developmental goals. The DFIs needed to be
more dynamic and proactive in enhancing the
range of facilities offered through product and
service innovation as well as broaden their
activities by providing value-added advisory/
consultancy services and technical assistance to
their customers. The DFIs were also encouraged
to proactively develop key productivity indicators
and other financial analysis for self-assessment on
their achievement of mandated roles.
A rating framework was used in the supervisory
process to assess the DFIs, both in terms of
performance of their mandated objectives as well
as the overall financial condition. A structured
rating framework for the DFIs was developed
taking cognisance of the mandated core business
activities and the underlying impact on the
management and financial elements of the
institutions.
Strong corporate governance and risk
management practices would enable DFIs to be
more dynamic in the performance of the
identified mandated roles. In supervising the DFIs,
attention is given to the need to balance the high
risk inherent in the portfolios with effective risk
management, the fulfilling of the mandated roles
and at the same time remaining financially viable.
Strengthening Financial Conditions and
Operational Structure
During the year, the Bank also issued the following
prudential policies and measures to enhance the
soundness of the financial conditions of the DFIs:
•
Guideline on Liquidity Requirements
In 2003, minimum liquidity requirements were
imposed on two DFIs, namely Bank Simpanan
Nasional (BSN) and Bank Kerjasama Rakyat
Malaysia Berhad (Bank Rakyat), given both


206
institutions mobilise substantial funds through
their deposit-taking activities from the public.
These DFIs were required to maintain a minimum
level of liquid assets as part of the measures to
mitigate liquidity risks. The Bank has formulated
two types of liquidity frameworks to be used in
determining the minimum level of liquid assets to
be maintained by Bank Rakyat and BSN.
Under the Liquid Assets Ratio Framework, BSN is
required to maintain at all times a minimum
liquidity ratio of at least 10% of designated
assets in proportion to its total eligible liabilities.
For Bank Rakyat, the New Liquidity Framework
(NLF) which is similar to that imposed on
banking institutions, is used to determine the
level of liquid assets to be maintained. Under
this framework, the liquidity needs of Bank
Rakyat are assessed based on its ability to
match its short-term liquidity requirement
arising from maturing obligations against
maturing assets. The NLF is designed to assess
liquidity at three levels. The first level assesses
the sufficiency of liquidity in the normal course
of business over the next one week to 12
months. The second level assesses whether a
financial institution has sufficient liquidity
surplus and reserves to meet sudden liquidity
withdrawal shocks. The third level assesses a
financial institution’s general funding structure,
in particular, assesses the degree of
dependency on particular markets. To ensure
that there is sufficient liquidity to meet its
liability obligations in the near term, Bank
Rakyat is required to maintain adequate
liquidity surplus not only to meet expected
obligations but also to sustain unexpected
heavy withdrawals for at least one month.
The minimum liquidity requirement for the other
DFIs will be imposed in stages.
•
Guideline on Corporate Governance
Standards on Directorship
As part of the on-going efforts to promote strong
corporate governance structures and practices in
DFIs, the Guideline on Corporate Governance
Standards on Directorship for DFIs was issued on
23 September 2003. This guideline aims to assist
the DFIs and their stakeholders in instituting
effective governance structure and oversight of
board of directors. The guideline outlines the
duties and responsibilities of the board of
directors, minimum requirements and rules
governing the appointment of directors and chief
executive officer (CEO) and the establishment of
board committees.
Duties and responsibilities of the Board
The guideline specifies the main duties and
responsibilities of the Board. The Board is
responsible for supervising the affairs of the
DFIs and to be fully informed of the institution’s
condition and management policies in ensuring
that the institution is soundly managed. In this
regard, the Board is responsible for the
selection and appointment of qualified and
competent senior executives to administer the
affairs of the institution. Specific for DFIs, the
Board is responsible in steering the institution
in achieving its mandated roles to provide
financial services and facilities for which the
institution was established for. Other main
duties and responsibilities of the board of
directors include ensuring that DFI’s strategic
focus are clearly defined, establishing and
ensuring the effective functioning of Board
committees, and setting up effective internal
control system and internal audit functions to
improve accountability.
Minimum qualification standard and training
requirements for directors
This minimum qualification standard and training
requirements for directors aim to ensure that
board of directors of DFIs possess the necessary
qualifications, skills and experience to effectively
discharge their governance responsibilities.
Directors of DFIs are expected to have an
understanding of the nature of business and the
current issues and the regulatory changes in their
identified targeted sectors.
Appointment of CEO and directors
This guideline emphasises the need to appoint
appropriate candidates as CEO or directors to
ensure the sound operation of a DFI. Candidates
must be suitably qualified with appropriate
experience, calibre and impeccable integrity, in
addition to being familiar with the operations,
state of the internal controls, requirements of
regulations and current policies affecting the DFI
to ensure smooth running of the day-to-day
operations of the institution. The guideline also
clarifies the ‘fit and proper’ criteria as set out in
the Development Financial Institutions Act 2002
(DFIA).


Development Financial Institutions
207
On the policy with regard to appointing
practising lawyers and accountants as directors of
a DFI, the guideline indicates that such
appointments can be made provided that they
are not employed by or are not partners in a legal
firm or accounting firm, which are on the panel
of lawyers or engaged to conduct audit of or
consultancy work for that particular DFI.
Directorship in other corporations
The CEO is not permitted to hold any executive
position in another corporation to ensure focus on
the management of the institution. Directorships in
subsidiaries and associate companies of the DFI
should not exceed five at any one time. The Board
should set policies on the maximum number of
directorships that can be held by other staff of the
DFI. To ensure that the non-executive director
participates and is actively involved in the
management and affairs of the DFI, attendance
must be at least 75% of the Board meetings.
Size and composition of the Board
The guideline prescribes that DFIs are required to
have at least seven directors on its board to
ensure adequate number of directors to represent
the interest of various stakeholders. In addition,
there must be sufficient number of independent
directors to provide a balanced view and opinion
in the Board. The guideline also restricts the
maximum number of executive directors on the
Board to two.
Board committees
To assist the Board in discharging its
responsibilities effectively, the Board is required to
set up four board committees with specific
functions and responsibilities. The setting up of
these committees at the board level facilitates
active involvement of the Board in various policy
formulation and to provide oversight and
direction on critical aspects of the organisation.
The four committees are: Audit and Examination
Committee, Nomination Committee,
Remuneration Committee, and Risk Management
Committee. The guideline provides the terms of
reference, composition, minimum qualification
where necessary and conducts of the respective
committees.
•
Guideline on Credit Card Operations for
Bank Simpanan Nasional
As part of the process to further increase the
awareness with regard to the products and
banking services and to implement the measures
on consumer protection, a Guideline on Credit
Card Operations which was issued to the banking
institutions was also extended to BSN being one
of the credit card issuers. The guideline was
effective from 28 July 2003.
Under the guideline, BSN is required to comply
with the requirements on the minimum age and
income requirements, placement of fixed deposit,
prudent lending, minimum monthly payment,
fees and charges, and classification of impaired
loans/financing and provisioning for bad and
doubtful debts with immediate effect. The
compliance with the requirements pertaining to
terms and conditions, statement on minimum
monthly payment, minimum disclosure on fees
and charges, supplementary cardholder’s liability,
liability for lost or stolen credit card, and
consumer awareness and education program
were effective from 28 January 2004.
•
Guideline on Classification of Impaired Loans
and Provisioning for Bad and Doubtful Debts
This guideline was issued pursuant to Section 41
of DFIA to all DFIs under the Bank’s purview
excluding the Malaysia Export Credit Insurance
Berhad (MECIB) on 13 March 2003. The guideline
sets out the minimum standards on classification
of impaired loans and advances and provisioning
requirements for such assets of DFIs. The
guideline aims to ensure that impaired assets and
potential losses are identified and recognised in a
timely manner, and loan assets and income are
fairly and prudently stated.
The guideline stipulates minimum categories of
classification for impaired loans, amount of
specific provision to be set aside for different
categories of impaired assets, treatment of
interest income of impaired assets, and general
provision to be set aside for the loan portfolio.
The impaired assets are categorised according to
the degree of recoverability of the loans. Loans
with no probability of recovery are accorded with
‘bad’ classification, ‘doubtful’ when the chances
of recovery are improbable and with high risk of
ultimate default, and ‘substandard’ when there is
more than the normal risk of loss.
The guideline requires DFIs to suspend all interest
accrued when the loan/financing is classified. On
minimum provisioning requirements, the
guideline requires the DFIs to maintain loan loss


208
provision at a level that is adequate to absorb
potential loan/financing losses. The provisions
required are in the form of specific provision and
general provision. While specific provision refers
to provision for loan losses of specific loan
accounts, general provision refers to provision for
loan losses of the overall loan portfolio. For the
specific provision, the DFIs are required to
gradually build up the provision for potential loan
losses according to the degree or category of
classified assets. DFIs are required to provide 10%
of the uncovered exposure for loans classified
substandard, 50% for doubtful classification, and
eventually full provision for loans classified bad.
The DFIs are also required to set aside provisions
for off-balance sheet items where the DFIs face
credit risk from failure of counter-parties to fulfill
their contractual obligations.
The guideline requires the DFIs to review the
adequacy of both specific and general provision
regularly at least every 6 months. This is to
ensure that the provisions set aside are
consistent with current information on the
collectibility of the loans. In addition, the DFIs’
assessment of the adequacy of the provisions
need to be performed in a systematic and
consistent manner, in conformity with the
objective criteria and be supported by adequate
documentation.
The guideline also emphasises active involvement
of the Board of Directors and management in
ensuring that approval and formulation of policy
on classification of impaired loans and
provisioning policy of the DFIs is consistent with
the minimum standards that have been set.
•
Circular on Use of Generic Names and “i”
Indicator for Islamic Banking Products
To increase awareness in Islamic products and
services offered by banking institutions and to
streamline and standardise the generic names
for Islamic banking products, the Bank issued a
guide on the use of standardised generic
names to financial institutions offering Islamic
banking products. The Bank requires all
banking institutions including DFIs that provide
Islamic banking products and services to use
standardised generic names as set out in the
list and to use “i” indicator for marketing and
advertising of Islamic banking products in all
media, brochure and product pamphlet, and
other printed forms or promotion events.
•
Circular on Permission for New Products and
Services
On 26 April 2003, a Circular on  Permission for
New Products and Services was issued with the
objectives to ensure that DFIs remained focus on
their mandated activities and at the same time
avoid undertaking unnecessary risks in
performing their mandated role. In addition, it
aimed to ensure that the products meet the
customers’ requirements.
PERFORMANCE OF DEVELOPMENT FINANCIAL
INSTITUTIONS
The financing activities of the DFIs improved in 2003,
in tandem with the overall growth of the economy.
Table 6.1
Development Financial Institutions1 : Sources and
Uses of Funds
Annual Change
As at end
 2002
2003
2003
RM million
Sources:
Shareholders’ funds
999
1,592
9,498
Paid-up capital
596
1,180
7,193
Reserves
321
-122
1,395
Retained earnings
82
534
910
Deposits accepted
492
2,585
42,383
Borrowings
1,111
2,100
16,076
Government
2,250
2,481
11,356
Multilateral /
  International agencies
113
-399
3,036
Others
-1,252
18
1,684
Others
1,779
369
11,135
Total
4,381
6,646
79,092
Uses:
Deposits placed
3,456
1,393
17,113
Investments
-2,700
1,874
21,142
of which:
Government securities
-219
66
3,562
Shares
1,328
-629
5,799
Quoted
847
-3
5,323
Unquoted
481
-626
476
Loans and advances
4,956
3,106
32,548
Fixed assets
595
99
3,706
Others
-1,926
174
4,583
Total
4,381
6,646
79,092
Contingencies:
Guarantee
-182
493
3,653
Export credit insurance
3
-26
125
Total
-179
467
3,778
1 Refers to Bank Pembangunan dan Infrastruktur Malaysia Berhad, Bank Industri &
Teknologi Malaysia Berhad, Bank Kerjasama Rakyat Malaysia Berhad, Bank
Simpanan Nasional, Export-Import Bank of Malaysia Berhad, Malaysia Export
Credit Insurance Berhad, Malaysian Industrial Development Finance Berhad,
Sabah Development Bank Berhad, Borneo Development Corporation (Sabah)
Sendirian Berhad, Borneo Development Corporation (Sarawak) Sendirian Berhad,
Bank Pertanian Malaysia, Credit Guarantee Corporation Malaysia Berhad, Sabah
Credit Corporation and Lembaga Tabung Haji.


Development Financial Institutions
209
The DFIs provided financing to strategic sectors and
sub-sectors of the economy. These included
agriculture, capital-intensive and high technology
industries, shipping, infrastructure, manufacturing,
export, Bumiputera entrepreneurs, co-operatives as
well as home ownership and property development
at the state level, namely in Sabah and Sarawak. In
2003, two DFIs, namely BSN and Bank Pertanian
Malaysia (BPM), were appointed by the Government
to implement the micro credit scheme, which was
part of the Government's Economic Package
announced in May 2003.
Financing Activity
Total loans outstanding of the DFIs increased at an
annual rate of 10.5% or RM3.1 billion (2002: 20.2%
or RM5 billion) to RM32.5 billion as at end-2003, led
by lending to the infrastructure sector by Bank
Pembangunan dan Infrastruktur Malaysia Berhad
(Bank Pembangunan) and retail financing by Bank
Rakyat.
In terms of overall sectoral distribution, consumption
credit rose strongly by 20.1% representing 24.8% of
total loans outstanding of the DFIs. Loans
outstanding to the construction, and transport,
storage and communication sectors as a group
increased by 3.8%, representing 26% of total loans.
Growth was also recorded in the agriculture and
manufacturing sectors, at 10.2% and 8.9%
respectively, contributing 21.3% to total loans
outstanding of the DFIs. In regard to credit insurance
and credit guarantee, total outstanding insurance
and guarantee coverage provided by the relevant
DFIs increased by 14.1% to RM3.8 billion as at the
end of the year, contributed by significantly higher
guarantee coverage provided by the Credit
Guarantee Corporation Malaysia Berhad (CGC).
Lending by six DFIs that are under the purview of
DFIA increased during the year. Bank Pembangunan's
financing of the infrastructure sector and Bumiputera
SMEs increased by 11% and 4.6% respectively. In
addition, the bank provided advisory services and
training to the SMEs. Retail financing provided by
Bank Rakyat to its members rose strongly by 20.8%
while BSN registered a strong increase of 15.8% in
its lending activities due to loans extended under the
micro credit scheme. Meanwhile, the Export-Import
Bank of Malaysia Berhad (EXIM Bank) recorded
growth of 2.1% in its lending activities. Declines in
lending/underwriting activities were, however,
recorded by Bank Industri & Teknologi Malaysia
Berhad (Bank Industri) and MECIB by 7.6% and
9.9% respectively, due primarily to capital
constraints. For the deposit-taking DFIs, savings
mobilised by BSN increased by 0.1% whilst that by
Table 6.2
Development Financial Institutions1 : Direction of
Lending
Annual Change
As at end
 2002
2003
2003
RM million
Agriculture, forestry
and fishery
214
302
3,266
Mining and quarrying
44
6
96
Manufacturing
209
298
3,654
Electricity, gas and water
supply
119
170
624
Import and export,
wholesale and retail trade,
restaurants and hotels
-378
166
406
Broad property sector
2,140
567
8,408
Construction
1,444
228
4,019
Purchase of residential
property
191
162
2,948
Purchase of non-
residential property
124
50
443
Real estate
381
127
998
Transport, storage and
communication
1,502
80
4,443
Finance, insurance and
business services
480
96
1,876
Consumption credit
1,312
1,351
8,067
Others
-686
70
1,708
Total
4,956
3,106
32,548
1 Refers to Bank Pembangunan dan Infrastruktur Malaysia Berhad, Bank Industri &
Teknologi Malaysia Berhad, Bank Kerjasama  Rakyat Malaysia Berhad, Bank
Simpanan Nasional, Export-Import Bank of Malaysia Berhad, Malaysian Industrial
Development Finance Berhad, Sabah Development Bank Berhad, Borneo
Development Corporation (Sabah) Sendirian Berhad, Borneo Development
Corporation (Sarawak) Sendirian Berhad, Bank Pertanian Malaysia, Credit
Guarantee Corporation Malaysia Berhad, Sabah Credit Corporation and
Lembaga Tabung Haji.
Table 6.3
Development Financial Institutions1 : Non-
performing Loans and Loan Loss Provisions
As at end
 2002
2003
RM million
General provisions
614
667
Interest-in-suspense
1,152
1,224
Specific provisions
2,163
2,135
Non-performing loans
5,028
4,934
Percent (%)
Gross NPL ratio2
17.7
15.7
Net NPL ratio3
6.8
5.6
Total provisions/NPL
78.1
81.6
1 Refers to Bank Pembangunan dan Infrastruktur Malaysia Berhad, Bank Industri &
Teknologi Malaysia Berhad, Bank Kerjasama Rakyat Malaysia Berhad, Bank
Simpanan Nasional, Export-Import Bank of Malaysia Berhad, Malaysian Industrial
Development Finance Berhad, Sabah Development Bank Berhad, Borneo
Development Corporation (Sabah) Sendirian Berhad, Borneo Development
Corporation (Sarawak) Sendirian Berhad, Bank Pertanian Malaysia, Credit
Guarantee Corporation Malaysia Berhad and Sabah Credit Corporation.
2 Gross NPL ratio = (NPL / Gross loans*) x 100%.
* Excluding loans under ECR scheme.
3 Net NPL ratio = (NPL less IIS less SP) / (Gross loans* less IIS less SP) x 100%.
* Excluding loans under ECR scheme.


210
Bank Rakyat increased strongly by 16.8% partly due
to attractive returns offered by the bank.
Gross NPLs of the DFIs declined by RM94.1 million to
RM4.9 billion as at the end of the year, resulting in
an improvement in the gross NPL ratio to 15.7%
compared with 17.7% a year ago. Nevertheless, the
gross NPL levels of most DFIs remained high, ranging
from 9% to 46.1% of total loans outstanding. All
DFIs under the purview of DFIA classified a loan or
financing account in default for six months or more
as non-performing.
As a group, the DFIs have made provisions
amounting to RM4 billion to cover potential loan
losses. The net NPL amount and ratio of the DFIs
stood at RM1.6 billion or 5.6% respectively as at
end-2003 (2002: RM1.7 billion or 6.8%).
Sources of Funding
Total deposits mobilised by the deposit-taking DFIs
increased by 6.5% to RM42.4 billion as at end-2003.
Deposits from individuals recorded a growth of 5.4%
(RM1.1 billion), accounting for the largest share of
total deposits mobilised (51.2%). Lembaga Tabung
Haji and BSN remained dominant in mobilising
savings from individuals, with the former recording
an increase of 9.9%, while the latter registering a
decline of 5.8% in 2003. Deposit placements by
business enterprises, and the Government and
Government agencies accounted for 33.9% and
12.1% respectively of total deposits.
Borrowings from the Government, which amounted
to RM11.4 billion as at end-2003 (2002: RM8.9
billion), represented 14.4% of total resources.
Borrowings from the Government were used
primarily to enhance access to financing. The
operations of the DFIs were also funded by
shareholders’ funds totalling RM9.5 billion or 12% of
total resources.
In 2003, four DFIs recorded pre-tax/zakat losses
totalling RM34.8 million, mainly due to poor asset
quality. The remaining 10 DFIs recorded pre-tax/zakat
profits totalling RM715.7 million.
Bank Pembangunan dan Infrastruktur Malaysia
Berhad
Bank Pembangunan dan Infrastruktur Malaysia
Berhad’s (Bank Pembangunan) primary roles are
promoting the participation of the Bumiputera
community in business and industry, and providing
financing for infrastructure projects, in particular
Government-identified projects. Bank Pembangunan
registered an increase in its lending activities in 2003.
Bank Pembangunan also provides advisory services,
entrepreneurial training and project consultancy
services to enhance the business capabilities of
Bumiputera SMEs. As part of the efforts to promote
the development of a viable and resilient Bumiputera
Commercial and Industrial Community, Bank
Pembangunan introduced two new packages known
as "Premis SMI" or "SMI Premises" and "Groombig"
in 2003. Under the "SMI Premises" package, apart
from low rental rates for its factory complexes, Bank
Pembangunan also provides loans, advisory services
(which include financial, corporate and technical
advice), training and matching grants (whereby Bank
Pembangunan provides grants amounting to 70% of
total project cost). As at end-2003, Bank
Pembangunan rented 229 of the 368 factory units to
SMEs. In the case of the "Groombig" package,
which is aimed at enhancing the performance of the
larger sized SMEs, the entrepreneurs were provided
with loans, advisory services and training. In 2003, a
total of 29 companies were identified to participate
in this programme.
Total loans outstanding to Bumiputera SMEs
increased by 4.6% (2002: -5.6%) to RM1.3 billion as
at end-year. Overall, including lending to non-
Bumiputera SMEs, total loans outstanding to SMEs
stood at RM1.6 billion, an increase of 5.9% over the
level at end-2002.
Graph 6.1
Bank Pembangunan dan Infrastruktur 
Malaysia Berhad: 
Direction of Lending as at 31 December 2003 
Others 
10.2%
Manufacturing
8.7%
Utilities
6.0%
Construction 
33.2%
Transport &  
communication 
41.9%


Development Financial Institutions
211
Loans to finance infrastructure projects recorded a
slower growth of 11% in 2003 compared with
56.5% in 2002. The outstanding loans for
infrastructure projects totalled RM8.6 billion as at
end-2003, accounting for 84.5% of total loans
outstanding. These were mainly to finance
Government-identified infrastructure projects. The
loan increase was attributed largely to loans
extended to the transport and communication
(RM80.8 million), construction (RM331.2 million) and
utilities (RM163.3 million) sectors. Overall, the loan
portfolio of Bank Pembangunan increased by 10.2%
to RM10.2 billion as at end-2003, representing
68.5% of Bank Pembangunan’s total assets.
As at end-2003, Bank Pembangunan managed 26
Government funds. Loan approvals and loan
disbursements under these funds increased by
203.8% (+RM334.6 million) and 63.4% (+RM82
million) respectively. The Tourism Infrastructure Fund
and Special Tourism Fund 2 were the main
beneficiaries with approvals of RM132.5 million and
RM187.2 million respectively.
Gross NPLs increased to RM912.6 million
representing 9% of total loans as at end-2003 (2002:
RM769.8 million or 8.3%), attributed largely to
higher NPLs for infrastructure loans. The gross NPL
ratio of infrastructure loans rose to 4.2% (2002:
2.6%), while the level of NPLs for SME loans declined
to 35% (2002: 38.2%). The net NPL ratio of Bank
Pembangunan showed a marginal decline from
3.2% to 3.1%.
During the year, the investment portfolio decreased
by 36.6% (RM574.4 million) following the disposal
of private debt securities (PDS) and Government debt
securities. Investments in PDS of RM757.5 million
formed the largest component of Bank
Pembangunan’s investment which stood at RM995.4
million as at end-2003. Deposits placed with financial
institutions increased to RM2.6 billion (2002: RM1.5
billion) to account for 17.5% of total assets.
The main sources of funding were borrowings from
the Government (RM4.2 billion), deposits from
Government agencies and public enterprises (RM3.8
billion), borrowings from multilateral and
international agencies (RM1.4 billion), debt securities
issued (RM1 billion) and Government grants and
subsidies (RM644.7 million), accounting for 74.3% of
Bank Pembangunan’s total resources. During the
year, Bank Pembangunan’s shareholders’ funds
increased by RM234 million to RM2.5 billion. Bank
Pembangunan’s paid-up capital rose to RM1.6 billion
following additional capital injection of RM400
million by the Government.
Bank Industri & Teknologi Malaysia Berhad
The lending activities of Bank Industri & Teknologi
Malaysia Berhad (Bank Industri) declined in 2003, by
7.6% (2002:-9.3%) to RM837.3 million as at end-
year. The maritime sector (comprising shipping,
shipyard and marine-related industries) was the main
recipient of the loans, representing 56.6% of total
loans outstanding, while the manufacturing sector
accounted for the remaining loans. As at end-2003,
total loans outstanding accounted for 19.8% of Bank
Industri’s total assets of RM4.2 billion.
Loan approvals declined by 4.7% (2002: +17.7%),
given that in 2003, the utilisation of the New Ship
Financing Facility was restricted to financing of
merchant vessels only. The approvals for the
manufacturing sector meanwhile continued to record
positive growth. During the year, lending activities of
Bank Industri were also constrained by the level of its
shareholders’ funds.
Bank Industri managed 13 Government funds during
2003, representing 34.9% of the total loans of Bank
Industri. Loan approvals and loan disbursements
under the funds continued to fall markedly, by
31.3% and 28% respectively, as most of the funds
have been fully utilised.
Gross NPLs decreased by RM1.4 million to RM323.6
million as at end-2003. However, due to a significant
Graph 6.2
Bank Industri & Teknologi Malaysia Berhad: 
Direction of Lending as at 31 December 2003 
Shipyard 
14.4%
Manufacturing 
43.4%
Shipping
36.7%
Marine-related 
industries 
5.5% 


212
contraction in the loan base, the gross NPL ratio
increased to 38.6% (2002: 35.8%). Loans to the
maritime sector accounted for 56.6% of total NPLs
while the manufacturing sector accounted for the
balance. The net NPL ratio fell marginally to 18.4%
from 18.9% a year ago.
Investment in subsidiaries (RM1 billion) and loans and
advances to subsidiaries (RM840.7 million) formed
the largest component (44.2%) of the bank’s assets
as at end-2003. The investment and advances were
mainly in four subsidiaries, namely MECIB, EXIM
Bank, Global Maritime Ventures Berhad and BI Credit
and Leasing Berhad.
Borrowings formed the largest source of funding for
Bank Industri, amounting to RM2.3 billion (54% of
total resources) as at end-2003, of which 52.7%
from the Government and 47.3% from multilateral
and international agencies. Another major source of
funding was deposits placed by Government and
Government agencies, totalling RM678.3 million. The
shareholders’ funds of Bank Industri rose to RM280.2
million as at end-2003 (2002: RM164.3 million)
mainly from the capital injection of RM80 million by
the Government in June 2003 as part of the
Government’s Economic Package.
Export-Import Bank of Malaysia Berhad
Financing activities of Export-Import Bank of Malaysia
Berhad (EXIM Bank) to promote the export of
Malaysia's goods and services recorded an increase of
2.1% to RM2.1 billion in 2003. New loans approved,
however, recorded a marked increase of 24.5% or
RM92.8 million, reflecting the significant growth of
Malaysian exports during the year. The two major
activities were financing provided under the Export
Credit Refinancing (ECR) scheme (54.2% of total
loans) and financing of overseas projects (41.6%),
while export financing constituted 4.2%. The bank
also provided export guarantee of RM172.3 million,
a decline of 2.1% from the previous year.
During the year, financing of overseas projects fell
further to RM866.2 million, constrained by the small
size of the bank's shareholders' funds. Nearly half of
the total was channelled to projects undertaken in
countries in the African continent and another
36.9% in South-East Asia. Meanwhile, the sole
guarantee issued was for a project undertaken in
South-East Asia. Consistent with its mandated role
to promote the diversification of Malaysia’s export
markets, loans to non-traditional markets accounted
for 60.4% of the total principal loans outstanding
as at end-2003. For project financing, 63.7% was
channelled to non-traditional markets, while 32.4%
of the export financing was channelled to the same
markets.
EXIM Bank is the designated agency to manage the
ECR scheme which is funded by the Government as
part of the efforts to promote exports. Competitive
rates are offered to banks participating in the
scheme for on-lending to exporters. EXIM Bank
disbursed a total of RM6.6 billion to exporters under
the ECR scheme, an increase of 7.5% from the level
in 2002,in line with the growth in Malaysia's exports
and the increase in the customer base by 7% to
1,760 exporters. The major users of the facility were
exporters in the palm oil products, rubber products,
chemical products and textiles industries.
Loans outstanding formed the largest asset of EXIM
Bank amounting to a share of 60.3% whilst deposit
placements accounted for 37.5% of EXIM Bank’s
total assets.
Gross NPLs improved during the year, to RM439.9
million (2002: RM450.9 million), representing
46.1% of total loans outstanding, excluding loans
provided under the ECR scheme (2002: 46.7%).
Project financing accounted for the largest
component of NPLs at 92.6%. The net NPL ratio
declined to 2.3% after significant provisioning of
RM436.3 million.
The bank sourced its funds through borrowings from
the Government, international agencies and its
parent company, apart from its shareholders' funds
of RM238.2 million. As at end-2003, borrowings
from the Government amounted to RM2 billion,
Graph 6.3
Export-Import Bank of Malaysia Berhad:
Credit Facilities as at 31 December 2003
Export
financing
4.2%
Project
financing
41.6%
ECR scheme
54.2%


Development Financial Institutions
213
international agencies RM298.2 million and, its
parent company RM369.7 million. These borrowings
accounted for 78% of the bank’s total resources.
Borrowings from the Government were utilised solely
for the ECR scheme.
Following the signing of Multilateral Letter of Credit
Confirmation Facility Agreements with seven Asian
export-import financing institutions in 2002 in order
to promote trade within the region, EXIM Bank
signed Bilateral Letter of Credit Confirmation Facility
Agreements with Korea EXIM Bank and India EXIM
Bank, to further enhance Malaysia's bilateral trade
with the respective countries.
Malaysia Export Credit Insurance Berhad
The activities of the Malaysia Export Credit
Insurance Berhad (MECIB), which provides insurance
cover and guarantee facilities to facilitate exports
and overseas investment, continued to decline in
2003. Total insurance coverage and guarantees
issued amounted to RM496.6 million as at end-
2003, a decline of 9.9% (2002: -13.3%), although
coverage under short-term credit insurance facilities
increased by 12.9% in tandem with Malaysia’s export
growth. Of the total coverage, 74.7% was
guarantees issued and the remaining were export
credit insurance covers. The guarantee coverage
were largely medium- and long-term exposures
while the export credit insurance cover was mainly
short-term in nature. MECIB faced capital
constraints to engage in large medium- and long-
term business.
Non-traditional markets accounted for 40.8% of the
total guarantee and insurance coverage, reflecting
MECIB’s role in supporting Malaysia’s export market
diversification efforts. Exposure to countries in East
Asia accounted for 46.9% of the total exposure,
followed by Africa 12.7% and South Asia 12%.
MECIB funded its activities solely from its
shareholders' funds, which improved slightly to
RM76.6 million as at end-2003 (2002: RM45.6
million). The loss percentage, indicating the ratio
of claims paid to premiums received, improved to
29.3% as at the end of 2003, compared with the
level of 55.3% recorded at the end of 2002.
The main assets of MECIB were investments in
securities and deposits placed with financial
institutions, accounting for 45.1% and 40.3% of
total assets respectively.
Bank Kerjasama Rakyat Malaysia Berhad
Bank Kerjasama Rakyat Malaysia Berhad (Bank
Rakyat) or People’s Cooperative Bank of Malaysia
registered strong growth both in financing and
deposit mobilisation activities. Bank Rakyat’s assets
increased significantly by 17.7% to RM17.1 billion
as at the end of the year. Financing formed the
major portion (58.2%) of total assets, followed by
deposit placements (24.5%) and investment in
securities (14.2%).
Financing activities grew strongly by 16.9% to
RM10 billion, with borrowings by members, which
accounted for 77.7% of total financing
outstanding, increasing by 20.8%. Demand for
consumption credit continued to register a
significant growth of 18.6% to RM6.9 billion as at
end-year. Financing extended to the property sector
grew by 15.8% to RM1.9 billion, reflecting primarily
Graph 6.4
Malaysia Export Credit Insurance Berhad:
Contingent Liabilities as at 31 December 2003
Short-term
guarantee
1.8%
Medium-and
long-term
guarantee
72.9%
Medium-and
long-term
insurance
0.4%
Short-term
insurance
24.9%
Graph 6.5
Bank Kerjasama Rakyat Malaysia Berhad:
Direction of Financing as at 31 December 2003
Others 
1.8%
Agriculture 
0.6%
Property 
19.1%
General 
commerce 
4.7%
Share financing 
1.1%
Purchase of 
motor vehicles 
2.8%
Consumption
credit 
68.9%
Manufacturing 
1%


214
strong demand for residential properties. Financing
of motor vehicles also registered strong growth of
136% although its share remained small at only
2.8%. In terms of sectoral distribution, consumption
credit accounted for 68.9% of the financing
outstanding whilst 19% and 4.7% were extended to
the property sector and general commerce
respectively. New financing approved and disbursed
remained relatively unchanged at RM3.6 billion and
RM3.7 billion respectively (2002: RM3.6 billion and
RM3.5 billion respectively).
The gross non-performing financing (NPF) ratio fell
marginally to 10.7% from 11.4% while the
outstanding gross NPF increased slightly to RM1.1
billion from RM974.2 million. The property sector
and consumption credit contributed 39.8% and
35.4% respectively, to total gross NPF. In terms of net
NPF, the ratio was 5.2%.
Bank Rakyat’s financing operations were largely
funded by deposits, totalling RM13.1 billion and
representing 76.6% of the bank’s total resources.
Deposits placed by business enterprises accounted for
a major share (66.7%), of which two-thirds was from
private enterprises while the remaining from public
enterprises. Deposits mobilised from individuals saw a
significant growth of 39.3% (RM454.9 million), raising
its share of total deposits to 12.3% (2002:10.3%),
attracted by the high rate of return offered by Bank
Rakyat. Similarly, deposits of cooperatives rose strongly
by 54.1% in 2003 although its share was only 2.6%
at RM339 million. Overall, deposits mobilised by Bank
Rakyat continued to register a strong growth of
16.8% (RM1.9 billion) due primarily to the favourable
returns offered by the bank.
Bank Rakyat’s shareholders’ funds rose from RM1.8
billion to RM2.5 billion as at end-2003. This was
attributed to higher members’ shares and
subscription funds, which increased to RM1.3 billion
(2002: RM0.9 billion). Bank Rakyat’s improved
profitability in 2003 further enlarged the bank’s
shareholders’ funds. During the year, the individual
membership of Bank Rakyat increased by 86,770 to
629,907 while cooperative membership increased by
84 to 1,067. The high dividend rate of 15% declared
by Bank Rakyat in 2002 and the privilege loan rate
offered to members attracted additional
membership.
Bank Simpanan Nasional
Savings mobilised from small savers by Bank
Simpanan Nasional (BSN) or National Savings Bank
declined while deposits from business enterprises
rose sharply by 54.9%. Retail loans to small
borrowers increased in 2003, consistent with the
role of the savings bank to meet the financing
needs of small borrowers. In June 2003, BSN was
appointed by the Government to implement the
micro credit scheme. As at the end of 2003, BSN
operated through 398 branches covering both the
urban and rural areas, and supported by 591
ATMs.
Total deposits outstanding increased marginally by
0.1% or RM4.9 million during the year to RM9.4
billion. Savings from individuals continued to
account for the largest component (71.3%) of the
deposit base although such savings declined by
5.8% or RM411.4 million to RM6.7 billion,
compared with growth of 4.1% or RM284.1
million in 2002. The increase of deposits from
business enterprises was in part due to the
requirement for micro credit borrowers to open an
account with BSN. In terms of type, more than
one-half of the deposits was in the form of savings
deposits, 36.3% fixed deposits and the remaining
in the form of general investment deposits.
The deposits were mainly invested in securities,
which amounted to RM5.5 billion (49.8% of total
assets) as at end-2003, of which RM2.8 billion
were investments in Government securities. The
balance was utilised to finance lending operations.
Total loans outstanding registered strong increase of
15.8% (2002: -7.4%) to RM2.4 billion, reflecting the
loans provided under the micro credit scheme which
Graph 6.6 
Bank Simpanan Nasional: 
Total Deposits Accepted as at 31 December 2003 
Individuals 
 71.3%
Government 
agencies 
10.9% 
Private-controlled 
business 
enterprises 
10.3%
Government-
controlled 
business 
enterprises 
6.0%  
Financial 
institutions 
1.5%


Development Financial Institutions
215
was launched in June 2003 as part of the
Government’s Economic Package. As at end-2003, a
total of RM415.6 million had been extended under
the micro credit scheme, accounting for 17% of total
loans outstanding. BSN received 102,432 loan
applications under the scheme, of which 60,364
applications amounting to RM541.8 million and
RM430.8 million were approved and disbursed
respectively. The micro credit borrowers were
involved mainly in food stall business, retail trading
and business services. Meanwhile, more than 90% of
the loans outstanding, excluding micro credit, was
extended to individuals mainly in the form of
consumer loans and for purchase of residential
property.
Gross NPLs decreased marginally by RM21.9 million
to RM297.4 million as at the end of 2003, attributed
to a decline in NPLs of credit card loans. NPLs of Giro
Housing Loans increased marginally by 1% to
RM158.6 million while NPLs of motor vehicle loans
fell slightly by 1.2% to RM112.5 million. The gross
NPL ratio improved to 12.2% as at end-2003 (2002:
15.1%) largely due to an expansion in the loan base.
Net NPLs decreased to 6.6% amounting to RM154.6
million.
In 2003, BSN’s reserves strengthened following the
capital injection of RM100 million by the
Government under the Economic Package.
Bank Pertanian Malaysia
Financing activities of Bank Pertanian Malaysia (BPM)
or Agriculture Bank of Malaysia increased
significantly in 2003. Under the Eighth Malaysia Plan
(8MP), BPM had been mandated to manage various
agricultural financing schemes with the objective to
enhance the performance of the agriculture sector in
the economy. In 2003, BPM received an allocation of
RM44.5 million for three financing schemes namely,
Food Production Credit, Bumiputera Commercial and
Industrial Community Scheme and Agricultural
Mechanisation and Automation Scheme. In addition,
as part of the Government’s Economic Package, BPM
was appointed to implement the micro credit
scheme.
Total loans outstanding increased strongly by 16.2%
to RM2.7 billion as at end-2003 following the
launching of the micro credit scheme. Since its
launch in June 2003, BPM received a total of 30,004
applications under the scheme and approved 17,237
applications with a value of RM199.3 million as at
end-2003. A total of RM194 million had been
disbursed to borrowers, mainly involved in agrobased
projects, agriculture marketing, crop cultivation and
livestock rearing.
Of the loans outstanding, a major part (60.5% or
RM1.7 billion) was extended to the oil palm, food
crop and livestock industries. Meanwhile, small
farmers accounted for 43.8% (RM1.2 billion) of loans
outstanding. As at end-2003, loans outstanding
represented 45.6% of BPM's total assets of RM6
billion.
BPM approved 27,735 loan accounts, and disbursed a
total of RM709.2 million during the year. Small farmers
continued to be the main target group with 98.4% of
the total loan applications approved. Although the
number of applications approved increased during the
year, in terms of value, the amount approved showed a
decline of 7.9% to RM709.2 million, as most of the
loans were small in size.
Gross NPLs amount and ratio on a 12-month
classification basis improved further to RM889.2
million and 32.4% respectively (2002: RM894.3
million and 37.8% respectively). Net NPLs stood at
RM326.4 million or 15% of total net loans.
Investments formed the second largest component of
the total assets of BPM at 31.9% or RM2 billion
mainly in PDS (37.2% of total investment), unit trusts
(29.6%) and promissory notes/commercial papers
(25.3%).
The major source of funds for BPM was deposits of
RM3.8 billion mobilised through its network of 119
branch offices and 4,907 mobile units nationwide.
Graph 6.7
Bank Pertanian Malaysia:  
Direction of Lending as at 31 December 2003
Others
21.4%
Rubber
1.5%
Tobacco
2.6%
Forestry
3.3%
Livestock
15.1%
Fishery
10.7%
Food crops
20.1%
Oil palm
25.3%


216
This represented 62.5% of BPM's total resources.
Borrowings from the Government totalled RM1.1
billion, accounting for 18.7% of total resources.
These were mainly to fund the various financing
schemes introduced by the Government. As at end-
2003, BPM managed 11 funds with loans
outstanding amounting to RM206.4 million or
10.8% of the total loans of BPM.
In 2003, BPM's shareholders' funds strengthened
following the capital injection of RM200 million by
the Government under the Economic Package and
the profit recorded in the financial year 2003.
Malaysian Industrial Development Finance
Berhad
Financing activities of Malaysian Industrial
Development Finance Berhad (MIDF) recorded a
marginal increase in 2003. During the year, MIDF was
appointed as the implementing agency for the new
Soft Loan Scheme for Factory Relocation
administered by the Small and Medium Industries
Development Corporation (SMIDEC). Consistent with
the growing demand for Islamic financing products,
MIDF introduced Islamic financing in October 2003,
offering a wide range of Shariah compliant schemes.
Loans outstanding grew by 6.4% to RM1.1 billion as at
end-2003. Loan disbursements increased significantly to
RM312.3 million (2002: RM240.6 million). The loans
outstanding were mainly for the manufacturing sector
(82.4%), with the major beneficiaries being the
fabricated metal products and machinery industry
(17.2%), basic iron and steel and non-ferrous products
industry (16%), and wood products industry (15.4%).
Meanwhile, loans outstanding to SMEs accounted for
50.1% of total loans.
During the year, loan approvals increased to RM493.7
million (2002: RM409.6 million), of which 85.3% was
for manufacturing establishments and 19.1% was for
Bumiputera projects.
Asset quality of MIDF improved significantly. Based
on 3-month classification, the gross NPL amount and
ratio improved to RM337.9 million (2002: RM524.9
million) and 29.8% (2002: 49.2%) respectively, due
to resolution of some NPL cases totalling RM195.4
million.
MIDF managed a total of ten Government and
Government agencies funds with total loans
outstanding of RM328.6 million, an increase of
34.3%. Loans approved under the special loan
schemes decreased to RM151.4 million (2002:
RM190.2 million) while loans disbursed increased to
RM134.8 million (2002: RM116.6 million).
The main sources of funds were shareholders’ funds
and borrowings. As at end-2003, total shareholders’
funds increased by 26.8% to RM1.3 billion (2002:
RM1 billion) following the issue of new shares,
accounting for 46.1% of total resources. Meanwhile,
borrowings accounted for another 40.2% of total
resources. This included RM641.6 million sourced
directly or indirectly from the Government to be on-
lent for socio-economic purposes. MIDF also raised
funds from the capital market amounting to
RM528.8 million as at end-2003 for its other
corporate lending activities.
Graph 6.8
Malaysian Industrial Development Finance Berhad:
Direction of Lending as at 31 December 2003
Non-manufacturing
17.6%
Manufacturing
82.4%
Plastic products
7.1%
Wood products
15.4%
Non-metallic
mineral products
10.1%
Basic iron & steel and
non-ferrous products
16.0%
Fabricated metal
products
& machinery
17.2%
Electrical & electronic
products
8.1%
Others
18.9%
Food, beverages
& tobacco
7.2%


Development Financial Institutions
217
Credit Guarantee Corporation Malaysia Berhad
The principal objective of the Credit Guarantee
Corporation Malaysia Berhad (CGC) is to assist SMEs
enhance their access to credit facilities. There was a
significant increase in guarantees issued in 2003,
contributing to facilitating financing to SMEs by
banking institutions.
In 2003, CGC launched the revised and liberalised
New Principal Guarantee Scheme and Islamic
Banking Guarantee Scheme to facilitate SMEs
obtain higher financing. CGC also introduced the
Special Relief Guarantee Scheme to provide
coverage for working capital provided by banking
institutions for businesses affected by the Severe
Acute Respiratory Syndrome, especially those
involved in the tourism industry. In addition, CGC
has engaged consultants under its Business Advisory
Service Entity plan to assist SMEs, particularly in
preparing business plans and financial documents.
Meanwhile, an online posting of Direct Access
Guarantee Scheme (DAGS) loans for bidding by the
banking institutions was launched to facilitate
financing to SMEs.
Total guarantees outstanding recorded a strong
growth of 18.3% (2002: –3.9%) to RM3 billion as at
end-2003. This was mainly attributed to the strong
performance of DAGS and the Flexi Guarantee
Scheme (Flexi Guarantee). Since the introduction of
DAGS in 2000, guarantees outstanding of this
scheme continued to rise markedly, by 120.4% in
2003 to RM718.3 million, as the revised programme
enabled more SMEs to gain access to the scheme.
Guarantees outstanding for the Flexi Guarantee also
expanded significantly, by 108.5% or RM262.6
million to RM547.6 million as at end-2003. This was
a turnaround from a decline of 25.4% or RM89.2
million experienced in 2002. The high growth of
Flexi Guarantee reflected mainly the higher demand
for loans extended under the Fund for Small and
Medium Industries 2 (FSMI 2) and New
Entrepreneurs Fund 2 (NEF 2).
Borrowers with loan size of below RM250,000
continued to be the main beneficiary, accounting
for 41.2% of total guarantees outstanding. They
were followed by borrowers with loans of between
RM250,000 and RM500,000 (25.5%) and those
with loan size of between RM500,000 to RM1
million (24.7%). Guarantees for loans of above RM1
million formed 8.6% of guarantees outstanding.
The general business sector remained the largest
group that benefited from guarantee coverage,
accounting for three quarters of total loans
guaranteed, followed by the manufacturing
(23.3%) and agriculture (1.3%) sectors.
Total provisions for claims increased by 38.1% or
RM119.5 million to RM433.5 million as at end-2003,
resulting from higher loans guaranteed turning non-
performing which increased by 28.4%. Meanwhile,
claims payable by CGC decreased by 16% to RM96.3
million (2002: RM114.6 million).
In addition to providing guarantee coverage, the
CGC also implemented a number of loan schemes
created by the Government for the SMEs. These
loans were extended by CGC to banking
institutions for on-lending to the SMEs. As at end-
2003, loans outstanding under the schemes
declined to RM915.8 million (2002: RM988.7
million). Of this, four major special loan schemes
namely, FSMI 2, Fund for Small Entrepreneurs,
NEF 2, and Islamic NEF 2 as a group amounted to
RM908.7 million or 99.2% of loans outstanding.
Of the total loans outstanding under these
schemes, 73.2% or RM670.1 million were
channelled to SMEs in the business services sector,
while 22.4% or RM205 million was for SMEs in the
manufacturing sector.
Gross NPL amount and ratio for the loans extended
by the banking institutions under the schemes
declined to RM86.8 million (2002: RM139.6 million)
and 9.5% (2002: 14.1%) respectively. The major
Graph 6.9 
Credit Guarantee Corporation Malaysia Berhad: 
Guarantee by Sector as at 31 December 2003
General business 
75.4%
Manufacturing
23.3%
Agriculture 
1.3% 


218
component of the gross NPLs was contributed by
loans to the business services sector, accounting for
66.3%.
The shareholders’ funds remain unchanged at RM2.1
billion as at end-2003, with paid-up capital of RM1.6
billion.
Lembaga Tabung Haji
The deposit mobilisation activities of Lembaga
Tabung Haji (LTH) or Pilgrims Fund Board increased
significantly in 2003, in tandem with the improved
performance of the economy. To further improve
services to its depositors, LTH has recently teamed up
with four major banks to provide Internet banking
facilities to its customers, enabling depositors with
these banks to transfer funds into their savings
accounts with LTH. LTH signed a Memorandum of
Understanding with an estate agent company to
provide accommodation for the pilgrims during Haj
pilgrimage through a long-term tenure arrangement.
This was part of continuous efforts by LTH to
enhance the quality of its services.
Total deposits mobilised by LTH increased by 9.9% to
RM11.3 billion while the number of its depositors
increased by 4.1% to 4.7 million. For the year 2003,
LTH had announced a bonus payout of 4% to its
depositors (2002: 3.5%).
Meanwhile, total investments made up RM8.1 billion
or 66.2% of total assets. Investment in shares,
amounting to RM3.8 billion, formed the largest
component in investment portfolio, followed by
deposit placements with financial institutions of
RM1.5 billion, investments in subsidiaries and
associate companies and investment in PDS of RM1.3
billion each. LTH also provided financing to its
subsidiaries involved in agriculture and construction
activities, and other companies totalling RM1.7 billion,
an increase of 24.2%.
Sabah Development Bank Berhad
After a year of strong expansion, the lending
operations of the Sabah Development Bank Berhad
(SDB) slowed down by 5.6% to RM1.2 billion as at
end-2003 (2002: RM1.3 billion). The decline in loans
outstanding was mainly attributed to the decline in
loans extended to Government-controlled business
enterprises. Significant declines were registered in
loans extended to the business services,
manufacturing and agriculture sectors.
While the number of loan approvals remained
relatively unchanged, the total value of loans
approved was substantially lower at RM250.6 million
(2002: RM794.3 million), as credit facilities were
extended mainly for small development projects.
Total loans disbursed also declined to RM184.3
million (2002: RM271.3 million). Meanwhile, loan
repayments increased to RM316.3 million (2002:
RM223.7 million), contributing to the decline in loans
outstanding.
A total of 43.3% of the loans outstanding was
extended to the real estate sector, while 10.6% was
channelled to the construction sector and 9.6% to
the business services sector. Loans remained the
Graph 6.10
Lembaga Tabung Haji:
Investments as at 31 December 2003
Private
debt securities
15.8%
Investment in
subsidiaries and
associates
16.0%  
Shares
47.3%
Deposits
placed
18.7%
Other
investment
2.2%
Graph 6.11 
Sabah Development Bank Berhad: 
Direction of Lending as at 31 December 2003 
Others 
22.8%
Business services 
9.6%
Construction 
10.6%
Real estate 
43.3%
Manufacturing 
5.6%
Agriculture, 
forestry & fishery 
8.1%  


Development Financial Institutions
219
largest asset component of SDB, accounting for
75.3% of total assets of RM1.6 billion.
Gross NPL amount and ratio improved to RM492
million and 39.7%, respectively (2002: RM542.2
million or 41.3%). A major share (69%) of the NPLs
comprised loans extended to the real estate and
business services sectors. The net NPL ratio was lower
at 4.6% (2002: 5.8%).
The main source of funds were deposits from the
Government and Government-controlled business
enterprises (RM354 million) and borrowings from
financial institutions (RM536.6 million). These
amounted to RM890.6 million or 54.1% of total
resources. The bank’s shareholders’ funds increased
to RM251.5 million (2002: RM233.2 million).
Sabah Credit Corporation
The lending activities of the Sabah Credit
Corporation (SCC) picked up strongly in 2003. Loans
outstanding increased by 18.9% (2002: -1.8%) to
RM632.8 million. Total loans approved and disbursed
increased significantly to RM236.5 million (2002:
RM80.1 million) and RM223.8 million (2002: RM84.8
million) respectively.
The strong expansion of 70.9% or RM253.6 million
in the lending operations was mainly on account of a
strong demand for consumption credit, of which
about two-thirds were executive loans and the
remaining was channelled for hire purchase facilities.
Housing loans, which declined marginally by 1.2% to
RM289.6 million, remained the largest loan
Graph 6.12
Sabah Credit Corporation: 
Direction of Lending as at 31 December 2003
Industrial 
development 
11.1% 
Others 
1.8%
Agriculture 
1.3%
Housing 
45.8%
Hire purchase 
13.2%
Executive 
loans 
26.8%
component. Loans outstanding accounted for 94.5%
of total assets (RM658.8 million) as at end-2003.
Gross NPL ratio, based on a 4-month classification,
improved to 13.6% (2002: 16.1%). A substantial share
of the NPLs (61.1%) was attributed to loans extended
to low cost housing. On a net basis, the NPL ratio was
slightly higher at 4.6% (2002: 4.1%).
Borrowings from the State Government (RM328.8
million) and banking institutions (RM156.2 million),
accounted for a combined share of 73.3% of total
resources.
Borneo Development Corporation (Sabah)
Sendirian Berhad
Property development activities in Sabah undertaken by
the Borneo Development Corporation (Sabah) Sendirian
Berhad (BDC Sabah) slowed down in 2003. This was
reflected in the decline of 2.1% in property
development expenditure and progress billings to
RM98.2 million.
As experienced in the previous two years, no new loan
applications were received by BDC Sabah due to
competitive lending rates offered by banking
institutions. Loans outstanding declined to RM9.5
million, following repayments of RM1.9 million in 2003
(2002: RM1.7 million). Of the amount outstanding,
75.2% was accounted for by loans to individuals, while
business enterprises accounted for the balance.
Gross NPLs, which stood at RM2.4 million or 25.4% of
loans outstanding, increased from the previous year
(2002: RM2.1 million or 20.1%). Loans for the
purchase of non-residential property constituted 94.7%
of total NPLs.
BDC Sabah sourced its funding mainly through
borrowings from financial institutions, which
amounted to RM75.7 million or 77.1% of total
resources. The shareholders’ funds declined to RM5.2
million.
Borneo Development Corporation (Sarawak)
Sendirian Berhad
Property development and construction activities
undertaken by the Borneo Development Corporation
(Sarawak) Sendirian Berhad (BDC Sarawak) for the
State Government, recorded a significant increase in
2003. The amount of stocks and work-in-progress
increased sharply by 49.9% (2002: -18.1%) to
RM50.3 million as at end-2003, representing the
largest (58.2%) asset component of BDC Sarawak.


220
The end-financing activities declined further as
borrowers continued to redeem their loans due to
competitive lending rates offered by banking
institutions. As a result, loans outstanding declined
to RM1 million as at end-2003 (2002: RM1.4 million).
Meanwhile, the investment portfolio, which
accounted for 12.4% of total assets of RM86.4
million, increased by 6.4% (2002: -38.8%) to
RM10.7 million.
Shareholders’ funds (RM38.7 million) and borrowings
from financial institutions (RM20.3 million) remained
the major source of funds to BDC Sarawak, with a
combined share of 68.3% of total resources.


External Relations
222
Economic Surveillance
222-223
International Financial Architecture
223
External Relations with the IMF
223-224
Islamic Banking
224
Combating Money Laundering and Terrorist Financing
224-229
Financial Sector Liberalisation
229-232
Regional Co-operation
231
White Box: Asian Bond Market Initiative
232
Bilateral Co-operation
232
Technical Assistance and Information Exchange


222
External Relations
Discussions at regional and international fora during
2003 focussed on promoting growth, enhancing
macroeconomic surveillance, strengthening
capacities, and deepening regional financial
collaboration. To take these agenda forward, Bank
Negara Malaysia continued to participate actively in
all key international and regional fora.
Economic Surveillance
The surveillance initiatives undertaken by the regional
groupings, including the ASEAN+3, South-East Asian
Central Banks (SEACEN), and Executives Meeting of
East-Asia and Pacific (EMEAP), were aimed at
complementing surveillance activities of the
international financial institutions. The meetings
focussed on macroeconomic policy management,
monetary and financial stability issues as well as
exchange of experiences in financial sector reforms.
In addition to the regional fora, surveillance issues
were also discussed at meetings of the Bank for
International Settlements (BIS).
Bank Negara Malaysia hosted the Sixth Meeting of
the Working Party on Monetary Policy in Asia in
Kuala Lumpur on 5-7 November 2003. The Meeting,
chaired by the BIS, was attended by senior officers
from 20 central banks and monetary authorities from
the Asian and G10 economies. The Working Party, a
group initiated by the BIS, meets annually to review
recent global and regional economic developments
and outlook, and its implications for monetary and
financial policies.
Malaysia participated in several initiatives by the
multilateral financial institutions to strengthen the
financial sector, in particular, in the work to
strengthen risk management in financial institutions.
At the International Monetary Fund (IMF), Malaysia
led the South-East Asia (SEA) Voting Group Office in
the meeting of experts on the guide for compiling
financial soundness indicators. The compilation
would provide guidance to member countries on the
concepts, definitions, data sources and techniques
Economic surveillance discussions covered macroeconomic policy
management, monetary and financial stability issues and
strengthening banking systems. Further progress was seen in the
area of developing codes and standards to strengthen financial
systems.
for the compilation and dissemination of the core
and encouraged sets of financial soundness
indicators. The set of data that member countries are
encouraged to compile and disseminate include 27
indicators on deposit taking institutions, other
financial corporations, non-financial corporate sector,
households, market liquidity and real estate markets.
At the BIS, Malaysia was part of the regional initiative
to enter into a consultative process in relation to the
Basel Accord to take account of the special
characteristics of banking operations in emerging
market economies, particularly those from the
region. Bank Negara Malaysia, as Chairman of the
EMEAP Working Group on banking supervision,
compiled and conveyed the views of member
countries of the EMEAP group to the Basel Committee
on Banking Supervision (BCBS). In August 2003, Bank
Negara Malaysia organised dialogue sessions between
the BCBS and regulators from EMEAP member
countries and India, as well as between the banking
industry of these countries and the BCBS. The Bank
also facilitated the participation of the domestic
banking sector in the Quantitative Impact Survey that
was conducted by the BIS during the year.
International Financial Architecture
The work on reform of the International Financial
Architecture (IFA) during 2003 focussed mainly on
crisis prevention measures, particularly through
developing a voluntary code of conduct for crisis
resolution. While there was continued opposition to
the IMF proposal of sovereign debt restructuring,
efforts to develop a Code of Good Conduct for parties
involved in sovereign debt restructuring made some
progress on including collective action clauses (CACs)
in international sovereign bonds.  While there was no
general acceptance to the inclusion of the CACs,
members were willing to accept such inclusions
provided the Code could accommodate country-
specific circumstances, by providing a degree of
flexibility in its application. Malaysia had, since 2000,
issued bonds that included CACs.


External Relations
223
A set-back in the IFA reform process was in the area of
up-front IMF liquidity support. After the 1997 Asian
Financial Crisis, the IMF introduced the Contingent
Credit Line (CCL) facility. The objective was to provide
front-loaded financial support. Access, however, was
confined only to member countries with strong
economic policies, which face short-term balance of
payments problems arising from unexpected external
developments. The facility has not been used by
member countries since it was introduced in 1999.
The IMF finally conceded to discontinue the CCL from
end-November 2003 when all efforts to improve the
design, access and implementation procedures had
not resulted in a scheme that would be practical in
assisting member countries.
Another area lacking progress in the IFA reform
efforts was in redressing the governance of the IMF.
Lack of consensus on according higher
representation in IMF decision making process to
non-G10 countries resulted in the 12th General
Review of Quotas being concluded in January 2003,
without any adjustment to the IMF quotas.
Developing and emerging economies continued to
view adjustment of the IMF’s quota structure as
critical since the current IMF quotas did not reflect
the increased significance and importance of the
emerging market economies in the world economy.
This issue would be pursued during the 13th General
Review of Quotas, which covers the period from
February 2003 to January 2008. Developing and
emerging economies are expected to maintain their
position on the realignment of the IMF quotas to
promote a more balanced voting structure at the IMF,
in line with the principle that relative voting strength
of members must reflect their relative economic
position in the global economy.
Notwithstanding the failure of developing countries
to secure higher quotas in the IMF, the SEA Voting
Group in the IMF and the World Bank set up two
focus groups to improve the effectiveness and
efficiency of the Voting Group Offices in
representing members’ interests and in participating
in policy discussions at the IMF and the World Bank
Executive Boards.  Bank Negara Malaysia was tasked
to lead in the area of improving the work process at
the IMF SEA Group Office. The final report of the
The IMF’s Article IV report on Malaysia concluded that the country
was well placed in the near term to benefit from the projected
global upturn, with the outlook biased on the upside.
Focus Group was endorsed by the Governors of the
SEA Group at the IMF/World Bank meeting in Dubai
in September 2003. A new rotation scheme,
commencing from November 2004 to October
2016, was also approved with Malaysia securing
greater representation at senior positions. Under
this rotation framework, Malaysia will assume the
post of Executive Director and lead the SEA Group
Office for a period of two years from November
2004 to October 2006.
External Relations with the IMF
Malaysia continued to engage the IMF during the
annual Article IV consultations on Malaysia’s
macroeconomic performance and policy issues for
2003 and expectations for 2004. The IMF’s
assessment of the management of the economy for
2003 was published as a public information notice
following the conclusion of the IMF Executive Board’s
discussions on Malaysia. The Managing Director of
the IMF visited Malaysia in September.
He noted the progress of reforms had enabled
Malaysia to sustain economic growth in spite of
weaknesses in the external environment.
Malaysia continues to maintain its net creditor status
in the IMF. Since September 2002, in line with
Malaysia’s strong balance of payments and
international reserves position, Malaysia has been
included in the IMF’s operational budget’s Financial
Transaction Plan (FTP).  Under the FTP
, selected IMF
members with strong balance of payments and
international reserve positions may be called upon to
provide foreign exchange resources to support the
IMF’s financial operations.  Under the FTP
, Malaysia
was called upon to transfer SDR45 million for the
period March to May 2003.
Islamic Banking
In the area of Islamic banking and finance, Bank
Negara Malaysia played an active role in the Islamic
Financial Services Board (IFSB), particularly through
the IFSB Council and Technical Committee meetings.
During the year, the IFSB finalised the guidelines for
the preparation of prudential standards for Islamic
financial institutions, and initiated the process of
preparing two standards, namely the standard on risk
management and standard on capital adequacy. In


224
this connection, the IFSB conducted two workshops
on risk identification in October 2003 in order to
improve the understanding of the risks faced by
Islamic financial institutions. These workshops were
attended by participants from Islamic banking
institutions in Bahrain, Iran, Jordan, Kuwait, Malaysia,
Pakistan, Qatar, Saudi Arabia and Sudan.
In 2003, the Central Bank of Egypt, Central Bank of
Jordan, Qatar Central Bank and Ministry of Finance,
Brunei Darussalam, became full members of the IFSB.
Three international organisations, namely, the Bank
for International Settlements, International Monetary
Fund and the World Bank, became associate
members of the IFSB, while the Asian Development
Bank became an observer. At end February 2004, the
IFSB had 36 members, comprising 13 full members, 3
associate members and 20 observers.
Combating Money Laundering and Terrorist
Financing
Malaysia continued to be at the forefront of global
efforts to combat money laundering activities and
the financing of terrorism. During the year, the
Malaysian Parliament passed the Anti-Money
Laundering (Amendment) Act 2003 to extend the
scope of the Anti-Money Laundering Act 2001
(AMLA) to include measures to be taken to prevent
terrorism financing offences and provisions to freeze,
seize and forfeit terrorist properties.
In July 2003, Bank Negara Malaysia was admitted as
a member of the Egmont Group of Financial
Intelligence Units. The Egmont Group provides a
forum to expand and exchange information on
financial intelligence, improve expertise and
capabilities of personnel, and foster better
communication among financial intelligence units.
Within the Asia/Pacific Group on Money Laundering
(APG), Malaysia became a member of the APG
Steering Group for a period of one year, up to June
2004. The Steering Group plays an advisory role in
the areas of key governance issues in the APG,
which include the revision of the Financial Action
Task Force (FATF) standards and modalities to meet
the increased international pressure for countries to
comply with the revised standards.
In line with the liberalisation path charted under the Financial
Sector Masterplan, Malaysia implemented further unilateral
liberalisation in the banking and insurance sectors in 2003.
Malaysia participated in the training and technical
assistance needs analysis that was conducted by
consultants commissioned under the Asia-Europe
Meeting (ASEM) Anti-Money Laundering Project.
The report on Malaysia was finalised in February
2003, with the ASEM consultants’ conclusion being
that Malaysia’s anti-money laundering system was
well developed, integrated and supported by
capable and professional staff across a number of
agencies. The ASEM consultants had acknowledged
Malaysia’s efforts in constructing an effective system
as well as the development of sound legislation,
effective institutions and well-trained staff.
Financial Sector Liberalisation
World Trade Organisation
In 2003, negotiations to further liberalise the services
sector, including financial services, at the World Trade
Organisation (WTO) continued to focus on the
“request and offer” phase, which began on 28
March 2001. The negotiations were generally based
on requests for market opening submitted by
member countries to a trading partner and offers
submitted by the trading partner. These were
conducted through bilateral discussions between
0
5
10
15
20
25
30
35
40
1999
2000
2001
2002
2003
Year
No. of commercial banks
0
5
10
15
20
25
30
35
Percent (%)
Graph 7.1
Foreign Participation in the Malaysian 
Commercial Banking Sector
Total no. of commercial banks (including the two Islamic banks)
No. of fully foreign-owned banks
No. of domestically-owned banks with foreign interest
Average foreign share (%) of equity across domestically-owned 
banks with foreign interest
Foreign share (%) of total commercial bank assets 
(comprising share of fully foreign-owned banks and other 
foreigners via equity participation in domestically-owned banks)


External Relations
225
Graph 7.2
Foreign Participation in the Malaysian Insurance 
Industry
Total no. of insurers
No. of foreign-owned insurers
Aggregate foreign market share (%) of 
general insurance premiums
Aggregate foreign market share (%) of 
life insurance premiums
0
10
20
30
40
50
60
70
1999
2000
2001
2002
2003
Year
No. of insurers
0
10
20
30
40
50
60
70
80
90
Percent (%)
members. The deadline for completion of
negotiations is 1 January 2005.
Table 1:
Financial Services Liberalisation Measures Since 2000
Year
Banking Sector
2000
•
The maximum total credit facilities that could be obtained by non-resident controlled
companies (NRCCs) from foreign-owned banking institutions in Malaysia was increased from
40% to 50% in December 2000.
•
Licensed Offshore Banks in the Labuan International Offshore Financial Centre (Labuan
Offshore Banks) would be allowed to invest in ringgit assets/instruments in Malaysia for their
own accounts, though not on behalf of their clients.
•
Licensed commercial banks, including the foreign-owned banks, and Bank Islam Malaysia
Berhad in Malaysia (licensed banks) were allowed to extend in aggregate an intra-day
overdraft facility of not exceeding RM200 million and an overnight facility of not exceeding
RM10 million to non-resident stockbroking companies and non-resident global custodian
banks to finance funding gaps due to inadvertent delay in relation to settlement for trade on
the KLSE. In addition, they can also enter into short-term currency swap and/or outright
forward contracts to cover for purchase of shares on the KLSE.
Non-banking financial sector (excluding insurance)
•
The maximum foreign equity limits in a stockbroking company and a financial leasing
company were increased to 49% from 30% effective 1 July 2000.
Banking Sector
2001
•
Foreign-owned banking institutions were allowed to set up communicative websites from
1 January 2001.
The Fifth Ministerial Conference (5th MC) to
undertake a mid-term review of the progress of
multilateral trade negotiations under the Doha
Development Agenda (DDA), including for
negotiations on trade in financial services, ended
without consensus. There were wide differences in
the positions of developed and developing country
members on the new issues of trade and investment,
trade and competition policy, transparency in
government procurement and trade facilitation.
Notwithstanding this outcome, the 5th MC agreed on
the need for member countries to continue working
on outstanding issues of the DDA. These
negotiations are ongoing among trade negotiators
in Geneva.
Malaysia has maintained an undertaking of
progressive liberalisation of financial services as part
of the overall measures to further develop the
domestic financial sector.  In line with the
liberalisation path charted under the Financial Sector
Masterplan, Malaysia has taken several steps to
unilaterally liberalise the banking and insurance
sectors in 2003 (see Table 1).


226
•
Banking institutions (including the foreign-owned banks) in Malaysia were allowed to extend
credit facilities in ringgit to finance the purchase and/or construction of one immovable
property for non-residents who participate in the Silver Hair Programme implemented by the
Immigration Department of Malaysia.
•
Financial institutions (including the foreign-owned banks) were allowed to extend up to three
credit facilities in ringgit to non-residents to finance the purchase or construction of any
property in Malaysia (excluding for the purchase of land), subject to their own internal credit
assessment guidelines.
•
Banking institutions (including the foreign-owned banks) in Malaysia were allowed to effect
transfers involving External Accounts and another External Account and/or Resident Account
of different account holders by way of:
(a) Automated Teller Machine transfer up to RM5,000 per person/company, per day, per bank
for any purpose;
(b) Internet-bank transfers up to RM5,000 per person/company, per day, per bank for any
purpose; and/or
(c) Cheques up to RM5,000 per cheque for any purpose.
Insurance sector
•
All insurers with the requisite minimum risk management and security systems in place were
allowed to offer the full range of life and general insurance products through the internet
with effect from April 2001.
Banking Sector
2002
•
Foreign-owned banking institutions were allowed to offer transactional internet banking from
1 January 2002.
•
Internal credit lines used solely to facilitate drawing against uncleared cheques, granted by
licensed banks (including the foreign-owned banks) to NRCCs, were excluded from the
computation of the NRCC’s total domestic credit facilities. Licensed banks were also permitted
to allow NRCCs to overdraw their current accounts for amounts of up to RM500,000 per
account for a period not exceeding 2 working days.
•
Banking institutions (including the foreign-owned banks) in Malaysia were allowed to extend
additional ringgit credit facilities to any non-resident up to an aggregate of RM5 million per
non-resident to finance projects undertaken in Malaysia. Prior to this, credit facilities in ringgit
to a non-resident, for purposes other than purchases of three immovable properties or a
vehicle, were limited to RM200,000.
Insurance sector
•
The areas in which insurers may employ expatriates were expanded to include, in addition to
the fields of specialised underwriting, actuarial and information technology previously
provided for, other areas involving product research and development, risk management and
investment.
Banking Sector
2003
•
Licensed banks (including the foreign-owned banks) in Malaysia were allowed to extend
overdraft facilities in ringgit not exceeding RM500,000 in aggregate to a non-resident
customer, provided such overdraft facilities are covered by fixed deposits placed by the non-
resident customer with the licensed banks in Malaysia. These overdraft facilities were in
addition to all ringgit credit facilities allowed to be extended freely by banking institutions
since 21 November 2002.


External Relations
227
•
The 50% limit on the maximum total credit facilities that could be obtained by NRCCs from
foreign-owned banking institutions in Malaysia was removed on 1 April 2003.
•
The overnight limit for foreign currency account (FCA) to retain receipts arising from export of
goods (export receipts) for Approved Operational Headquarters (OHQ) was increased to
USD70 million from USD10 million. The maximum overnight limit on export FCA of other
resident exporters was also raised to USD70 million.
•
Residents may invest in investment products that are linked to foreign currency denominated
derivatives that are offered by licensed banks (including the foreign-owned banks) in Malaysia.
The foreign currency funds used for the investment that are utilised from the residents’ FCA
will be earmarked and computed as part of the aggregate overnight balances of the FCA of
the residents.
•
Allow up to three new Islamic banking licences to qualified foreign players.
Insurance sector
•
Effective 17 April 2003, foreign-owned insurers with foreign shareholding not exceeding 51%
were allowed to open not more than two branch offices in one year.
Banking Sector
2004
•
To enhance cash flow management for supporting value chain expansion in Malaysia, licensed
banks (including foreign-owned banks) can retain higher amount of foreign currency funds
for residents in FCA:
-
Up to a maximum of USD100 million (previously USD70 million) of export receipts.
-
Any amount of non-export receipts for residents with domestic borrowing (previously
need approval).
-
Up to USD150,000 for education/employment purpose (previously USD100,000).
•
Labuan Offshore Banks are allowed to maintain FCA for residents:
-
Up to USD0.5 million of non-export receipts for residents without domestic borrowing
(previously need approval).
-
Up to USD150,000 for education/employment purpose (previously USD100,000).
-
Any amount overseas foreign currency funds for resident individuals.
•
To enhance access to ringgit funds for business requirements in Malaysia, the various limits for
banking institutions lending to non-residents in ringgit have been consolidated to one single
aggregate limit of RM10 million for use in Malaysia for any purpose (excluding stockbroking
company, custodian bank and correspondent bank).
•
The extension of property loans in ringgit by residents, including licensed banks, to non-
residents now includes the purchase of land (previously not allowed).
•
Licensed banks are allowed to extend an aggregate overnight overdraft facility of RM200
million (increased from RM10 million) to a non-resident stockbroking company or a non-
resident custodian bank to facilitate settlement for purchase of shares listed on the KLSE.
•
Resident individuals employed or staying abroad with foreign currency funds sourced from
abroad are allowed to invest in any foreign currency assets, including those offered by
licensed banks, approved licensed merchant banks and Labuan Offshore Banks.
•
Multilateral Development Bank and foreign multinational corporation issuers of ringgit-
denominated bonds in Malaysia may enter into forward foreign exchange contracts with
onshore licensed banks to hedge their currency risks arising from the issuance of the ringgit
denominated bonds. Non-resident investors subscribing to these issues can also hedge their
foreign exchange risks.


228
China
Singapore
Thailand
Date Agreement came into effect
Negotiations concluded
Agreements under negotiations
Proposed (negotiations not started)
Chile, New Zealand and Singapore
European Free Trade Association (EFTA) comprises Switzerland, Iceland, Liechtenstein and Norway
1
2
USA
Bilateral Free Trade Arrangements (FTA)s
for Selected Regional Countries since 2001
July 2003 
November 2002 
January 2003 
January 2004 
January 2004 
January 2001 
Sri Lanka
Peru
Pacific Three1
New Zealand
Mexico
Korea
Jordan
Japan
India
Hong Kong
EFTA2
Canada
Bahrain
Australia
ASEAN
Source: Various publications
Increased foreign presence is also through strategic
alliances between foreign players and local
entities. These included bancassurance and
outsourcing arrangements undertaken by
domestic-owned financial institutions with foreign
partners.
ASEAN Framework Agreement on Services and
Proposed Free Trade Arrangements
Liberalisation of financial services among the
ASEAN countries is also being effected under the
ASEAN Framework Agreement on Services (AFAS).
A third round of negotiations on financial services
under the AFAS which began in 2002 is expected
to be concluded by 2004. Under this round,
ASEAN member countries will make further
General Agreement for Trade in Services (GATS)-
plus commitments on financial services, that is,
undertake liberalisation measures beyond those
made under the GATS.
Apart from the AFAS, financial services
liberalisation would be covered within the scope of
trade arrangements currently pursued by Malaysia
with partner countries to promote freer trade and
investment regimes. Malaysia has commenced
negotiations on establishing free trade
arrangements (FTA)s with the People’s Republic of
China (under the proposed ASEAN-China free
trade area) and Japan. The proposed FTAs would
complement  existing trade liberalisation initiatives
under the WTO and other regional economic
integration arrangements, namely, the ASEAN Free
Trade Area for goods, the AFAS for services and
the ASEAN Investment Area for investment
liberalisation.


External Relations
229
Japan
China
2003
YEAR
2002
2004
2
November 2002
ASEAN-China
Framework Agreement
signed
1 
3
4
November 2002
ASEAN-Japan Joint
Declaration  signed
October 2003
ASEAN-Japan Framework
for Comprehensive
Economic Partnership
signed
December 2003
Agreed to start
bilateral
negotiations in
2004
January 2004
Bilateral
negotiations
started
June 2004
To conclude negotiations
on trade in goods
2003
Negotations on FTA
ongoing
1 Malaysia participates with other ASEAN countries in negotiations on the proposed ASEAN-China Free Trade Area.
2 The ASEAN-China Framework Agreement on Comprehensive Economic Co-operation was signed on 4 November 2002 to serve as a basis 
for the countries to start negotiations on establishing a free trade area between ASEAN and China.
3 The ASEAN-Japan Joint Declaration on Comprehensive Economic Partnership (CEP) was signed on 5 November 2002 to develop a 
concrete framework to realise such a partnership between ASEAN and Japan.  While considering a framework for the realisation of 
the CEP between ASEAN and Japan as a whole, the Joint Declaration does not preclude bilateral economic partnerships between Japan 
and individual ASEAN countries.  
4 The Framework was signed on 8 October 2003 and provides for consultations among ASEAN and Japan to start from early 2004 on areas 
of facilitation, co-operation, and trade and investment liberalisation, among others.
     
Progress of Malaysia's Negotiations on Proposed Free Trade Arrangements (FTA)s with China and Japan
Regional Co-operation
The momentum of collaborative efforts to strengthen
and deepen regional co-operation picked up in 2003,
with much of the focus being on developing regional
financial markets and enhancing regional financial
stability. These efforts include the strengthening of
Further strengthening of regional co-operation with the
expansion of bilateral swap arrangements under the Chiang Mai
Initiative (CMI); enhanced regional surveillance; and new
initiatives to deepen and broaden Asian bond markets.
Miyazawa Initiative, provide Malaysia with access to
a total of US$6 billion in financing.
An effective surveillance mechanism is essential to
the effectiveness of the CMI arrangement. To
improve regional surveillance, the ASEAN+3 finance
short-term financial support, particularly through the
bilateral swap arrangement; regional surveillance
under the ASEAN+3 forum; and initiatives to meet
the region’s long-term funding requirements through
the development of bond markets.
Further progress was made among the ASEAN+3
countries in the expansion of the bilateral swap
arrangement network under the Chiang Mai Initiative
(CMI). To date, 16 bilateral swap arrangements with
a combined value of US$35.5 billion have been
concluded, and would be available to ASEAN+3
member countries. Of the 16 bilateral swap
arrangements, Malaysia had signed three
agreements. The three, together with Malaysia’s
US$2.5 billion agreement with Japan under the New
forum adopted new mechanisms to enhance the
surveillance processes undertaken under the CMI
arrangement. In this connection, the exchange of
economic reviews and policy dialogues among the
ASEAN+3 countries were further deepened and
broadened with an in-depth analysis of topical
regional issues that would strengthen the region’s
peer review process. Meanwhile, regional
surveillance of capital flows in the Asian region was
further strengthened in 2003 and in early 2004
through data exchange and assessments of
developments among members of the SEACEN
Expert Group on Capital Flows.
The year 2003 witnessed two significant events
towards the development of bond markets in Asia


230
ABMI under 
ASEAN + 3
To identify issues & 
impediments to regional 
bond market development
                                     Asian Bond Fund
                                     under EMEAP
US$1 billion Fund
– invest in US$ denominated
bonds issued by Asian
sovereign & quasi-issuers in
EMEAP economies (except
Japan, Australia and
New Zealand)
SUPPLY
DEMAND
Objective
Broadening & deepening bond markets in the region
with the launch of the US$1 billion Asian Bond
Fund (ABF) and the Asian Bond Market Initiative
(ABMI). The development of deeper and more liquid
bond markets will assist in channelling the large
pool of savings in Asia to fund productive
investment in the region. Together, these initiatives
signal strong official support to expand  regional
bond markets. Under the ABMI, six working groups
have been tasked to identify the necessary
infrastructure and impediments that need to be
removed in order to encourage  the growth of
regional bond markets.
While the voluntary working groups under the
ABMI aim to address supply-side measures deemed
necessary for active participation of both bond
issuers and investors, the ABF complements the
ABMI on the demand-side by taking the first step
towards facilitating the channelling of a portion of
official reserves held by the Asian economies back
into the region. The ABF concept is being studied to
include bonds denominated in regional currencies.
Together, the ABMI and the ABF reflect
strengthened efforts by the public sector to broaden
and deepen the regional bond markets.
Korea
Japan
People’s
Republic
of China
Malaysia
Indonesia
Philippines
People's Republic
of China
Korea
5 October 2001
(US1billion)126July2002(US1 billion)
2
9 October 2002
(US1.5billion)117February2003(US3 billion)
1
27 August 2001
(US3billion)19August2002(US1 billion)
29 August 2003
(US1billion)2130July2001(US3 billion)
1 
11 June 2002
(US1billion)26December2001(US2 billion)
1 
28 March 2002
(US3billion)224June2002(US2 billion)
2
4 July 2001
(US2billion)124December2003(US1 billion)
30 December 2003
(US1billion)10November2003(US1 billion)
1 
1 
1 
Singapore
Thailand
Bilateral Swap Arrangement Agreements under the Chiang Mai Initiative
Dates indicate when the agreements were signed. The maximum drawing amount for each agreement is indicated in parentheses. The combined 
total size of the 16 bilateral swap arrangement (BSA) agreements is US$35.5 billion (based on the overall availibility under the BSAs, where the maximum 
drawing amount under two-way swap arrangements is counted twice to reflect the swap amount available to both parties under the agreement). 
1 A one-way swap arrangement where the requesting country under the agreement can request the swap-providing country to enter into a swap transaction. 
2 A two-way swap arrangement where either party could request the other party to enter into a swap transaction under the agreement. 
  
Agreements signed between the Plus Three countries (People's Republic of China, Japan and Korea) and ASEAN countries 
  
Agreements signed among the Plus Three countries 


External Relations
231
Asian Bond Market Initiative
Significance of the ABMI
The Asian Bond Market Initiative (ABMI), launched under the ASEAN+3 Finance Ministers’ forum, is a
comprehensive approach to develop a regional bond market in East Asia. Its aim of creating a deep, broad
and liquid bond market in Asia would further enhance the efficiency of channelling Asian savings into
long-term investments in the region. A deeper Asian bond market will also improve the management of
maturity mismatches present in financing economic activities, facilitate management of currency and
interest rate risks, and improve the overall efficient allocation of capital.
Following the Chiang Mai Initiative, the ABMI is the most significant ASEAN+3 regional financial co-
operation project. Essentially, it reflects the collective effort of the ASEAN+3 finance, central bank and
monetary authorities to improve the financial infrastructure and initiate appropriate policies in supporting
regional bond market development.  Implementation of the ABMI is through a structured approach. Six
voluntary working groups have been set up to identify issues and impediments to bond market
development in a range of areas through regular meetings (see chart). Studies are also being undertaken
by these working groups to recommend modalities for regulatory and legal frameworks that will facilitate
cross-border issuance and investment within the region. The working groups also consult regularly with
key private sector stakeholders, such as multilateral development banks, financial intermediaries and
market participants.
Malaysia’s commitment
Malaysia is fully committed to the successful development of the ABMI and Bank Negara Malaysia is an
active member in all the working groups. Malaysia chairs the Working Group on Foreign Exchange
Transactions and Settlement Issues (Bank Negara Malaysia), and co-chairs the Working Group on Technical
Assistance Co-ordination with Indonesia and the Philippines (Securities Commission). In leading the
Working Group on Foreign Exchange Transactions and Settlement Issues, it has been acknowledged that
the creation of a deep and liquid bond market in Asia needs to be complemented with a sound and
efficient bond settlement system mechanism. Efforts are, therefore, being directed towards establishing a
conducive and enabling environment to facilitate foreign exchange transactions and to address issues
related to timely and cost-effective settlement of cross-border transactions.
As part of the work programme, the Working Group organised a Symposium on Foreign Exchange
Transactions and Settlement Issues in Kuala Lumpur on 20 October 2003 to deliberate on issues pertaining
to foreign exchange transactions and settlement issues in cross-border bond transactions.
Singapore
and Japan
Asian Bond Market Initiative (ABMI)
ASEAN+3 Finance Ministers
Ministers
endorsed the
ABMI on 7
August 2003
Chair country
Comprising
ASEAN+3
Ministry of
Finance,
Central Bank
and Securities
Commission
officials
Creating New
Securitised
Debt
Instruments
Thailand
Korea
Malaysia
China
Indonesia, the
Philippines
and Malaysia
ASEAN+3 Finance and Central Bank Deputies
Voluntary Working Groups
Credit
Guarantee
Mechanisms
Foreign
Exchange
Transactions
and Settlement
Issues
Local and
Regional
Rating
Agencies and
Dissemination
of Information
on Bond
Market
Technical
Assistance
Coordination
Issuance of Bonds
Denominated in Local
Currency by Multilateral
Development Banks,
Foreign Government
Agencies and Asian
Multinational
Companies


232
Increased focus of bilateral co-operation was in the area of
trade and financing, including the use of gold in financing
bilateral trade.
Malaysia accords a high priority to regional co-
operation in training to strengthen domestic
capacities in the financial sector and macroeconomic
management. In this regard, Bank Negara Malaysia
has supported the activities of the SEACEN Research
and Training Centre, which undertakes intensive
central banking training, especially in bank
supervision, macroeconomic policy formulation,
financial stability assessment, and financial reforms.
In 2003, the SEACEN Centre extended its training to
16 non-members while continuing to provide
training to its members, which expanded to 12, with
the admission of the Ministry of Finance, Brunei
Darussalam1. The SEACEN Centre also extended its
collaboration with Japan, and regional groupings and
international institutions such as the Asia-Pacific
Economic Co-operation (APEC), BIS, IMF and the
World Bank. The closer collaboration with a wider
group of countries and institutions has facilitated the
Centre’s work in ensuring broad-based training of
central bankers given the rapid changes in the global
financial markets.
Bilateral Co-operation
In enhancing bilateral co-operation in trade and
financing, progress was made on Malaysia’s proposal
for the Gold-based Trade Payments Arrangement
(GTPA). The GTPA enables a debtor country to settle
its bilateral trade balance using gold.
Promotion of the GTPA was also undertaken through
collaboration with the Islamic Development Bank
(IDB). As a result of this collaboration, member
countries of the IDB unanimously endorsed the GTPA
and agreed to enter into bilateral negotiations in
order to operationalise the scheme. Subsequently,
the GTPA was adopted by the Organisation of the
Islamic Conference (OIC) countries’ Heads of State/
Government at the 10th OIC Summit in October
2003, as contained in the Putrajaya Declaration. On-
going discussions with bilateral trading partners on
GTPA commenced in 2003.
Technical Assistance and Information Exchange
Bank Negara Malaysia continued to encourage
capacity building through technical assistance and
information exchange among central banks and
monetary authorities. In 2003, Bank Negara Malaysia
received 14 foreign participants from 13 central
banks, under the sponsorship of the Malaysian
Technical Co-operation Programme (MTCP), to
attend Bank Negara Malaysia’s central banking and
banking supervision courses.
Bank Negara Malaysia also participated in
collaborative capacity-building efforts under various
regional fora in areas such as banking supervision,
alternative remittance systems, domestic bond
market development, and Islamic banking and
insurance. The development of takaful and
retakaful in Islamic countries was actively promoted
by Bank Negara Malaysia, particularly through the
organisation of international seminars and
workshops, provision of training and consultancy
services as well as sharing of technical expertise
by the Malaysian takaful operators. These
initiatives had contributed to the establishment of
takaful operators in several Developing-8 (D-8)
member countries, namely Bangladesh, Indonesia
and Nigeria.
1 Effective 1 April 2004, SEACEN’s membership will increase to 13 members,
with the admission of the Reserve Bank of Fiji. The other SEACEN members
are the Ministry of Finance, Brunei Darussalam; Bank Indonesia; The Bank of
Korea; Bank Negara Malaysia; The Bank of Mongolia; Central Bank of
Myanmar; Nepal Rastra Bank; Bangko Sentral ng Pilipinas; Monetary
Authority of Singapore; Central Bank of Sri Lanka; Central Bank of China,
Taipei; and Bank of Thailand.


Organisation and 
Human Resource
234-238
Organisation Development – Overview
238-240
Risk Management in Bank Negara Malaysia
241
Organisation Structure


234
ORGANISATION DEVELOPMENT - OVERVIEW
2003 marked the third year of the Bank’s 5-year
Knowledge-Based Organisation (KBO) strategic
development initiative. The initiative was launched in
2000 to enable the Bank to leverage on the
application of knowledge as a critical resource to
enhance productivity and organizational
performance. The Bank’s KBO development efforts
incorporate human resource management, training
and learning management, knowledge management,
information and communication technology
management, corporate governance, information
security management and office space management.
New initiatives implemented in 2003 focused on
content management, improvements to the facilities
and systems available for learning and training,
integration of key and critical information and
communication technology systems as well as the
conceptualization of the organisation performance
measurement system.
The Bank also conducted an independent
organisation climate survey to assess the progress
achieved over the previous three years. The results
indicated that the Bank’s organisation development
initiatives had created a more effective organisation
in terms of leadership, operational efficiency,
knowledge management, communications, career
development, compensation and work-life balance.
Human Resource Management
The Bank continued to enhance the existing human
resource policies and practices, in particular, placed
sharper focus on performance measurement and
rewards management. With the increase in the
Bank’s responsibilities over the recent three years, the
staff strength has also increased. Also, arising from
the changing composition of the workforce in terms
of background, experience and age structure, the
human resource policies have been realigned to the
changing requirements to be relevant.
Cognizance of the changing challenges, there has
been a gradual shift to greater emphasis on
performance-based rewards, opportunities for
learning and development and improved amenities to
enhance the quality of working life. Greater flexibility
and wider choice of reward options were developed
to better position the institution to retain top talent,
Organisation and Human Resource
improve staff productivity, and at the same time be
flexible enough to meet changing staff aspirations at
different stages in their career paths. The
introduction and implementation of flexi benefits
plan, mentoring programmes and active recognition
programmes aim to accommodate these objectives.
In 2003, the Bank introduced new awards for
Cultural and Professional Development while a
Career Management Unit was established to
structure and assist long-term career planning by
staff. The list of approved professional qualifications
for sponsorship by the Bank was also expanded.
Together with the other organisation development
initiatives, such as competency and knowledge
management, more personalized training and wider
availability of learning resources, the human resource
management approach has constantly evolved to
meet the varied priorities of a dynamic workforce.
Consequently, a performance-based culture has
increasingly been embedded in the Bank.
In terms of capacity, the total staff strength of the
Bank increased by 3.5% to 2,295 as at end of 2003.
Staff turnover rate remained low at less than 2%.
In terms of occupational safety and health, the Bank
recognizes that while work and career fulfillment can
have an effect on employee productivity and
commitment, health and safety also contributes to
enhancing the effectiveness of an organisation. During
2003, the Bank embarked on and completed more
structured safety audit programmes. Apart from
ensuring high standards of safety in the office
environment, the Bank provided more avenues for staff
to improve their health and fitness.  The Bank
conducted health talks to enhance awareness on issues
related to stress management, SARS, diabetes and
osteoporosis. A long-term programme covering the
environment, personal resources and health practices is
also being initiated. This five-year programme will be
implemented in stages, beginning from 2004.
Training and Learning Management
The Bank’s drive to promote organisational learning
to facilitate a performance-based culture is reflected
through a number of initiatives implemented in
2003. A programme is now in place that ensures that
the workforce in the organisation has a responsibility
to learn and develop. The learning experience and
training is integrated with performance planning and
evaluation to ensure that the returns on expenditure


Organisation and Human Resource
235
on staff development is maximised. Technology has
been, and will be used more extensively in improving
the delivery of content for learning throughout the
Bank. A Learning Management System has been put
in place to provide tools for staff to gauge their
learning requirements, explore the type of content
available, design a personal learning agenda and
conduct learning more effectively. The anticipated
outcome is the development of a culture more
inclined to online learning, and the capacity to
integrate individual learning with individual staff
performance management.
The Bank’s investment in staff training amounted to
RM8 million during the year 2003, an increase of
45% compared to 2002.  On average, this amounted
to RM3,500 per employee, an increase of 40% from
2002.  An average of 12 training man-days per staff
was achieved for year 2003 (2002 - 11 training man-
days).  Bank-wide training programmes organised by
the Human Resource Development Centre (HRDC)
accounted for 46% of total investment in staff
training with the programmes oriented towards the
building of core functional and management skills
and ICT and leadership skills.
Information and Communication Technology
Management
The use of Information and Communication
Technology (ICT) solutions was expanded and
enhanced to facilitate the development of a
performance driven Knowledge Based
Organisation (KBO). The Bank has embarked on a
technology blueprint for central ICT-Knowledge
Management (KM) services. This framework is to
provide focus for action to address ICT and KM
infrastructure needs and include information and
technology integration. The emphasis is not only in
automating the organisation, but more
importantly, connecting people to people, and
more rapid access to well-organised information
across all relevant spectrum for sound analysis and
decision-making. The ultimate aim is to create an
organisation with highly knowledgeable and
collaborative people where ICT is leveraged
extensively to serve stakeholders.
The Virtual Discussion Room (VDR), Departmental
Homepages (DHP) and other collaboration and
communication services introduced in 2002 continue
to mature with steady growth in usage and content.
In 2003, a new channel – the Corporate Portal
(Kijang.Net) – was introduced to provide a single
window that facilitates awareness and
communication through access to on-line electronic
information services and application systems in the
Bank, as well as polls and surveys.
The Bank will continue to strengthen the security,
reliability and resilience of the ICT infrastructure.
Towards this end, a new state-of-the-art Data Centre
offsite from the Bank’s Head Office is being planned.
Remote access facilities were also implemented to
provide greater flexibility for work and improved
lifestyles among staff as part of the Bank’s Work-Life
Balance initiative.
Information Security Management
In 2003, a revised Information Security Policy was
introduced to optimize the use of the Bank’s
intellectual capital and to facilitate easy access to
information and widespread knowledge sharing to
add value to the Bank without compromising on
controls governing use of sensitive data.
The Information Security policy was benchmarked
against the British Standard 7799 and other
international best practice. The broad framework
encompasses three decision drivers, namely
Technology, Strategy and Usage; Business Initiatives
and Processes; and Risk Management.  The three
drivers define the Information Security framework
used in safeguarding the Bank’s information assets.
The framework will guide security standards within
the information and communication technology
environment, and in the adoption of appropriate
business rules, procedures and staff education
programmes to raise awareness about information
disclosure practices.
The Information Security Management Unit was
established in 2003 to implement the Information
Security policy through appropriate enforcement,
monitoring and recovery processes. The Unit
collaborates closely with the Corporate Governance
Unit as well as the Information Technology Services
Department, which is responsible for data and
communications network management. The
Information Security Policy is expected to promote
greater knowledge sharing within the Bank by
defining the rules of disclosure for restricted
information.
Knowledge Management
The Bank’s knowledge management practices
achieved another milestone in 2003 with the
implementation of a Knowledge Management
Measurement Framework.  The framework will be


236
used to guide future efforts in designing the Bank’s
KM practices by measuring the Bank’s progress
against four criteria – Continuity & Stability,
Competency and Productivity, Innovation &
Responsiveness.  The framework reinforces the
Bank’s existing processes for promoting the
identification, acquisition, application and retention
of knowledge in the organisation.
During 2003, the Bank initiated a series of
knowledge audits to assess knowledge gaps within
the Bank. The knowledge audits, as well as various
other indicators are fed into the KM measurement
framework to enable more effective monitoring of
the progress of KM initiatives. The Bank’s Library
Unit leads the knowledge audits, as well as review
and implement programmes to improve content
management. This includes the Corporate
Taxonomy project which is now under way to map
The successful implementation of new ICT tools,
changes to HR practices, development of a
‘knowledge centric’ library and re-engineering of
training and learning methodologies marks the
Bank’s transition into Phase 3 of the KM Roadmap.
Changes to behavior and culture oriented towards
the proactive use of personal and organisation
knowledge to deliver concrete results in a prompt
manner are expected to yield the desired results
over the next few years.
Office Space Management
The Bank has begun to implement a new office
space design and layout that incorporates elements
of flexibility, efficiency, comfort and ergonomics that
will improve the working conditions for the staff, as
well as provide enabling and broader range of
facilities to assist a knowledge worker.
An open plan office concept was adopted to
and structure the ‘information domain’ of the Bank.
The ‘information domain’ refers to all the types of
information relevant to the Bank, in terms of
subject, media (document or digital database),
confidentiality (public, confidential or secret) and
relationship with other information within the Bank.
The corporate taxonomy will enable effective and
efficient searching, storing and communication of
information within the Bank. Given the exponential
growth in information today, this project will be a
major milestone in enabling the ease of access and
productive use of the knowledge-bank within
the Bank.
enhance flexibility, effective use of space and
harmonisation as part of space management. The
restrictions to individual and acoustical privacy were
managed through low partitions and creation of
additional spaces for small group discussions.
Facilities for teamwork and collaboration were
made widely available by having dedicated
projectors and network devices in all meeting
spaces. Variable lighting, ergonomically structured
chairs and workstations with ample storage space
contributed to workplace safety and staff
convenience.
• KM Strategy
• KM Infrastructure
• Knowledge Processes
• Repositories
• Knowledge Policy
• Knowledge
 
Sharing
 
Culture
• Knowledge
 
Culture
• Learning
 
Organisation
• Knowledge Permeating
• Intellectual
 
Capital
 
Measurement
Phase 1
Initial
Phase 2
Awareness
Phase 3
Reuse and Leverage
Phase 4
Institutionalise
ORGANISATION
OPERATIONAL
EFFICIENCY AND
EFFECTIVENESS
...enhance our
reputation as a
professional,
credible and
responsive
knowledge-
based Central
Bank
ACHIEVING SUSTAINABLE SUPERIOR PERFORMANCE BY
LEVERAGING ON KNOWLEDGE
KM ROADMAP 2001 - 2005


Organisation and Human Resource
237
The Bank’s approach in dealing with office space
management as an issue integral to organisation
development has led to solutions that not only
address space requirements, but also ensure that
the physical space within the Bank reflects the
values espoused by the Bank as a knowledge-based
organisation.
Corporate Governance
In performing its functions as decreed by the
Central Bank of Malaysia Act 1958, the Bank is
guided by its overall mission, aspiration and shared
values. In addition to the Central Banking Act, other
legislations have also extended the objects and
powers of the Bank as well as the specific manner
in which the functions are undertaken. Collectively,
the legislative framework shapes the Bank’s
governance and functional structure that enables
the institution to undertake its roles and
responsibilities.
In compliance with the Act, 12 Board Meetings
were held during the year. In addition, the following
senior management meetings were held - 4 Board
Audit Committee Meetings, 54 Management
Committee Meetings, 4 Reserve Management
Committee Meetings, 4 Risk Management
Committee Meetings, 8 Monetary Policy Committee
Meetings, 17 Financial Stability Committee
Meetings and 6 Payment System Meetings. During
the year, 2 Board Briefings to the Prime Minister and
Minister of Finance were conducted to present the
Bank’s assessment of the banking system, the
financial sector and outlook for the economy. The
Bank also provided an assessment of the
developments and challenges facing the banking
system, the financial sector and the overall
economy, and proposed recommendations to
address these challenges.
Awards
The Board congratulates the Governor, Tan Sri Dato’
Sri Dr. Zeti Akhtar Aziz for the award as ‘The Asia’s
Best Central Bank Governor’ for 2003 by
Euromoney Institutional Investor plc, a UK-based
financial publication house and ‘Global Central
Bank Governor’ for the year 2004 by The Banker,
a monthly magazine published by the Financial
Times Business Limited.
The Board extends its congratulations to Dato’ Ooi
Sang Kuang on being conferred the Darjah Yang
Mulia Pangkuan Negeri (D.M.P
.N.) on the
occasion of the birthday of His Excellency, the Yang
Terutama Yang di-Pertua Negeri Pulau Pinang on 12
July 2003.
The Board also congratulates Encik Yahaya bin Haji
Besah on being conferred the Darjah Johan Negeri
(D.J.N.), Puan Woo Seok Hooi and Puan Khairani
binti Rejab on being conferred the Pingat Jasa
Kebaktian (P
.J.K.) on the occasion of the birthday of
His Excellency, the Yang Terutama Yang di-Pertua
Negeri Pulau Pinang on 12 July 2003, Encik Mohd
Yunos bin Haji Salih, Encik Abdullah bin Lebai
Ahmad, Puan Helen Jeniffer Buma and Encik Loh
Kam Fatt on being conferred the Pingat Mahkota
Perlis (P
.M.P
.) on the occasion of the birthday of His
Royal Highness, the Tuanku Raja of Perlis on 17 May
2003, Encik Abdul Rajap bin Abidin on being
conferred the Pingat Jasa Kebaktian (P
.J.K.) on the
occasion of the birthday of His Excellency, the Yang
di-Pertuan Negeri Melaka on 11 October 2003, Encik
Yap Bee Fatt, Encik Saari bin Rajap dan Encik
Nasaruddin bin Zakaria on being conferred the
Pingat Jasa Kebaktian (P
.J.K.) on the occasion of
the birthday of His Royal Highness, the Sultan of
Pahang Darul Makmur on 24 October 2003 and
Encik Kunchi Raman a/l C V Kluva Chary on being
conferred the Pingat Jasa Kebaktian (P
.J.K.) on
the occasion of the birthday of His Royal Highness
the Sultan of Kedah Darul Aman on 19 January
2003.
As in previous years, the Bank continued to reward
deserving staff with its formal Recognition Awards.
During the Bank’s annual dinner held on 13
September 2003, a total of eight awards were
issued for Academic Achievement, Excellent
Performance, Excellent Team Performance,
Leadership, Innovation, Quality Service, Sport and
Cultural.
Retirement
The Board wishes to place on record its appreciation
and gratitude to the 24 retirees who have rendered
loyal and dedicated service to the Bank. The staff
who retired from the services of the Bank in 2003
are listed in Table 8.1.
The Board of Directors would also like to extend its
gratitude to all Bank staff for their dedication and
commitment in the year 2003. The Board looks
forward to the continued commitment and
professionalism of all staff in the year ahead in
striving for performance excellence in this
challenging and fast changing economic and
business environment.


238
Table 8.1
List of Retirees
No
Name
Department/Branch
1
Puan Rafiah binti Salim
Governor’s Office
2
Encik Che Sab bin Ahmad
Special Investigation
3
Encik Low Koon Seng
Governor’s Office
4
Cik Tan Sook Peng
International
5
Encik Wong Yew Sen
Insurance Supervision
6
Puan Gan Choon @ Gan Soo Mei
Statistical Services
7
Puan Ti Thiow Chen @ Ti Teow Kim
Foreign Exchange Administration
8
Encik Mukhtar bin Yusof
Malaysian Electronic Payment System
9
Encik Che Norudin bin Che Alli
Security
10
Puan Fahimah binti Haji Yaacob
Foreign Exchange Administration
11
Encik Ismail @ Awang Sulong bin Abu Bakar
Human Resource Management
12
Encik John Teo
Foreign Exchange Administration
13
Encik Sidek bin Sabli
Insurance Regulation
14
Encik Tan Ewe Lee
Payment Systems
15
Puan Maznah binti Haji Ali
Bank Regulation
16
Encik Md Hanafiah bin Mohd Zin
Bank Regulation
17
Encik Abdul Rajap bin Abidin
Security
18
Encik Aladdin bin Ibrahim
Security
19
Cik Loo Yuk Ng @ Loh Yee Ee
Statistical Services
20
Puan Siti Norzini binti Abdullah @ Joyce Koh
IT Services
21
Encik Thyagarajah a/l Gurusamy
PPPM Shah Alam
22
Encik Yap Bee Fatt
Foreign Exchange Administration
23
Encik Doraimuthu a/l Changlimuthu
BNM Pulau Pinang
24
Puan Fatimah binti Moin
Finance
25
Encik Sol Ong @ Mohamad Sol bin Sebli
BNM Kuching
26
Encik Sulaiman bin Abu Kassim
Human Resource Development Centre
RISK MANAGEMENT IN BANK NEGARA
MALAYSIA
The Bank’s risk management framework provides
for independent oversight at the supervisory and
operational levels; establishes policies and
processes for good practices; promotes
organisation wide communication; and emphasises
continuous improvement.
Risk Management Structure
With the formation of the Risk Management
Committee (RMC) in 2002, the risk management
structure had evolved further. In 2003, the role of
the departments in operationalising the risk
management framework was brought into greater
focus. At the same time, the relationship of the
Risk Management Unit (RMU) with the
departments and its support functions for the
RMC were sharpened. The other key components
of the risk management structure are the Middle
Office and the Internal Audit Department. During
2003, the RMU assumed the function of a
centralised business continuity management of
the Bank.
Risk Management Practices
In providing supervisory risk management
oversight, the RMC sets the standards and imposes
requirements that ensure that appropriate risk
management practices are embedded into
strategic initiatives, policy formulation and
operations of the Bank. In 2003, the RMC
continued the assessments of departmental reports
on the areas of potential risk and controls, risk
issues, risk events that occurred and their
management. The RMC also engaged in discussion
with the Department Heads on policy and strategic
focus and the approaches to managing existing
and potential risks.


Organisation and Human Resource
239
At the functional level, the Department Heads have
direct responsibility for ensuring that risk
management practices are integral to daily
operations. The departments are required to make an
annual declaration to Management on their review
of the risk profiles of their operations to form an
assessment of the adequacy of departments’ risk
management.
During the year, the RMU provided technical support
and performed its coordination and oversight role.
Specifically, the RMU assisted the departments in
their management reporting by providing guidance
on the approach and reporting requirements. It also
continued to monitor and report on the status of the
annual declaration. Regular audit by the Internal
Audit Department ensured that policies and
procedures were being adopted. The aim is to
provide Management with timely and relevant
information, to ensure that the key risks are
identified and addressed and that decisions are
implemented to achieve their objectives.
Policy Risk
Policy risk is managed through a structured
framework and process for policymaking and
implementation. Major components of the
framework are the internal committees and working
groups for cross-functional consultation and
deliberation. The high-level committees include the
Monetary Policy Committee, Financial Stability
Committee and Management Committee which are
chaired by the Governor. The working groups, whose
membership comprises Assistant Governors and
Department Heads, ensure that all information and
expertise are tapped in the design and formulation of
policy. In certain cases, the consultation process
includes external stakeholders. A policymaking
checklist is also in place to ensure that all implications
have been taken into account in the deliberation of
the policy content and that the procedural
requirements have been met.
The  policymaking mechanism is designed to increase
the prospect of achieving balanced and well-
considered policies. It has provided a formal channel
for the alternative perspectives to be taken into
account at all stages of the policy formulation from
the conceptualisation through to the development
and the issuance of a policy. Since 2002, the
communication aspects of policy implementation
have been centralised in the Corporate
Communication Department and have continued
efforts to strengthen and extend the external
communication to become an integral part of the
work to enhance the effectiveness of policy.
Financial Risk
The main risks in managing the external reserves,
including market, credit and operational risk, are
monitored independently by the Middle Office, a unit
separate from the dealing function. The Middle
Office assesses the risks by monitoring economic and
financial developments affecting major asset classes
and sizable market developments that could have
implications on the Bank’s external reserves portfolio.
The Middle Office also monitors compliance with the
investment guidelines, credit policies and operational
procedures. This is carried out through periodic
review and evaluation of reserve management
activities, taking into account market developments
and dynamics. Reserve management activities are
also subjected to independent checks by the Back
Office, and compliance checks of the internal and the
external auditors.
Enterprise Operational Risk
The operational risk management approach of the
Bank requires ownership of risks, self-assessment,
continual review, escalation of key risk issues and
accountability for control improvement and issue
resolution.
Management fosters the risk management culture
and its risk tolerance levels for the operational
control environment. The RMU establishes and
maintains the overall operational risk management
framework. The Department Heads have the primary
responsibility for managing the risks arising from
their operations and ensuring that an effective
operational control environment is in place in their
business areas. Management considers the periodic
department reports derived from self-assessment and
drawn up from a line perspective, against the overall
Bank perspective and goals. The resulting
comprehensive coverage of operational risk and
event database is a valuable source of information
for in-depth risk analysis and control effectiveness
evaluation.
During the year, the risk management methodology
and toolkit for risk identification, assessment and
reporting were reviewed. Several proposals for
revision were made to incorporate current best
practices. The changes were to enhance the
robustness of the self-assessment methodology and
improve the reporting process as well as the
monitoring of risks and action plans to control risks.


240
Knowledge management initiatives continued to be
pursued, leveraging on information technology, to
harness implicit and explicit information and to allow
for greater accessibility to the users. More extensive
use was made of the Bank’s and the departments’
websites to disseminate information. At the same
time, the Information Security Policy and Standards
was enforced to enhance maintenance of
information integrity and confidentiality.
Business Continuity Management
The Bank has established procedures for business
continuity across all critical departments. The threat
of disruption to monetary and financial system
stability resulting from unexpected events is
managed through the running of a remote recovery
centre and the maintenance of a dedicated
Command Centre at the Head Office. During crisis,
essential personnel are divided into two teams. One
team operates from the Head Office, while the
other team operates at the Bank’s Recovery Centre.
The back up facilities of key systems undergo
regular live-run exercises to provide continuous
assessment of the Bank’s state of readiness to
respond to unforeseen situations. The facilities and
procedures, together with the crisis management
machinery are in place to deal with unexpected
disruptions and challenges. This aspect of risk
management is given priority recognising the
growing need to expect the unexpected. As part of
the strengthening of the Bank’s business continuity
management the Business Continuity Unit (BCU) is
now placed under the RMU. The BCU would have
full-time staff with the necessary expertise to
supervise, coordinate and maintain the Bank’s
contingency arrangements, plans and programmes.


Organisation and Human Resource
241
Secretary to the Board
Mohd Nor bin Mashor
Governor's Office
Ng Chow Soon
Corporate Communications
Abu Hassan Alshari bin Yahaya
Internal Audit
Yahaya bin Haji Besah
Bank Regulation
Nor Shamsiah binti Mohd Yunus
Insurance Regulation
Donald Joshua Jaganathan
Islamic Banking and Takaful
Bakarudin bin Ishak
DFI Regulation
Che Zakiah binti Che Din
Risk Management
Teo Kee Tian
ASSISTANT GOVERNOR
Dato' Mohd Razif bin Abd. Kadir
REGULATION
DEPUTY GOVERNOR
Dato' Mohd Salleh bin Haji Harun
Bank Supervision I
Azizan bin Haji Abd Rahman
Bank Supervision II
Chung Chee Leong
Insurance Supervision
Sani bin Ab. Hamid
Information Systems Supervision
Ramli bin Saad
Payment Systems
Ahmad Hizzad bin Baharuddin
Ahmad Hizzad bin Baharuddin
Property and Services
Zulkifli bin Abd Rahman
Special Investigation
Kamari Zaman bin Juhari
Financial Intelligence
Koid Swee Lian
ASSISTANT GOVERNOR
Datuk Zamani bin Abdul Ghani
SUPERVISION
BOARD OF DIRECTORS
GOVERNOR
Dr. Zeti Akhtar Aziz
IT Services
Hong Yang Sing
Human Resource Management
Mainor bin Awang
Human Resource Development Centre
Lim Lai Hong
Strategic Planning
Mior Mohd Zain bin Mior Mohd Tahir
Corporate Services
Mohd Nor bin Mashor
Security
Ahmad bin Mansur
Currency Management and Operation
Hor Weng Keng
Branches (6)
London Rep. Office
New York Rep. Office
ASSISTANT GOVERNOR
Dato' Mohamad Daud bin Hj. Dol Moin
ORGANISATIONAL DEVELOPMENT
DEPUTY GOVERNOR
Dato' Ooi Sang Kuang
ASSISTANT GOVERNOR
Vacant
INVESTMENT AND OPERATIONS
Investment Operations and Financial Market
Muhammad bin Ibrahim
Finance
Abdul Aziz bin Abdul Manaf
ASSISTANT GOVERNOR
Datuk Latifah Merican Cheong
ECONOMICS
Monetary Assessment and Strategy
V. Vijayaledchumy
Legal
Gopala Krishnan Sundaram
Economics
Dr. Phang Hooi Eng
International
Wan Hanisah binti Wan Ibrahim
Foreign Exchange Administration
Mahdi bin Mohd. Ariffin 
Statistical Services
Chan Yan Kit
BANK NEGARA MALAYSIA
BANK NEGARA MALAYSIA
Organisation Structure




Balance Sheets as at 31 December 2003
Annual Accounts


245
245
CERTIFICATE OF THE AUDITOR GENERAL
ON THE FINANCIAL STATEMENTS OF BANK NEGARA MALAYSIA
FOR THE YEAR ENDED 31 DECEMBER 2003
I have audited the financial statements of Bank Negara Malaysia for the year ended 31 December 2003. These
financial statements are the responsibility of the management. My responsibility is to express an opinion on these
financial statements based on my audit.
2.
The audit has been conducted in accordance with the Audit Act 1957 and in accordance with approved
auditing standards. Those standards require the audit be planned and performed to obtain reasonable assurance
whether the financial statements are free of material misstatement. This audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. Evaluation is also made on
the accounting principles used and the overall financial statements presentation.
3.
In my opinion, the financial statements give a true and fair view of the financial position of Bank Negara
Malaysia as at 31 December 2003 and of the results of its operations for the year then ended in accordance with
approved accounting standards.
(DATUK DR. HADENAN BIN ABDUL JALIL)
AUDITOR GENERAL
PUTRAJAYA
10 MARCH 2004


246
STATEMENT BY CHAIRMAN
AND ONE OF THE DIRECTORS
We, Zeti Akhtar Aziz and Oh Siew Nam being the Chairman and one of the Directors of Bank Negara Malaysia,
do hereby state that in the opinion of the Board, the financial statements are drawn up so as to give a true and
fair view of the state of affairs of Bank Negara Malaysia as at 31 December 2003 and of the results of operations
for the year ended on that date.
On behalf of the Board,
On behalf of the Board,
ZETI AKHTAR AZIZ
 OH SIEW NAM
CHAIRMAN
DIRECTOR
5 MARCH 2004
5 MARCH 2004
KUALA LUMPUR
KUALA LUMPUR


247
247
DECLARATION BY THE OFFICER PRIMARILY RESPONSIBLE
FOR THE FINANCIAL MANAGEMENT OF BANK NEGARA MALAYSIA
I, Abdul Aziz Abdul Manaf being the officer primarily responsible for the financial management of Bank Negara
Malaysia, do solemnly and sincerely declare that the financial statements, are to the best of my knowledge and
belief, correct and I make this solemn declaration conscientiously believing the same to be true and by virtue of
the provisions of the Statutory Declarations Act, 1960.
Subscribed and solemnly declared
)
by the abovenamed at Kuala Lumpur
)
this 5 March 2004.
)
Before me,


248
Bank Negara Malaysia
Balance Sheet as at 31 December 2003
2003
2002
RM
RM
LIABILITIES
Note
Authorised Capital
RM200,000,000
Paid-up Capital
3
100,000,000
100,000,000
General Reserve Fund
4
5,864,876,290
5,398,963,841
Other Reserves
5
36,442,290,538
24,744,032,881
Currency in Circulation
29,445,445,674
27,137,417,900
Deposits:
Commercial Banks, Finance Companies
and Merchant Banks
98,498,572,386
69,864,345,027
Federal Government
4,905,179,432
13,827,163,949
Others
6
6,312,202,946
5,613,870,679
Bank Negara Papers
13,385,045,306
12,280,763,725
Allocation of Special Drawing Rights
7
785,160,395
718,346,440
Other Liabilities
 5,093,884,077
 2,512,656,290
200,832,657,044
162,197,560,732
Profit and Loss Appropriation Account for the Year Ended 31 December 2003
2003
2002
RM
RM
Transfer to General Reserve Fund
465,912,449
331,941,108
Amount Payable to Federal Government
1,000,000,000
500,000,000
1,465,912,449
831,941,108
Notes on the following pages form part of these financial statements.


249
249
2003
2002
RM
RM
ASSETS
Note
Gold and Foreign Exchange
8
166,139,324,237
127,515,059,930
International Monetary Fund Reserve Position
3,652,006,672
3,315,547,927
Holdings of Special Drawing Rights
684,961,188
585,019,336
Malaysian Government Papers
9
98,521,225
29,384,948
Deposits with Financial Institutions
2,893,714,989
2,902,228,350
Loans and Advances
8,946,108,379
8,015,270,790
Deferred Expenditure
10
-
570,720,918
Other Assets
11
18,418,020,354
19,264,328,533
200,832,657,044
162,197,560,732
2003
2002
RM
RM
Net Profit
1,465,912,449
831,941,108
1,465,912,449
831,941,108
Annual Accounts


250
Notes To The Financial Statements - 31 December 2003
1. Principal Activities of the Bank
The Bank’s principal roles and responsibilities are as follows:
(a) achieving monetary stability;
(b) promoting a stable financial system;
(c) ensuring an efficient payment system;
(d) issuing currency in Malaysia; and
(e) acting as a banker and a financial adviser to the Federal Government.
2. Accounting Policies
(a) Gold, Securities and Investments
Gold, securities and investments are stated at cost and provisions have been made for diminution in
value as at 31 December 2003.
(b) Foreign Currency Translation
Assets and liabilities in foreign currencies have been revalued into ringgit at rates of exchange ruling on
the balance sheet date. Transactions in foreign currencies during the year have been translated into
ringgit at rates of exchange ruling on value dates.
The International Reserves comprising Gold and Foreign Exchange, International Monetary Fund Reserve
Position and Holdings of Special Drawing Rights at 31 December 2003 was RM170,476.3 million
equivalent to US$44,862.2 million.
3. Paid-up Capital
The entire issued and paid-up capital of RM100 million is owned by the Government of Malaysia.
4. General Reserve Fund
2003
2002
RM
RM
As at 1 January
5,398,963,841
5,067,022,733
Transfer from Net Profit
465,912,449
331,941,108
As at 31 December
5,864,876,290
5,398,963,841
5. Other Reserves
Other reserves comprise the Exchange Rate Fluctuation Reserve and the Contingency Reserve.
6. Deposits - Others
A substantial part of these deposits comprises deposits from Federal Statutory Authorities.
7. Allocation of Special Drawing Rights
International Monetary Fund (IMF) member countries are allocated Special Drawing Rights (SDR) in
proportion to their subscriptions to the IMF. The allocation represents a dormant liability of the Bank
to the IMF, against which assets are received in SDR from the IMF. The net cumulative of the allocation
was RM785,160,395 equivalent to SDR139,048,000.


251
251
8. Gold and Foreign Exchange
2003
2002
RM
RM
Foreign Securities
131,488,613,346
100,151,230,400
Foreign Deposits
20,113,541,612
14,195,692,918
Balances with Other Central Banks, Bank for
International Settlements (BIS) and IMF
2,510,527,105
2,696,527,431
Others
12,026,642,174
10,471,609,181
166,139,324,237
127,515,059,930
9. Malaysian Government Papers
2003
2002
RM
RM
Malaysian Government Securities
98,521,225
29,384,948
10. Deferred Expenditure
This represents the net deficiency arising from foreign exchange transactions in 1993. The Government has
undertaken to make good this deficiency as and when required to do so by the Bank. As at 31 December
2003, the amount has been fully amortised over a period of 10 years beginning from 1994.
11. Other Assets
Other assets include investments in shares and bonds of RM18,306,865,784 acquired under section 30(1)(j)
and section 30(1)(oo)(i) of the Central Bank of Malaysia Act 1958 (Revised - 1994).
12. Contingent Liabilities
Total contingent liabilities as at 31 December 2003 amounted to RM5,128,030,073. These comprise:
(a) an amount of RM5,045,320,650 which represents the obligation of the Bank to pay in full, in SDR or
other convertible currencies, the amount of Malaysia’s quota in the IMF under the Articles of
Agreement; and
(b) an amount of RM82,709,423 which represents the uncalled portion of the 3,000 units of shares held by
the Bank in BIS. The amount is based on the nominal value (in gold francs) of the uncalled portion and
gold price as at the balance sheet date.
13.
Income Tax
The Bank is exempted from payment of income tax and supplementary income tax as set out in the Income
Tax (Exemption) (No. 7) Order 1989.
Annual Accounts




Annex


Contents
1.
Foreign Exchange Administration Policies
P1
2.
Funds and Guarantee Facility Administered/Funded by Bank Negara Malaysia: Fund Utilisation
P9
3.
Licensed Banking Institutions (as at 31 December 2003)
P10
4.
Financial Institutions Offering Islamic Banking Services  (as at 31 December 2003)
P12
5.
National Shariah Advisory Council Members for Islamic Banking and Takaful
– Session 2001-2003
P14
Key Economic and Financial Statistics
Chapter 1: The Malaysian Economy in 2003
A.1
Gross Domestic Product by Kind of Economic Activity in Constant 1987 Prices
P17
A.2
Growth in Manufacturing Production (1993=100)
P18
A.3
Production of Primary Commodities
P19
A.4
GNP by Demand Aggregates
P20
A.5
Savings-Investment Gap
P21
A.6
Balance of Payments
P22
A.7
Principal Markets for Manufactured Exports
P24
A.8
Principal Export Markets for Electronics
P25
A.9
Principal Export Markets for Electrical Products
P25
A.10
Principal Export Markets for Chemicals and Chemical Products
P26
A.11
Principal Export Markets for Manufactures of Metal
P26
A.12
Principal Export Markets for Optical and Scientific Equipment
P27
A.13
Principal Export Markets for Petroleum Products
P27
A.14
Export Prices of Major Commodities
P27
A.15
Principal Export Markets for Palm Oil
P28
A.16
Principal Export Markets for Rubber
P28
A.17
Principal Export Markets for Saw Logs
P29
A.18
Principal Export Markets for Sawn Timber
P29
A.19
Principal Export Markets for Crude Oil
P30
A.20
Principal Export Markets for LNG
P30
A.21
External Debt and Debt Servicing
P31
A.22
Gross Overseas Investment by Country
P32
A.23
Consumer Price Index (2000=100) Sub-groups of Food
P33
A.24
Producer Price Index (1989=100)
P33
A.25
Supply of Office Space, Retail Space, Condominiums and Apartments in the Klang Valley
P34
A.26
Average Monthly Rentals for Prime Office and Retail Space in the Klang Valley
P34
Chapter 2: Monetary and Fiscal Developments
A.27
Broad Money (M3)
P35
A.28
Money Supply: Annual Change and Growth Rates
P35
A.29
Interest Rates (%)
P36
A.30
Consolidated Public Sector Finance
P37
Chapter 3: Outlook and Policy
A.31
Major Industrial Countries: Key Economic Indicators
P38
A.32
East Asia: Key Economic Indicators
P39


Annex
Chapter 4: The Financial Sector
A.33
Sources and Uses of Funds of the Financial System
P40
A.34
Commercial Banks: Commitments and Contingencies
P41
A.35
Finance Companies: Commitments and Contingencies
P42
A.36
Merchant Banks: Commitments and Contingencies
P43
A.37
Commercial Banks: Income and Expenditure
P44
A.38
Finance Companies: Income and Expenditure
P44
A.39
Merchant Banks: Income and Expenditure
P45
A.40
Commercial Banks: Lending Guidelines to the Priority Sectors
P45
A.41
Finance Companies: Lending Guidelines to the Priority Sectors
P46
A.42
Commercial Banks: Direction of Lending
P47
A.43
Finance Companies: Direction of Lending
P48
A.44
Merchant Banks: Direction of Lending
P49
A.45
Commercial Banks: Non-performing Loans by Sector
P50
A.46
Finance Companies: Non-performing Loans by Sector
P51
A.47
Merchant Banks: Non-performing Loans by Sector
P52
A.48
Islamic Banking System: Sources and Uses of Funds
P53
A.49
Islamic Banking System: Commitments and Contingencies
P53
A.50
Islamic Banking System: Income and Expenditure
P54
A.51
Islamic Banking System: Financing Activities
P55
A.52
Islamic Banking System: Financing to Small and Medium-Sized Enterprises
P55
A.53
Islamic Banking System: Direction of Financing
P56
A.54
Islamic Banking System: Non-performing Financing by Sector
P57
A.55
Banking System: Selected Indicators
P58
A.56
Banking System: Key Data
P59
A.57
Housing Credit Institutions
P60
A.58
Outstanding Housing Loans
P61
A.59
Approved Housing Loans
P61
A.60
Leasing Companies: Sources and Uses of Funds
P62
A.61
Leasing Companies: Income and Expenditure
P62
A.62
Leasing Companies: Financing by Sector
P63
A.63
Factoring Companies: Sources and Uses of Funds
P63
A.64
Factoring Companies: Income and Expenditure
P64
A.65
Factoring Companies: Financing by Sector
P64
A.66
Capital Market Debt Securities: Amount Outstanding
P65
A.67
Urban Credit Co-operative Societies
P66
Chapter 5: Development Financial Institutions
A.68
Development Financial Institutions: Sources and Uses of Funds
P67
A.69
Development Financial Institutions under DFIA: Sources and Uses of Funds
P68
A.70
Development Financial Institutions: Direction of Lending
P69
A.71
Development Financial Institutions under DFIA: Direction of Lending
P70
A.72
Bank Industri & Teknologi Malaysia Berhad
P70
A.73
Export-Import Bank of Malaysia Berhad
P71
A.74
Malaysia Export Credit Insurance Berhad
P71
A.75
Bank Simpanan Nasional
P72
A.76
Bank Kerjasama Rakyat Malaysia Berhad
P72
A.77
Bank Pembangunan dan Infrastruktur Malaysia Berhad
P73
A.78
Other Development Financial Institutions: Core Activities
P73
A.79
Development Financial Institutions: Selected  Data
P74
A.80
Development Financial Institutions: Government Special Funds
P75
A.81
Development Financial Institutions: Bank Negara Malaysia Funds
P76
A.82
Development Financial Institutions: Funds from Multilateral and International Agencies
P77


Annex
P1
Foreign Exchange Administration Policies
Foreign exchange administration rules were further liberalised and simplified in April 2004 (refer to the White
Box: ”Liberalisation and Simplification of Foreign Exchange Administration Rules” in Chapter 3). All regulations
continue to be applied uniformly to transactions with all countries, except Israel, Serbia and Montenegro for
which special restrictions apply. Foreign exchange administration regulations are also applied where appropriate
to prevent recourse to the Malaysian banking system for money laundering and terrorist financing. With the
latest changes, the following are the rules affecting foreign exchange transactions:
I
Current Account Transactions
(a)
Payments for Import of Goods and Services
• There is no restriction on payments to non-residents for import of goods and services. Such payments
must be made in foreign currency except currencies of Israel, Serbia and Montenegro.
• There is no restriction for residents to enter into a forward foreign exchange contract with onshore
licensed banks or approved merchant banks to buy foreign currency against ringgit to make payment
for import from a non-resident.
(b)
Proceeds Arising from Export of Goods (Export Proceeds)
• All export proceeds are required to be repatriated back to Malaysia in accordance with the payment
schedule as specified in the sales contract, which should not exceed six months from the date of
export.
• Export proceeds must be received in foreign currency and must be sold for ringgit or retained in export
foreign currency account (FCA) with onshore licensed banks. The aggregate overnight limits range
between USD30 million and USD100 million, depending on the average monthly export receipts.
Higher limits may be allowed on a case-by-case basis.
• Residents may enter into a forward foreign exchange contract with an onshore licensed bank to sell
foreign currency export proceeds for ringgit or another foreign currency, provided the maturity of the
forward contract is not later than six months after the intended date of export.
• Only resident exporters with annual gross exports exceeding RM50 million equivalent are required to
submit quarterly reports to the Controller of Foreign Exchange (the Controller).
(c)
Import and Export of Currency by Travellers
• Import and export of ringgit up to RM1,000, including demonetised RM1,000 and RM500 notes, and
export of foreign currency up to an equivalent of RM10,000 by residents are allowed. Resident
travellers are required to obtain permission from the Controller and declare in the Traveller’s Declaration
Form (TDF) when they –
- Carry into or out of Malaysia, ringgit notes exceeding RM1,000.
- Carry out foreign currency notes including traveller’s cheques, exceeding the equivalent of RM10,000.
Permission is given within one day of application.
• There is no restriction for non-residents to bring in any amount of foreign currency and/or traveller’s
cheques. Declaration in the Arrival/Departure Card (IMM.26) issued by the Immigration Department is
only required for amounts in excess of the equivalent of USD2,500.


P2
• Non-residents would need to seek permission from the Controller if the amount of foreign currency to
be carried abroad exceeds the amount brought into Malaysia, provided the amount to be taken out is
more than the equivalent of USD2,500.
• Non-residents must obtain permission from the Controller and declare ringgit exceeding RM1,000
being brought into or out of Malaysia.
II
Capital Account Transactions
(a)
Foreign Direct Investment
• There is no restriction on repatriation of capital, profits, dividends, interest and rental income by foreign
direct investors.
(b)
Investment Abroad by Residents
• Onshore licensed banks and approved merchant banks may invest abroad as long as they comply with
the Banking and Financial Institution Act 1989 or Islamic Banking Act 1983 and their approved foreign
currency net open position limit. Remittances for investment abroad must be made in foreign currency.
• Residents, other than onshore licensed banks and approved merchant banks, are required to seek prior
permission from the Controller to remit funds in excess of RM10,000 equivalent in foreign currency for
overseas investment purposes. Permission is based on a set of transparent criteria.
• However, resident individuals may invest any amount in foreign currency in securities under the
Employee Share Option/Purchase Scheme offered by their employers’ overseas parent or related
companies.
• Resident individuals employed or staying abroad with own foreign currency funds sourced from abroad
may invest in any foreign currency assets, including those offered by onshore licensed banks and
licensed offshore banks in Labuan.
• Resident unit trust management companies may invest abroad up to the full amount of the Net Asset
Value (NAV) subscribed by non-residents and up to 10% of the NAV per fund subscribed by residents.
Different funds of a unit trust management company or funds of different companies may be pooled
to benefit from economies of scale when investing abroad. Such investments are required to be in line
with the Securities Commission’s prudential guidelines.
• Resident insurance companies and takaful operators may invest abroad up to 5% of their margin of
solvency (MOS) and up to 5% of their total assets respectively.
• Resident insurance companies and takaful operators may also invest abroad up to 10% of the NAV of
the investment-linked funds that they market. These investments are required to comply with prudential
insurance and takaful regulations issued by Bank Negara Malaysia.
• Resident fund/asset managers may invest abroad up to the full amount of investments by their
non-resident clients and up to 10% of investments by resident clients. These funds by different
companies may be pooled to benefit from economies of scale when investing abroad. Such
investments should be based on the mandate of their clients and in compliance with the Securities
Commission’s prudential guidelines.
(c)
Foreign Currency Credit Facilities Obtained by Residents
• Residents may obtain credit facilities in foreign currency up to the equivalent of RM5 million in
aggregate from onshore licensed banks, licensed merchant banks and non-residents.  Any amount
exceeding the permitted limit would require the prior permission of the Controller. Where the aggregate
amount exceeds the equivalent of RM1 million, the resident is required to provide the Controller with
information on the credit facilities.


Annex
P3
• Residents may also obtain trade financing of any amount in foreign currency from onshore licensed
banks and licensed merchant banks provided the tenure of the credit does not exceed 12 months.
• There is no restriction for repayment of credit facilities obtained as long as such credit facilities have
been obtained in accordance with the relevant foreign exchange administration rules.
(d)
Extension of Credit Facilities to Non-Residents
Foreign Currency Credit Facilities
• Onshore licensed banks may extend credit facilities in foreign currency to non-residents for any purpose.
However, credit facilities extended for the purchase or construction of immovable property in Malaysia
would be subject to similar requirements as for ringgit credit facilities outlined below.
Ringgit Credit Facilities
• Non-bank residents may extend credit facilities in ringgit to a non-resident not exceeding an aggregate
of RM10,000.
• Resident stockbroking companies may extend margin financing facilities to non-resident clients for the
purchase of shares listed on Malaysia Securities Exchange Berhad (MSEB), provided they comply with
all the relevant regulations imposed by MSEB.
• Onshore licensed banks may extend ringgit overnight overdraft facilities in aggregate not exceeding
RM200 million to a non-resident stockbroking company or a non-resident custodian bank. The facilities
are strictly for financing funding timing gaps due to unforeseen or inadvertent/technical administration
errors or time zone delays in relation to settlement of trades on MSEB.
• Residents, bank or non-bank, may extend up to a maximum of three property loans in ringgit to a
non-resident to finance/refinance the purchase or construction of any immovable property in Malaysia,
excluding for the purchase of land only, subject to their own internal credit assessment guideline. All
purchases of immovable properties are subject to the guidelines issued by the Foreign Investment
Committee (FIC). Details of the guidelines can be found at http://www.epu.jpm.my/.
• In addition, banking institutions may extend credit facilities in ringgit up to the aggregate limit of
RM10 million to a non-resident (excluding a non-resident stockbroking company, custodian bank and
correspondent bank) for any purpose for use in Malaysia, other than to finance the purchase or
construction of immovable property.
Prior permission of the Controller is required for the extension of credit facilities exceeding the
aggregate limit.
Swap/Forward
• Onshore licensed banks are allowed to enter into –
(i)
Short-term currency swap arrangements with non-resident stockbrokers and non-resident
custodian banks to cover payment for their share purchases on MSEB; and
(ii) Outright ringgit forward sales contract with non-residents for the same purpose.
The permission is subject to the condition that such contracts are based on firm commitment and
not on anticipated purchases, and for maturity period of up to three working days with no rollover
option.
• Onshore licensed banks and approved merchant banks may enter into forward foreign exchange
contracts with residents to purchase any foreign currency receivables against ringgit from the residents
up to the tenure of the underlying transaction, provided the transaction is supported by firm
underlying commitment to receive such currency.


P4
• Onshore licensed banks and approved merchant banks may also enter into forward foreign exchange
contracts with residents to purchase any foreign currency yet to be received by the resident for another
currency up to the tenure of the underlying transaction, provided the transaction is supported
by firm underlying commitment.
• For forward purchase of export proceeds, the maturity date of the forward foreign exchange contract
should not be later than six months after the intended date of export.
• For forward foreign exchange contract involving two foreign currencies, the use or retention of the
foreign currency being purchased must comply with the current foreign exchange administration rules.
• Onshore licensed banks, approved merchant banks and licensed offshore banks in Labuan may enter
into interest rate swaps with residents, provided the transaction is supported by firm underlying
commitment.
• A resident company which has sold forward foreign currency receivables for ringgit, may temporarily
retain up to the amount of foreign currency receipts received earlier than the maturity date of the
forward foreign exchange contract in its FCA with onshore licensed banks, pending maturity of the
forward foreign exchange contract.
• Multilateral Development Banks (MDBs), where Malaysia is a member, and foreign multinational
corporations (MNCs) wishing to enter into forward foreign exchange contracts with onshore licensed
banks to hedge the currency risks of the MDB and MNC issuers arising from the issuance of ringgit-
denominated bonds would be considered based on the merits of each case.
• Onshore licensed banks may enter into forward foreign exchange contracts with non-residents who
invest in ringgit-denominated bonds issued by MDBs and MNCs to hedge their currency risk arising
from the investment in the ringgit-denominated bonds.
(e)
Portfolio Investments
• There is no restriction for non-resident portfolio investors to repatriate their principal sum and profits
out of the country at any time.
III
Ringgit Credit Facilities to Non-Resident Controlled Companies
• There is no restriction for residents, including foreign-owned banking institutions in Malaysia, to extend
credit facilities in ringgit to a Non-Resident Controlled Company (NRCC) operating in Malaysia up to an
aggregate limit of RM50 million per corporate group or on single entity basis and any amount of short-
term trade financing where the tenure does not exceed 12 months. Residents are required to obtain
prior permission from the Controller to extend ringgit credit facilities exceeding RM50 million in
aggregate to a NRCC. The NRCC has to comply with the 3:1 gearing ratio requirement between its
domestic debt and eligible capital funds only for amounts that exceed RM50 million. Higher gearing
will be allowed on a case-by-case basis.
IV
Issuance of Ringgit Private Debt Securities
• Residents may raise domestic credit facility through the issuance of ringgit Private Debt Securities
regardless of amount, provided the proceeds are not used for financing of investment abroad and/or
for refinancing of offshore borrowing. The issuance of Private Debt Securities must also be in accordance
with the Exchange Control Guideline on Private Debt Securities. The amount issued by the NRCC would
be included as part of the NRCC’s total domestic credit facilities and the rule on the 3:1 gearing ratio
would apply.
• Applications for issuance of ringgit bonds in Malaysia by MDBs, where Malaysia is a member, and
MNCs would be considered based on the merits of each case.


Annex
P5
V
Foreign Currency Accounts of Residents
• Resident exporters may open foreign currency accounts (FCA) with onshore licensed banks to retain
between USD30 million and USD100 million foreign currency export proceeds depending on their
average monthly export receipts.
• The permissible aggregate overnight limits are as follows –
Average Monthly Export Receipts
Aggregate Overnight Limit
(USD million)
Exceeding RM100 million
100
Exceeding RM50 million up to RM100 million
60
Up to RM50 million or for new exporters
30
• In addition, resident exporters are given the option to merge their export and non-export FCA in
accordance with overnight limits imposed on export FCA.
• Resident companies with or without domestic credit facilities may open FCA with onshore licensed
banks to retain foreign currency receivables, other than export proceeds, with no overnight limit.
• Resident companies with or without domestic credit facilities may open FCA to retain foreign currency
receivables, other than export proceeds, up to an aggregate overnight limit of USD500,000 with
licensed offshore banks in Labuan.
• Resident companies may also temporarily retain in their onshore FCA, proceeds that have been sold
forward for ringgit and received earlier than maturity date of the said forward contract.
• Resident individuals may open FCA solely to facilitate education and employment overseas up to an
aggregate overnight limit of –
(i)
USD150,000 with onshore licensed banks;
(ii) USD150,000 with licensed offshore banks in Labuan; and
(iii) USD50,000 with overseas banks.
• Resident individuals with foreign currency funds overseas may maintain FCA, onshore or offshore,
without limit imposed on the overnight balance of the accounts.
• Resident individuals in Malaysia who have foreign currency funds are free to invest in any foreign
currency products offered by onshore licensed banks.
VI
Foreign Currency Accounts of Non-Residents
• Onshore licensed banks and licensed merchant banks may open FCA for non-residents.
• There are no limits on the FCA of non-residents and no restrictions on the inflow and outflow of funds
through the FCA of non-residents.
VII
External Accounts of Non-Residents
• Financial institutions may open accounts in ringgit known as External Accounts for non-residents.
There is no overnight limit on External Accounts. A non-resident may make ringgit cash withdrawal of
any amount from the External Account.
• Non-residents may use ringgit funds in the External Account for the following purposes –
- Purchase of foreign currency excluding the currencies of Israel, Serbia and Montenegro;
- Purchase of ringgit assets in Malaysia;


P6
- Payment for goods and services for own use in Malaysia;
- Payment of administrative and statutory expenses incurred in Malaysia;
- Payment under a non-financial guarantee (where the External Account holder is making payment
upon the guarantee being called upon);
- Extension of ringgit credit facilities to staff in Malaysia in accordance with the terms and conditions
of employment;
- Repayment of ringgit credit facilities permitted by the Controller or in accordance with terms and
conditions of employment; and
- Payments to resident beneficiary for any purpose other than the following –
: Payment for the import of goods and services;
: Extension of ringgit credit facilities to residents other than as permitted by the Controller;
: Settlement under financial guarantees; and
: Payment on behalf of a third party.
• The sources of funds in the ringgit External Accounts may be from –
- Sale of foreign currency excluding the currencies of Israel, Serbia and Montenegro;
- Sale of ringgit assets;
- All income derived in Malaysia including salaries, wages, royalties, commissions, fees, rental,
interest, profits or dividends;
- Proceeds from ringgit credit facilities permitted by the Controller or in accordance with the terms and
conditions of employment;
- Proceeds from repayment of ringgit credit facilities permitted by the Controller or in accordance with
the terms and conditions of employment;
- Transfers from -
: another External Account of the same account holder of any amount;
: another External Account and/or Resident Account of different account holders by way of –
o
Automated Teller Machine transfer up to RM5,000 per person/company, per day, per bank for
any purpose;
o
Internet-bank transfers up to RM5,000 per person/company, per day, per bank for any
purpose.
- Deposit of ringgit notes of an aggregate not exceeding RM10,000 per day; and
- Deposit of cheques up to RM5,000 per cheque for any purpose.
• Ringgit funds in the External Accounts may be converted into foreign currency and repatriated or used
in Malaysia for permitted purposes.
• There is no restriction on the operation of the External Accounts of non-residents working or studying
in Malaysia (including their spouse, children and/or parents who are currently residing in Malaysia),
Central Banks, Embassies, Consulates, High Commissions, Supranational or International organisations
recognised by the Malaysian Government. Such persons or organisations can use funds in the External
Accounts for all purposes, including the permissible purposes referred above.


Annex
P7
VIII
Special Status Granted to Selected Companies
(a)
Offshore Entities in the Labuan International Offshore Financial Centre
• Entities incorporated or registered under the Offshore Companies Act 1990 in the Labuan International
Offshore Financial Centre are declared as non-residents for foreign exchange administration purposes.
• Offshore entities in Labuan may deal in foreign currency other than the currencies of Israel, Serbia and
Montenegro with non-residents.
• All offshore entities may maintain External Accounts with resident banks to facilitate the defrayment
of statutory and administrative expenses in Malaysia.
Offshore insurance entities in Labuan may also use their External Accounts to facilitate the receipt of
insurance premiums and for payment of claims arising from insurance and reinsurance of domestic
insurance business.
• Licensed offshore banks in Labuan may receive payments in ringgit from residents arising from fees,
commissions, dividends or interest from deposit of funds.
• Licensed offshore banks in Labuan may invest in assets/instruments in Malaysia for their own account
provided investments are transacted directly with resident banking institutions or resident brokers. The
investments must not be financed by ringgit borrowings.
(b)
Multimedia Super Corridor Companies
• Companies operating in Multimedia Super Corridor (MSC) which are incorporated as separate legal
entities, are given exemption from foreign exchange administration regulations upon the companies
being awarded the MSC status by the Multimedia Development Corporation. The exemption granted to
the MSC companies is solely for transactions undertaken on their own account. However, prior
permission should be obtained to deal with Specified Persons and in Restricted Currencies of Israel,
Serbia and Montenegro. In addition, the MSC companies are also required to submit the necessary
statistical forms/reports/statements for monitoring purposes.
(c)
Approved Operational Headquarters
• Approved Operational Headquarters (OHQs) may –
(i)
Open FCA with onshore licensed banks to retain export proceeds in foreign currency up to an
aggregate overnight balance equivalent to USD100 million, regardless of the amount of export
receipts.
(ii) Open FCA with onshore licensed banks, licensed offshore banks in Labuan or overseas banks
for crediting foreign currency receivables, other than export proceeds, with no limit on the
overnight balances.
(iii) Obtain domestic credit facilities in ringgit not exceeding RM50 million, provided the ringgit
funds are used in Malaysia.
(iv) Obtain any amount of foreign currency credit facilities from onshore licensed banks and licensed
merchant banks in Malaysia, and from any non-resident, provided the OHQ does not on-lend to, or
raise the funds on behalf of, any resident. Proceeds from such foreign currency credit facilities can
be extended to their related companies overseas or invested abroad provided their aggregate
domestic credit facilities in ringgit does not exceed RM50 million.


P8
(d)
Approved International Procurement Centres
• Approved International Procurement Centres (IPCs) may –
(i)
Retain any amount of export proceeds in FCA maintained with onshore licensed banks for
approved IPC activities only.
(ii) Enter into forward foreign exchange contracts with onshore licensed banks to hedge exchange
risk based on projected volume of export.
(e)
Approved Regional Distribution Centres
• Approved Regional Distribution Centres (RDCs) may –
(i)
Retain any amount of export proceeds in FCA maintained with onshore licensed banks for
approved RDC activities only.
(ii) Enter into forward foreign exchange contracts with onshore licensed banks to hedge exchange
risk based on projected volume of import and export.


Annex
P9
Funds /  
Guarantee Facility
Terminated Funds
Ship Financing Facility 
Fund for Food 
Bumiputera Entrepreneurs Project  Fund 
Fund For Small and Medium Industries 2 
New Entrepreneurs Fund 2 
Rehabilitation Fund for Small Businesses 
Special Relief Guarantee Facility8
30-Oct-92
600
1,3003
3003
2,0001,3
1,1502,3
800
04-Jan-93
10-Feb-00
15-Apr-00
15-Jul-01
01-Nov-03
21-May-03
06-Feb-88
18-Jun-90
29-Oct-93
10-Mar-90
05-Feb-91
01-May-98
04-Jan-93
02-Jan-98
12-Dec-89
23-Nov-98
03-Jul-01
01-Jan-91
29-Feb-92
31-Oct-95
31-Dec-97
04-Aug-99
04-Aug-99
03-Apr-00
03-Apr-00
15-Jul-01
01-Nov-03
01-Nov-03
  1,000
38
6,946
596
1,929
1,336
–
  –
38
8,176
893
3,527
1,952
0
  73
0
1,230
297
1,598
616
0
  73
577
1,296
317
1,049
652
–
 –
 –
 –
577
1,411
438
2,285
1,077
0
  40
0
115
121
1,236
425
0
  40
543
1,299
362
1,588
807
0
341
698
92
1,410
771
0
Enterprise Rehabilitation Fund 
Abandoned Housing Projects Fund 
Fund to Accelerate the Construction 
    of Low-Cost Houses 
Special Fund for Tourism
Industrial Adjustment Fund
Special Scheme for Low and Medium
    Cost Houses 
Bumiputera Industrial Fund 
Fund for Small and Medium Industries 
New Entrepreneurs Fund 
Rehabilitation Fund for Small and Medium
    Industries 
Entrepreneurs Rehabilitation and
    Development Fund
 5003
 2003
 1,8503
 1,2503
 3303,4
 104
 600
 500
 100
 100
 1,000
1   The allocation was increased from RM650 million to RM2,000 million in 2003 
2   The allocation was increased from RM500 million to RM1,150 million in 2003
3   Revolving funds 
4   Unutilised allocations were transferred to Rehabilitation Fund for Small Businesses 
5   Approval withdrawn by banks/borrowers and/or amount required were reduced by banks/borrowers 
6   Additional funding requirements 
7   Borrowers’ outstanding loan balances with the lending institutions 
8   A guarantee scheme through Credit Guarantee Corporation Malaysia Berhad funded by Bank Negara Malaysia to assist businesses affected by the Severe Acute Respiratory Syndrome (SARS)
Funds and Guarantee Facility Administered/Funded by Bank Negara Malaysia: Fund Utilisation
Date 
established
Fund 
allocation 
(RM m)
Fund 
allocation 
(RM m)
Number of applications approved
Number of applications approved
Amount approved (RM m)
Total disburse- 
ments as at 
end 2003 
(RM m)
Outstanding 
as at end 
20037
(RM m)
Total disburse- 
ments as at 
end 2003 
(RM m)
Outstanding 
as at end 
20037
(RM m)
Annual 
change
Annual 
change
Total as at end
Annual 
change
Date 
established
Date 
terminated
2002
2003
2002
2003
2002
2003
Amount approved (RM m)
Total as at end
Annual 
change
2002
2003
Total as at end
Total as at end
764
894
74
331
54
297
194
25
203
95
98
660
95
99
5,426
3,825
3,140
297
21
764
74
54
194
25
96
99
5,420
3,126
322
33
0
0
0
0
0
-25
0
-65
-145
25
12
1,432
323
2
896
331
297
203
95
604
95
3,776
1,421
352
3
26
0
0
0
0
-565
0
-495
-115
29
1
850
346
297
203
95
579
91
3,724
1,396
306
1
109
12
0
43
14
13
51
2,097
445
236
1


P10
Licensed Banking Institutions (as at 31 December 2003)
Commercial Banks
1. ABN AMRO Bank Berhad
2. Affin Bank Berhad
3. Alliance Bank Malaysia Berhad
4. AmBank Berhad
5. Bangkok Bank Berhad
6. Bank of America Malaysia Berhad
7. Bank of China (Malaysia) Berhad
8. Bank of Tokyo-Mitsubishi (Malaysia) Berhad
9.
10.
Bumiputra-Commerce Bank Berhad
11.
Citibank Berhad
12.
Deutsche Bank (Malaysia) Berhad
13.
EON Bank Berhad
14.
Hong Leong Bank Berhad
15.
HSBC Bank Malaysia Berhad
16.
J.P
.
 Morgan Chase Bank Berhad
17.
Malayan Banking Berhad
18.
OCBC Bank (Malaysia) Berhad
19.
Public Bank Berhad
20.
RHB Bank Berhad1
21.
Southern Bank Berhad
22.
Standard Chartered Bank Malaysia Berhad
23.
The Bank of Nova Scotia Berhad
United Overseas Bank (Malaysia) Berhad
Islamic Banks
1. Bank Islam Malaysia Berhad
2. Bank Muamalat Malaysia Berhad
1  Merged with Bank Utama (Malaysia) Berhad with effect from 1 May 2003


Annex
P11
Finance Companies
1. AFFIN-ACF Finance Berhad
2. Alliance Finance Berhad
3. AmFinance Berhad
4. Bumiputra-Commerce Finance Berhad
5. EON Finance Berhad
6. Hong Leong Finance Berhad
7. Kewangan Bersatu Berhad
8. Mayban Finance Berhad
9. Public Finance Berhad
10. RHB Delta Finance Berhad
11. Southern Finance Berhad
Merchant Banks
1. Affin Merchant Bank Berhad
2. Alliance Merchant Bank Berhad
3. AmMerchant Bank Berhad
4. Aseambankers Malaysia Berhad
5. Commerce International Merchant Bankers Berhad
6. Malaysian International Merchant Bankers Berhad
7. Public Merchant Bank Berhad
8. RHB Sakura Merchant Bankers Berhad
9. Southern Investment Bank Berhad
10. Utama Merchant Bank Berhad


P12
Financial Institutions Offering Islamic Banking Services
(as at 31 December 2003)
Islamic Banks
1. Bank Islam Malaysia Berhad
2. Bank Muamalat Malaysia Berhad
Participating Banks in the Islamic Banking Scheme
Commercial Banks
1. Affin Bank Berhad
2. Alliance Bank Malaysia Berhad
3. AmBank Berhad
4. Citibank Berhad
5. EON Bank Berhad
6. Hong Leong Bank Berhad
7. HSBC Bank Malaysia Berhad
8. Malayan Banking Berhad
9. OCBC Bank (Malaysia) Berhad
10. Public Bank Berhad
11. RHB Bank Berhad
12. Southern Bank Berhad
13. Standard Chartered Bank Malaysia Berhad
Finance Companies
1. Affin-ACF Finance Berhad
2. AmFinance Berhad
3. EON Finance Berhad
4. Hong Leong Finance Berhad
5. Mayban Finance Berhad
6. Public Finance Berhad
7. Southern Finance Berhad


Annex
P13
Merchant Banks
1. Affin Merchant Bank Berhad
2. Alliance Merchant Bank Berhad
4. Commerce International Merchant Bankers Berhad
3. AmMerchant Bank Berhad
Discount Houses
1. Abrar Discounts Berhad
2. Affin Discount Berhad
3. Amanah Short Deposits Berhad
4. CIMB Discount House Berhad
5. KAF Discounts Berhad
6. Malaysia Discount Berhad
7. Mayban Discount Berhad
Development Financial Institutions Offering Islamic Banking
Facilities
1. Bank Kerjasama Rakyat Malaysia Berhad
2. Bank Simpanan Nasional
3. Bank Pembangunan dan Infrastruktur Malaysia Berhad
4. Bank Industri & Teknologi Malaysia Berhad


P14
National Shariah Advisory Council Members
for Islamic Banking and Takaful – Session 2001-2003
1. Yang Amat Arif Dato’ Sheikh Ghazali Abdul Rahman
-
Chairman
Director General
Shariah Judiciary Department Malaysia
2. Datuk Haji Md. Hashim Haji Yahaya
-
Deputy Chairman
Academic Fellow
International Islamic University Malaysia
3. Sohibus Samahah Dato’ Haji Hassan Haji Ahmad
-
Member
Mufti of Pulau Pinang
4. Dato’ Dr. Abdul Monir Yaacob
-
Member
-
Member
Director General
Institute of Islamic Understanding Malaysia
5. Dato’ Dr. Abdul Halim Ismail
Executive Director
BIMB Securities Sdn. Bhd.
6. Assoc. Prof. Dr. Mohd Daud Bakar
-
Member
Deputy Rector
Student Affairs & Discipline
International Islamic University Malaysia
7. Assoc. Prof. Dr. Joni Tamkin Borhan
-
Member
Department of Shariah and Economics
Academy of Islamic Studies
University of Malaya


Annex
Key Economic and
Financial Statistics
Annex


Annex
P17
1999
2000
2001
RM million
Agriculture
17,596
18,062
17,897
Mining and quarrying
15,344
15,385
15,258
Manufacturing
56,840
67,250
63,346
Construction
6,926
6,964
7,108
Services
106,293
113,409
119,962
Less: Imputed bank service charges
14,896
15,832
17,678
Plus: Import duties
5,319
4,721
4,746
GDP at purchasers' prices1
193,422
209,959
210,640
Annual change (%)
Agriculture
0.5
2.6
-0.9
Mining and quarrying
6.9
0.3
-0.8
Manufacturing
11.7
18.3
-5.8
Construction
-4.4
0.6
2.1
Services
4.5
6.7
5.8
Less: Imputed bank service charges
6.7
6.3
11.7
Plus: Import duties
20.1
-11.2
0.5
GDP at purchasers' prices
6.1
8.5
0.3
2002
2003p
2004f
18,438
19,453
15,826
16,581
65,908
71,311
7,275
7,417
124,939
130,030
18,614
19,570
5,537
5,489
219,309
230,710
19,952
17,494
78,550
7,525
136,727
20,851
5,158
244,555
3.0
5.5
3.7
4.8
4.0
8.2
2.3
1.9
4.1
4.1
5.3
5.1
16.7
-0.9
4.1
5.2
2.6
5.5
10.2
1.5
5.2
6.5
-6.0
6.0 ~ 6.5
1     Numbers may not necessarily add up due to rounding 
p  Preliminary
f   Forecast
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Table A.1
Gross Domestic Product by Kind of Economic Activity in Constant 1987 Prices


P18
Table A.2
Growth in Manufacturing Production (1993=100)
2000
2001
2002
2003
2001
2002
2003
Index
Annual change (%)
Export-oriented industries
223.3
200.1
210.2
-10.4
5.0
Electrical machinery, apparatus
appliances and supplies
272.4
229.2
247.8
-15.9
8.1
Electronics
337.2
269.1
305.2
-20.2
13.4
Electrical products
171.2
166.6
158.2
-2.8
-5.1
Radio and television sets
186.3
170.6
157.4
-8.4
-7.8
Cables and wires
172.6
180.6
145.8
4.6
-19.2
Manuf. of office, computing
and accounting machinery
261.2
227.1
176.1
Manuf. of refrigerating, exhaust,
ventilating and air-conditioning
machinery
113.2
132.3
161.8
16.9
22.2
Textiles and wearing apparel
129.6
118.8
111.4
-8.3
-6.2
Wood and wood products
103.6
104.9
98.6
1.2
-6.0
Chemicals and chemical products1
247.9
228.7
235.0
-7.7
2.7
Rubber products1
174.2
180.0
183.5
3.3
2.0
Off-estate processing
186.6
200.9
215.1
7.7
7.1
Others
129.1
106.2
115.1
-17.7
8.3
Domestic-oriented industries
172.1
184.1
190.4
7.0
3.4
Construction-related products
168.4
176.1
182.9
4.6
3.8
Non-metallic mineral products
156.3
171.3
180.0
9.6
5.1
Basic iron and steel and
non-ferrous metal
183.5
182.3
186.6
-0.7
2.4
Transport equipment
199.3
237.1
251.9
19.0
6.2
Food products
148.3
154.7
168.2
4.3
8.7
Beverages
134.2
138.5
121.9
3.2
-11.9
Tobacco products
174.9
164.4
148.0
-6.0
-10.0
Petroleum products
166.3
198.3
190.2
19.3
-4.1
Fabricated metal products
192.6
200.0
201.7
3.9
0.8
Paper products
162.0
165.0
186.2
1.9
12.8
Total
209.7
195.8
204.7
235.3
271.7
351.3
147.1
134.4
128.8
156.6
180.6
109.0
99.5
283.8
217.9
240.5
120.9
202.0
201.6
197.5
206.7
238.0
183.0
147.3
153.8
194.7
216.5
201.2
226.1
-6.6
4.5
1 As of second quarter of 2001, chemicals and chemical products and rubber products were reclassified as export-oriented
industries rather than domestic-oriented industries given that about three-quarters of the total output are related to export
demand
Source: Department of Statistics, Malaysia
-13.1
-22.5
11.9
9.6
15.1
-7.0
-14.6
-11.7
11.6
-2.2
0.9
20.8
18.7
11.8
5.1
6.1
10.2
9.7
10.8
-5.5
8.8
20.8
3.9
2.3
7.4
8.0
10.5
-11.1


Annex
P19
Table A.3
Production of Primary Commodities
1999
2000
2001
2002
2003p
1999
2000
2001
2002
2003p
Volume
Annual change (%)
Crude palm oil
(‘000 tonnes)
10,554 10,842 11,804 11,909
26.9
2.7
8.9
0.9
Rubber
(‘000 tonnes)
769
615
547
589
Saw logs
(‘000 cu. metres)
21,776 23,074 18,923 20,649
0.5
6.0
-18.0
9.1
Cocoa
(‘000 tonnes)
84
70
58
48
Crude oil
(‘000 bpd)
691
681
666
698
-4.7
-1.5
-2.1
4.9
Natural gas
(mmscfd)
3,952
4,367
4,542
4,674
6.2
10.5
4.0
2.9
Tin-in-concentrates
(‘000 tonnes)
7.3
6.3
5.0
4.2
13,355
698
21,381
36
736
4,916
3.6
12.1
18.4
3.5
-24.0
5.4
5.2
-14.2
27.6
Source: Malaysian Palm Oil Board
Department of Statistics, Malaysia
Forestry Departments (Peninsular Malaysia, Sabah & Sarawak)
Malaysian Cocoa Board
PETRONAS
Minerals and Geoscience Department Malaysia
-13.2
-20.0
-11.1
7.7
-7.2
-16.0
-17.9
-17.4
-14.1
-21.2
-15.2
p  Preliminary


P20
Table A.4
GNP by Demand Aggregates
1999
2000
2001
2002
2003p
2004f
at Current Prices
(RM million)
Consumption
158,100
Private consumption
125,056
Public consumption
33,044
Investment
65,841
Private investment
31,375
Public investment
34,466
Change in stocks1
1,476
Exports of goods and services
364,861
Imports of goods and services
289,514
GDP at purchasers' value
300,764
Net factor payments abroad
-20,886
GNP at purchasers' value
279,878
at Constant 1987 Prices
(RM million)
Consumption
107,862
Private consumption
84,377
Public consumption
23,485
Investment
51,568
Private investment
24,574
Public investment
26,994
Change in stocks1
1,254
Exports of goods and services
212,085
Imports of goods and services
179,347
GDP at purchasers' value
193,422
Net factor payments abroad
-13,628
GNP at purchasers' value
179,794
p  Preliminary
f   Forecast
1   Includes statistical discrepancy
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
181,031
145,355
35,676
87,729
44,102
43,627
5,378
427,004
358,530
342,612
-28,909
313,703
192,741
150,644
42,097
83,345
34,528
48,817
-3,268
389,256
327,765
334,309
-25,623
308,686
209,521
159,506
50,015
83,764
30,066
53,698
1,251
415,040
348,918
360,658
-25,061
335,597
223,706
169,813
53,893
87,089
30,785
56,304
-1,456
450,592
367,918
392,012
-22,614
369,398
242,669
186,244
56,425
87,807
34,479
53,328
3,048
502,550
418,030
418,044
-24,715
393,329
119,238
95,370
23,868
64,840
32,596
32,244
2,785
246,158
223,062
209,959
-19,271
190,688
125,549
97,630
27,919
63,050
26,120
36,930
-1,778
227,685
203,866
210,640
-17,642
192,998
133,282
101,946
31,336
63,249
22,702
40,547
1,677
237,904
216,802
219,309
-17,253
202,057
140,927
107,111
33,816
64,960
22,956
42,004
-607
253,006
227,577
230,710
-15,302
215,408
150,968
115,739
35,229
65,202
25,596
39,606
2,742
283,598
257,954
244,555
-17,020
227,535


Annex
P21
f  Forecast
Table A.5
Savings-Investment Gap
1999
2000
2001
2002
2003p
2004f
(RM million)
Public gross domestic capital formation
34,466
43,627
48,817
53,698
56,304
Public savings
50,694
55,391
53,534
63,496
66,313
Deficit/surplus
16,228
11,764
4,717
9,798
10,009
Private gross domestic capital formation
32,851
49,480
31,260
31,317
29,329
Private savings
64,517
69,969
54,230
52,013
70,081
Deficit/surplus
31,666
20,489
22,970
20,696
40,752
Gross domestic capital formation
67,317
93,107
80,077
85,015
85,633
(as % of GNP)
24.1
29.7
25.9
25.3
23.2
Gross national savings
115,211
125,360
107,764
115,509
136,394
(as % of GNP)
41.2
40.0
34.9
34.4
36.9
Balance on current account
47,895
32,252
27,687
30,494
50,761
(as % of GNP)
17.1
10.3
9.0
9.1
13.7
53,328
61,305
7,977
37,527
79,596
42,068
90,855
23.1
140,900
35.8
50,045
12.7
 Includes the change in stocks. Previously, the change in stocks was distributed between the public and private sector gross
 domestic capital formation
p  Preliminary
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
1
1


P22
Table A.6
Balance of Payments
2000
Item
RM million
Goods1
374,033
 294,889
 79,144
Trade account
 373,270
 311,459
 61,811
Services
 52,971
 63,641
-10,670
Transportation
 10,646
 22,382
-11,736
Travel
 19,043
 7,885
 11,158
Other services
 22,794
 32,824
-10,030
Government services n.i.e.3
 488
 550
-62
Balance on goods and services
 427,004
 358,530
 68,474
Income
 7,547
 36,456
-28,909
Compensation of employees
 1,301
 2,276
-975
Investment income2
 6,246
 34,180
-27,934
Current transfers
 2,872
 10,185
-7,313
Balance on current account
 437,423
 405,171
 32,252
% of GNP
10.3
Capital account
–
–
Financial account
-23,848
Direct investment
 6,694
Abroad
-7,699
In Malaysia
 14,393
Portfolio investment
-9,395
Other investment
-21,147
Official sector
 3,936
Private sector
-25,083
Balance on capital and
financial account
-23,848
Errors and omissions
-12,107
of which:
Exchange revaluation
gain (+) / loss (-)
-5,335
Overall balance
(surplus + / deficit -)
-3,703
Bank Negara Malaysia
international reserves, net4
RM million
113,541
US$ million
29,879
Reserves as months of
retained imports
 4.5
1
Adjusted for valuation and coverage to the balance of payments basis. Imports include military goods which are not
included in trade data
2
Include undistributed earnings of foreign direct investment companies. The counterpart of these earnings is shown as
reinvested earnings under “Direct Investment” in the Financial Account
3
Include transactions of foreign military and diplomatic establishments
4
All assets and liabilities in foreign currencies have been revalued into ringgit at rates of exchange ruling on the balance 
sheet date and the gain/loss has been reflected accordingly in the Bank’s account
e  Estimate
f   Forecast
Note: Numbers may not necessarily add up due to rounding
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
2001
334,326
 264,472
 69,854
334,284
 280,229
 54,055
54,929
 63,295
-8,366
10,443
 21,795
-11,352
26,081
 9,933
 16,148
17,932
 31,119
-13,187
473
448
25
389,255
 327,767
 61,488
7,018
 32,641
-25,623
 1,395
 2,409
-1,014
5,623
 30,232
-24,609
2,040
 10,218
-8,178
398,313
 370,626
 27,687
9.0
-14,791
1,091
-1,014
2,105
-2,466
-13,416
7,114
-20,530
-14,791
-9,234
-4,060
3,662
117,203
30,843
5.1
+                   -                 Net
+                   -                Net


Annex
P23
2002
2003e
2004f
RM million
 358,504
286,387
72,117
398,998
301,297
97,701
357,682
303,063
54,619
398,882
317,746
81,136
56,536
62,532
-5,996
51,594
66,620
-15,026
10,847
22,419
-11,572
10,514
23,787
-13,273
 27,049
 9,947
 17,102
 22,423
 10,816
 11,607
 18,166
29,408
-11,242
18,206
31,225
-13,019
474
758
-284
452
793
-341
 415,040
348,919
66,121
450,592
367,917
82,675
8,129
33,190
-25,061
13,116
35,730
-22,614
 1,653
2,832
-1,179
2,170
3,120
-950
 6,476
30,358
-23,882
10,946
32,610
-21,664
 2,513
13,079
-10,566
 1,929
11,229
-9,300
  425,682
395,188
30,494
465,638
414,876
50,761
9.1
13.7
–
–
-11,941
-12,063
 4,935
-7,238
 12,173
-6,506
-10,370
 4,720
-15,090
-4,362
 6,627
 14,191
 131,394
34,577
5.4
 4,242
-5,172
9,414
4,176
-20,481
-11,210
-9,271
360
443,429
346,991
94,438
443,297
366,765
76,532
59,121
71,039
-11,918
12,410
27,034
-14,624
 27,127
 12,084
 15,043
19,120
31,267
-12,147
464
654
-190
502,550
418,030
84,520
13,700
38,415
-24,715
2,164
3,125
-961
11,537
35,290
-23,753
 2,062
11,823
-9,761
518,312
468,267
50,045
12.7
 11,927
 39,059
 170,453
44,856
6.8
+                  -               Net
+                 -                Net
+                  -                 Net
-12,063
-11,941


P24
Table A.7
Principal Markets for Manufactured Exports
1999
2000
2001
2002
2003p
Country
ASEAN
Singapore
Thailand
Indonesia
Philippines
Brunei Darussalam
EU
United Kingdom
Germany
Netherlands
Others
United States
Japan
Hong Kong China
Chinese Taipei 
Korea
The People’s  
  Republic of China
Australia
Canada
West Asian Countries
Latin American
  Countries
Rest of the World
Total
65,004
48,390
8,396
3,415
4,170
633
44,837
11,438
6,955
13,880
12,564
68,058
28,027
13,395
12,835
5,481
5,660
5,924
2,262
5,042
2,242
12,963
271,730
26.8
20.1
3.2
1.6
1.7
0.2
14.5
3.5
2.7
4.4
3.9
23.3
11.2
5.0
3.6
2.3
2.5
2.2
0.9
1.8
1.3
4.6
100.0
72,140
52,483
9,816
4,983
4,113
745
40,894
8,355
7,176
13,609
11,754
65,830
32,413
14,327
9,767
6,692
 11,266
 5,862
1,977
6,885
3,436
13,827
285,316
26.1
18.5
4.1
1.9
1.4
0.2
12.7
2.6
2.3
3.7
4.1
24.0
9.3
6.3
3.8
2.6
4.6
2.0
0.7
2.0
1.0
4.9
100.0
82,705
57,647
13,513
6,287
4,324
934
41,194
8,123
8,065
10,336
14,670
75,035
28,818
24,765
11,575
7,143
17,445
7,123
2,160
7,549
2,959
18,479
326,950
25.2
17.6
4.1
1.9
1.3
0.3
12.6
2.5
2.5
3.2
4.4
22.9
8.8
7.6
3.5
2.2
5.3
2.2
0.7
2.3
0.9
5.8
100.0
RM
million
share
%
RM
million
share
%
RM
million
share
%
RM
million
share
%
RM
million
share
%
25.0
10.3
23.9
3.1
1.3
1.5
0.2
16.5
4.2
2.6
5.1
4.6
4.9
4.7
2.0
2.1
2.2
0.8
1.9
0.8
4.9
100.0
17.8
74,165
35,763
85,210
10,166
5,064
5,537
675
  46,057
11,067
8,682
13,843
12,465
15,795
11,421
7,363
7,979
7,054
2,900
5,717
4,169
14,315
317,908
63,768
18.4
1.8
1.4
2.9
25.3
3.4
0.3
14.3
100.0
2.5
4.8
4.1
3.9
2.1
0.7
23.1
11.4
5.0
3.4
2.3
2.4
1.2
4.9
78,859
708
38,493
302,275
12,355
55,996
7,836
7,064
11,084
12,509
13,994
5,906
1,991
72,427
28,253
19,031
11,409
7,867
5,992
3,022
15,031
5,629
4,171
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
p  Preliminary


Annex
P25
Table A.8
Principal Export Markets for Electronics
1999
2000
2001
2002
2003p
Country
United States
41,660
28.8
42,378
25.4
34,793
24.9
42,281
26.8
Singapore
28,621
19.8
 41,048
24.6
30,335
21.7
33,079
21.0
Chinese Taipei 
9,153
6.3
7,289
4.4
6,520
4.7
 7,863
5.0
Japan
12,621
8.7
15,970
9.6
13,502
9.7
11,209
7.1
Hong Kong China
6,506
4.5
8,017
4.8
7,470
5.3
 12,525
7.9
Others
44,132
30.4
48,595
29.1
41,000
29.4
42,914
27.3
Total
144,885
100.0
166,791
100.0
139,632
100.0
157,663
100.0
45,352
27.1
32,067
19.1
 8,061
4.8
10,479
6.3
The People's 
  Republic of China
2,192
1.5
3,494
2.1  
6,012
4.3
7,792
4.9
9,028
5.4
 18,041
10.8
44,592
26.5
167,620
100.0
RM 
million
% 
share
RM 
million
% 
share
RM 
million
% 
share
RM 
million
% 
share
RM 
million
% 
share
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
p  Preliminary
Table A.9
Principal Export Markets for Electrical Products
1999
2000
2001
2002
2003p
Country
United States
13,817
27.5
17,358
27.3
17,324
28.6
17,427
31.7
Singapore
7,958
15.9
 8,665
13.6
8,120
13.4
7,442
13.6
United Kingdom
1,542
3.1
1,601
2.5
1,435
2.4
 1,400
2.6
Japan
6,778
13.5
9,337
14.7
9,207
15.2
7,584
13.8
Hong Kong China
2,263
4.5
2,992
4.7
2,534
4.2
 2,483
4.5
Others
14,218
28.4
18,983
29.9
16,854
27.6
14,007
25.5
Total
50,162
100.0
63,638
100.0
60,675
100.0
54,890
100.0
16,379
29.3
8,539
15.3
 1,351
2.4
Germany
1,662
3.3
1,794
2.8
1,865
3.1
 1,410
2.6
 1,438
2.6
6,848
12.2
The People's 
  Republic of China
865
1.7
1,428
2.2
1,770
2.9
1,579
2.9
2,137
3.8
 2,403
4.3
15,167
27.1
55,927
100.0
RM 
million
% 
share
RM 
million
% 
share
RM 
million
% 
share
RM 
million
% 
share
RM 
million
% 
share
Thailand
1,059
2.1
1,480
2.3
1,566
2.6
 1,558
2.8
 1,665
3.0
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
p  Preliminary


P26
Table A.10
Principal Export Markets for Chemicals and Chemical Products
1999
2000
2001
2002
2003p
Singapore
1,454
13.1
1,900
12.7
1,646
11.1
1,736
10.1
Hong Kong China
993
8.9
1,373
9.1
1,176
7.9
1,239
7.2
Japan
1,199
10.8
1,586
10.6
1,566
10.5
1,750
10.2
United States
922
8.3
1,426
9.5
1,218
8.2
1,042
6.1
Chinese Taipei 
409
3.7
671
4.5
620
4.2
882
5.1
Thailand
680
6.1
976
6.5
1,164
7.8
1,387
8.0
Indonesia
617
5.6
1,153
7.7
999
6.7
1,302
7.6
The People’s
Republic of China
647
5.8
1,054
7.0
1,533
10.3
2,294
13.3
2,929
13.8
2,165
10.2
2,125
10.0
1,771
8.3
1,551
7.3
1,532
7.2
1,060
5.0
960
4.5
7,143
33.7
21,236
100.0
Others
4,184
37.7
4,872
32.4
4,957
33.3
5,596
 32.4
Total
11,105
100.0
15,011
100.0
14,879
100.0
17,228
100.0
Country
RM
million
share
%
RM
million
share
%
RM
million
share
%
RM
million
share
%
RM
million
share
%
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
p  Preliminary
Table A.11
Principal Export Markets for Manufactures of Metal
1999
2000
2001
2002
2003p
Country
RM
%
million
share
RM
%
million
share
RM
%
million
share
RM
%
million
share
RM
%
million
share
Singapore
2,155
2,270
27.4
24.3
United States
633
8.0
687
755
445
5.2
495
476
23.2
2,134
20.3
2,289
9.0
1,016
7.4
837
4.9
558
6.3
714
3.9
443
7.4
486
8.5
594
5.5
665
5.8
504
4.1
398
2.8
368
39.9
3,430
8.0
644
8.8
736
26.3
2,020
5.7
501
4.3
360
3.6
240
34.8
3,475
374
310
2,994
5.5
Japan
667
8.5
6.8
The People’s
Republic of China
341
4.3
7.6
Thailand
458
5.8
5.7
Indonesia
314
4.0
4.5
3.8
432
3.6
403
40.8
4,611
100.0
11,303
2.8
217
3.3
240
288
Korea
279
3.5
2.5
Hong Kong China
447
5.7
4.2
Others
2,568
32.8
     38.9
Total
7,862
8,618
8,692
8,796
100.0
100.0
100.0
100.0
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
p  Preliminary


Annex
P27
1999
2000
2001
2002
2003p
Country
RM
million
%
share
RM
million
%
share
RM
million
%
share
RM
million
%
share
RM
million
%
share
United States 
1,141 
23.6 
1,999 
29.3 
2,132 
27.3 
1,874 
23.0 
2,007 
21.8
Singapore 
696 
14.4 
859 
12.6 
1,110 
14.2 
1,572 
19.3 
1,749 
19.0 
Japan 
765 
15.8 
1,004 
14.7 
1,163 
14.9 
1,186 
14.6 
1,393 
15.1
Netherlands 
140 
2.9 
291 
4.3 
415 
5.3 
511 
6.3 
649 
7.0
The People's
 Republic of China 
84 
1.7 
173 
2.5 
232 
3.0 
199 
2.4 
455 
4.9
Hong Kong China 
284 
5.9 
342 
5.0 
408 
5.2 
429 
5.3 
442 
4.8
Germany 
361 
7.5 
584 
8.6 
437 
5.6 
408 
5.0 
405 
4.4
Others 
1,363 
28.2 
1,573 
23.0 
1,905 
24.5 
1,972 
24.1 
2,113 
23.0
  
Total 
4,834 
100.0 
6,825 
100.0 
7,802 
100.0 
8,151 
100.0 
9,213 
100.0
Table A.12
Principal Export Markets for Optical and Scientific Equipment
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
p  Preliminary
Table A.13
Principal Export Markets for Petroleum Products
1999
2000
2001
2002
2003p
Country
RM
%
million
share
RM
%
million
share
RM
%
million
share
RM
%
million
share
RM
%
million
share
Singapore
1,337
2,457
29.6
39.9
United States
108
2.4
239
1,371
746
9.2
119
921
34.6
3,043
38.3
3,605
5.6
525
19.5
1,836
2.9
274
4.3
408
2.9
274
270
3.3
188
11.8
1,001
11.0
412
2.4
188
1.3
257
257
31.2
2,274
2.9
276
16.9
991
30.2
2,906
1.5
201
2.8
110
36.0
2,637
231
2,927
2.5
Japan
576
12.8
13.1
The People’s
Republic of China
505
11.2
5.4
Australia
249
5.5
2.5
355
7.9
3.4
2.9
23.6
2,224
100.0
9,416
4.4
0.5
366
41
Korea
101
2.2
3.4
Hong Kong China
1,282
28.4
29.8
Others
Total
4,513
8,131
8,408
7,620
100.0
100.0
100.0
100.0
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
p  Preliminary
Table A.14
Export Prices of Major Commodities
1999
2000
2001
2002
2003p
1999
2000
2001
2002
2003p
Annual change (%)
Palm oil (RM/tonne)
1,615
1,122
944
1,367
-31.8
-30.5
-15.9
44.9
Rubber (sen/kg)
238
263
230
269
-16.7
10.4
-12.7
17.0
Saw logs (RM/cu. metre)
395
384
315
359
14.8
-2.9
-17.9
13.9
Sawn timber
(RM/cu. metre)
996
1,050
943
990
5.8
5.4
-10.2
5.0
Crude oil  (US$/barrel)
18.18
29.58
25.53
24.81
1,617
379
366
926
30.27
29.9
62.7
-13.7
-2.8
18.3
41.0
1.9
-6.5
22.0
Source: Department of Statistics, Malaysia
p  Preliminary


P28
Table A.15
Principal Export Markets for Palm Oil
1999
2000
2001
2002
2003p
1999
2000
2001
2002
2003p
('000 tonnes)
% share
The People's
Republic of China
783
1,023
1,364
1,940
8.7
11.5
13.0
17.9
India
2,402
2,029
2,066
1,670
26.8
22.9
19.7
15.4
European Union
1,071
988
1,610
1,478
12.0
11.1
15.4
13.6
Netherlands
637
530
1,028
847
7.1
6.0
9.8
7.8
Italy
100
121
155
127
1.1
1.4
1.5
1.2
Sweden
67
76
100
102
0.8
0.8
1.0
0.9
United Kingdom
39
25
51
50
0.4
0.3
0.5
0.5
Others
228
236
276
352
2.6
2.6
2.6
3.2
Middle East
1,217
1,168
1,236
1,449
13.6
13.2
11.8
13.4
Pakistan
1,028
1,075
1,143
1,059
11.5
12.1
10.9
9.8
Singapore
468
358
423
441
5.2
4.0
4.0
4.1
United States
124
178
208
270
1.4
2.0
2.0
2.5
Japan
356
353
379
434
4.0
4.0
3.6
4.0
Bangladesh
53
98
178
230
0.6
1.1
1.7
2.1
Korea
190
198
241
218
2.1
2.2
2.3
2.0
Myanmar
145
124
115
114
1.6
1.4
1.1
1.1
Others
1,127
1,271 
1,503
1,551
12.5
14.5
14.5
14.1
Total
8,964
8,863
10,466 10,854
2,502
1,650
1,648
974
98
106
90
380
1,749
1,105
489
231
430
272
211
159
2,063
12,509
20.0
13.2
13.2
7.8
0.8
0.8
0.7
3.1
14.0
8.8
3.9
1.8
3.4
2.2
1.7
1.3
16.5
100.0
100.0
100.0
100.0
100.0
Source: Department of Statistics, Malaysia
p  Preliminary
Country
Table A.16
Principal Export Markets for Rubber
('000 tonnes)
% share
European Union
356
350
318
309
36.2
35.8
38.7
33.3
Germany
100
107
119
119
10.2
10.9
14.5
12.8
Belgium
48
51
44
30
4.8
5.2
5.4
3.2
Italy
36
33
30
28
3.7
3.4
3.6
3.0
United Kingdom
51
35
25
24
5.2
3.6
3.0
2.6
Netherlands
17
17
12
15
1.7
1.7
1.5
1.6
Others
104
107
88
93
10.6
11.0
10.7
10.1
The People’s
Republic of China
66
94
85
129
6.7
9.6
10.3
13.9
United States
111
101
66
81
11.3
10.3
8.0
8.7
Korea
84
73
58
59
8.5
7.5
7.1
6.4
Iran
Turkey
26
30
24
24
2.7
3.1
2.9
2.6
Chinese Taipei 
15
11
12
14
1.6
1.1
1.5
1.5
Japan
25
21
18
14
2.5
2.1
2.2
1.5
Others
262
255
181
253
26.5
26.1
22.0
27.3
Total
984
978
822
928
100.0
100.0
100.0
100.0
Source: Department of Statistics, Malaysia
p  Preliminary
Country
39
43
60
45
305
129
19
29
22
12
94
207
76
69
25
14
10
191
945
48
4.0
4.4
7.3
4.8
32.3
13.7
2.0
3.1
2.3
1.3
9.9
21.9
8.0
7.3
2.6
1.5
1.1
20.2
100.0
5.1
2001
2001
2000
2000
1999
1999
2003p
2002
2002
2003p


Annex
P29
Source: Department of Statistics, Malaysia
Table A.17
Principal Export Markets for Saw Logs
1999
2000
2001
2002
2003p
1999
2000
2001
2002
2003p
('000 cubic metres)
% share
Japan
2,280
2,184
1,375
1,641
33.9
33.7
28.4
32.2
The People’s
Republic of China
1,680
1,405
1,071
1,106
25.0
21.7
22.2
21.7
India
838
873
985
998
12.4
13.5
20.4
19.5
Chinese Taipei 
919
898
669
651
13.6
13.8
13.8
12.7
Hong Kong China
440
541
417
188
6.5
8.3
8.6
3.7
Korea
393
301
175
159
5.8
4.6
3.6
3.1
Thailand
95
102
28
39
1.4
1.6
0.6
0.8
Others
93
180
114
322
1.4
2.8
2.4
6.3
Total
6,738
6,484
4,834
5,104
1,356
1,338
1,371
694
103
140
60
446
5,508
100.0
100.0
100.0
100.0
24.6
24.3
24.9
12.6
1.9
2.5
1.1
8.1
100.0
p  Preliminary
Country
Source: Department of Statistics, Malaysia
Table A.18
Principal Export Markets for Sawn Timber
1999
2000
2001
2002
2003p
1999
2000
2001
2002
2003p
(‘000 cubic metres)
% share
Thailand
490
563
532
590
17.4
19.6
22.1
23.8
Chinese Taipei
213
226
170
183
7.6
7.9
7.0
7.4
Netherlands
273
270
197
194
9.7
 9.4
8.2
7.8
The People’s
Republic of China
149
137
151
173
5.3
4.8
6.3
7.0
Japan
237
239
187
200
8.4
8.3
7.8
8.1
Hong Kong China
143
132
135
151
5.1
4.6
5.6
6.1
Singapore
247
219
185
160
8.8
7.6
7.7
6.5
Korea
144
129
120
98
5.1
4.5
5.0
4.0
Republic of Yemen
70
114
83
59
2.5
3.9
3.4
2.4
Belgium
71
69
52
64
2.5
2.4
2.2
2.6
United Arab Emirates
78
82
66
59
2.8
2.9
2.7
2.4
United Kingdom
69
55
52
55
2.4
1.9
2.2
2.2
Germany
39
31
23
30
1.4
1.1
1.0
1.2
Others
595
610
458
458
21.0
21.1
18.8
18.5
Total
2,818
2,876
2,411
2,474
627
214
222
177
196
108
188
92
70
97
55
52
43
675
2,816
100.0
100.0
100.0
100.0
22.2
7.6
7.9
6.3
7.0
3.8
6.7
3.3
2.5
3.4
1.9
1.8
1.5
24.1
100.0
p  Preliminary
Country


P30
Table A.19
Principal Export Markets for Crude Oil
1999
2000
2001
2002
2003p
1999
2000
2001
2002
Source: Department of Statistics, Malaysia
2003p
(‘000 tonnes)
% share
India
2,387
2,161
1,690
2,462
13.5
13.0
11.2
15.2
Thailand
2,306
2,890
2,797
2,358
13.0
17.3
18.6
14.6
Japan
2,004
1,299
1,457
2,131
11.3
7.8
9.7
13.2
Korea
2,540
2,292
2,190
1,838
14.3
13.7
14.5
11.4
The People’s
Republic of China
299
705
838
1,723
1.7
4.2
5.6
10.6
Australia
2,087
1,760
1,852
1,687
11.8
10.6
12.3
10.4
Indonesia
1,658
1,060
753
956
9.4
6.4
5.0
5.9
New Zealand
603
565
487
604
3.4
3.4
3.2
3.7
Myanmar
633
595
453
561
3.6
3.6
3.0
3.5
Philippines
553
527
362
511
3.1
3.2
2.4
3.2
Sri Lanka
353
473
400
485
2.0
2.8
2.7
3.0
United States
1,143
1,054
704
412
6.4
6.3
4.7
2.5
Singapore
626
626
215
203
3.5
3.8
1.4
1.3
Others
533
665
879
261
3.0
3.9
5.7
1.5
Total
17,725 16,672 15,077 16,192
3,396
3,097
1,440
1,271
2,013
2,248
1,290
321
–
466
425
839
467
640
17,913
100.0
100.0
100.0
100.0
19.0
17.3
8.0
7.1
11.2
12.5
7.2
1.8
–
2.6
2.4
4.7
2.6
3.6
100.0
p  Preliminary
Country
Source: Department of Statistics, Malaysia
Table A.20
Principal Export Markets for LNG
1999
2000
2001
2002
2003p
1999
2000
2001
2002
2003p
(‘000 tonnes)
% share
Japan
10,070
11,076
11,308
10,782
66.7
71.8
73.3
71.8
Korea
3,210
2,498
2,255
2,304
21.3
16.2
14.6
15.4
Chinese Taipei
1,753
1,802
1,860
1,857
11.6
11.7
12.1
12.4
Others
0.4
0.3
–
0.4
Total
15,088
15,430
15,423
15,007
100.0
100.0
100.0
100.0
71.8
15.4
12.5
0.3
100.0
p  Preliminary
Country
55
54
–
64
12,494
2,687
2,167
17,402
54


Annex
P31
Table A.21
External Debt and Debt Servicing1
1999
2000
2001
2002
2003p
RM million
Medium and long-term debt:
Gross borrowing
Federal Government
NFPEs
Private sector
Repayment and prepayment
Federal Government
NFPEs
Private sector
Net borrowing
Federal Government
NFPEs
Private sector
Outstanding debt
Federal Government
NFPEs
Private sector
Currency composition (% share)
U.S. dollar
Japanese yen
Others
Short-term debt:
Outstanding debt
Banking sector2
Non-bank private sector
Total external debt:
Total external debt (US$ million)
% GNP
Annual change (%)
Total servicing (including short-term 
   interest payment)
of which:
Medium and long-term debt
Repayment (excluding
prepayment)
Federal Government
NFPEs
Private sector
Interest payment
Federal Government
NFPEs
Private sector
Debt service ratio (% of exports of 
  goods and services)
Total debt
Medium and long-term debt
Federal Government
NFPEs
Private sector
1    Data on MAS was included under private sector up to 2000 and under NFPEs from 2001 
2    Excludes currency and deposits held by non-residents with resident banking institutions
p  Preliminary
Note: Numbers may not necessarily add up due to rounding
Source: Ministry of Finance and Bank Negara Malaysia
21,410
23,390
31,550
23,853
4,763
4,767
7,030
10,465
6,080
7,719
11,311
3,655
10,567
10,903
13,209
9,732
16,152
17,941
22,323
23,104
1,840
3,903
735
2,445
2,230
3,836
10,447
6,942
12,082
10,203
11,141
13,717
5,259
5,448
9,227
749
2,923
864
6,295
8,020
3,850
3,883
865
-3,287
-1,515
701
2,068
-3,985
139,706
143,465
149,346
153,587
18,369
18,821
24,328
36,283
57,021
59,566
67,415
64,330
64,315
65,077
57,604
52,974
100
100
100
100
20
18
15
14
8
22,427
17,600
24,072
32,055
12,661
9,271
11,926
21,894
9,766
8,329
12,147
10,162
162,133
161,065
173,419
185,643
42,667
42,385
45,636
48,853
57.9
51.3
56.2
55.3
-4.6
-0.7
7.7
7.0
23,312
25,043
26,954
28,020
15,726
16,370
19,612
20,780
1,840
3,903
735
2,445
2,230
2,506
7,886
6,942
11,656
9,962
10,991
11,393
6,058
7,117
6,345
6,484
883
1,187
1,150
1,879
2,755
3,408
3,574
3,430
2,420
2,522
1,621
1,174
6.3
5.8
6.8
6.7
5.8
5.4
6.6
6.5
0.7
1.2
0.5
1.0
1.3
1.4
2.9
2.5
3.8
2.9
3.2
3.0
7
7
6
74
75
78
77
20,969
3,144
5,157
12,668
28,892
6,854
12,437
9,602
-7,923
-3,710
-7,279
3,066
152,788
37,284
59,558
55,946
100
13
10
34,462
24,597
9,865
187,250
49,276
50.7
0.9
28,287
21,491
3,861
10,017
7,612
6,149
1,930
3,287
932
6.1
6.0
1.2
2.9
1.8
77


P32
–
Table A.22
Gross Overseas Investment by Country1   
1999
2000
2001
2002
2003
Countries
RM million
Cayman Islands
Bermuda 
Mauritius
Isle of Man
Labuan2
125
349
37
2,082
906
4,014
3,924
513
553
532
270
153
United States
5,714
Singapore
15
1,683
–
…
1
398
313
100
...
Sudan
 435
Hong Kong China
400
410
125
1,057
United Kingdom
Indonesia
Namibia
201
134
58
83
…
–
304
...
The People's Republic of China
292
536
158
…
2,920
1,635
 
151
Thailand
Egypt
Australia
1,099
172
28
45
306
...
900
Chad
Japan
Bahrain
 
2
46
142
Korea
28
Pakistan
104
4
5
...
122
8,523
4,720
3,164 
4,625
142
50
88
2
101
928
Netherlands
Vietnam
59
Philippines
India
29
76
77
Germany
Ireland
Others
     of which: 
Total
13,391
13,809
13,107
16,424
1   Refers to direct equity investment, purchase of real estate and extension of loans to non-residents abroad. Includes capital 
   invested or loans extended by the foreign-owned companies in/to their parent companies abroad. For the purpose of 
   compiling balance of payments statistics, capital invested in or loans extended to parent companies abroad must be offset 
   against the capital invested in or loans extended to Malaysia by the parent companies abroad. At present, the Cash BOP 
   Reporting System is not able to segregate this type of transaction
2  Labuan IOFC is treated as a non-resident for exchange control purposes
Source: Cash BOP Reporting System, Bank Negara Malaysia
73
16
14
100
33
192
14
–
–
…
…
28
21
531
43
22
156
209
54
–
159
104
109
2,392
2,972
1,130
1,647
1,622
2
1
36
7
420
787
59
82
420
386
–
–
–
–
175
994
492
520
600
Chinese Taipei
30
10
28
34
666
844
138
167
215
225
243
266
356
117
120
137
100
51
3,996
87
66
54
57
79
10,590
933


Annex
P33
Table A.23
Consumer Price Index (2000=100) Sub-groups of Food
Weights 
(%)
2000
2001
2002
2003
Annual change (%)
Food
33.8
1.9
0.7
0.7
of which:
Food at Home
24.1
1.7
0.4
0.2
Rice, bread and other cereals
5.5
0.3
0.2
0.1
Meat
3.4
3.8
0.0
-1.3
Fish
4.9
5.4
3.5
1.0
Milk and eggs
2.1
-1.4
-0.2
1.0
Oils and fats
0.8
-1.5
-6.4
1.8
Fruits and vegetables
5.0
-0.7
-1.0
0.2
Sugar
0.5
-0.2
-0.1
-1.9
Coffee and tea
0.8
0.0
0.1
0.4
Other foods
1.1
1.1
-0.2
0.3
Food away from home
9.7
2.6
1.3
2.0
1.3
1.6
0.4
2.4
1.3
2.2
4.4
2.5
0.2
1.6
0.5
0.7
Source: Department of Statistics, Malaysia
Table A.24
Producer Price Index (1989=100)
Weights
(%)
1999
2000
2001
2002
2003
Annual change (%)
Domestic Economy
100.0
-3.3
3.1
-5.0
4.4
of which:
Food and live animals chiefly for food
14.9
-2.3
0.4
0.4
0.4
Beverages and tobacco
2.1
10.2
0.4
1.8
3.9
Crude materials, inedible except fuels
18.0
-2.7
1.3
-5.9
7.0
Mineral fuels, lubricants and
related materials
18.8
14.2
33.9
-10.6
0.0
Animal and vegetable oils and fats
8.5
-29.4
-31.9
-17.6
46.5
Chemicals and related products N.E.C. 
4.4
1.5
1.0
-1.1
-0.7
Manufactured goods classified 
  chiefly by material
10.8
-0.9
0.9
-0.5
-0.2
Machinery and transport equipment
18.3
-0.5
-0.1
-0.1
-0.3
Miscellaneous manufactured articles
3.6
1.4
0.9
-0.6
-0.3
Commodities and transactions not  
  classified elsewhere in the S.I.T.C. 
0.6
-0.9
0.4
10.3
2.6
Local Production
79.3
-3.9
3.6
-6.1
5.7
Imports
20.7
-0.6
1.1
-0.3
-0.7
5.7
-0.2
0.9
7.5
11.4
15.7
1.4
1.8
0.1
0.9
0.5
6.8
0.8
Source: Department of Statistics, Malaysia


P34
Table A.25
Supply of Office Space, Retail Space, Condominiums and Apartments in the Klang Valley1 
Condominiums 
and Apartments
Office Space
Retail Space
Year
Square  
metres
Square  
metres
Occupancy
rate2 (%)
Occupancy
rate2 (%)
Units
1993
332,246
91.5
130,345
97.3
18,232
1994
192,808
94.3
117,340
98.5
9,331
1995
362,851
94.9
341,091
96.1
17,822
1996
296,742
95.5
136,964
92.8
14,568
1997
869,394
94.9
362,574
90.5
5,473
1998
1,158,776
79.9
364,027
61.7
14,151
1999
265,645
76.2
89,787
76.6
9,547
2000
1,374,452
76.9
218,562
78.5
5,466
2001
2003 (Jan-Sep)
 177,576
74.7
95,663
79.9
17,067
 2002
200,195
75.5
141,644
83.0
20,465
92,800
77.2
190,175
83.3
19,060
1   Refers to Kuala Lumpur and Selangor
2   Refers to end period
Source: NAPIC, Valuation and Property Services Department 
Year
Table A.26
Average Monthly Rentals for Prime Office and Retail Space in the Klang Valley1
Prime Office Space
Prime Retail Space
RM/sq.m
Annual change (%)
RM/sq.m
Annual change (%)
1998
46
-19.3
162
-39.3
1999
42
-8.7
175
8.0
2000
48
14.3
194
10.9
2001
48
0.9
215
11.0
2002
2003
45
-6.7
226
5.0
45
0.0
226
0.0
1  Refers to Kuala Lumpur and Selangor
Source: CH Williams Talhar & Wong Sdn. Bhd.


Annex
P35
Table A.27
Broad Money (M3)
Annual change
As at end 
2003
1999
2000
2001
2002
2003
RM million
Broad money (M3)1
33,131
21,906
13,022
31,607
Currency2
6,019
-1,949
-92
1,751
Demand deposits
12,403
7,623
2,882
6,718
Broad quasi-money
14,709
16,232
10,232
23,138
Fixed deposits
29,745
8,207
-358
12,648
Savings deposits
7,908
6,380
4,454
5,590
NIDs
-21,864
-932
600
3,575
Repos
-2,461
-314
4,186
2,507
Foreign currency deposits
1,382
2,890
1,350
-1,182
Factors Affecting M3
Net claims on Government
2,248
4,388
-1,542
11,538
Claims on Government
-2,906
3,326
4,165
-867
Less: Government deposits
-5,155
-1,062
5,707
-12,405
Claims on private sector
-9,792
25,968
20,335
27,737
Loans
-20,377
21,566
17,081
19,288
Securities
10,585
4,402
3,255
8,449
Net external operations
31,391
7,336
6,741
1,237
Bank Negara Malaysia3
19,164
1,633
7,722
7,564
Banking system
12,227
5,703
-980
-6,327
Other influences
9,284
-15,786
-12,513
-8,905
48,502
2,232
11,187
35,083
17,065
5,602
1,965
8,016
2,435
12,878
3,890
-8,988
32,424
21,723
10,701
19,467
27,131
-7,664
-16,267
549,627
25,943
77,358
446,326
327,308
62,458
10,977
33,177
12,406
8,494
32,836
24,342
567,482
475,605
91,877
136,271
138,097
-1,826
-162,620
1   Excludes interplacements among banking institutions
2   Excludes holdings by banking system
3   Includes exchange rate revaluation loss/gain
Table A.28
Money Supply: Annual Change and Growth Rates
M35
M23
M11
Deposits 
 with other 
banking 
institutions4
Demand
deposits
Narrow 
quasi-money2
Total
Total
Total
Currency
RM m
RM m
RM m
RM m
RM m
RM m
RM m
%
%
%
%
%
%
%
1999 33,131
8.3
40,666 13.7
19,313 35.7
6,534 35.8 12,778 35.6
21,354
8.8
-7,535
-7.2
2000 21,906
5.0
17,564
5.2
4,769
6.5
-2,517 -10.2
7,287 15.0
12,795
4.9
4,342
4.5
2001 13,022
2.9
7,810
2.2
2,512
3.2
-115
-0.5
2,627
4.7
5,298
1.9
5,213
5.1
2002
2003
31,607
6.7
21,030
5.8
8,344 10.3
1,749
7.9
6,595 11.3
12,686
4.5
10,577
9.9
48,502
9.7
42,497 11.1
13,009 14.6
2,204
9.2 10,805 16.6
29,488 10.0
6,005
5.1
1   Currency in circulation and demand deposits of the private sector placed with commercial banks and Islamic banks
2   Comprising savings and fixed deposits, negotiable instruments of deposits (NIDs), repos and foreign currency deposits of the
   private sector placed with commercial banks and Islamic banks
3   M1 plus narrow quasi-money
4   Comprising fixed deposits and repos of the private sector placed with finance companies, merchant banks and discount
   houses. Also includes saving deposits with finance companies, NIDs with finance companies and merchant banks, foreign
   currency deposits placed with merchant banks and call deposits with discount houses. Excludes interplacement among the
   banking institutions
5   M2 plus deposits placed with other banking institutions


P36
Table A.29
Interest Rates (%)
Average rates at end-year
Average rates at end-month in 2003
1999
2000
2001
2002
Jan.
Feb.
Mar.
Apr.
May
Jun.
Jul.
Aug.
Sep.
Oct.
Nov.
Dec.
3-month interbank
Commercial banks
Fixed deposit:
3-month
12-month
Savings deposit
Base lending rate (BLR)
Finance companies
Fixed deposit:
3-month
12-month
Savings deposit
Base lending rate (BLR)
Treasury bills
(91 days)
Government securities
(1 year)
Government securities
(5 years)
3.18
3.33
3.95
2.76
6.79
3.49
4.13
3.50
7.95
2.71
3.37
5.21
3.25
3.48
4.24
2.72
6.78
3.52
4.27
3.44
7.95
2.98
3.36
4.80
3.27
3.21
4.00
2.28
6.39
3.22
4.01
2.94
7.45
2.73
2.93
3.18
3.13
3.20
4.00
2.12
6.39
3.20
4.00
2.65
7.45
2.82
2.94
3.15
2.91
3.20
4.00
2.10
6.39
3.20
4.00
2.58
7.45
2.80
2.89
3.10
2.86
3.20
4.00
2.07
6.39
3.20
4.00
2.58
7.45
2.80
2.89
3.12
2.90
3.20
4.00
2.04
6.39
3.20
4.00
2.57
7.45
2.79
2.89
3.10
2.86
3.20
4.00
2.04
6.39
3.20
4.00
2.51
7.45
2.79
2.88
3.08
2.86
3.00
3.69
1.95
6.00
3.02
3.72
2.25
6.90
2.78
2.87
3.05
2.88
3.00
3.70
1.92
6.00
3.01
3.72
2.22
6.90
2.77
2.88
3.09
2.88
3.00
3.70
1.92
6.00
3.00
3.68
2.22
6.90
2.77
2.95
3.63
2.90
3.00
3.70
1.87
6.00
3.00
3.68
2.23
6.90
2.82
2.93
3.93
2.86
3.00
3.70
1.87
6.00
3.00
3.68
2.23
6.90
2.82
2.92
3.94
2.88
3.00
3.70
1.87
6.00
3.00
3.68
2.22
6.90
2.77
2.86
4.44
2.87
3.00
3.70
1.86
6.00
3.00
3.68
2.19
6.90
2.78
2.93
4.38
2.87
3.00
3.70
1.86
6.00
3.00
3.68
2.18
6.90
2.77
2.93
4.28


Annex
P37
Table A.30
1999
2000
2001
2002
2003e
RM million
General government
Revenue
70,887
96,763
% growth
2.2
5.6
Operating expenditure
54,274
75,450
% growth
8.0
4.4
Current surplus
16,612
21,312
NFPEs
Revenue
98,242
126,275
% growth
33.8
20.4
Operating expenditure
61,596
80,951
% growth
24.4
23.8
Current surplus
36,646
45,324
Public sector current surplus
53,258
66,637
% of GDP
17.7
18.5
Net development expenditure
46,422
69,125
% growth
-0.8
15.7
General government
20,964
36,828
% growth
22.4
3.2
NFPEs
25,458
32,297
% growth
-14.2
34.4
Overall balance
6,835
-2,488
% of GDP
2.3
-0.7
General government
-4,352
-15,515
NFPEs
11,187
76,002
7.2
64,445
18.7
11,556
112,929
14.9
71,725
16.4
41,204
52,761
15.4
50,439
8.7
27,079
29.2
23,360
-8.2
2,322
0.7
-15,522
17,844
91,633
20.6
72,299
12.2
19,334
104,876
-7.1
65,392
-8.8
39,484
58,818
17.6
59,724
18.4
35,692
31.8
24,032
2.9
-906
-0.3
-16,358
15,452
13,026
110,408
14.1
84,809
12.4
25,600
149,183
18.1
104,556
29.2
44,627
70,227
17.9
71,951
4.1
43,727
18.7
28,225
-12.6
-1,725
-0.4
-18,127
16,402
e  Estimate
Source: Ministry of Finance, state governments and non-financial public enterprises
Consolidated Public Sector Finance


P38
Table A.31
Major Industrial Countries: Key Economic Indicators
1999
2000
2001
2002
2003e
2004f
Annual change (%)
REAL GDP
Major Industrial Countries
3.4
3.9
1.0
1.5
2.2
United States
4.1
3.8
0.3
2.4
3.1
Japan
0.2
2.8
0.4
-0.4
2.7
Euro Area
2.8
3.5
1.5
0.9
0.4
Germany
2.0
2.9
0.8
0.2
-0.1
United Kingdom
2.4
3.1
2.1
1.7
2.3
INFLATION
Major Industrial Countries
1.4
2.2
2.2
1.5
1.8
United States
2.2
3.4
2.8
1.6
2.3
Japan
-0.3
-0.9
-0.7
-0.9
-0.3
Euro Area
1.1
2.1
2.4
2.3
2.0
Germany
0.6
1.4
1.9
1.3
1.0
United Kingdom1
2.3
2.1
2.1
2.2
2.8
(% of labour force) 
UNEMPLOYMENT
Major Industrial Countries
United States
4.2
4.0
4.8
5.8
6.0
Japan
4.7
4.7
5.0
5.4
5.3
Euro Area
9.4
8.5
8.0
8.4
9.1
Germany
8.4
7.8
7.9
8.6
9.5
United Kingdom
6.0
5.5
5.1
5.2
3.0
(% of GDP)
CURRENT ACCOUNT BALANCE
Major Industrial Countries
United States
-3.2
-4.2
-3.9
-4.6
-5.1
Japan
2.6
2.5
2.1
2.8
2.9
Euro Area
0.4
-0.5
0.2
0.9
0.8
Germany
-1.1
-1.4
0.0
2.3
2.4
United Kingdom
-2.2
-2.0
-1.3
-0.9
-1.0
FISCAL BALANCE
Major Industrial Countries
United States
1.2
2.1
0.7
-2.2
-4.3
Japan
-8.7
-7.2
-6.7
-6.3
-6.1
Germany
-1.3
1.3
-1.1
-1.5
-1.9
United Kingdom
1.2
4.1
0.9
-1.4
-2.6
2.9
3.9
2.0
1.6
1.2
2.3
1.3
1.3
-0.6
1.6
0.6
2.5
5.7
5.4
9.2
9.8
5.2
-4.7
2.9
0.8
2.1
-0.9
-4.2
-5.4
-1.7
-2.8
1    Refers to Retail Price Index excluding mortgage interest
e  Estimate
f  Forecast
Source:   IMF World Economic Outlook, September 2003
              OECD Economic Outlook, December 2003
              Datastream, National Sources


Annex
P39
Table A.32
East Asia: Key Economic Indicators
1999
2000
2001
2002
2003e
2004f
REAL GDP
Annual change (%)
Regional Countries
 6.7
7.8
4.1
6.2
6.2
The People’s Republic of China
7.1
8.0
7.3
8.2
 9.1
Korea
10.9
9.3
3.1
6.3
2.9
Chinese Taipei
5.4
5.9
-2.2
3.6
3.2
Singapore
6.4
9.4
-2.4
2.2
1.1
Hong Kong China
3.4
10.2
0.5
2.3
3.3
Malaysia
6.1
8.5
0.3
4.1
5.2
Thailand
4.4
4.6
1.9
5.4
6.7
Indonesia
0.8
4.9
3.4
3.7
4.1
Philippines
3.4
4.4
3.0
4.4
4.5
CONSUMER PRICES
Annual change (%)
Regional Countries
1.3
1.2
2.4
1.3
1.8
-2.9
0.4
0.7
-0.8
 1.2
0.8
2.3
4.1
2.7
3.5 
0.2
1.3
0.0
-0.2
-0.3
0.0
1.3
1.0
-0.4
0.5
-4.0
-3.8
-1.6
 -3.0
-2.6
2.8
1.6
1.4
1.8
1.2
0.3
1.6
1.6
0.7
1.8
24.0
3.8
11.5
11.9
6.6
6.7
4.4
6.1
3.1
3.4 
4.0 ~ 5.0 
CURRENT ACCOUNT BALANCE
( % of GDP)  
Regional Countries
The People’s Republic of China
1.6
1.9
1.5
2.8
1.4
Hong Kong China
7.3
5.4
7.5
10.8
13.9
FISCAL BALANCE2
( % of GDP) 
Regional Countries
Korea
-2.6
1.4
1.8
1.0
1.3
Chinese Taipei
-1.3
-3.2
-6.6
-3.0
-2.3
Philippines
-3.8
-4.0
-4.0
-5.2
-4.6
6.6 ~ 6.8
 8.3
5.2
4.7
3.5 ~ 5.5
6.0
6.0 ~ 6.5
6.3 ~ 7.3
4.0 ~ 5.0
4.9 ~ 5.8
2.4 ~ 2.7
 3.0
3.0
0.4
0.5 ~ 1.5
-1.0
1.5
1.0 ~ 2.0
4.5 ~ 6.5
1.3
Korea
6.0
2.7
1.9
1.3
1.6
1.8
Chinese Taipei
2.9
2.9
6.4
9.1
8.5
8.8
Singapore
25.9
16.7
19.0
21.5
23.7
23.0
14.3
Malaysia
15.9
9.4
8.3
8.5
 12.9
 12.0
Thailand
10.2
7.6
5.4
6.0
5.3
4.8
Indonesia
 4.1
5.3
4.9
4.3
2.7
1.9
Philippines
10.0
11.3
1.8
5.4
2.6
1.9
The People’s Republic of China
-2.1
 -2.8
-2.6
-3.0
-2.7
n.a.
n.a.
n.a.
Singapore
3.4
2.5
-1.8
0.1
 -1.1
 n.a.
Hong Kong China
0.8
-0.6
-5.0
-4.9
-4.0
n.a.
Malaysia
-3.2
-5.8
-5.5
-5.6
-5.3
n.a.
Thailand
-3.3
-2.2
-2.4
-1.4
0.3
n.a.
Indonesia
-2.1
-5.1
-2.3
-1.7
-1.9
n.a.
n.a.
1
 Refers to composite prices
2
 Refers to central government balance
e
 Estimate
f
 Forecast
n.a. Not available
Source: National Sources 
              CEIC
              IMF World Economic Outlook, September 2003
The People’s Republic of China
Korea
Chinese Taipei
Singapore
Hong Kong China1
Malaysia
Thailand
Indonesia
Philippines


P40
9,417.1
Table A.33
Sources and Uses of Funds of the Financial System
1999
2000
2001
2002
2003p
RM million
Sources of Funds:
Capital, reserves and profit
113,197.9
120,990.7
123,863.2
134,871.7
Currency
30,483.1
26,708.9
25,385.4
27,137.4
Demand deposits
75,077.8
83,205.3
92,129.0
87,539.5
1
486,187.1
503,079.1
508,836.0
547,135.3
49,282.5
45,385.0
44,971.3
44,767.7
117,586.8
110,791.5
102,161.7
122,405.2
312,338.3
339,770.3
354,996.6
372,884.1
Other deposits  (of which):
Public sector
Other financial institutions2
Private sector
Foreign
6,979.5
7,132.3
6,706.4
7,078.3
Borrowings
31,949.8
34,820.5
37,380.8
44,948.0
69,576.7
67,603.3
68,552.4
70,836.8
52,792.3
51,355.6
53,448.2
46,973.0
Funds from other financial institutions
Domestic2
Foreign
16,784.4
16,247.7
15,104.2
23,863.8
Insurance, provident and pension 
  funds
213,892.6
236,640.1
256,000.6
274,384.5
Other liabilities
153,893.9
190,138.4
193,163.0
208,266.6
Total Liabilities
1,174,258.9
1,263,186.3
1,305,310.4
1,395,119.8
Uses of Funds:
Currency
8,834.4
5,336.7
7,369.8
178,785.1
183,470.2
177,108.1
187,883.0
164,139.5
162,274.1
156,669.0
166,670.3
Deposits with other financial institutions
Domestic
Foreign
14,645.6
21,196.1
20,439.1
21,212.7
16,458.1
16,572.4
16,286.0
19,001.8
3,702.3
4,260.4
4,063.5
5,680.0
Bills
Treasury
Commercial
12,755.8
12,312.0
12,222.5
13,321.8
489,449.9
512,428.5
531,745.7
560,459.4
4,418.4
5,529.4
5,188.8
10,191.1
25,672.1
26,450.3
25,984.9
23,746.4
456,557.7
477,954.0
498,374.6
524,393.4
Loans and advances
Public sector
Other financial institutions
Private sector
Foreign
2,801.7
2,494.8
2,197.4
2,128.5
244,851.6
281,460.8
321,280.5
342,111.4
75,441.0
88,197.3
103,714.8
104,354.9
1,516.1
1,233.9
2,183.0
3,189.7
162,996.8
186,728.5
208,854.7
226,671.9
Securities
Malaysian government
Foreign
Corporate
Others
4,897.7
5,301.1
6,528.0
7,894.9
Gold and forex reserves
113,765.9
109,835.5
113,542.3
127,515.1
Other assets
121,531.2
150,584.5
140,011.1
150,779.3
Total Assets
1,174,258.9
1,263,186.3
1,305,310.4
1,395,119.8
158,808.6
29,445.4
92,094.8
617,353.0
40,583.0
161,350.9
406,032.3
9,386.8
48,035.6
88,877.7
61,867.4
27,010.3
297,068.8
232,378.1
1,564,062.0
6,264.4
224,560.8
209,345.0
15,215.8
16,751.2
3,539.8
13,211.4
600,844.8
8,816.3
23,436.8
566,251.7
2,340.0
393,321.3
124,285.8
3,469.4
258,980.3
6,585.8
166,139.3
156,180.2
1,564,062.0
1
Equals savings, fixed and other (NIF,  LPHT, etc.) deposits + NIDs + repos
2
Effective 1998, the statutory reserves of banking institutions have been reclassified as “Funds from other financial
institutions” instead of “Other deposits from other financial institutions”
p Preliminary
2


Annex
P41
Table A.34
Commercial Banks1: Commitments and Contingencies
As at end
1999
RM 
million
%
share
2000
RM 
million
%
share
2001
RM 
million
%
share
2002
RM 
million
%
share
2003
RM 
million
%
share
Assets sold with recourse and commitments with
  drawdown 
12,091.4
131,915.7
17,296.9
48,348.1
13,174.3
6,914.2
17,959.4
1,858.1
9,954.6
Credit extension commitments
Direct credit substitutes
Foreign exchange related contracts
Interest rate related contracts
Trade-related contingencies
Transaction-related contingencies
Underwriting obligations
Others
Total
259,512.7
4.7
50.8
6.7
18.6
5.1
2.7
6.9
0.7
3.8
100.0
4.0
44.4
4.8
27.3
5.2
4.8
6.0
0.5
3.1
100.0
11,282.3
159,824.0
13,894.6
81,445.1
32,667.8
13,465.3
19,025.6
1,768.1
11,293.9
344,666.6
3.3
46.4
4.0
23.6
9.5
3.9
5.5
0.5
3.3
100.0
2.7
39.9
3.0
20.4
21.6
4.2
4.9
0.5
2.8
100.0
2.9
35.8
3.0
21.4
25.7
4.1
4.3
0.4
2.4
100.0
13,818.0
169,490.0
14,156.4
101,331.6
121,497.6
19,404.9
20,448.1
1,818.4
11,600.3
473,565.2
11,440.7
167,530.0
12,705.8
85,361.0
90,528.5
17,438.5
20,639.0
1,952.0
11,838.6
419,434.0
12,249.3
137,597.3
14,999.8
84,506.6
15,987.1
14,785.5
18,485.7
1,664.4
9,518.3
309,794.0
1 Excludes Islamic banks
Note: Numbers may not necessarily add up due to rounding


P42
Table A.35
Finance Companies: Commitments and Contingencies
As at end
1999
RM 
million
%
share
2000
RM 
million
%
share
2001
RM 
million
%
share
2002
RM 
million
%
share
2003
RM 
million
%
share
Assets sold with recourse and commitments with
  drawdown 
5,536.1
9,654.0
968.6
0.0
667.0
0.0
18.8
0.0
306.5
Credit extension commitments
Direct credit substitutes
Foreign exchange related contracts
Interest rate related contracts
Trade-related contingencies
Transaction-related contingencies
Underwriting obligations
Others
Total
17,150.9
32.3
56.3
5.6
0.0
3.9
0.0
0.1
0.0
1.8
100.0
41.8
49.2
3.1
0.0
5.1
0.0
0.2
0.0
0.5
100.0
9,990.7
8,779.9
198.3
0.0
1,389.0
0.0
40.7
0.0
32.6
20,431.3
48.9
43.0
1.0
0.0
6.8
0.0
0.2
0.0
0.2
100.0
53.0
34.6
0.5
0.0
11.8
0.0
0.1
0.0
0.0
0.0
100.0
51.4
36.5
0.5
0.0
11.6
0.0
0.1
0.0
0.0
100.0
13,010.2
9,241.1
136.3
0.0
2,929.0
0.0
15.9
0.0
25,332.6
13,983.8
9,136.1
141.6
0.0
3,109.0
0.0
29.1
0.0
0.0
26,399.5
8,186.1
9,640.4
611.0
0.0
1,007.0
0.0
41.6
0.0
105.4
19,591.7
Note: Numbers may not necessarily add up due to rounding


Annex
P43
Table A.36
Merchant Banks: Commitments and Contingencies
As at end
1999
RM 
million
%
share
2000
RM 
million
%
share
2001
RM 
million
%
share
2002
RM 
million
%
share
2003
RM 
million
%
share
Assets sold with recourse and commitments with
  drawdown 
302.0
4,967.8
4,310.6
707.7
9,372.8
0.1
1,014.5
717.0
76.5
Credit extension commitments
Direct credit substitutes
Foreign exchange related contracts
Interest rate related contracts
Trade-related contingencies
Transaction-related contingencies
Underwriting obligations
Others
Total
21,469.1
1.4
23.1
20.1
3.3
43.7
0.0
4.7
3.3
0.4
100.0
0.6
16.0
8.2
3.8
61.0
0.0
3.4
6.4
0.5
100.0
1,425.5
2,639.7
1,325.1
1,320.1
39,658.8
0.1
790.4
1,617.5
80.0
48,857.2
2.9
5.4
2.7
2.7
81.2
0.0
1.6
3.3
0.2
100.0
2.2
2.7
1.3
1.9
89.7
0.0
1.0
1.2
0.1
55.4
100.0
1.3
2.0
1.0
1.2
93.0
0.0
0.7
0.9
0.0
100.0
1,595.2
2,444.0
1,228.6
1,459.9
115,332.1
0.0
818.2
1,138.9
124,072.3
1,736.0
2,089.1
1,039.3
1,506.6
70,701.1
0.0
749.0
937.5
44.1
78,802.7
161.0
4,114.8
2,111.4
964.7
15,686.3
1.2
886.0
1,653.5
118.3
25,697.1
Note: Numbers may not necessarily add up due to rounding


P44
Table A.37
Commercial Banks : Income and Expenditure
1
For the financial year
For the calendar year
2000
2001
2002
2001
2002
2003p
RM million
Interest income net of
interest-in-suspense
25,416.7
24,969.7
25,472.5
 25,055.5
(Interest-in-suspense)
3,148.8
3,488.2
4,087.2
3,759.7
Less:     Interest expense
13,455.8
12,961.4
13,341.4
12,808.6
Net interest income
11,960.9
12,008.4
12,131.0
12,247.0
Add:     Fee-based income
Add:     Other income
2,304.3
2,429.6
2,552.7
2,871.8
Gross operating profit
     
7,677.0
7,171.9
7,033.2
7,255.3
Gross operating profit
     after provision
3,472.8
1,168.7
837.6
3,447.9
2,648.7
3,475.6
3,669.4
2,909.4
Less:     Loan loss provisions
4,204.3
6,003.2
6,195.6
3,807.4
Less:     Staff cost
3,299.6
3,624.3
3,768.7
3,688.1
Overheads
3,288.6
3,641.8
3,881.9
4,175.3
Pre-tax profit
6,121.4
4,644.3
25,157.7
3,959.0
12,876.2
12,281.5
2,827.1
7,357.1
3,372.8
2,986.8
3,984.2
3,635.1
4,116.4
6,359.7
4,507.1
6,357.3
 26,533.4
3,169.2
13,505.2
13,028.2
3,213.2
7,811.8
4,255.5
2,652.3
3,556.3
3,907.9
4,521.8
6,907.8
1  Excludes Islamic banks
p Preliminary
Note: Numbers may not necessarily add up due to rounding
Table A.38
Finance Companies: Income and Expenditure
For the financial year
For the calendar year
2000
2001
2002
2001
2002
2003p
RM million
Interest income net of
interest-in-suspense
9,002.4
7,637.4
8,865.2
 8,824.1
(Interest-in-suspense)
1,153.7
1,161.5
1,330.6
1,521.6
Less:     Interest expense
4,867.1
3,375.8
3,947.5
3,884.2
Net interest income
4,135.3
4,261.6
4,917.7
4,939.8
Add:     Fee-based income
Add:     Other income
116.9
224.8
132.9
104.2
Gross operating profit
     
2,660.7
3,036.6
3,259.9
3,242.6
Gross operating profit
     after provision
979.0
1,664.9
1,600.8
1,871.7
482.5
369.2
520.0
507.7
Less:     Loan loss provisions
1,681.7
1,371.6
1,659.1
1,370.9
Less:     Staff cost
683.6
663.0
772.9
783.0
Overheads
907.9
786.8
1,017.8
1,018.5
Pre-tax profit
1,461.5
2,034.1
9,299.7
1,452.4
4,094.5
5,205.1
103.0
3,412.2
1,887.8
524.2
1,524.4
802.1
1,093.9
2,412.0
2,120.8
2,379.4
 9,250.6
1,361.7
4,020.8
5,229.8
101.1
3,558.4
2,161.1
516.6
1,397.3
812.7
959.8
2,677.7
p Preliminary
Note: Numbers may not necessarily add up due to rounding


Annex
P45
Table A.39
Merchant Banks: Income and Expenditure
For the financial year
For the calendar year
2000
2001
2002
2001
2002
2003p
RM million
Interest income net of
interest-in-suspense
1,803.4
1,783.7
1,728.8
 1,601.0
(Interest-in-suspense)
421.7
313.8
311.9
296.8
Less:     Interest expense
1,205.2
1,176.9
1,146.7
1,070.1
Net interest income
598.2
606.8
582.1
530.9
Add:     Fee-based income
Add:     Other income
288.3
296.3
277.8
338.2
Gross operating profit
     
622.2
580.1
537.1
521.2
Gross operating profit
     after provision
108.8
-314.6
-405.5
203.1
439.6
624.6
700.3
388.3
Less:     Loan loss provisions
513.4
894.7
942.6
318.2
Less:     Staff cost
147.3
204.9
204.2
226.5
Overheads
116.9
118.1
118.6
121.3
Pre-tax profit
548.4
310.0
1,714.3
328.1
1,138.7
575.5
306.2
549.9
178.3
488.3
371.6
214.8
117.0
666.6
294.8
591.3
 1,636.5
220.9
1,146.6
489.9
327.6
424.6
101.9
590.2
322.7
260.6
132.2
692.1
p  Preliminary
Note: Numbers may not necessarily add up due to rounding
Table A.40
Commercial Banks1: Lending Guidelines to the Priority Sectors
Loans to Bumiputera
community
Total outstanding loans
(RM billion)
Total outstanding loans (%)
Non-compliance
(no. of institutions)
Housing Loan
Commitments2
Total number of houses
(units)
Non-compliance
(no. of institutions)
1   Excluding performance of Islamic banks
2   Compliance date for 2000 Lending Guideline in respect of housing loan commitments has been extended
   from end-December 2001 to end-December 2002
3   Target achieved as at 31 December 2003
Target
Compliance Date of 31 December 2002
Achieved3
Achieved
170,571
3
Target
94.8
30.0
Achieved
93.1
29.4
12
Target
112,515
32,825
78,114
20.6
9.07
Loans to Small
and Medium Enterprises
Total loans approved
  (RM billion)
2000 Lending Guidelines 2002 Lending Guidelines
2003/2004 Lending Guidelines
(Compliance Date of 
31 December 2004)


P46
Table A.41
Finance Companies: Lending Guidelines to the Priority Sectors
Loans to Bumiputera
community
Total outstanding loans
(RM billion)
Total outstanding loans (%)
Non-compliance
(no. of institutions)
Housing Loan
Commitments1
Total number of houses
(units)
Non-compliance
(no. of institutions)
1   Compliance date for 2000 Lending Guideline in respect of housing loan commitments has been extended from 
   end-December 2001 to end-December 2002
2   Target achieved as at 31 December 2003
Target
Compliance Date of 31 December 2002
Achieved
Achieved
46,989
3
Target
27.8
30.0
Achieved2
44.4
47.9
1
Target
31,200
5,675
18,935
1.92
6.8
Loans to Small
and Medium Enterprises
Total loans approved
  (RM billion)
2000 Lending Guidelines 2002 Lending Guidelines
2003/2004 Lending Guidelines
(Compliance Date of 
31 December 2004)


Annex
P47
Table A.42
Commercial Banks1: Direction of Lending
As at end
2003
  2002
Loans by Sectors
Agriculture, hunting, forestry and fishing
10,278.1
3.0
Mining and quarrying
835.1
0.3
Manufacturing
56,750.3
16.8
Electricity, gas and water supply
5,985.7
1.8
Wholesale and retail trade, restaurants and hotels
32,892.1
9.7
Wholesale trade
19,351.1
5.7
Retail trade
9,868.3
2.9
Restaurants and hotels
3,672.7
1.1
Broad property sector
144,345.1
42.7
Construction
24,189.9
7.2
Purchase of residential property
86,246.4
25.5
Purchase of non-residential property
22,551.3
6.7
Real estate
11,357.5
3.4
Transport, storage and communication
7,608.2
2.3
Financial, insurance and business services
27,524.0
8.1
Financial services
19,830.7
5.9
Insurance
588.4
0.2
Business services
7,104.9
2.1
Consumption credit
23,436.5
6.9
Personal uses
13,541.7
4.0
Credit cards
8,990.2
2.7
Purchase of consumer durables
368.5
0.1
Purchase of passenger cars
536.0
0.2
Purchase of securities
15,707.8
4.6
Purchase of transport vehicles
465.5
0.1
Community, social and personal services
4,552.2
1.4
Others
7,860.9
2.3
Total loans outstanding2
338,241.5
100.0
9,292.4
2.6
942.1
0.3
56,666.8
15.9
4,630.5
1.3
34,878.6
9.8
20,472.9
5.8
10,448.7
2.9
3,957.0
1.1
160,346.9
45.0
22,453.8
6.3
101,829.3
28.6
24,240.1
6.8
11,823.7
3.3
8,233.1
2.3
27,296.2
7.7
19,990.1
5.6
192.1
0.1
7,113.9
2.0
25,627.6
7.2
14,188.3
4.0
10,577.6
3.0
351.5
0.1
510.1
0.1
14,546.8
4.1
726.4
0.2
3,807.7
1.1
9,014.0
2.5
356,009.1
100.0
1    Including lslamic banks
2    Including loans sold to Cagamas
Note: Numbers may not necessarily add up due to rounding
RM million
% share
RM million
% share


P48
RM million
% share
Table A.43
Finance Companies: Direction of Lending
As at end
2003
2002
Loans by Sectors
RM million
% share
Agriculture, hunting, forestry and fishing
562.9
0.6
Mining and quarrying
113.0
0.1
Manufacturing
2,513.9
2.5
Electricity, gas and water supply
50.1
0.1
Wholesale and retail trade, restaurants and hotels
3,466.0
3.5
Wholesale trade
1,361.7
1.4
Retail trade
1,576.1
1.6
Restaurants and hotels
528.1
0.5
Broad property sector
25,880.9
25.8
Construction
5,504.1
5.5
Purchase of residential property
14,042.2
14.0
Purchase of non-residential property
4,895.8
4.9
Real estate
1,438.7
1.4
Transport, storage and communication
1,785.2
1.8
Financial, insurance and business services
1,419.2
1.4
Financial services
271.5
0.3
Insurance
16.5
0.0
Business services
1,131.2
1.1
Consumption credit
56,880.5
56.6
Personal uses
789.5
0.8
Credit cards
1,601.2
1.6
Purchase of consumer durables
38.9
0.0
Purchase of passenger cars
54,450.9
54.2
Purchase of securities
3,950.5
3.9
Purchase of transport vehicles
2,570.1
2.6
Community, social and personal services
962.0
1.0
Others
317.6
0.3
Total loans outstanding1
100,471.7
100.0
569.4
0.5
106.3
0.1
2,766.3
2.6
50.8
0.1
3,638.1
3.4
1,428.8
1.3
1,626.0
1.5
583.3
0.6
25,533.5
23.9
5,333.9
5.0
14,647.6
13.7
4,409.8
4.1
1,142.1
1.1
1,651.8
1.5
1,381.0
1.3
237.3
0.2
14.5
0.0
1,129.2
1.1
63,585.1
59.5
958.9
0.9
1,658.8
1.6
21.3
0.0
60,946.1
57.0
3,637.4
3.4
2,577.4
2.4
1,065.8
1.0
366.7
0.3
106,929.6
100.0
1  Including loans sold to Cagamas
Note: Numbers may not necessarily add up due to rounding


Annex
P49
Table A.44
Merchant Banks: Direction of Lending
As at end
   2003
  2002
Loans by Sectors
RM million
% share
RM million
% share
Agriculture, hunting, forestry and fishing
807.4
6.0
Mining and quarrying
69.2
0.5
Manufacturing
2,012.1
14.9
Electricity, gas and water supply
779.8
5.8
Wholesale and retail trade, restaurants and hotels
705.2
5.2
Wholesale trade
156.5
1.2
Retail trade
148.3
1.1
Restaurants and hotels
400.4
3.0
Broad property sector
3,859.9
28.6
Construction
2,495.3
18.5
Purchase of residential property
77.1
0.6
Purchase of non-residential property
209.0
1.6
Real estate
1,078.4
8.0
Transport, storage and communication
363.0
2.7
Financial, insurance and business services
938.3
6.9
Financial services
768.2
5.7
Insurance
0.0
0.0
Business services
170.2
1.3
Consumption credit
40.3
0.3
Personal uses
21.1
0.2
Purchase of consumer durables
Purchase of passenger cars
19.1
0.1
0.0
Purchase of securities
1,981.6
14.7
Purchase of transport vehicles
0.3
0.0
Community, social and personal services
203.9
1.5
Others
1,720.0
12.8
Total loans outstanding1
13,481.0
100.0
1   Including loans sold to Cagamas
Note: Numbers may not necessarily add up due to rounding
0.0
652.3
5.9
47.7
0.4
1,667.9
15.1
384.7
3.5
655.3
5.9
97.4
0.9
92.8
0.8
465.1
4.2
2,858.8
25.9
1,708.0
15.5
78.2
0.7
150.0
1.4
922.6
8.3
845.3
7.7
633.1
5.7
535.2
4.8
0.0
0.0
97.9
0.9
57.0
0.5
35.5
0.3
21.5
0.2
0.0
1,709.4
15.5
0.5
0.0
98.4
0.9
1,432.6
13.0
11,042.9
100.0
0.0


P50
1   Excludes Islamic banks 
2   Includes commercial vehicles 
Note: Numbers may not necessarily add-up due to rounding
Table A.45
Commercial Banks1: Non-performing Loans by Sector
NPL by sector
RM million
As at end
As percentage of total loans to the sector  
%
1999
2000
2001
2003
2002
2000
2001
2002
2003
Business enterprises
Households 
Others
Agriculture, hunting, forestry and fishing
Mining and quarrying
26,337.1
Manufacturing
Electricity, gas and water supply
160.4
533.8
6,765.7
Wholesale and retail trade, restaurants  
   and hotels  
31.0
Wholesale trade
Retail trade 
Restaurants and hotels
1,656.6
Broad property sector
Construction 
Purchase of residential property
Purchase of non-residential property 
Real estate
Transport, storage and communication 
Finance, insurance and business services
12,598.3
Consumption credit
5,185.6
   Personal use
3,198.2
Credit cards 
Purchase of consumer durable goods 
2,071.0
Purchase of securities
Community, social and personal services
1,809.2
1,433.6
163.0
1999
6,436.8
3,633.1
1,081.3
895.2
2,143.5
1,289.0
2,997.1
212.5
450.6
1,957.4
548.0
677.6
Total
33,451.5
28,164.7
150.4
556.3
7,714.6
179.5
1,869.6
13,818.5
5,395.4
3,342.8
2,539.9
2,016.7
1,661.6
64.5
6,865.3
4,021.8
1,057.6
1,094.6
2,540.4
1,090.8
2,387.7
290.6
409.8
2,192.1
491.7
630.6
35,660.6
37,022.8
173.8
737.6
10,662.9
208.7
1,924.1
18,951.2
7,366.9
4,939.3
3,806.0
1,986.3
1,621.2
52.5
8,616.2
4,219.0
1,127.9
1,166.9
2,839.0
796.1
3,856.6
312.6
226.7
2,927.7
892.3
1,273.1
46,912.1
32,900.4
109.2
825.7
10,857.5
196.3
1,630.5
18,635.3
6,508.3
6,425.2
2,916.7
2,082.7
1,675.4
43.1
9,882.3
3,524.6
1,007.9
886.2
2,785.1
751.5
2,361.8
364.1
179.7
2,389.6
868.8
1,150.0
43,932.7
28,993.1
101.3
672.1
8,634.9
1,316.8
1,570.5
17,713.1
5,065.8
7,523.5
2,538.9
2,198.4
1,681.5
39.2
11,017.8
3,823.9
1,248.2
1,005.2
2,584.9
776.7
1,808.7
477.7
135.1
2,321.6
508.4
866.9
40,877.8
12.6
14.8
7.3
12.5
0.5
9.9
11.7
19.9
6.6
17.8
10.7
12.1
21.1
8.6
12.1
12.2
19.6
10.0
12.6
11.0
5.0
26.4
12.9
9.9
10.5
13.2
13.1
6.0
13.7
2.6
10.5
11.8
21.3
5.7
21.4
10.8
13.8
9.3
7.9
12.9
11.5
25.6
12.0
12.5
8.4
4.9
37.4
14.4
10.5
6.9
17.6
17.4
7.4
19.1
4.8
10.6
14.7
30.3
7.0
30.1
9.9
13.2
12.1
8.7
13.4
12.0
29.5
13.3
10.5
13.0
4.3
18.9
20.7
19.5
15.6
15.9
13.6
8.2
19.7
3.5
8.6
13.3
28.5
7.7
25.8
9.3
12.8
13.3
8.6
10.8
10.3
24.2
12.8
10.0
8.7
4.1
30.8
15.5
19.3
15.0
14.0
10.9
7.4
15.7
28.7
7.8
11.4
24.0
7.6
21.6
9.0
12.3
12.6
8.4
11.1
12.1
25.5
11.1
9.6
6.7
4.6
27.1
16.2
13.6
9.8
Purchase of transport vehicle2 


Annex
P51
1 Includes commercial vehicles
Table A.46
Finance Companies: Non-performing Loans by Sector
NPL by sector
RM million
As at end
As percentage of total loans to the sector  
%
1999
2000
2001
2003
2002
2000
2001
2002
2003
Business enterprises
Households
Others
Agriculture, hunting, forestry and fishing
Mining and quarrying
8,012.4
Manufacturing
Electricity, gas and water supply
70.0
117.2
1,031.5
Wholesale and retail trade, restaurants 
   and hotels  
16.8
Wholesale trade
Retail trade
Restaurants and hotels
255.1
Broad property sector
Construction
Purchase of residential property
Purchase of non-residential property
Real estate
Transport, storage and communication
Finance, insurance and business services
4,979.5
Consumption credit
1,989.4
   Personal use
1,211.9
Credit cards
Purchase of consumer durable goods
550.3
Purchase of securities
Community, social and personal services
268.0
178.8
26.5
1999
6,318.2
546.4
174.8
116.5
1,227.8
564.0
841.4
62.7
3,973.5
1,729.6
192.6
7,904.3
59.4
120.3
768.1
15.9
153.9
5,910.6
2,060.3
1,712.2
587.0
313.7
210.8
15.8
6,205.9
511.8
210.0
147.9
1,551.1
750.2
554.7
87.2
3,507.6
1,344.7
253.2
9,026.6
70.3
100.0
870.8
16.7
158.0
6,919.0
2,328.8
1,801.9
789.8
354.7
239.4
18.5
6,046.7
568.2
203.4
206.7
1,998.5
735.3
637.0
96.8
3,203.0
1,374.2
224.2
8,474.9
45.6
59.9
859.1
17.8
191.5
6,900.2
2,139.7
2,058.7
756.6
264.6
180.0
14.5
5,747.9
610.7
189.1
230.1
1,945.2
616.7
604.0
70.1
2,843.7
1,161.7
238.8
7,498.8
37.5
55.2
644.4
5.9
148.5
7,084.4
2,234.4
2,284.7
598.3
287.1
186.0
5.0
5,605.6
536.1
152.3
235.3
1,967.1
339.5
433.8
96.1
2,578.1
911.5
190.7
25.4
27.4
14.8
31.6
22.6
21.2
18.9
27.3
10.2
32.2
12.0
17.9
19.4
13.0
15.3
11.2
14.7
22.0
24.1
37.8
5.7
12.7
25.1
19.6
28.2
31.8
16.4
26.6
26.9
13.7
23.3
33.6
13.8
38.4
13.8
26.3
15.1
11.2
15.6
13.0
27.3
29.2
36.1
28.2
6.4
9.2
22.8
27.5
33.6
40.0
15.6
29.0
35.5
11.8
26.6
38.7
13.8
51.2
14.4
26.5
46.8
9.2
17.0
13.5
40.9
36.8
39.5
43.7
6.4
6.7
28.7
23.5
34.3
40.4
10.6
34.2
35.6
14.1
26.7
38.9
14.7
52.6
10.9
22.8
37.2
7.6
17.6
12.0
43.6
39.7
34.5
42.6
4.4
5.0
29.4
24.8
31.3
35.3
9.7
23.3
11.7
10.4
27.7
41.9
15.6
52.4
10.9
19.4
23.3
6.8
14.7
9.4
40.3
44.6
20.6
31.4
5.8
4.1
25.1
17.9
Note: Numbers may not necessarily add-up due to rounding
84.6
Total
14,415.2
145.2
14,255.4
220.7
15,294.0
135.6
14,358.4
94.0
13,198.4
12.5
30.9
56.4
42.7
25.6
Purchase of transport vehicle1


P52
1 Includes commercial vehicles
Note: Numbers may not necessarily add-up due to rounding
Table A.47
Merchant Banks: Non-performing Loans by Sector
NPL by sector
RM million
As at end
As percentage of total loans to the sector  
%
1999
2000
2001
2003
2002
2000
2001
2002
2003
Business enterprises
Households
Others
Agriculture, hunting, forestry and fishing
Mining and quarrying
3,131.7
Manufacturing
Electricity, gas and water supply
0.0
39.5
475.7
Wholesale and retail trade, restaurants 
  and hotels  
54.2
Wholesale trade
Retail trade
Restaurants and hotels
48.4
Broad property sector
Construction
Purchase of residential property
Purchase of non-residential property
Real estate
Transport, storage and communication
Finance, insurance and business services
1,372.0
Consumption credit
852.0
   Personal use
25.9
Credit cards
Purchase of consumer durable goods
417.9
Purchase of securities
Community, social and personal services
6.7
6.7
0.0
1999
70.6
93.1
20.0
24.7
76.2
229.0
354.2
0.0
0.1
1,058.9
10.4
2,464.6
0.4
25.9
383.1
57.5
35.2
1,144.9
565.5
0.4
510.8
12.9
12.9
0.0
155.5
195.9
32.8
127.9
68.2
79.6
87.9
0.0
0.0
901.8
38.9
3,597.7
0.5
86.5
891.5
133.4
45.4
1,477.3
807.5
0.7
577.8
13.2
13.2
0.0
333.3
197.4
33.1
118.8
91.3
63.6
187.2
0.0
0.1
878.9
121.6
3,222.7
4.1
47.3
792.5
208.4
29.8
1,282.0
756.6
0.2
454.3
12.2
12.2
0.0
343.0
181.4
5.6
146.1
70.9
38.4
139.4
0.0
0.1
821.5
118.7
2,314.5
4.4
22.0
538.1
118.0
9.8
1,004.6
531.2
0.1
407.3
11.5
11.5
0.0
220.2
217.6
6.5
201.3
65.9
22.9
85.6
0.0
0.1
544.4
29.2
20.2
0.0
5.3
20.3
6.8
14.1
24.1
23.6
24.8
25.5
17.9
18.0
0.0
4.0
7.8
8.5
4.0
22.4
18.2
22.2
0.0
0.6
36.5
2.3
17.7
0.5
2.5
17.2
8.2
12.6
23.9
18.3
0.5
36.1
35.2
35.3
0.0
9.3
20.7
15.4
28.2
30.2
8.2
7.1
0.0
0.3
27.5
10.2
30.4
0.5
10.0
40.4
29.3
26.3
33.7
28.8
0.9
45.8
40.4
40.5
0.0
21.2
24.5
17.4
26.8
36.9
10.7
18.2
0.0
1.1
40.0
33.1
30.3
5.9
5.9
39.4
26.7
19.0
33.2
30.3
0.3
42.1
57.4
57.5
0.0
19.9
25.7
3.7
36.5
33.9
10.6
14.9
0.0
0.6
41.5
58.2
26.8
9.1
3.4
32.3
30.7
10.0
35.1
31.1
0.2
44.1
32.4
32.5
0.0
15.4
562.1
464.1
453.4
423.2
283.9
35.1
26.4
37.2
38.2
28.7
33.2
7.0
43.3
43.9
2.7
13.5
0.0
0.4
31.8
29.7
Total
3,764.4
3,084.2
4,384.4
3,988.9
2,818.6
Purchase of transport vehicle1


Annex
P53
Table A.48
Islamic Banking System: Sources and Uses of Funds
Sources
Capital and reserves
4,703
6.9
Deposits
Funds from other
financial institutions
Other liabilities
Total
Uses
Cash
Reserves with
Bank Negara Malaysia
Deposits with other
financial institutions
Financing
Securities
Other assets
Total
1     Denotes the interbranch balances pending settlement
p  Preliminary 
2002
As at end
Islamic 
Banks
Islamic 
Banks
IBS 
Banks
IBS 
Banks
Total
RM million
2003p
RM million
Total
%
share
%
share
1,398
16,421
555
1,786
3,305
36,885
3,889
3,831
53,306
78.3
4,444
6.5
5,617
8.3
200
20,160
47,910
68,070
100.0
40
240
0.3
549
647
1,196
1.8
3,215
4,520
7,735
11.4
9,158
27,560
36,718
53.9
5,721
13,556
19,277
28.3
1,317
1,587
2,904
4.3
20,160
47,910
68,070
100.0
6,784
8.3
1,523
17,584
113
1,734
5,261
42,628
6,872
6,481
60,212
73.2
6,985
8.5
8,215
10.0
231
20,954
61,242
82,196
100.0
24
255
0.3
587
930
1,517
1.9
3,239
5,743
8,982
10.9
9,764
38,851
48,615
59.2
5,764
16,790
22,554
27.4
1,369
-1,0961 
273
0.3
20,954
61,242
82,196
100.0
Table A.49
Islamic Banking System: Commitments and Contingencies
Assets sold with recourse
and commitments with
drawdown
48
8.9
Credit extension
commitments
1,215
5,348
6,563
Direct credit substitutes
448
373
4.8
Foreign exchange related 
contracts
156
0.9
Trade-related contingencies
986
5,290
Transaction-related
contingencies
899
443
1,342
7.8
Underwriting obligations
–
315
315
1.8
Others
31
181
1.2
Total
3,783
13,433
100.0
p Preliminary
As at end
2003p
2002
Islamic
Banks
IBS 
Banks
RM million
Islamic 
Banks
Total
% 
share
IBS 
Banks
Total
% 
share
RM million
1,483
1,531
821
156
6,276
212
17,216
–
36.5
38.1
45
8.6
1,418
8,287
9,705
503
357
3.7
189
0.8
1,103
6,429
1,157
634
1,791
7.8
60
510
570
2.5
64
392
2.0
4,539
18,559
100.0
1,950
1,995
860
189
7,532
456
23,098
–
32.6
42.0


P54
Table A.50
Islamic Banking System: Income and Expenditure
Finance income  net of
1
income-in-suspense
627.9
1,768.6
(Income-in-suspense)
201.1
Less:   Finance expense
291.2
Net finance income
336.7
Add:   Non-finance income
77.2
Less:
Provisions
129.4
Staff cost
105.9
Overheads
102.3
Pre-tax profit
76.3
1 Finance income includes income from securities
p Preliminary
For the financial year
For the calendar year
RM million
Islamic
Banks
Total
Islamic
Banks
IBS
Banks
Total
Islamic
Banks
IBS
Banks
Total
Islamic
Banks
IBS
Banks
Total
2003p
2002
2003p
2002
IBS
Banks
2,396.5
154.0
355.1
848.2
1,139.4
920.4
1,257.1
215.5
292.7
377.4
506.8
51.2
157.1
83.1
185.4
624.2
700.5
596.9
2,266.5
51.6
265.4
331.5
82.5
125.6
104.7
131.3
52.4
2,863.4
141.9
193.5
966.5
1,231.9
1,300.0
1,631.5
356.9
439.4
759.2
884.8
73.5
178.2
144.0
275.3
680.2
732.6
1,096.0
2,300.9
3,195.7
201.2
171.9
373.1
625.2
1,144.8
1,568.8
470.8
1,156.1
1,626.9
116.1
378.9
495.0
143.7
562.3
139.0
60.0
199.0
148.5
120.6
269.1
155.7
792.1
947.8
706.0
925.1
2,944.8
3,869.9
95.0
210.8
305.8
403.0
1,285.5
1,688.5
522.1
1,659.3
2,181.4
111.9
615.4
727.3
163.3
1,155.7
145.2
83.3
228.5
196.0
188.0
384.0
129.5
847.7
977.2
1,319.0


Annex
P55
Table A.51
Islamic Banking System: Financing Activities
Financing approvals
Financing disbursements
Financing repayments
2,056.1
p  Preliminary
For the year
2003p
2002
Islamic
Banks
IBS
Banks
Total
Islamic
Banks
IBS
Banks
Total
RM million
2003p
2002
Islamic
Banks
IBS
Banks
Total
Islamic
Banks
IBS
Banks
Total
RM million
As at end
10,253.7
12,309.8
1,999.2
14,740.0
16,739.2
7,242.9
16,944.4
24,187.3
8,114.9
28,046.6
36,161.5
6,561.0
14,214.9
20,775.9
7,680.7
18,560.6
26,241.3
Outstanding financing
9,158.2
27,559.5
36,717.7
9,764.5
38,850.8
48,615.3
Total outstanding 
    financing
Total non-performing
    financing 
823.2
p  Preliminary
2003p
2002
Islamic
Banks
IBS
Banks
Total
Islamic
Banks
IBS
Banks
Total
RM million
2,674.4
3,497.6
1,759.0
4,407.2
6,166.2
–
–
–
322.9 
289.1 
612.0
Table A.52
Islamic Banking System: Financing to Small and Medium-Sized Enterprises
As at end


P56
Table A.53
Islamic Banking System: Direction of Financing
As at end
2003p
2002
Islamic
Banks
IBS
Banks
Total
RM million
Agriculture, hunting,
forestry and fishing
267.3
 1,326.7
1,594.0
4.3
Mining and quarrying
29.5
 45.0
74.5
0.2
Manufacturing
1,659.5
2,221.7
3,881.2
10.6
Electricity, gas and water
390.6
 143.1
533.7
1.5
Community, social and
personal services
39.5
 174.4
213.9
0.6
Broad property sector
4,682.6
11,053.1 15,735.7
42.8
Real estate
52.5
 616.8
669.3
1.8
Construction
1,318.2
960.0
2,278.2
6.2
Purchase of residential
property
2,451.9
8,310.9 10,762.8
29.3
Purchase of non-
residential property
860.0
 1,165.4
2,025.4
5.5
Wholesale, retail,
restaurants and hotels
391.6
 994.8
1,386.4
3.8
Transport, storage and
communication
100.1
 724.7
824.8
2.2
Finance, insurance and
business services
158.0
 1,113.7
1,271.7
3.5
Purchase of securities
248.0
 687.0
935.0
2.5
Consumption credit
900.7
 8,386.5
9,287.2
25.3
Credit cards
27.8
 32.7
60.5
0.2
Personal uses
409.9
 651.7
1,061.6
2.9
Purchase of consumer
durables
44.7
 18.6
63.3
0.2
Purchase of transport
vehicles
418.3
 7,683.5
8,101.8
22.1
Others
290.8
 688.8
979.6
2.7
Total
9,158.2
27,559.5 36,717.7
100.0
202.2
 1,659.4
1,861.6
3.9
15.0
 48.5
63.5
0.1
1,529.7
2,857.1
4,386.8
9.0
43.0
 205.9
248.9
0.5
63.7
 239.6
303.3
0.6
5,305.2
15,177.5 20,482.7
42.1
90.6
 721.3
811.9
1.7
1,328.5
1,605.0
2,933.5
6.0
3,022.2
11,322.0 14,344.2
29.5
863.9
 1,529.2
2,393.1
4.9
405.9
 1,391.1
1,797.0
3.7
152.8
 871.5
1,024.3
2.1
261.6
 1,671.7
1,933.3
4.0
226.7
 694.2
920.9
1.9
1,431.4  13,440.7 14,872.1
30.6
90.3
 65.9
156.2
0.3
562.0
 1,075.1
1,637.1
3.4
40.3
 13.8
54.1
0.1
738.8  12,285.9 13,024.7
26.8
127.3
 593.6
720.9
1.5
9,764.5
38,850.8 48,615.3
100.0
p Preliminary
%
share
Islamic
Banks
IBS
Banks
Total
RM million
%
share


Annex
P57
Table A.54
Islamic Banking System: Non-performing Financing by Sector1
As at end
NPF by sector
2003p
2002
2002
%
2003p
Islamic 
Banks
IBS 
Banks
Total
RM million
Islamic 
Banks
IBS 
Banks
Total
Agriculture, hunting, forestry and fishing
34.4
42.2
76.6
-0.3
 4.8
Mining and quarrying
4.7
0.2
4.9
2.0
6.6
Manufacturing
208.3
165.5
373.8
-2.1
9.6
Electricity, gas and water
1.7
0.1
1.8
 127.8
0.3
Community, social and personal services
13.0
28.7
41.7
7.9
19.5
Broad property sector
706.9
1,426.5
2,133.4
32.2
13.6
Real estate
0.9
267.9
 268.8
6.2
40.2
Construction
278.8
144.3
 423.1
41.2
18.6
Purchase of residential property
256.9
737.0
993.9
45.4
 9.2
Purchase of non-residential property
170.3
277.3
 447.6
10.1
22.1
Wholesale, retail, restaurants and hotels
88.6
56.3
 144.9
42.4
10.5
Transport, storage and communication
31.4
79.1
 110.5
97.9
13.4
Finance, insurance and business services
25.9
4.3
30.2
35.8
 2.4
Purchase of securities
88.4
111.3
199.7
-29.4
21.4
Consumption credit
178.8
256.3
435.1
19.8
4.7
Credit cards
0.2
2.2
2.4
229.2
4.0
Personal uses
126.3
39.2
165.5
17.6
15.6
Purchase of consumer durables
6.3
0.6
6.9
-34.8
10.9
Purchase of transport vehicles
46.0
214.3
260.3
20.7
3.2
Others
14.3
8.6
22.9
247.2
2.3
Total
1,396.4
2,179.1
3,575.5
32.0
44.4
76.4
4.8
0.2
5.0
202.2
163.9
366.1
4.1
...
4.1
27.8
17.2
45.0
865.3
1,955.6
2,820.9
0.1
285.4
 285.5
359.8
237.8
 597.6
317.6
1,127.3
1,444.9
187.8
305.1
 492.9
66.4
139.9
 206.3
51.3
167.4
 218.7
31.6
9.4
41.0
59.5
81.5
141.0
226.8
294.3
521.1
4.8
3.1
7.9
140.9
53.7
194.6
4.3
0.2
4.5
76.8
237.3
314.1
3.7
75.8
79.5
1,575.5
2,949.6
4,525.1
26.6
4.1
7.9
8.4
 1.6
14.8
13.8
35.2
20.4
10.1
20.6
11.5
21.4
2.1
15.3
3.5
5.1
11.9
8.3
2.4
11.0
1  Based on actual classification
p Preliminary
Change
As percentage of total
financing to sector


P58
 
 
1   Excludes Islamic banks
2   Based on Malaysian operations only
3   Cost = Staff cost and overheads (excluding loan loss provisions)
Pre-tax profit /
      Average assets (%)
Pre-tax profit / 
      Average shareholders' funds (%)
Pre-tax profit /
      Average employee (RM'000)
Cost3 incurred per ringgit of revenue 
      earned4 (sen) 
Cost3 incurred per ringgit of net interest
      income4 (sen)
Overheads to staff 
      cost ratio (%)
Staff cost
      per employee (RM'000) 
Loan deposit
      ratio5 (%)
Loans per office
      (RM million)
Deposits per office5
      (RM million)     
Commercial banks1
Finance companies
As at calendar year end
Merchant banks
Banking system1
1999
2000
2001
2002
2003
1999
2000
2001
2002
2003
1999
2000
2001
2002
2003
1999
2000
2001
2002
2003
1.3
16.5
84.1
38.1
54.9
41.4
87.9
164.3
186.8
104.2
1.4
17.4
94.5
39.0
54.7
49.8
87.7
175.4
200.1
98.4
114.6
0.9
10.7
63.4
41.5
62.6
54.8
101.0
89.6
190.7
213.0
113.2
1.2
14.3
95.4
43.6
64.2
55.4
88.4
201.7
228.1
115.7
1.2
14.7
103.9
44.6
64.7
58.8
83.3
205.6
246.7
162.4
-0.8
-14.5
-43.1
37.9
44.5
27.8
88.5
84.3
95.2
123.5
1.7
33.2
91.6
31.2
35.7
36.7
100.4
90.2
89.8
131.7
1.8
31.0
102.9
32.1
36.4
37.5
108.0
106.0
98.2
130.1
1.9
29.1
127.0
32.5
36.5
41.8
111.1
133.1
119.8
118.1
2.0
32.9
143.7
30.3
33.9
43.6
115.8
146.7
126.6
125.2
-0.4
-4.9
-70.1
26.0
60.4
56.5
72.9
857.7
1,175.9
70.0
1.5
16.8
248.6
19.6
43.6
70.0
70.1
789.1
1,125.5
58.1
0.8
7.4
124.8
20.7 
55.5
86.4
57.6
768.8
1,334.6
53.6
1.4
13.1
244.5
27.7
65.5
93.6
51.3
792.9
1,547.1
50.7
1.6
14.4
284.9
27.9
80.2
107.3
37.6
649.4
1,725.4
0.8
10.5
50.7
37.4
52.6
38.6
87.2
141.9
162.7
101.7
1.4
19.3
97.7
36.2
49.3
47.4
89.0
151.1
169.7
104.2
1.0
13.1
73.9
38.2
55.0
51.8
91.2
166.1
182.1
113.1
1.3
16.3
106.3
40.3
56.5
53.5
90.6
184.3
203.4
112.7
1.4
17.2
117.4
40.5
56.5
56.9
86.4
191.1
221.0
Table A.55
Banking System1,2: Selected Indicators
4   Net of interest-in-suspense
5   Including NIDs and repos


Annex
P59
Table A.56
Banking System1: Key Data
As at end
1999
2000
 2001
2002
2003
Number of institutions
68
62
47
45
- Commercial banks1
33
31
25
24
- Finance companies
23
19
12
11
  - Merchant banks
12
12
10
10
Risk-weighted capital ratio (%)
12.5
12.5
13.0
13.2
- Commercial banks1
12.8
12.3
12.8
13.2
  - Finance companies
10.8
11.5
12.1
12.0
  - Merchant banks
14.5
17.1
19.6
19.0
Office network
2,749
2,713
2,557
2,403
- Commercial banks1
1,767
1,758
1,664
1,631
  - Finance companies
960
933
874
755
  - Merchant banks
22
22
19
17
ATM network
3,883
3,906
3
8
3,983
4,027
- Commercial banks1
3,302
3,346
3,378
3,476
  - Finance companies
581
560
605
551
Number of banks with internet services
–
12
- Commercial banks1
12
Persons served per office
- Commercial banks1
12,854
13,256
13,959
14,899
  - Finance companies
23,659
24,920
26,474
32,185
Number of employees
92,630
93,290
90,288
87,747
- Commercial banks1
69,714
70,226
67,398
65,866
  - Finance companies
20,543
20,725
20,488
19,430
  - Merchant banks
2,373
2,339
2,402
2,451
44
23
11
10
13.4
13.6
11.3
18.4
2,430
1,684
729
17
4,184
3,707
477
12
12
15,026
33,536
87,521
66,458
18,634
2,429
1 Excludes Islamic banks
–
3
8


P60
Table A.57
Housing Credit Institutions
Lending
rate for new
housing loans (%)
2002
2003
2002 2003
Commercial banks
4.41
1,594
Finance companies
4.51
746
Treasury Housing
1970
To  provide housing loans to 
Government employees
4.0
Loans Division
Malaysia Building
1950
To be the nation’s single largest
provider of property finance and
to contribute to the continuous
growth of the nation
3.5 ~ 8.5
22
–
Society Berhad
Borneo Housing Mortgage
1958
To provide housing loans mainly
to Sabah and Sarawak State
Government employees
4.5 ~ 8.9
2
Finance Berhad
Sabah Credit Corporation
1955
To  improve the social economic
development of Sabah through
loans mainly to the property,
agriculture and business sectors
8.0 ~ 10.5
11
Bank Kerjasama Rakyat
1954
A co-operative society which
collects deposits and provides
conventional banking facilities
as well as according to Syariah
principles
7.11 
98
Malaysia Berhad
Bank Simpanan Nasional
1974
To promote and mobilise savings
particularly from small savers
and to inculcate the habit of
thrift and savings 
4.71
4.51
4.01
4.0
2.0 ~ 6.5
7.5 ~ 8.5
8.0 ~ 10.5
7.41 
4.01
421
1,700
672
22
–
2
11
100
398
1  Average
Source: Bank Negara Malaysia and various housing credit institutions
Year of
establishment
Objective
No. of
branches
–
–


Annex
P61
Table A.58
Outstanding Housing Loans
2002
2003p
2003p
2002
2002
2003p
RM million
Annual change (%)
% share
Commercial banks
86,246
18.0
68
Treasury Housing Loans Division
22,172
13.9
17
Finance companies
14,042
7.7
11
Bank Kerjasama Rakyat Malaysia Berhad
1,108
-13.0
Bank Simpanan Nasional
1,133
-11.7
Malaysia Building Society Berhad
1,236
-1.0
Borneo Housing Mortgage Finance Berhad
650
3.9
Sabah Credit Corporation
293
-0.8
Total
126,880
101,829
24,754
14,648
1,371
1,058
1,207
680
290
145,837
15.0
18.1
11.6
4.3
23.7
-6.6
-2.4
4.7
-1.0
14.9
100
p
Preliminary
… Negligible
Source: Bank Negara Malaysia and various housing credit institutions
1
1
1
1
...
70
17
10
100
1
1
1
...
...
Table A.59
Approved Housing Loans
2003p
2003p
2003p
2002
RM million
Annual change (%)
% share
Commercial banks
26,795
6.8
77
Treasury Housing Loans Division
5,051
23.6
15
Finance companies
2,410
26.2
Bank Kerjasama Rakyat Malaysia Berhad
403
-3.1
Malaysia Building Society Berhad
113
-67.7
…
Borneo Housing Mortgage Finance Berhad
85
12.9
Bank Simpanan Nasional
78
-51.0
…
Sabah Credit Corporation
30
-19.2
…
Total
34,965
27,943
4,738
2,090
567
364
88
65
19
35,874
8.9
4.3
-6.2
-13.3
40.6
221.4
3.4
-16.4
-36.3
2.6
100
p
Preliminary
… Negligible
Source: Bank Negara Malaysia and various housing credit institutions
...
7
1
78
13
1
…
…
100
…
6
2
2002
2002


P62
As at the end of 2003, 292 leasing companies and 28 factoring companies had registered with Bank Negara
Malaysia. However, only 114 leasing companies and 15 factoring companies submitted statistics pertaining to
their operations to the Bank. Total assets of the 114 leasing companies and 15 factoring companies amounted to
RM21.2 billion and RM2.1 billion respectively at the end of 2003. Nevertheless, of the 114 leasing companies,
only 37 were pure leasing companies, while of the 15 factoring companies, only 10 were pure factoring
companies. The remaining companies only undertook leasing and factoring business as part of their overall
business activities.
Table A.60
Leasing Companies : Sources and Uses of Funds
1
As at end
1999
2000
2001
2002
2003
RM million
Sources
Capital and reserves
654
839
839
770
Borrowings from financial institutions
1,898
1,711
1,923
2,141
Inter-company borrowings
1,296
1,316
1,343
1,454
Others
2,400
2,447
2,400
2,684
Total
6,248
6,313
6,505
7,049
Uses
Cash and bank balances
266
191
229
225
Investments
308
279
309
323
Receivables
3,056
3,107
3,014
3,118
Leasing
1,537
1,495
1,423
1,420
Factoring
17
209
Hire purchase
1,261
1,331
1,275
1,307
Others
254
273
299
182
Others
2,618
2,736
2,953
3,384
1,554
1,759
1,375
2,342
7,030
198
387
2,370
1,508
204
503
155
4,074
1 Statistics shown are for pure leasing companies only
Note: Numbers may not necessarily add up due to rounding
4
8
Table A.61
Leasing Companies : Income and Expenditure
1 
During the period
1999
2000
2001
2002
2003
RM million
Income
Income from
329
315
313
302
Leasing
225
223
217
212
Factoring
3
Hire purchase
102
90
85
76
Others
11
Others
265
224
188
306
Total
594
539
501
607
Expenditure
Interest paid
289
180
187
165
Financial institutions
253
156
166
155
Block discounting
36
24
21
10
Bad debts written off and provision
195
33
108
35
Others
183
168
165
199
Total
667
381
460
398
Pre-tax Profit
-73
158
41
209
326
226
6
75
20
200
526
141
134
7
5
183
329
197
1 Statistics shown are for pure leasing companies only
Note: Numbers may not necessarily add up due to rounding
1
2
0
2
9
1


Annex
P63
25
8
Table A.62
Leasing Companies : Financing by Sector
1
During the period
1999
2000
2001
2002
2003
RM million
Sector
Agriculture
Mining and quarrying
17
Manufacturing
111
0
3
3
17
317
172
102
Electricity
0
General commerce
27
89
266
125
Property sector
29
61
50
38
Construction
24
57
46
36
Real estate
2
Residential property
0
Transport and storage
16
83
805
54
Business, insurance and other services
35
147
113
121
Consumption credit
Others
83
26
108
128
Total
312
771
1,535
585
1 Statistics shown are for pure leasing companies only
Note: Numbers may not necessarily add up due to rounding
3
1
3
5
0
0
0
3
0
0
0
4
4
14
9
126
0
106
207
179
28
0
53
116
53
695
0
25
Table A.63
Factoring Companies : Sources and Uses of Funds
1 
As at end
1999
2000
2001
2002
2003
RM million
Sources
Capital and reserves
89
116
164
164
Borrowings from financial institutions
247
324
445
293
Inter-company borrowings
256
697
600
416
Others
385
896
658
1,092
Total
977
2,033
1,867
1,964
Uses
Cash and bank balances
0
2
0
0
4
0
4
30
5
25
45
255
202
234
Investments
35
Receivables
928
1,458
998
1,170
Leasing
4
Factoring
808
1,312
872
1,111
Hire purchase
Others
118
142
122
55
Others
14
295
622
525
81
267
267
425
1,040
0
14
24
602
4
542
57
401
1 Statistics shown are for pure factoring companies only
Note: Numbers may not necessarily add up due to rounding


P64
Table A.64
Factoring Companies : Income and Expenditure
1
During the period
1999
2000
2001
2002
2003
RM million
Income
Income from
47
47
37
38
Leasing
0
0
0
6
0
9
8
2
0
Factoring
38
38
29
29
Hire purchase
0
9
0
8
Others
Others
15
99
129
28
297
Total
62
146
166
335
Expenditure
Interest paid
42
17
Financial institutions
0
0
0
42
28
28
17
Block discounting
0
Bad debts written off and provision
202
14
28
14
Others
41
49
33
45
Total
285
91
89
76
Pre-tax Profit
-223
55
77
259
31
0
24
0
6
75
106
15
15
0
5
17
37
68
1 Statistics shown are for pure factoring companies only
Note: Numbers may not necessarily add up due to rounding
Table A.65
Factoring Companies : Financing by Sector
1
During the period
1999
2000
2001
2002
2003
RM million
Sector
Agriculture
0
0
0
0
Mining and quarrying
Manufacturing
71
76
66
57
Electricity
General commerce
133
127
140
179
Property sector
222
245
270
103
Construction
174
195
222
76
Real estate
48
50
48
27
Residential property
0
Transport and storage
Business, insurance and other services
86
77
51
50
Consumption credit
Others
23
25
541
513
Total
567
584
1,096
927
1 Statistics shown are for pure factoring companies only
Note: Numbers may not necessarily add up due to rounding
0
0
0
0
3
6
8
5
3
4
3
2
0
0
0
23
20
20
1
46
120
43
36
1
6
37
18
286
0
1
3
17
22


Annex
P65
Table A.66
Capital Market Debt Securities1: Amount Outstanding
As at end
1999
2000
2001
2002
2003p
RM million (nominal value)
Malaysian Government Securities
78,336
89,050
103,450
 109,550
Government Investment Issues
2,000
4,000
4,000
5,000
Khazanah Bonds
8,980
10,000
10,000
 10,000
Malaysia Savings Bonds
359
379
0
464
Danaharta Bonds
10,344
11,140
Danamodal Bonds
11,000
11,000
Cagamas Bonds
13,019
17,312
18,427
22,595
Other Corporate Bonds
78,632
100,494
117,674
103,951
Medium Term Notes
681
1,726
2,910
4,450
Total
203,370
245,081
278,601
278,150
1  Refer to debt securities with an original maturity period of more than one year
p Preliminary
11,140
11,140
11,000
11,000
 130,800
7,000
 11,000
455
25,628
136,002
8,596
328,021
8,539
–


P66
Table A.67
Urban Credit Co-operative Societies1
Annual change
As at end 
2003
2002
2003
Annual 
change (%)
Number
Total co-operative societies
41
Deposit-taking co-operatives
Other credit co-operatives
41
0
1
(‘000)
Total members
92
Deposit-taking co-operatives
Other credit co-operatives
91
RM million
% share
Sources of funds
Share subscriptions
123.0
Reserves
71.9
Borrowings
85.2
Sundry creditors
17.3
Savings and deposits
13.5
Surplus
8.9
Total
319.8
Uses of funds
Investments
74.8
Shares
39.5
Fixed and savings deposits
28.5
Real estates
3.9
Others
2.9
Loans to members
114.3
Fixed assets
72.7
Other assets
37.2
Cash and bank balances
7.8
Others
13.0
11
11
0
1,506
-18,166
-19,672
71.7
27.9
15.3
7.1
22.1
988.6
1,132.7
50.7
3.1
41.3
8.7
-2.4
61.4
11.9
0.8
1,035.0
-26.8
424
418
6
345,834
1,274,473
928,639
1,096.8
242.7
155.6
115.2
177.5
1,588.2
3,376.0
462.9
136.1
197.1
106.2
23.5
1,513.7
224.9
34.7
1,129.0
10.8
2.7
2.7
0
0.4
-1.7
-2.1
7.0
13.0
10.9
6.5
14.3
164.9
216.6
12.3
0.8
2.1
10.0
-0.6
4.2
5.6
2.2
11.0
-71.3
100
98.6
1.4
27.1
100.0
72.9
32.5
7.2
4.6
3.4
5.3
47.0
100.0
13.7
4.1
5.8
3.1
0.7
44.9
6.7
1.0
33.4
0.3
1  Urban credit co-operative societies, which comprise of employees credit societies, thrift and loan societies and thrift and 
 investment societies, were established primarily to provide consumer credit and serve as an investment channel for members
2  Refers to total loans outstanding
Source: Department of Co-operative Development Malaysia
2


Annex
P67
1
As at end
1999
2000
2001
2002
2003
RM million
4,701.3
6,314.2
6,906.6
7,905.3
4,168.9
5,258.5
5,416.9
6,012.4
1,054.6
1,216.6
1,196.2
1,517.0
-522.2
-160.9
293.5
375.9
27,492.1
34,752.2
39,305.7
39,797.6
11,058.1
11,825.4
12,866.0
13,977.0
6,140.2
6,238.3
6,625.7
8,875.4
2,760.9
3,034.8
3,321.7
3,434.3
2,157.0
2,552.3
2,918.6
1,667.3
6,543.5
8,470.4
8,987.6
10,766.5
49,795.0
61,362.2
68,065.9
72,446.4
7,210.5
11,493.2
12,265.2
15,720.7
16,352.5
17,506.6
21,968.0
19,268.1
2,072.0
2,497.1
3,715.0
3,495.8
4,250.9
4,759.8
5,099.4
6,427.4
3,885.1
4,203.5
4,478.5
5,325.6
365.8
556.3
620.9
1,101.8
18,736.8
21,998.0
24,486.3
29,442.4
1,870.2
2,090.2
3,011.6
3,606.7
5,625.0
8,274.2
6,334.8
4,408.5
49,795.0
61,362.2
68,065.9
72,446.4
4,228.3
4,211.8
3,342.4
3,160.1
136.1
204.5
148.3
151.5
4,364.4
4,416.3
3,490.7
3,311.6
9,497.6
7,192.3
1,395.1
910.2
42,382.6
16,076.5
11,356.3
3,035.7
1,684.5
11,135.3
79,092.0
17,113.4
21,141.7
3,562.0
5,798.6
5,322.5
476.1
32,548.1
3,706.0
4,582.8
79,092.0
3,652.7
125.6
3,778.3
Table A.68
Development Financial Institutions : Sources and Uses of Funds
Sources:
Shareholders’ funds
Paid-up capital
Reserves
Retained earnings
Deposits accepted
Borrowings
Government
Multilateral/International
    agencies
Others
Others
Total
Uses:
Deposits placed
Investments
of which:
Government securities
Shares
Quoted
Unquoted
Loans and advances
Fixed assets
Others
Total
Contingencies:
Guarantee
Export credit insurance
Total
1 Refers to Bank Pembangunan dan Infrastruktur Malaysia Berhad, Bank Industri & Teknologi Malaysia Berhad, Bank Kerjasama
Rakyat Malaysia Berhad, Bank Simpanan Nasional, Export-Import Bank of Malaysia Berhad, Malaysia Export Credit Insurance
Berhad, Malaysian Industrial Development Finance Berhad, Sabah Development Bank Berhad, Borneo Development
Corporation (Sabah) Sendirian Berhad, Borneo Development Corporation (Sarawak) Sendirian Berhad, Bank Pertanian
Malaysia, Credit Guarantee Corporation Malaysia Berhad, Sabah Credit Corporation and Lembaga Tabung Haji


P68
Table A.69
Development Financial Institutions  under DFIA : Sources and Uses of Funds
1
2
As at end
1999
2000
2001
2002
2003
RM million
Sources:
Shareholders’ funds
3,188.8
3,417.0
3,942.7
Paid-up capital
2,526.4
2,552.0
2,675.5
Reserves
637.0
732.7
885.1
Retained earnings
25.4
132.3
382.1
Deposits accepted
15,953.1
20,911.6
25,102.5
Borrowings
6,802.3
7,822.4
8,283.4
Government
3,177.8
3,310.8
3,420.3
Multilateral/International
    agencies
2,247.0
2,562.9
2,891.7
Others
1,377.5
1,948.7
1,971.4
Others
3,330.1
4,656.5
5,418.8
Total
29,274.3
36,807.5
42,747.4
Uses:
Deposits  placed
4,282.4
6,585.6
7,849.9
Investments
7,376.4
7,126.4
10,713.7
of which:
Government securities
1,731.2
1,920.1
3,340.0
Shares
1,492.3
1,511.4
2,282.9
Quoted
1,444.1
1,433.9
2,203.8
Unquoted
48.2
77.5
79.1
Loans and advances
13,643.5
16,866.4
18,962.1
Fixed assets
855.0
865.4
836.8
Others
3,117.0
5,363.7
4,384.9
Total
29,274.3
36,807.5
42,747.4
Contingencies:
Guarantee
998.3
806.8
673.4
Export credit insurance
136.1
204.5
148.3
Total
1,134.4
1,011.3
821.7
1 Refers to Bank Pembangunan dan Infrastruktur Malaysia Berhad, Bank Industri & Teknologi Malaysia Berhad, Bank
Kerjasama Rakyat Malaysia Berhad, Bank Simpanan Nasional, Export-Import Bank of Malaysia Berhad and Malaysia Export
Credit Insurance Berhad
2 Development Financial Institutions Act 2002
4,739.6
3,246.0
863.0
630.6
25,869.3
8,865.4
5,261.7
3,135.1
468.6
6,848.4
46,332.7
10,257.2
9,981.2
3,216.2
2,040.6
1,939.8
100.8
22,827.5
1,377.4
1,879.4
46,322.7
575.4
151.5
726.9
5,977.6
4,125.0
745.9
1,106.7
26,977.3
10,723.4
7,541.7
2,811.1
370.6
7,184.7
50,863.0
10,836.0
10,962.9
3,370.5
1,775.1
1,705.2
69.9
25,515.4
1,433.3
2,115.4
50,863.0
543.3
125.6
668.9


Annex
P69
Table A.70
Development Financial Institutions : Direction of Lending
1
As at end
1999
2000
2001
2002
2003
RM million
Agriculture, forestry and fishery
2,260.3
2,584.9
2,750.2
2,964.3
Mining and quarrying
44.7
47.4
46.1
90.0
Manufacturing
3,272.8
3,086.1
3,147.6
3,356.6
Electricity, gas and water supply
34.8
265.0
335.0
453.8
Import and export, wholesale and retail
trade, restaurants and hotels
532.6
522.1
618.0
240.4
Broad property sector
4,097.8
4,687.0
5,700.3
7,840.6
Construction
1,151.6
1,613.7
2,346.9
3,790.5
Purchase of residential property
2,102.5
2,090.6
2,593.7
2,785.2
Purchase of non-residential property
188.8
163.1
268.8
393.4
Real estate
654.9
819.6
490.9
871.5
Transport, storage and communication
1,166.4
2,028.9
2,860.6
4,362.1
Maritime
992.0
801.5
733.1
530.4
Finance, insurance and business services
1,053.0
1,213.0
1,300.7
1,780.5
Consumption credit
4,006.6
5,084.5
5,404.2
6,716.1
of which:
Purchase of motor vehicles
674.0
997.6
819.2
816.5
Credit card
33.5
42.9
47.8
48.0
Purchase of securities
290.1
330.0
356.2
173.2
Others
985.7
1,347.5
1,234.3
934.4
Total
18,736.8
21,997.9
24,486.3
29,442.4
3,265.9
96.1
3,654.4
624.2
406.3
8,407.9
4,019.0
2,947.7
443.0
998.2
4,442.5
473.3
1,876.0
8,066.6
884.0
23.7
136.2
1,098.7
32,548.1
1  Refers to Bank Pembangunan dan Infrastruktur Malaysia Berhad, Bank Industri & Teknologi Malaysia Berhad, Bank
 Kerjasama Rakyat Malaysia Berhad, Bank Simpanan Nasional, Export-Import Bank of Malaysia Berhad, Malaysian Industrial
 Development Finance Berhad, Sabah Development Bank Berhad, Borneo Development Corporation (Sabah) Sendirian
 Berhad, Borneo Development Corporation (Sarawak) Sendirian Berhad, Bank Pertanian Malaysia, Credit Guarantee
 Corporation Malaysia Berhad, Sabah Credit Corporation and Lembaga Tabung Haji


P70
Table A.71
Development Financial Institutions  under DFIA  : Direction of Lending
1
2 
As at end
1999
2000
2001
2002
2003
RM million
Agriculture, forestry and fishery
301.7
397.0
454.4
459.6
Mining and quarrying
29.5
33.5
34.5
80.5
Manufacturing
2,118.2
2,154.2
2,204.2
2,130.2
Electricity, gas and water supply
34.8
265.0
335.0
453.8
Import and export, wholesale and retail
trade, restaurants and hotels
235.9
135.2
129.0
125.9
Broad property sector
3,415.7
4,054.7
5,078.2
6,846.8
Construction
943.9
1,427.6
2,192.1
3,641.3
Purchase of residential property
1,783.8
1,779.8
2,288.0
2,480.3
Purchase of non-residential property
186.3
160.9
267.3
391.3
Real estate
501.7
686.3
330.8
333.9
Transport, storage and communication
974.9
1,871.1
2,746.5
4,321.6
Maritime
992.0
801.5
733.1
530.4
Finance, insurance and business services
944.6
1,096.8
1,198.0
877.6
Consumption credit
3,959.3
5,037.5
5,339.6
6,567.8
of which:
Purchase of motor vehicles
626.7
950.6
754.6
 741.2
Credit card
33.5
42.9
47.8
48.0
Purchase of securities
290.1
330.0
356.2
173.2
Others
346.8
689.8
353.4
260.1
Total
13,643.5
16,866.3
18,962.1
22,827.5
395.1
79.5
2,375.4
624.2
307.3
7,402.1
3,852.1
2,648.1
440.6
461.3
4,398.7
473.2
1,077.4
7,813.0
 800.2
23.7
136.2
433.3
25,515.4
1 Refers to Bank Pembangunan dan Infrastruktur Malaysia Berhad, Bank Industri & Teknologi Malaysia Berhad, Bank
Kerjasama Rakyat Malaysia Berhad, Bank Simpanan Nasional and Export-Import Bank of Malaysia Berhad
2 Development Financial Institutions Act 2002
Table A.72
Bank Industri & Teknologi Malaysia Berhad
Year of establishment
1979
Objectives
The principal activity of Bank Industri & Teknologi Malaysia Berhad 
is to finance capital intensive and high technology industries 
in priority sectors such as shipping industry and manufacturing.
Loans Approved (RM million)
Loans Disbursed (RM million)
Sector
2003
2002
2003
2002
Maritime
202.1
47.0
Shipping industry
143.2
20.2
Shipyard industry
25.5
17.1
Marine-related industries
33.4
9.7
Manufacturing
99.9
79.7
of which:
High technology
22.2
14.5
Total
302.0
76.3
57.4
1.2
17.7
211.4
16.8
287.7
126.7
83.7
52.8
17.5
13.4
54.6
6.1
138.3
Source: Bank Industri & Teknologi Malaysia Berhad


Annex
P71
Objectives
Table A.73
Export-Import Bank of Malaysia Berhad
Year of establishment
1995
Establishing an institutional support mechanism to facilitate the
exports of goods and services by providing medium and long
term credit to Malaysian exporters and investors, as well as foreign
buyers of Malaysian goods. Effective January 1998, the Export
Credit Refinancing facility was transferred  from Bank Negara
Malaysia to Export-Import Bank of Malaysia Berhad.
Loans Approved (RM million)
Loans Disbursed (RM million)
Facility
2003
2003
2002
2002
Buyer credit facility
144.4
43.0
Overseas investment credit facility
50.9
17.3
Supplier credit facility
168.2
190.6
Export of  services financing facility
15.0
Export credit refinancing
6,149.0
6,149.0
Others
–
–
–
Total
6,527.5
22.8
239.4
209.1
–
6,611.2
–
7,082.5
10.7
40.7
109.4
–
6,611.2
–
6,772.0
6,399.9
Source: Export-Import Bank of Malaysia Berhad
Table A.74
Malaysia Export Credit Insurance Berhad
Year of establishment
1977
Objectives
Support and strengthen Malaysian exports through the provision of
export credit insurance facilities to exporters to cover against 
commercial and non-commercial risks and issuing guarantees for
banks and financial institutions to facilitate access to export 
finance, and encouraging reverse investment by Malaysian investors 
through the provision of political risk insurance for investment.
Contingent Liabilities
Business Coverage
(RM million)
(RM million)
As at end-2002
As at end-2003
2002
2003
Short-term Policies
Comprehensive policies
114.8
Banker’s  export finance insurance policy
Bank letter of credit policy
Specific policies
Bond indemnity support
Sub-total
Medium and Long-term Policies
Specific policies
Buyer credit guarantee
375.7
Bond indemnity support
23.1
Sub-total
433.5
Total
550.9
1,225.1
Source: Malaysia Export Credit Insurance Berhad
0.6
0.5
–
34.7
117.4
1.5
847.2
377.9
0.2
Oversea investment insurance
–
–
375.7
2.0
–
–
3.2
–
844.0
121.4
331.4
23.2
364.0
496.6
1,412.2
8.9
–
–
1.9
132.6
2.3
1,102.2
310.0
23.1
7.5
8.4
276.5
2.0
–
–
24.9
–
1,077.3


P72
Table A.75
Bank Simpanan Nasional
Year of establishment
1974
Objectives
Bank Simpanan Nasional is a savings bank, incorporated under the 
National Savings Bank Act 1974 and focuses on retail banking and
personal finance especially for small savers.
Deposits Accepted
(RM million)
Interest Rate /
Rate of Return (%)
Deposits facility
As at end-2002
As at end-2003
2002
2003
Savings deposits
Fixed deposits
GIRO deposits
1.30 ~ 2.30
Islamic deposits
294.0
2.21 ~ 4.88
Premium savings certificates
1.50
Total
RM million
Investments
As at end-2002 As at end-2003
Quoted shares
Malaysian Government Securities
Private debt securities
Subsidiary companies
437.8
Associate companies
231.8
Total
9,430.2
Number of branches
421
Number of account holders (‘000)
 11,230
Number of automatic teller machine (ATM)
593
Source: Bank Simpanan Nasional
1,478.2
785.6
1.30 ~ 4.50
1,639.6
4,573.0
437.8
231.8
398
 11,365
591
1,923.7
671.1
1,510.5
4,774.9
1,231.7
3,741.6
3,341.4
821.5
292.4
9,435.2
1,163.9
3,478.6
3,595.9
904.4
3.20 ~ 4.00
1.30 ~ 2.30
1.96 ~ 3.40
1.50
1.30 ~ 4.50
3.00 ~ 3.70
Table A.76
Bank Kerjasama Rakyat Malaysia Berhad
Year of establishment
1954
Objectives
Bank Kerjasama Rakyat Malaysia Berhad mobilises savings and
provides financing services to its members as well as
non-members.
Financing Outstanding  (RM million)
As at end-2002
As at end-2003
Sector
Members
Non-members
Members
Non-members
Agriculture
48.0
14.0
Purchase of property
980.1
658.6
General commerce
33.5
487.7
Purchase of securities
21.8
119.8
Purchase of motor vehicles
117.6
0.6
Consumption credit
5,078.4
700.2
Manufacturing
–
–
Construction
Others
–
122.3
9.8
124.7
Total
6,401.7
Source: Bank Kerjasama Rakyat Malaysia Berhad
2,115.4
45.2
11.7
1,228.3
670.1
46.4
424.7
15.8
101.5
278.3
0.7
6,120.0
735.3
–
100.3
–
–
–
178.4
7,734.0
2,222.7


Annex
P73
Table A.77
Bank Pembangunan dan Infrastruktur Malaysia Berhad
Year of establishment
1973
Objectives
To increase the participation and involvement of the Bumiputera
community in business and industry through financing and equity
participation and to provide financing for infrastructure projects,
in particular Government-identified projects.
Loans Approved (RM million)
Loans Disbursed (RM million)
Sector
2002
2003
2002
2003
Infrastructure
2,790.1
2,997.6
Government programmes
1,551.1
2,177.2
Private programmes
1,239.0
820.4
SME  
728.8
534.8
of which:
Bumiputera
638.2
449.4
Total
3,518.9
4,753.8
2,883.0
1,870.8
1,086.8
1,059.6
5,840.6
3,532.4
1,589.8
853.9
735.9
649.7
526.4
2,239.5
Source: Bank Pembangunan dan Infrastruktur Malaysia Berhad
Table A.78
Other Development Financial Institutions : Core Activities
1
As at end
1999
2000
2001
2002
2003
RM million
Lending Activity
Agriculture
Manufacturing
1,154.6
931.8
943.3
1,226.4
Broad property sector
682.2
632.3
622.2
993.8
Construction
207.6
186.1
154.8
149.2
Purchase of residential property
318.7
310.7
305.7
305.0
Purchase of non-residential property
2.7
2.2
1.5
2.1
Real estate
153.2
133.3
160.2
537.5
Consumption credit
47.3
47.0
64.6
148.4
Others
Total
5,093.3
Other Activities
Deposits accepted
11,538.9
13,840.6
14,203.2
13,928.3
of which:
Savings
8,471.4
10,066.9
11,161.9
11,134.4
Guarantee issued
1 Refers to Malaysian Industrial Development Finance Berhad, Sabah Development Bank Berhad, Borneo Development Corporation
(Sabah) Sendirian Berhad, Borneo Development Corporation (Sarawak) Sendirian Berhad, Bank Pertanian Malaysia, Credit
Guarantee Corporation Malaysia Berhad, Sabah Credit Corporation and Lembaga Tabung Haji
1,958.6
2,187.9
2,295.8
2,504.8
1,250.6
1,332.6
1,598.3
1,741.6
5,131.6
5,524.2
6,615.0
3,230.0
3,405.0
2,669.0
2,584.7
1,279.1
1,005.8
166.9
299.6
2.4
536.9
253.6
15,405.3
12,160.4
2,870.9
1,623.3
7,032.7
3,109.4


P74
Table A.79
Development Financial Institutions: Selected Data
As at end
2002
2003
DFIs under DFIA1:
Branch
ATM
Staff
Branch
ATM
Staff
Bank Pembangunan dan Infrastruktur
Malaysia Berhad
13
603
Bank Kerjasama Rakyat Malaysia Berhad
98
104
2,752
Bank Simpanan Nasional
421
593
5,043
Bank Industri & Teknologi Malaysia Berhad
276
Export-Import Bank of Malaysia Berhad
80
Malaysia Export Credit Insurance Berhad
63
Sub-total
532
697
8,817
Other DFIs: 
Bank Pertanian Malaysia
143
144
2,309
Malaysian Industrial Development Finance
Berhad
224
Sabah Development Bank Berhad
82
Borneo Development Corporation (Sabah)
Sdn Bhd
23
Borneo Development Corporation (Sarawak)
Sdn Bhd
41
Credit Guarantee Corporation Malaysia Berhad
12
251
Sabah Credit Corporation
11
207
Lembaga Tabung Haji
119
1,408
Sub-total
292
144
4,545
Total
824
841
13,362
13
100
398
–
–
–
511
119
7
–
–
–
17
11
119
273
784
–
111
591
–
–
–
695
142
–
–
–
–
–
–
–
142
837
640
2,804
5,069
303
73
60
8,949
2,349
228
83
18
37
272
206
1,543
4,736
13,685
1 Development Financial Institutions Act 2002.
–
–
–
–
–
–
–
7
–
–
–
–
–
–
–
–
–
–


Annex
P75
Table A.80
Development Financial Institutions: Government Special Funds
Loans (RM million)
Approved
Disbursed
Outstanding
as at end
2002
2003
2003
2003
2002
2002
Bank Pembangunan dan Infrastruktur Malaysia Berhad
Fund for Publication
0.5
0.3
0.7
Fund for Film Industry
16.7
17.4
13.0
Venture Capital Fund
0.2
4.7
6.6
Tourism Infrastructure Fund
10.0
6.8
6.8
Small Scale Enterprises1
5.9
New Entrepreneurs Fund 2
53.6
59.2
43.1
Fund for Small and Medium Industries 2 
8.5
6.0
Seed Capital Scheme
20.3
23.3
57.8
Graduate Entrepreneurs Fund
1.0
2.7
7.2
Terengganu Entrepreneurs Fund
15.1
5.2
3.3
Financing Scheme for Indian Rural Economic Development
Financing Scheme for Rural Economic Development
6.1
8.0
29.1
0.5
0.2
0.2
Food and Furniture Scheme
–
0.6
20.3
Special Fund for Tourism
Third Window Financing Scheme (Tanmiah1)
Financing Programme for Wholesalers and 
 Distributors (Tanmiah2)
–
–
–
–
–
–
Bank Kerjasama Rakyat Malaysia Berhad
Financing Scheme for Rural Economic Development
8.9
7.3
8.9
Bank Industri & Teknologi Malaysia Berhad
New Ship Financing Facility
54.7
22.2
39.0
High Technology Fund
22.3
14.5
33.0
Easy Financing Scheme - PAKSI
2.5
3.7
10.2
Women Entrepreneurs Fund
7.0
4.7
7.5
New Technology Investment Fund
–
–
–
Export-Import Bank of Malaysia Berhad
Export Credit Refinancing (ECR) Scheme2
6,149.0
6,149.0
1,076.1
Malaysian Industrial Development Finance Berhad
Soft Loan for Small and Medium Enterprises
78.8
30.0
30.0
Bank Pertanian Malaysia
Agricultural Mechanisation and Automation Scheme
3.0
2.3
6.1
Bumiputera Commercial & Industrial Community Scheme
8.9
9.2
11.0
Credit Scheme for Paddy
32.7
31.6
29.5
Commercial Agriculture Graduate Entrepreneurs Scheme
0.7
0.3
0.7
Modernisation Automation Scheme1 
–
–
16.0
Special Fund for Terengganu-based 
 Small and Medium Enterprises
–
–
–
Malaysian Industrial Energy Efficiency Improvement Project
–
–
–
Special Fund for Fishery
7.6
9.9
17.1
Low Intensity Tapping System
0.6
0.1
0.1
Oil Palm Replanting Scheme
32.9
17.5
19.7
–
–
0.2
–
1.5
4.0
–
0.6
7.6
132.5
9.2
16.3
4.9
–
118.7
90.1
8.9
5.9
27.1
13.8
56.1
5.4
2.8
8.0
11.0
17.3
10.6
5.6
5.3
29.5
–
0.2
0.3
19.9
1.6
2.4
187.2
3.5
–
–
33.4
33.2
–
–
–
–
–
14.5
11.0
9.0
15.6
4.2
21.4
49.9
16.8
6.1
34.3
–
0.8
7.8
–
3.2
8.3
30.0
–
–
6,611.2
6,611.2
1,128.7
46.8
37.5
62.9
1.6
4.0
9.0
16.7
9.5
16.2
4.4
31.2
27.3
0.5
0.6
0.9
–
–
15.3
1.2
0.8
0.8
2.0
–
–
1.1
1.1
16.2
0.2
0.2
0.2
31.6
10.9
30.0
1 Fund has been fully utilised
2  Inclusive of funds from Bank Negara Malaysia and these funds are channelled through 24 participating  banks
–
–
–
–
6.2
4.6


P76
Table A.81
Development Financial Institutions: Bank Negara Malaysia Funds1
Loans (RM million)
Outstanding
Approved
Disbursed
as at end
2002
2003
2002
2003
2002
2003
Bank Pembangunan dan Infrastruktur Malaysia Berhad
New Entrepreneurs Fund2
5.8
141.2
New Entrepreneurs Fund 2
81.7
38.7
58.2
Fund for Small and Medium Industries2
–
–
1.3
119.5
Fund for Small and Medium Industries 2 
12.6
Bumiputera Industrial Fund2
–
–
–
–
0.1
0.6
–
–
–
5.1
8.6
–
–
–
21.1
Industrial Adjustment Fund2
0.3
Rehabilitation Fund for Small and Medium Industries3
3.9
36.4
Fund for Food
1.6
5.7
Special Fund for Tourism2
9.6
Bank Industri & Teknologi Malaysia Berhad
New Entrepreneurs Fund2
6.0
Fund for Small and Medium Industries2
46.6
Fund for Small and Medium Industries 2
5.1
Bumiputera Industrial Fund2
0.1
Industrial Adjustment Fund2
14.6
Rehabilitation Fund for Small and Medium Industries3
8.0
Ship Financing Facility
3.4
0.7
356.4
Malaysian Industrial Development Finance Berhad
New Entrepreneurs Fund2
0.7
9.1
New Entrepreneurs Fund 2
11.3
Fund for Small and Medium Industries2
–
–
–
–
–
–
–
–
–
–
–
–
–
9.1
11.1
2.1
5.5
7.9
–
0.2
1.8
47.6
Fund for Small and Medium Industries 2 
13.1
Bumiputera Industrial Fund2
2.5
Industrial Adjustment Fund2
3.7
Rehabilitation Fund for Small and Medium Industries3
3.9
Bank Pertanian Malaysia
Fund for Small and Medium Industries2
–
–
–
8.8
90.1
Rehabilitation Fund for Small and Medium Industries3
15.2
Fund for Food
282.2
195.9
464.2
Credit Guarantee Corporation Malaysia Berhad4
New Entrepreneurs Fund 2
418.0
243.1
299.2
Fund for Small and Medium Industries 2
569.3
106.5
–
–
–
4.1
–
17.9
–
–
–
–
– 
–
–
–
–
–
3.1
–
–
–
–
22.1
–
–
121.0
–
–
294.4
0.3
115.1
0.9
–
–
–
–
0.3
4.4
–
–
–
20.2
15.9
–
–
–
5.1
–
0.9
–
4.2
1.2
–
0.5
171.0
71.4
99.9
452.1
128.9
167.6
108.2
19.9
0.3
39.9
5.1
8.1
2.2
–
New Entrepreneurs Fund 2
–
1.1
1.8
0.5
0.5
22.9
–
9.9
4.6
341.1
7.9
13.8
6.5
25.5
19.4
31.4
1.7
3.7
2.9    
84.9
Fund for Small and Medium Industries 2 
–
–
–
6.8
3.1
3.0
14.1
551.1
350.4
450.0
1  Bank Negara Malaysia fund for the ECR scheme administered by EXIM Bank is merged with the Government fund in Table A.83 
2  Funds have been fully utilised 
3  Fund was closed on 1 November 2003 and replaced by Rehabilitation Fund for Small Businesses
4  Administers and channels the funds through various lending institutions


Annex
P77
Table A.82
Development Financial Institutions: Funds from Multilateral and International Agencies
Loans (RM million)
Approved
Disbursed
Outstanding
as at end
2002
2003
2002
2003
2002
2003
Bank Pembangunan dan Infrastruktur Malaysia Berhad
ASEAN-Japan Development Fund-Overseas Economic
Cooperation Fund1
20.3
15.1
64.3
Japan Bank for International Cooperation-Fund for Small and
Medium Scale Industry Promotion Programme1
3.1
10.5
45.0
Japan Bank for International Cooperation-Fund for Small and
Medium Industries
3.6
33.2
92.6
Japan Bank for International Cooperation 1- JEXIM1
–
742.5
1,182.1
Islamic Development Bank
–
14.9
48.9
Bank Industri & Teknologi Malaysia Berhad
–
–
–
27.0
15.2
–
–
2.7
–
–
–
143.3
30.8
–
–
–
ASEAN-Japan Development Fund-Overseas Economic
Cooperation Fund1
8.8
The Export-Import Bank of Japan1
26.9
Overseas Economic Cooperation Fund-Fund for
    Small and Medium Scale Industry Promotion Programme1
25.9
Japan Bank for International Cooperation 3001
151.8
Japan Bank for International Cooperation 2001
55.8
Japan Bank for International Cooperation-Fund for Small and
Medium Industries1
60.5
23.6
52.2
Export-Import Bank of Malaysia Berhad
Japan Bank for International Cooperation 3001
268.9
Japan Bank for International Cooperation 2001
168.0
Malaysian Industrial Development Finance Berhad
Japan Bank for International Cooperation-Fund for Small and
Medium Industries
46.0
53.5
136.2
ASEAN-Japan Development Fund-Overseas Economic
Cooperation Fund
37.8
14.0
40.8
Japan Bank for International Cooperation-Fund for Small and
Medium Scale Industry Promotion Programme
3.0
6.0
16.9
48.8
–
–
–
–
–
52.3
-
–
–
–
45.9
22.0
30.8
–
5.4
25.1
17.8
33.2
44.1
15.7
–
–
–
39.5
6.4
–
–
–
26.0
47.4
24.2
–
20.3
Bank Pertanian Malaysia
ASEAN-Japan Development Fund-Overseas Economic
Cooperation Fund1
134.0
78.5
50.5
110.5
1,191.5
49.0
5.1
29.3
21.6
161.8
43.9
64.3
227.5
142.2
152.3
51.1
12.1
48.7
1 Fund has been fully utilised

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Bank Negara Malaysia Annual Report 2003 
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Statutory Requirements
In accordance with section 48 of the Central Bank of Malaysia Act 1958, Bank Negara Malaysia
hereby publishes and has transmitted to the Minister of Finance a copy of this Annual Report
together with a copy of its Annual Accounts for the year ended 31 December 2003, which have
been examined and certified by the Auditor-General. The Annual Accounts will also be published
in the Gazette.
26 March 2004
Zeti Akhtar Aziz
Chairman
Board of Directors


Board of Directors
Dr. Zeti Akhtar Aziz
D.K. (Johor), P
.S.M., S.S.A.P
., D.P
.M.J.
Governor and Chairman
Dato’ Mohd Salleh bin Hj. Harun
D.S.D.K.
Deputy Governor
Dato’ Ooi Sang Kuang
D.M.P.N.
Deputy Governor
Tan Sri Dato’ Seri Dr. Samsudin bin Hitam
P
.S.M., P.N.B.S., D.C.S.M., S.S.A.P
., S.M.J., D.P
.M.T., D.P
.M.P., J.S.M., K.M.N., A.M.N.
Secretary General to the Treasury
Datuk Oh Siew Nam
P
.J.N.
Tan Sri Datuk Amar Haji Bujang bin Mohd. Nor
P
.S.M., D.A., P
.N.B.S., J.S.M., J.B.S., A.M.N., P
.B.J. P
.P
.D.(Emas)
Tan Sri Dato’ Seri Dr. Mohd. Noordin bin Md. Sopiee
P
.S.M., D.I.M.P., D.M.S.M., D.G.P
.N.
Dato’ N. Sadasivan
D.P
.M.P., J.S.M., K.M.N.


Governor
Dr. Zeti Akhtar Aziz
Deputy Governor
Dato’ Mohd Salleh bin Hj. Harun
Deputy Governor
Dato’ Ooi Sang Kuang
Assistant Governor
Datuk Zamani bin Abdul Ghani
Assistant Governor
Dato’ Mohamad Daud bin Hj. Dol Moin
Assistant Governor
Datuk Latifah Merican Cheong
Assistant Governor
Dato’ Mohd Razif bin Abd. Kadir
Secretary to the Board
Mohd Nor bin Mashor
Directors/Heads of Department
Governor’s Office
Ng Chow Soon
Internal Audit
Yahaya bin Haji Besah
Legal
Gopala Krishnan Sundaram
Economics
Monetary Assessment and Strategy
V. Vijayaledchumy
Economics
Dr. Phang Hooi Eng
International
Wan Hanisah binti Wan Ibrahim
Foreign Exchange Administration
Mahdi bin Mohd. Ariffin
Statistical Services
Chan Yan Kit
Regulation
Bank Regulation
Nor Shamsiah binti Mohd Yunus
Insurance Regulation
Donald Joshua Jaganathan
Islamic Banking and Takaful
Bakarudin bin Ishak
DFI Regulation
Che Zakiah binti Che Din
Risk Management
Teo Kee Tian
Supervision
Bank Supervision I
Azizan bin Haji Abd Rahman
Bank Supervision II
Chung Chee Leong
Insurance Supervision
Sani bin Ab. Hamid
Payment Systems
Ahmad Hizzad bin Baharuddin
Information Systems Supervision
Ramli bin Saad
Special Investigation
Kamari Zaman bin Juhari
Financial Intelligence
Koid Swee Lian
Investment and Operations
Investment Operations and Financial Market
Muhammad bin Ibrahim
Finance
Abdul Aziz bin Abdul Manaf
Organisational Development
IT Services
Hong Yang Sing
Human Resource Management
Mainor bin Awang
Human Resource Development Centre
Lim Lai Hong
Corporate Services
Mohd Nor bin Mashor
Corporate Communication
Abu Hassan Alshari bin Yahaya
Strategic Planning
Mior Mohd Zain bin Mior Mohd Tahir
Currency Management and Operation
Hor Weng Keng
Security
Ahmad bin Mansur
Property and Services
Zulkifli bin Abd Rahman
Chief Representative
London Representative Office
Lillian Leong Bee Lian
New York Representative Office
Shamsuddin bin Mohd Mahayiddin
Branch Manager
Pulau Pinang
Ong Boon Teck
Johor Bahru
Ishak bin Musa
Kota Kinabalu
Yusoff bin Yahaya
Kuching
Nallathamby s/o Nalliah
Kuala Terengganu
Mokhtar bin Mohd Noh
Shah Alam
Hamzah bin Abu Bakar


Contents
Governor’s Statement
The Malaysian Economy in 2003
Overview ................................................................................................................. 02
White Box: Potential Output of the Malaysian Economy ....................................... 07
Sectoral Review ....................................................................................................... 12
Domestic Demand Conditions .................................................................................. 27
Prices and Employment ............................................................................................ 32
External Sector......................................................................................................... 37
White Box: Recent Trends in Foreign Direct
Investment in Malaysia ....................................................................... 47
Flow of Funds .......................................................................................................... 56
Monetary and Fiscal Developments
Monetary Policy in 2003 .......................................................................................... 60
White Box: Monetary Policy Statement ................................................................. 61
Monetary Developments .......................................................................................... 62
Exchange Rate Developments .................................................................................. 68
Fiscal Policy and Operations ..................................................................................... 69
Outlook and Policy
The International Economic Environment ................................................................. 80
Malaysian Economy in 2004 .................................................................................... 85
White Box: Liberalisation and Simplification of Foreign
Exchange Administration Rules ........................................................... 89
Monetary Policy in 2004 .......................................................................................... 96
Fiscal Policy in 2004 ................................................................................................. 98
Financial Sector Policy in 2004 ................................................................................. 99
White Box: Report on SME Development Framework ......................................... 101
The Financial Sector
Sources and Uses of Funds of the Financial System................................................. 104
Management of the Banking System...................................................................... 107
White Box: The International Center for Leadership in Finance............................ 110
Supervisory Activities.............................................................................................. 119
White Box: Banking Measures Introduced in 2003.............................................. 122
Performance of the Banking System ....................................................................... 128
White Box: Financial Sector Masterplan .............................................................. 141
White Box: The Proposed Deposit Insurance System in Malaysia ......................... 150
Other Financial Institutions ..................................................................................... 152
Financial Markets ................................................................................................... 157
White Box: Key Capital Market Measures in 2003 .............................................. 164
Developments in Payment and Settlement Systems ................................................ 172
White Box: Payment Systems Act 2003 .............................................................. 173
Malaysia’s Anti-Money Laundering and Counter Financing
of Terrorism (AML/CFT) Programme........................................................................ 178


The Islamic Financial System
Growing Significance of the Islamic Financial System.............................................. 182
Policy Thrusts in 2003 ............................................................................................ 186
White Box: Introduction of Islamic Variable Rate Mechanism .............................. 187
White Box: The Framework of the Rate of Return ............................................... 190
White Box: Guidelines on the Specimen Reports and Financial
Statements for Licensed Islamic Banks (GP8-i) ................................... 193
Performance of the Islamic Banking System............................................................ 196
Development Financial Institutions
Introduction ........................................................................................................... 204
Policies and Measures ............................................................................................ 204
Performance of Development Financial Institutions................................................. 208
External Relations
Economic Surveillance ............................................................................................ 222
International Financial Architecture ........................................................................ 222
External Relations with the IMF .............................................................................. 223
Islamic Banking ...................................................................................................... 223
Combating Money Laundering and Terrorist Financing ........................................... 224
Financial Sector Liberalisation ................................................................................. 224
Regional Co-operation ........................................................................................... 229
White Box: Asian Bond Market Initiative ............................................................. 231
Bilateral Co-operation ............................................................................................ 232
Technical Assistance and Information Exchange...................................................... 232
Organisation and Human Resource
Organisation Development – Overview................................................................... 234
Risk Management in Bank Negara Malaysia ........................................................... 238
Organisation Structure ........................................................................................... 241
Annual Accounts
Balance Sheet as at 31 December 2003 ................................................................. 245
Annex .................................................................................................................. 253


The more optimistic global environment and stronger domestic economic conditions have
enhanced Malaysia’s prospects as we advance into 2004.  The renewed strength of the recovery
of the world economy is now supported by a more synchronised expansion of the major
industrial economies and the strong growth in the Asian region.  While economic and financial
policies have been important in providing the stimulus to the improved overall growth
performance, the increasing significance of the private sector in driving this growth has
increased the prospects for the sustainability of these positive trends.
Strong domestic demand has been particularly evident in the Asian region, reflecting the
increased role of the private sector in driving the growth.  This strong growth in regional
demand has provided a rapidly expanding market for Asian goods and services.  The increased
regional integration is, however, not only occurring as a result of the growth in intra-regional
trade, but also in the form of financial flows, with intra-Asian investments gaining greater
significance, resulting in a growing amount of the savings in Asia being reinvested in the region.
As these trends become more pronounced, they would not only contribute towards greater
regional integration but would also reinforce further the regional growth momentum. In
addition, the growing demand from the Asian economies has also been increasingly supportive
of the global recovery.  Indeed, this trend would contribute towards reducing the external
imbalances existing in the global economy and increase the prospects for a more balanced
global growth.
The Malaysian economy in 2003 benefited from the more robust external demand and increased
private sector activity in the domestic economy.  A better-than-expected economic performance
of 5.2% was recorded during the year.  The growth momentum is projected to strengthen
further in the region of 6 – 6.5% in 2004, with the private sector assuming the lead role as the
engine of growth.  Private consumption and investment activity are projected to be stronger,
underpinned by improved economic and employment conditions and stronger balance sheets in
both the corporate and financial sectors.  Growth is expected to be stronger across almost all
sectors of the economy, with the services and manufacturing sectors being the main drivers of
growth.  While the role of the Government in the economy remains important, the focus of
policy has now shifted to providing an enabling environment, including enhancing the
Government delivery system to reduce the cost of doing business, and to providing a stable and
sound macroeconomic environment.
The underlying economic and financial fundamentals have continued to strengthen in the
early part of 2004, according monetary policy the flexibility to remain supportive of private
sector activity.  This is reflected in the near absence of inflationary pressures in both the
consumer and asset markets and excess capacity in the system, evident in the gap between
actual and potential output.  Price stability has also been reinforced by productivity
improvements and further capacity expansion.  In addition, as the globalisation process
intensifies, there is increased access to goods and services at lower costs.  Moreover, as the
corporate sector performance improves, higher costs will not always translate into higher
prices in this more competitive environment.  The Government’s fiscal prudence has also been
a factor in reinforcing price stability.  Against this environment, low interest rates can remain
for some time to come.
Governor’s Statement


In this stable environment, and with the much strengthened banking system and progress
achieved in the development of the financial infrastructure, it is timely to transition to the new
interest rate framework.  The aim is to achieve greater efficiency in the operations of the
financial markets and thus facilitate more effective pricing in the financial system as well as
enhance the effectiveness of the monetary transmission mechanism.  The window of
opportunity will therefore be taken during this period when the current interest rate policy will
remain unchanged.  This will provide the market with the opportunity to adjust to the new
monetary operating procedures to achieve the desired outcome of more efficient functioning
financial markets and increased effectiveness of monetary policy.
Liquidity has remained ample in an environment of a strong external balance, a steady inflow of
foreign direct investment and increased portfolio inflows.  Sterilisation operations, however, have
been conducted, taking into consideration the need to ensure adequate liquidity to support
financing of the private sector-led growth, while at the same time, ensuring that this does not
result in any risks to the financial system and to the economy.  Important to this process is that
the Central Bank has the instruments and the capacity to absorb this liquidity.  The costs
involved in these operations are essentially covered by the returns on the investment of the
increased inflows.  The Central Bank will absorb such immediate-term costs of monetary policy
to ensure the stability and sustainability of our medium and long-term prospects.  In the current
environment, the net position has continued to remain positive.  In managing the reserves, a
well-diversified reserves portfolio is maintained. Major considerations taken into account are
capital preservation and liquidity, while optimising returns.  This has ensured a sound financial
position for the Central Bank.
On the exchange rate, the objective of our policy remains unchanged, that is, to achieve
exchange rate stability, in particular, with our trading partners.  As our trade with the region
becomes increasingly significant, exchange rate stability in the region becomes increasingly
important. At the very outset, when the pegged exchange rate arrangement was introduced
almost six years ago, we have stated that we want an effective exchange rate mechanism that
will efficiently facilitate international trade and investment. While there may be trade-offs, the
benefits of the present system have far outweighed any costs.  Consideration for an alternative
system should only be made in the event of anticipated fundamental misalignment or structural
change or if new regional arrangements can be evolved.
Extreme movements and high volatility in exchange rates have always been a concern, even to
the major economies.  For emerging market economies, the ramifications of such movements
are even more pronounced and far-reaching.  Recent pronouncements and pressures on Asian
economies to adopt more flexible exchange rate regimes have been based on the view that
adjustments in the exchange rate would correct structural imbalances in the global economy.  It
needs to be recognised that the comparative advantage that Asia possesses is not due to
exchange rates but reflects other factors that have resulted in lower costs.  Adjustments in
exchange rates are therefore unlikely to correct such structural imbalances.  In addition, whether
exchange rate appreciation can address any signs of overheating needs to take into account the
nature of the price pressures.  In situations where the pressures are sectoral or localised, other
measures, including prudential measures, may be more effective in addressing these


developments.  Indeed, the exchange rate should not be used for the purpose for which it may
not be able to yield the desired results.
In strengthening our competitiveness, Malaysia has adopted a more comprehensive strategy,
addressing all dimensions that will enhance competitiveness.  This includes strategies to enhance
labour quality and productivity, innovation, enterprise and the public delivery system, applied not
only to the manufacturing sector but to all sectors of the economy. The strategy is essentially to
assess costs on a more comprehensive basis.  The strategy is towards achieving an enhanced
overall cost competitiveness, leveraging on our low country risk, including the economic, social
and political stability, reliable intellectual property protection framework, and our industrial
maturity.  Moving forward, efforts will therefore be focused on developing an efficient supply
chain that is reinforced with local supporting industries, and on becoming more knowledge-
based with the necessary skills and competencies.
An integral part of the strategy on competitiveness is to develop a robust Small and Medium-
Scale Enterprises (SME) sector that will be able to contribute more significantly to the economy.
Two years ago, Bank Negara Malaysia proposed a comprehensive framework for the
development of SMEs to provide an enabling environment and to strengthen the infrastructure
for SME development.  The progress of the work achieved thus far will be deliberated by the
National SME Development Council.  The Council, which is being set up by the Government, will
function as the highest policy-making body that will chart the future direction and strategies for
SME development and ensure coordination and comprehensiveness of the policies.
As part of the efforts to enhance overall cost competitiveness, reduce country risks and sustain
our position as a destination of choice for both local and foreign investors, a gradual
liberalisation of rules and regulations will be undertaken by Bank Negara Malaysia to improve
the delivery systems and reduce regulatory costs to business.  Leveraging on technology to
improve the surveillance system on capital flows has improved the ability to monitor the risks
associated with these flows.  This has therefore enabled the further deregulation and
liberalisation of foreign exchange rules. In addition to the liberalisation in early 2003, further
liberalisation of foreign exchange rules will take effect from 1 April 2004 to improve efficiency
in the delivery system, while further reducing the cost of doing business.
In the development of the financial system, significant progress has been achieved during
the first three years of the Financial Sector Master Plan.  The efforts to evolve a more
diversified financial structure that is complemented with the development of strengthened
financial institutions have now yielded positive results.  While the banking sector is still the
main mobiliser and provider of financing, the more diversified financial infrastructure has
increased the potential for new and alternative channels to mobilise savings as well as
increased the alternative sources of financing. Financing from the capital market, in
particular, the private bond market, specialised financial institutions and the insurance
sector, have now become more significant.  The provision of financial services to micro-
enterprises has also been strengthened, while venture capital as an alternative form of
financing has provided increased support to the new areas of growth that are more
technology and knowledge intensive.


Significant progress has been achieved on institutional development and capacity building.  The
level of capitalisation, the capacity to lend to a wider range of activities, the level of operational
efficiency, the level of skills, the more differentiated scope of business, the level of innovation,
the standards of service quality and the risk management capacity have shown significant
improvements.  This is reflected, in particular, in the lower operating costs, the narrowing of
margins, and the wider range of new products and services. These improvements are also
reflected in the ability of the domestic institutions to maintain market shares in an environment
of increased competition and narrowing margins.
The supporting infrastructure has also been strengthened to reinforce this trend.  These include
the consumer education programme, the strengthening of the Credit Guarantee Corporation,
the establishment of the International Centre for Leadership in Finance to develop world-class
leaders in the financial services sector and the new Financial Mediation Bureau to be established
this year.  Work is also underway to develop a deposit insurance scheme that will add another
layer to the consumer protection framework, representing a further building block in our
financial infrastructure.  Of significance is that it is designed to take into account the structure
and conditions in our financial system and economy.  The deposit insurance system will have a
broader mandate that will integrate the financial restructuring processes and structure within its
operations.  The system will also be the first to provide for the protection of Islamic deposits in
line with Shariah principles. These developments have also been complemented by
improvements in the regulatory and supervisory framework to ensure the soundness and
resilience of the financial system.
Access to financing to a wider range of activities in the private sector, in particular, to the SMEs,
continues to improve.  Outstanding loans to SMEs grew at an annual rate of 10% in 2003.
Financing to the private sector and to the SMEs is expected to remain robust in 2004.  Other
measures that have supported this trend include the establishment of the Small Debt Resolution
Committee, supported by Bank Negara Malaysia’s SME Special Unit and continued availability of
Bank Negara Malaysia’s special funds that currently amount to RM5.6 billion.  New avenues are
also being developed to increase the SMEs’ access to capital market funding.
As the financial sector evolves to meet the needs of increasingly sophisticated consumers,
attention has been directed to ensure that basic banking facilities are widely available and that
these facilities are offered at minimal costs to all segments of society.  In addition, as banking
consumers become more empowered by their awareness of financial products and facilities, they
will exercise their rights and ability to select between products and services offered by different
institutions.  This, combined with the transparency requirements, will ensure that pricing is
commensurate with the financial products and services.  The competitive process is also
expected to result in more competitive pricing of products and services and encourage greater
innovation.
The insurance industry continued to perform an important role in supporting economic
growth as a mobiliser of long-term funds and as a risk transfer mechanism.  An important
aspect in the development of the insurance industry is also the increasing socio-economic role
of insurance in meeting the demand for healthcare financing support.  This is being realised


Zeti Akhtar Aziz
Governor
26 March 2004
through the increasing provision of medical and health insurance products. As major
institutional investors, insurers have an increasingly important role in the development of the
capital markets. The insurance fund assets have increased significantly in 2003 to account for
the largest share of the total fund assets of the industry.  During the year, the framework
governing insurance market practices, including claims handling practices, standards of
product disclosure and dispute resolution mechanisms, were further strengthened to ensure
greater consumer protection.  A comprehensive consumer education programme was also
launched to promote a larger role for consumer activism in the insurance business and
practices and to ensure competitive prices to consumers.
The comprehensiveness of the Islamic financial system in Malaysia, in terms of both the pool
of Islamic financial players as well as the broad spectrum of innovative Islamic financial
products have enhanced the role of the Islamic financial system as a financial intermediary
and enabler of economic growth.  Further progress in the development and expansion of
the Islamic financial system was achieved in 2003.  Policy initiatives have focused on
liberalising the domestic Islamic banking system, increasing the level of competition, and
promoting financial innovation.  Other measures were also directed towards strengthening
and broadening the legal framework for Islamic banking and finance.  On the global front,
the Islamic Financial Services Board (IFSB) has drawn wide participation and has made
significant progress in fulfilling its mandated role.  The promulgation of standards on the
capital adequacy and risk management is progressing rapidly and work on establishing
standards for corporate governance has already been initiated.  The year has also seen
further Islamic-based issues accessing the international capital markets.  Cumulatively, these
developments have enhanced the role of Islamic finance as an integral component of the
international financial system.
Bank Negara Malaysia has continued its developmental role during the year, over and above
our core mandate of monetary and financial stability.  This broader mandate is outlined in
our Financial Sector Master Plan and essentially takes a holistic approach in the development
and management of the financial system.  While efforts to address areas of vulnerability and
identifying emerging risks are important, these need to be complemented with efforts to
build the financial infrastructure.  Institutional and capacity building are necessary
foundations for the financial system.  It is in this context that the Central Bank drives the
development of the financial sector.


The Malaysian 
Economy in 2003
02-12
Overview
07
White Box: Potential Output of the
Malaysian Economy
12-27
Sectoral Review
27-32
Domestic Demand Conditions
32-37
Prices and Employment
37-56
External Sector
47-51
White Box: Recent Trends in Foreign Direct
Investment in Malaysia
56-58
Flow of Funds


4.H-2
2
OVERVIEW
While events in the first half of the year had an
impact on growth, the mutually reinforcing
combination of strong economic fundamentals,
supportive monetary and financial policies and
decisive Government action provided the platform
for growth to accelerate in the second half. For the
year as a whole, real gross domestic product (GDP)
expanded by 5.2% (2002: 4.1%), exceeding the
official forecast of 4.5%.
The Malaysian Economy in 2003
The Malaysian economy demonstrated greater resilience in the
face of uncertainties to expand by 5.2%, more rapidly than
previously forecast.
Growth in 2003 was broad based and balanced
across sectors. The manufacturing sector grew by
8.2% on the back of strong production growth, both
in the export-oriented and domestic-oriented
industries. Export-oriented industries, particularly the
electronics and chemicals industries, benefited from
the recovery in the global electronics sector as
investment demand picked up in most major
economies. This growth was also seen in the strong
expansion in manufactured exports (8.2%) and
capacity utilisation levels that exceeded 80%. In
Graph 1.1
The Economy in 2003 (at 1987 Prices)
Supply of goods and services (RM458.3 billion)
Services
25.3%
Construction
1.6%
Imports of services
8.9%
Imports of goods
40.7%
Manufacturing
15.6% 
Agriculture
4.2%
Mining
3.6%
Trade, etc. 25.6%
Finance, etc. 25.3%
Government services 12.9%
Transport, etc. 15.1%
Utilities 7.2%
Others 14.0%
Demand for goods and services (RM458.3 billion)
Exports of goods
48.9%
Exports of services
6.3%
Private consumption
23.4%
Public consumption
7.4%
Public investment
9.2%
Private investment
4.9%


3
The Malaysian Economy in 2003
certain industries, the 90% utilisation level was
breached in 2003, prompting an increase in capital
expenditure.
The agriculture sector also enjoyed higher growth of
5.5% as higher production and prices, mainly of
palm oil and rubber, drove growth. The mining
sector, which grew by 4.8%, also enjoyed the
benefits of higher prices. In addition, the production
capacity in the sector was enhanced with the MLNG
Tiga plant and four new oil and gas fields each
coming on-stream. Higher prices and improving
external demand conditions led to the strong growth
in exports of primary commodities (30.4%).
The services sector experienced the greatest impact
from the uncertainties in the first half, most notably
the impact of the severe acute respiratory syndrome
(SARS) outbreak on tourism and travel-related
activities. The wholesale and retail trade, hotels and
restaurants sub-sector and air passenger travel
segment, in particular, were severely affected as the
number of tourist arrivals dropped significantly from
a pre-SARS monthly average of one million to about
half that number in April. However, the impact of
SARS proved transitory and these sub-sectors
recovered rapidly in the second half. In addition, the
strong loan growth, increased use of new services in
the cellular telecommunications segment and
sustained volume of international trade ensured that
growth in the sector remained resilient. The sector
recovered rapidly and for the year as a whole
expanded by 4.1%.
Growth in the construction sector moderated to
1.9% due to slower growth in the civil engineering
sub-sector as a result of the completion of several
privatised projects. On the other hand, strong
2
4
6
8
10
1999
2000
2001
2002
2003
0
0
50
100
150
200
250
Annual change (%)
RM billion
Graph 1.2
Real GDP
Real GDP value (RHS)
Real GDP growth (LHS)
-5
0
5
10
15
20
1999
2000
2001
2002
2003
Annual change (%)
-5
0
5
10
15
20
RM ('000)
Graph 1.4
GNP Growth and Nominal GNP per Capita
Nominal GNP per Capita (RHS)
Nominal GNP (LHS)
Real GNP (LHS)
0
5
10
15
20
1999
2000
2001
2002
2003
Annual change (%)
Graph 1.3
Real GDP and Aggregate Domestic Demand 
GDP
Aggregate domestic demand
-10
-5
0
5
10
15
1999
2000
2001
2002
2003
Percentage
point 
-10
-5
0
5
10
15
Annual change
(%)
Graph 1.5
Contribution to Real GDP Growth:
Domestic Demand and Net Exports
Domestic demand (LHS)
Net exports (LHS)
Real GDP growth (RHS)


4.H-4
4
Table 1.1: Malaysia – Key Economic Indicators
2001
2002
2003p
2004f
Population (million persons)
24.0
24.6
25.1
25.6
Labour force (million persons)
9.9
10.2
10.5
10.9
Employment (million persons)
9.5
9.8
10.2
10.5
Unemployment (%)
3.6
3.5
3.5
3.4
Per Capita Income
(RM)
12,855
13,683
14,592
15,376
(US$)
3,383
3,601
3,840
4,046
NATIONAL PRODUCT (% change)
Real GDP
0.3
4.1
5.2
6.0 – 6.5
(RM billion)
210.6
219.3
230.7
244.6
Agriculture, forestry and fishery
-0.9
3.0
5.5
2.6
Mining and quarrying
-0.8
3.7
4.8
5.5
Manufacturing
-5.8
4.0
8.2
10.2
Construction
2.1
2.3
1.9
1.5
Services
5.8
4.1
4.1
5.2
Nominal GNP
-1.6
8.7
10.1
6.5
(RM billion)
308.7
335.6
369.4
393.3
Real GNP
1.2
4.7
6.6
5.6
(RM billion)
193.0
202.1
215.4
227.5
Real aggregate demand1
2.5
4.2
4.8
5.0
Private expenditure1
-3.3
0.7
4.3
8.7
Consumption
2.4
4.4
5.1
8.1
Investment
-19.9
-13.1
1.1
11.5
Public expenditure1
15.6
10.8
5.5
-1.3
Consumption
17.0
12.2
7.9
4.2
Investment
14.5
9.8
3.6
-5.7
Gross national savings (as % of GNP)
34.9
34.4
36.9
35.8
BALANCE OF PAYMENTS (RM billion)
Goods
69.9
72.1
97.7
96.4
Exports (f.o.b.)
334.3
357.7
398.9
443.3
Imports (f.o.b.)
280.2
303.1
317.7
366.8
Services balance
-8.4
-6.0
-15.0
-11.9
(as % of GNP)
-2.7
-1.8
-4.1
-3.0
Income
-25.6
-25.1
-22.6
-24.7
(as % of GNP)
-8.3
-7.5
-6.1
-6.3
Current tranfers
-8.2
-10.6
-9.3
-9.8
Current account balance
27.7
30.5
50.8
50.0
(as % of GNP)
9.0
9.1
13.7
12.7
Bank Negara Malaysia reserves, net2
117.2
131.4
170.5
–
(as months of retained imports)
5.1
5.4
 6.8
–
PRICES (% change)
CPI (2000=100)
1.4
1.8
1.2
1.5
PPI (1989=100)
-5.0
4.4
 5.7
–
Real wage per employee in the manufacturing sector
1.6
 3.2
2.6
–
Note: Figures may not necessarily add up due to rounding.
1 Exclude stocks.
2 All assets and liabilities in foreign currencies have been revalued into ringgit at rates of exchange ruling on the balance sheet date and the gain/loss has been reflected
accordingly in the Bank’s account.
p Preliminary
f Forecast


5
The Malaysian Economy in 2003
Table 1.2: Malaysia – Financial and Monetary Indicators
2001
2002
2003p
FEDERAL GOVERNMENT FINANCE (RM billion)
Revenue
79.6
83.5
92.8
Operating expenditure
63.7
68.7
75.2
Net development expenditure
34.2
35.1
38.5
Overall balance
-18.4
-20.3
-20.9
Overall balance (% of GDP)
-5.5
-5.6
-5.3
Public sector net development expenditure
59.7
69.1
72.0
Public sector overall balance (% of GDP)
-0.3
-0.7
-0.4
EXTERNAL DEBT
Total debt (RM billion)
173.4
185.6
187.2
Medium and long-term debt
149.3
153.6
152.8
Short-term debt1
24.1
32.1
34.5
Debt service ratio (% of exports of goods and services)
Total debt
6.8
6.7
6.1
Medium and long-term debt
6.6
6.5
6.0
Change in 2001
Change in 2002
Change in 2003
RM billion
%
RM billion
%
RM billion
%
MONEY AND BANKING
Money Supply
M1
2.5
3.2
8.3
10.3
13.0
14.6
M2
7.8
2.2
21.0
5.8
42.5
11.1
M3
13.0
2.9
31.6
6.7
48.5
9.7
Banking system deposits
8.6
1.8
25.3
5.3
49.5
9.8
Banking system loans2
16.1
3.9
19.8
4.6
21.8
4.8
Manufacturing
…
…
-1.2
-2.0
-0.2
-0.3
Broad property sector
12.4
8.2
10.8
6.6
14.7
8.4
Finance, insurance and business services
0.7
2.2
-2.5
-7.7
-0.6
-1.9
Loan-deposit ratio
85.9%
84.9%
80.9%
Financing-deposit ratio3
95.7%
95.1%
91.7%
2001
2002
2003
%
%
%
INTEREST RATES (AVERAGE RATES AS AT END-YEAR)
3-month interbank
3.27
3.13
2.87
Commercial banks
Fixed deposit
3-month
3.21
3.20
3.00
12-month
4.00
4.00
3.70
Savings deposit
2.28
2.12
1.86
Base lending rate (BLR)
6.39
6.39
6.00
Finance companies
Fixed deposit
3-month
3.22
3.20
3.00
12-month
4.01
4.00
3.68
Savings deposit
2.94
2.65
2.18
Base lending rate (BLR)
7.45
7.45
6.90
Treasury bill (3-month)
2.73
2.82
2.77
Government securities (1-year)
2.93
2.94
2.93
Government securities (5-year)
3.18
3.15
4.28
2001
2002
2003
%
%
%
EXCHANGE RATES
Movement of Ringgit (end-period)
Change against composite
3.5
-3.4
-3.2
Change against SDR
3.8
-7.3
-8.5
Change against US$4
0.0
0.0
0.0
1 Excludes currency and deposits held by non-residents with resident banking institutions.
2 Includes loans sold to Cagamas.
3 Adjusted to include holdings of private debt securities.
4 Ringgit was pegged at RM3.80=US$1 on 2 September 1998.
p Preliminary


4.H-6
6
demand for housing sustained activity in the
residential construction segment.
In 2003, GDP growth was private sector-driven.
Private expenditure contributed 2.5 percentage
points of the 5.2% growth rate. Both households
and the corporate sector benefited from rising
disposable incomes, the improving terms of trade
for commodities and strengthening external
demand. While household incomes increased as a
result of growth in wages and higher commodity
prices, the corporate sector generated higher profits
and cash flows from rising productivity and higher
export earnings. From a sample of 300 non-financial
companies listed on the Kuala Lumpur Stock
Exchange (KLSE), 54% recorded higher cumulative
profits for the first three quarters of 2003 compared
with the same period a year earlier and the
annualised return-on-equity rose from 5.4% in the
third quarter of 2002 to 7.3% in the third quarter
of 2003.
As a result of higher disposable income, especially for
households, private consumption increased by 5.1%.
In addition, the low interest rate environment,
coupled with the high savings rate, provided the
impetus for households to increase their borrowings
for consumption expenditure. Measures unveiled in
the Economic Package in May improved consumer
confidence, further supporting consumption
expenditure.
A significant development in 2003 has been the
turnaround in private investment, which increased by
1.1% after two years of contraction. The improved
economic outlook, particularly in the second half,
stronger corporate balance sheets and cashflow
positions and high capacity utilisation, especially in
the manufacturing sector, prompted increased capital
spending. In addition, the low interest rate
environment and the steps taken to improve
companies’, especially the small and medium
enterprises’ (SMEs), access to finance, provided the
impetus for capital expansion.
The public sector continued to play an important role
in sustaining domestic demand, especially in the first
half. Real public consumption increased by 7.9% due
to higher spending on supplies and services. On the
other hand, real public investment growth
moderated to 3.6% in line with the moderate
increase in Federal Government development
expenditure and lower capital spending by the
non-financial public enterprises.
As a result, real aggregate domestic demand
(excluding change in stocks), increased more rapidly
by 4.8%. However, this pick-up in demand did not
lead to an increase in inflation. The Consumer Price
Index (CPI) increased more moderately by 1.2%
during the year (2002: 1.8%), with core inflation –
inflation that excludes price-volatile and price-
administered items – amounting to 0.6% in spite of
higher commodity prices. While stronger economic
growth led to a narrowing of the output gap, it was
not completely eliminated and reflected excess
capacity in selected sectors.
In 2003, the external sector’s contribution to growth
turned positive (2 percentage points; 2002: –1.3
percentage points), primarily due to the acceleration
of exports of goods in the trade account by 11.5%
(2002: 7%). The trade surplus increased to RM81.1
billion (2002: RM54.6 billion). Sustained consumer
demand and the pick-up in investment activity in the
major industrial economies as well as higher
commodity prices spurred the growth in exports of
manufactures and primary commodities. On the
other hand, import growth moderated to 4.8%
(2002: 8.1%) as exports of primary commodities,
unlike manufactured exports, had a low import
content. Further, the changing pattern of investment,
especially foreign direct investment (FDI), into the
services sector were smaller in scale but had higher
potential to generate value added. As a result,
imports of capital goods remained relatively stable
(0.7%).
The large trade surplus, coupled with a smaller
income account deficit brought about by the
repatriation of earnings from overseas investments by
Malaysian firms, more than compensated for the
larger services account deficit (RM15 billion) due to
lower tourism receipts. As a result, the current
account surplus increased to RM50.8 billion,
equivalent to 13.7% of gross national product (GNP)
(2002: 9.1% of GNP).
The financial account in the balance of payments
remained stable, recording a deficit of RM12.1
billion (2002: -RM11.9 billion). Stronger inflows of
funds for investment were balanced by higher
repayments and prepayments of external debt by
the public sector and overseas investments by
Malaysian companies. FDI into Malaysia remained
significant while funds for portfolio investment
turned around to record an inflow as the KLSE
staged a markedly improved performance, especially
since the third quarter.


7
The Malaysian Economy in 2003
Potential Output of the Malaysian Economy
Potential output is output derived from the full use of available capital and potential employment,
which is the level of employment that is consistent with the “natural” or “long run” rate of
unemployment.  Therefore, the potential output is defined as the maximum capacity of output that
the economy can achieve without experiencing either inflationary pressures or external imbalances.
The output gap is the difference between actual and potential output and is measured as a
percentage of potential output.  When actual output is lower than its potential, the output gap is
negative and, theoretically, output can sustain an increase without exerting undue inflationary
pressures on the economy.
Table 1
Actual GDP and Potential Output
Actual
Potential
Investment
Labour
Output
GDP
output
Gap
Period
Annual change (%)
(% of
potential
output)
1992-1997
9.2
8.2
14.1
3.9
-1.9
1998
-7.4
3.7
-43.0
-2.1
-11.4
1999
6.1
2.4
-6.5
3.7
-8.3
2000
8.5
4.0
25.7
4.3
-4.3
2001
0.3
3.2
-2.8
3.3
-6.9
2002
4.1
1.7
0.3
3.1
-4.8
2003
5.2
3.4
2.7
3.3
-3.1
-30
-20
-10
0
10
20
30
40
50
60
-15
-10
-5
0
5
10
15
20
25
30
RM billion
% of potential
output 
Potential output
Actual output (GDP)
Output gap
Graph 1
Actual and Potential Output
92
93
94
95
96
97
98
99
00
01
02
03
During the high growth years of the early 1990s, actual output closely followed its potential, as shown in
Table 1 and Graph 1. Amidst the pronounced contraction in output experienced after the Asian financial
crisis, the output gap had widened significantly in 1998 but as the economy recovered, the gap narrowed.
In 2002, the output gap was 4.8% compared to 6.9% in 2001. Subsequently, in 2003, the stronger
pickup in economic activity compared to the growth in potential output led to a further narrowing of the
output gap. Bank Negara Malaysia’s latest estimates of potential output indicated that actual GDP
increased at a faster pace (5.2%) compared to potential GDP (3.4%). Nevertheless, the faster growth of
GDP did not exert inflationary pressures as actual GDP would have to increase by more than 8% before
the output gap could be bridged in 2003.
The potential growth rate doubled in 2003, due mainly to stronger growth in capital investment (2.7%;
2002: 0.3%) as business sentiment improved amidst higher capital utilisation rates in selected sectors of
the economy.
The estimated short-run elasticity of capital is significantly higher than the short-run elasticity of labour,
implying that changes in capital have a greater impact on output and that returns to capital have
continued to improve. This has encouraged firms to accelerate their investment activities, including the
upgrading of technological capabilities that, in turn, could have had an immediate impact on output.
In line with previous findings, the long-run elasticity of capital, which is estimated to be 0.50, is higher
than its short-run counterpart. This higher return to capital implies more efficient capital utilisation, as
calculated by the ratio of output to capital, which has had a faster rate of increase compared to the ratio
of output to labour. Previous supportive infrastructure investments, which have long gestation periods,
have begun to show positive returns, while stronger investment activities were visible in the services sector,
mainly in technology and logistics infrastructure. With the greater focus and emphasis placed on a
knowledge-driven economy, expectations are for potential output to expand further.


4.H-8
8
As a result of the large current account surplus,
sustained inflows of funds for investment, including
FDI, and revaluation gains from the translation of
non-US dollar assets into ringgit terms, the net
international reserves of Bank Negara Malaysia
increased to RM170.5 billion, or equivalent to
US$44.9 billion at the end of 2003. This represented
an increase of RM39.1 billion or US$10.3 billion
during the year. The increasing trend in reserves
continued into 2004. By 15 March, the reserves rose
to RM194.9 billion or US$51.3 billion, sufficient to
finance 7.8 months of retained imports and was 5.2
times the short-term external debt.
Malaysia’s external debt position remained stable in
2003, standing at RM187.2 billion or 50.7% of GNP
(2002: RM185.6 billion or 55.3% of GNP) in spite of
a RM4.1 billion revaluation adjustment that resulted
mainly from the appreciation of the euro and yen.
Malaysia’s external debt position remains sustainable
with the debt service ratio improving from 6.7% in
2002 to 6.1% in 2003. In addition, the nation’s debt
profile remains healthy, with short-term debt
accounting for only 18.4% of total external debt.
The health of the banking system improved in 2003,
in tandem with stronger economic growth. Banks
continue to be well capitalised with the risk-weighted
capital ratio sustained at a high level at 13.4%, well
above the prescribed 8% mark. The trend for non-
performing loans (NPLs) also reversed with the ratio,
on a 6-month basis, declining from 7.5% as at end-
2002 to 6.8% as at end-2003.
Macroeconomic Management
Coming into 2003, the Malaysian economy was
already in a strong position. Private sector activity
was exhibiting an upward trend. Commodity prices
remained high, providing a significant positive
multiplier effect on rural incomes. Further, both the
monetary and fiscal stance were conducive to
sustaining growth without increase in risk, given the
benign inflation outlook, strong external position and
the sustainable public sector finances. Given this
strength, it was assessed that the economy had the
resilience to absorb the impact of uncertainties that
could adversely affect growth prospects. Hence, the
macroeconomic policy stance was left unchanged in
the early part of the year.
By the second quarter, however, the unforeseen
SARS outbreak and the weaker-than-expected global
economic conditions prompted new policy measures.
Economic and financial indicators for the first half-
year also indicated that growth in the United States
remained well below trend, mainly due to subdued
investment. Deflationary concerns and continued
financial market volatility cast doubt on the strength
of global economic activity. This prompted the
authorities to take pre-emptive measures in order to
support economic activity. On 21 May, Bank Negara
Malaysia reduced its policy rate, the 3-month
Intervention Rate, by 50 basis points to 4.5%. This
move was aimed at mitigating the effects of a more
adverse external environment on domestic demand.
A comprehensive economic stimulus and relief
package, encompassing fiscal and financing
measures, was announced by the Government. The
package was designed to provide immediate relief to
affected sectors, diversify economic activity and
improve long-term competitiveness.
In the short term, the main stimulus measures were
designed to provide relief to affected sectors and
encourage private consumption in order to diversify
the sources of growth. Hotels and restaurants were
exempted from service taxes and received a
discount on utility charges. Income tax payments for
travel agencies were suspended, the road tax on
taxis was reduced and import duties on selected
items were lowered. In addition, a Special Relief
Guarantee Fund of RM1 billion was set up by Bank
Negara Malaysia to provide working capital to
affected companies while existing funding facilities,
especially for SMEs, were enlarged. To encourage
consumer spending, employees’ contribution to the
Employees Provident Fund was reduced by two
percentage points and civil servants were given an
interim half-month bonus. In addition, measures
targeted at construction activities, particularly
measures to provide affordable housing to the
lower income group, also had a positive effect on
consumption.
With the additional expenditure, coupled with
revenue foregone arising from the relief measures
implemented, the overall Federal Government deficit
was revised from the budgeted 4% of GDP to 5.3%
of GDP. However, the higher deficit did not exert
pressure on domestic consumer prices and interest
rates as the high savings rate and excess liquidity in
the banking system made it possible for the bulk of
the deficit to be financed from non-inflationary
domestic sources. While the deficit led to higher
Federal Government debt (48.2% of GDP as at end-
2003), this level was sustainable. Debt servicing
remained low (14% of operating expenditure).
Similarly, the Federal Government external debt


9
The Malaysian Economy in 2003
declined to 9.5% of GDP
, thus lowering exposure to
external risks. Given the Government’s target to
achieve a balanced budget in the near term, the
debt-to-GDP ratio is expected to decline in the
medium term as growth accelerates.
The immediate effect of the measures was to
strengthen domestic demand and hence, growth.
After recording a 4.5% growth in the first half, real
GDP accelerated to 5.2% in the third quarter. As
conflict in the Middle East was resolved and SARS
abated, domestic consumer and business sentiment
improved markedly in the third quarter. Further
declined during the year. The average lending rate
charged by commercial banks declined further, and
at end-year was 39 basis points lower than the end-
2002 level. Liquidity remained ample during the year
as BNM’s operations stabilised inter-bank interest
rates at low levels.
The ringgit peg has provided stability and
predictability during a period of increased uncertainty
in financial markets, thereby facilitating trade and
investment activities. While the US dollar depreciated
during the year, Bank Negara Malaysia’s estimates
indicate that the ringgit remains close to its fair
The proactive monetary and fiscal measures implemented by the
Government in response to uncertainties in the first half
supported growth and provided the platform for the private
sector to take the lead in generating growth. For the longer
term, Malaysia has formulated a comprehensive strategic
framework to meet new challenges.
favourable signs started to emerge from September
as growth in the United States exceeded the trend
rate in the third quarter following a recovery in
investment and a build-up in inventories. In tandem,
the other major economies also recorded stronger
growth. The mutually reinforcing combination of
fiscal expansion and monetary easing provided the
platform on which the domestic economy was able
to leverage on the accelerating global and regional
growth momentum. In the fourth quarter, growth
accelerated to 6.4%, the fastest rate since the fourth
quarter of 2000.
The reduction in interest rates spurred loan growth,
prompted by increased demand from both
households and businesses, particularly SMEs. As a
result, total financing from the banking system
through loans and holdings of private debt securities
increased by 5.9%. The demand for credit intensified
in the latter part of the year as global economic
conditions improved, consequently leading to a
strengthening of the growth momentum in Malaysia.
In particular, funding to the SMEs increased strongly
with a large proportion of new loans directed to this
segment. By end-2003, loans to SMEs had expanded
by 10% and accounted for 38.4% of all loans
outstanding to business enterprises.
As a result of the reduction in the Intervention Rate,
ample liquidity and a competitive lending
environment, lending rates charged by the banks
value. The surplus in the current account remains
large while reserves continue to rise. Domestically,
inflation remains low at 1.2% and there appears to
be no significant imported inflation. Hence,
economic fundamentals continue to support the
current exchange rate arrangement.
The importance of strong fundamentals was
demonstrated in 2003. They allowed the
Government to implement a wide-ranging and
comprehensive response to adverse conditions
without creating undue risks. In addition, the
successful corporate sector restructuring undertaken
in recent years provided the enabling conditions for a
positive private sector response to the measures.
Equally important, the comprehensive and balanced
approach, with fiscal and monetary policy reinforcing
each other, increased the likelihood of achieving the
aims of the measures.
The May Economic Package did not only serve as a
short-term stimulus package but was also an integral
part of longer-term initiatives to meet emerging
challenges. The Mid-Term Review of the Eighth
Malaysia Plan (2001-2005) clearly identifies two
major challenges that are becoming increasingly
apparent: dealing with the changing dynamics of
global competition and increasing capacity to
manage risks from greater volatility. Thus, the May
Economic Package and the 2004 Federal
Government Budget laid out the following strategies


4.H-10
10
to ensure that growth is sustained over the longer
term while fundamentals are strengthened:
•
Increase competitiveness by enhancing
productivity
Integral to achieving this objective is the move
towards a knowledge-based economy. Some
important strides have been made in enhancing
the knowledge content of economic activity in
2003, especially by enhancing education and
training and promoting higher value-added
industries.
•
Strengthen resilience through sound
economic fundamentals and strong
financial and corporate sectors
The financial sector restructuring process
undertaken following the Asian financial crisis
has been completed and the corporate sector
has begun to increase investments and expand
operations. A major milestone in 2003 was
Danamodal Nasional Berhad’s redemption of
bonds with a nominal value of RM11 billion on
21 October. Currently, Danamodal still has
assets with a book value of RM2.2 billion. As
proceeds from their disposal is expected to
exceed book value, the net cost incurred by
Danamodal in recapitalising the banking sector
is estimated to be 0.15% of GDP.
Notwithstanding the successful completion of
the restructuring process, regulatory agencies
will continue to ensure that Malaysian
companies and financial institutions
continuously upgrade governance and reporting
standards.
•
Stimulate private domestic investment as
well as attract quality FDI
To promote private investment, a number of
measures were directly targeted at SMEs by
improving their access to financing as well as
making several tax and non-tax incentives
available to them. The focus on domestic
sources of investment, however, is not at the
expense of foreign investors. A number of
measures were announced under the economic
package that liberalised regulations governing
foreign investment.
•
Promote new sources of growth in the
manufacturing and services sector
Apart from making Malaysia a more conducive
location for existing businesses, several sectors
were earmarked as new sources of growth.
These included education, tourism and health
services in the services sector; Islamic finance;
and high-technology manufacturing.
•
Revitalise the agriculture sector
The agriculture sector recorded the fastest
growth after manufacturing in 2003. While high
commodity prices provided the incentive for
higher production, the sector has deep and
strong links with the rest of the economy. As
such, measures taken to improve productivity
and returns in this sector and develop new
downstream activities will have a significant
multiplier impact on the rest of the economy.
•
Pursue sound macroeconomic management
with fiscal prudence
The Government is committed to a programme
of gradual fiscal consolidation. Similarly,
monetary policy has remained supportive of
growth while ensuring risks, either in the form
of inflation or external imbalances, are
contained.
•
Improve the delivery system of the
Government to create a pro-business
environment
Improved efficiency, especially in the public
sector, will effectively reduce costs, thereby
boosting competitiveness. Therefore, the final
strategic prong was aimed at enhancing the
efficiency in the delivery of public services and
effectiveness in implementing national
development policies and strategies. These
included eliminating bureaucratic delays,
streamlining regulations and procedures,
reducing duplication and shortening waiting
periods.
Banking sector policies in 2003 were aimed at
enhancing the infrastructure and environment for
banking institutions to deliver quality products and
services, encouraging greater innovation while
maintaining financial stability. In addition, an
important strategy was to ensure that the banking
system continued to be a facilitator of growth,
particularly in providing financing and other
ancillary services to the SMEs.
•
Strengthening the capacity of domestic
banking institutions
During the year, efforts were directed at
developing and enhancing the quality of human
capital in the banking sector. As the business


11
The Malaysian Economy in 2003
environment and consumer demands are
constantly evolving, continuous upgrading of
skills is necessary, particularly at the top
management level. Recognising this, Bank
Negara Malaysia initiated two important
measures to enhance the quality of human
capital in the banking sector. The International
Centre for Leadership in Finance was established
to accelerate the development of skilled and
competent leaders of financial institutions and
corporations. Work has also been initiated to
reposition Institut Bank-Bank Malaysia to better
meet the needs of the financial sector through
more focused training and accreditation,
particularly in specialised areas.
To provide a conducive environment for banking
conglomerates to further improve their group
structures, rationalise their operations and improve
efficiency, the Banking and Financial Institutions
Act 1989 was amended to allow the merger of the
commercial bank and finance company within a
domestic banking group into a single legal entity.
•
Safeguarding financial stability and fortifying
the financial system
During the year, steps were taken to strengthen
corporate governance practices in the banking
institutions. These included enhancing the role of
the board of directors, especially independent
directors, and regulations covering the
appointment of external auditors.
To ensure that the activities of banking
conglomerates do not introduce risks to the
financial system, Bank Negara Malaysia is
formalising and strengthening the existing
infrastructure and regulatory framework. To
strengthen the legal framework, the Central Bank
of Malaysia Act 1958, the Banking and Financial
Institutions Act 1989, the Islamic Banking Act
1983 and the Takaful Act 1984 were amended in
2003. A new Payment System Act 2003 was also
enacted to formalise the Bank’s oversight authority
of the payment system.
•
Ensuring that all sectors of the economy have
adequate access to finance
Policies were directed at facilitating improved
access to credit for the various sectors of the
economy, particularly the SMEs. In addition, a
micro-financing programme that has an extensive
outreach was also established for micro
enterprises.
•
Strengthening the consumer awareness and
protection framework
Active consumerism is a critical prerequisite in the
transition towards greater market orientation.
Therefore, an effective consumer education and
protection framework is being developed to allow
banking consumers to eventually take greater
responsibility for their financial decisions. To assist
consumers in making their decisions, the Bank is
currently finalising the product transparency and
disclosure rules. Bank Negara Malaysia has also
initiated work on establishing a framework on
basic banking services, which aims to ensure that
the banking public, especially the low-income
group, would have access to affordable basic
banking services. To enable consumers to seek
redress on a broad range of retail consumer
issues raised against financial institutions
regulated by the Bank, the Financial Mediation
Bureau, a one-stop center for the resolution of
these issues, will be established in the first half
of 2004.
The increased strength and resilience of the
banking system has provided a positive
environment for the effective implementation of
a deposit insurance scheme in Malaysia. The
implementation of the system will further
strengthen the consumer protection framework
by providing for the explicit protection of deposits
as well as greater incentives for sound financial
and business practices among banking
institutions.
The rapid development of the domestic Islamic
financial system, accentuated by significant progress
on the global front in recent years, have set the stage
for it to play a more prominent role in the economy.
Currently, 33 banking institutions, including two
Islamic banks, offer a comprehensive range of Islamic
financial products and services to the Malaysian
public. Similarly, the takaful industry has progressed
rapidly, accounting for 5.6% of assets in the
insurance sector in 2003. During the year, policy
focused on strengthening the institutional
infrastructure, enhancing the regulatory framework,
strengthening the Shariah and legal infrastructure
and developing intellectual capital and consumer
education. In 2003, Bank Negara Malaysia brought
forward liberalisation in Islamic banking to allow
full-fledged foreign Islamic banks in Malaysia.
The strategies laid out for sustaining long-term
growth will continue to be complemented by


4.H-12
12
appropriate short-term measures. Conversely, taking
steps to ensure the long-term sustainability of growth
and strength of fundamentals would provide both
the resources and platform on which shorter-term
corrective measures may be taken. Thus, the
interaction between short- and longer-term
macroeconomic policies in Malaysia aims to be
complementary in nature, one reinforcing the other,
to achieve sustained economic development.
SECTORAL REVIEW
Manufacturing Sector
In 2003, output growth in the manufacturing sector
gained momentum especially in the second half-year,
following the broad-based recovery in the global
economy and strengthening domestic demand.
Manufacturing production growth strengthened to
10.5% (2002: 4.5%), with expansion across a wide
range of products in both the export- and domestic-
oriented industries. Consonant with the pick-up in
production activities, value-added growth of the
manufacturing sector doubled to 8.2% (2002: 4%),
Graph 1.6
Manufacturing Sector: Sales, Production  
and Exports 
Sales
Production
Exports
2002
2003
Annual change (%)
-15
-10
-5
0
5
10
15
20
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1997
1998
1999
2000
2001
2002
2003p
%
Annual change (%)
Capacity utilisation (LHS)
Output (RHS)
Graph 1.7
Capacity Utilisation in the Manufacturing 
Sector
p Preliminary
60
65
70
75
80
85
-20
-10
0
10
20
30
Pick-up in exports and strengthening domestic demand led to
stronger expansion in the manufacturing sector.
and contributed significantly to overall GDP growth.
Consequently, the share of the manufacturing sector
in GDP rose slightly to 30.9% (2002: 30.1%). The
capacity utilisation rate in the manufacturing sector
remained high at 82% in 2003 (2002: 82%), with
the export- and domestic-oriented industries
operating at 86% and 77% respectively (2002: 83%
and 81% respectively).
Export-oriented industries expanded by 11.9% in
2003, with stronger expansion in the second half-year,
led by the cyclical upturn in global electronics demand,
and further enhanced by the strong performance of
the chemicals and rubber products industries. Given
the strong inter-linkages, the chemical industry also
benefited from the spillover effects of the upsurge in
the electronics industry. Demand for chemical and
rubber products were strong, particularly from the US
and the Asia-Pacific region. Overall, the outbreak of
SARS in the region during the early part of the year
had a minimal impact on export-oriented industries,
notwithstanding some slowdown in the regional
economies.
While the SARS outbreak had affected consumer
demand, the Economic Package introduced in May
Table 1.3
Manufacturing Sector: Value Added and
Production
2002
2003
Annual change (%)
Value added
(Constant at 1987 price)
4.0
8.2
Overall Production
4.5
10.5
Export-oriented industries
5.0
11.9
 of which:
Electronics
13.4
15.1
Electrical products
-5.1
-7.0
Chemicals and chemical products
2.7
20.8
Wood and wood products
-6.0
0.9
Textiles and wearing apparel
-6.2
-2.2
Off-estate processing
7.1
11.8
Rubber products
2.0
18.7
Domestic-oriented industries
3.4
6.1
 of which:
Construction-related products
3.8
10.2
Fabricated metal products
0.8
7.4
Food products
8.7
8.8
Transport equipment
6.2
-5.5
Petroleum products
-4.1
2.3
Source: Department of Statistics, Malaysia.


13
The Malaysian Economy in 2003
helped to stimulate domestic demand and support the
growth of the domestic-oriented industries (6.1%).
Output was higher in all sub-sectors, except for the
transport equipment industry. Of significance, growth
strengthened in the fabricated metal products,
construction-related materials and food and beverages
industries. These industries benefited largely from the
improved domestic demand and continued growth in
the construction sector. Only the automobile industry
recorded lower output, affected by subdued sales of
motor vehicles.
The electronics industry recorded another year of
strong growth following the broad-based expansion
in global demand across all geographical regions
and products. Expansion in the first-half year was
moderate and picked up strongly in the second-half
year. Growth emanated mainly from the expansion
in the wireless and personal computer (PC) markets
as well as consumer electronics products.  While
growth in wireless products was driven by the rising
demand for wireless applications and cell phones,
the demand for PCs was led by the PC replacement
cycle, which took place in the latter half of the year
as companies invested to replace their equipment
acquired during the Y2K period. The consumer
electronics products experienced strong growth due
to growing consumer interest in adopting new
technology and multi-functional devices such as
camera phones, personal digital assistants (PDAs)
and digital video decoders (DVDs). In terms of
export markets, the Asia-Pacific region continued to
spearhead growth and remained the largest market
for the global semiconductor sales. Demand was
especially strong from the People’s Republic of
China (P.R.China), which became the largest
importer of chips in the world.
Malaysian manufacturers were able to benefit from
the emerging global electronics up-cycle, in view of
the diversity in product mix and export markets.
Local semiconductor manufacturers continued to
move up the value chain from assembly and
packaging activities to become full turnkey
providers to maintain their competitiveness.
Amidst increased global competition, the
performance of the electrical products sub-sector
continued to deteriorate. The decline was mainly in
the audio-visual and telecommunication products
as producers who emphasised on low labour cost
had relocated elsewhere. Nevertheless, output of
air conditioners, refrigerators and other ventilating
devices continued to increase in tandem with the
improving external demand. Overall, the
performance of the industry was also affected by
lower offtake from most of the major importers of
Malaysia’s electrical products, particularly from the
US, Japan, Hong Kong  China, the United Kingdom
and Netherlands. Nevertheless, exports to P
.R.China
increased strongly.
Growth in the chemical products industry
accelerated in 2003, benefiting from the spillover
effects of the strong pick-up in the electronics
industry as well as the improved external demand
for organic chemicals, and resins and plastic
products. The expansion was further reinforced by
the higher output of industrial gases following the
commencement of the new MLNG plant in
Sarawak. The resins and plastic products sub-sector
continued to experience strong growth, driven by
stronger domestic demand from the food,
construction and packaging industries as well as
increased demand from the Asia-Pacific region. In
particular, exports of Malaysia’s chemical products
to major markets, namely P.R.China, Singapore and
Japan, continued to expand strongly during
the year.
The stronger performance of the off-estate
processing industry was supported mainly by
higher activity in palm oil processing, arising from
improved offtake for processed palm oil products,
particularly from Japan and Europe. Production of
rubber products also increased strongly, driven by
higher external demand for rubber gloves for
medical examinations and surgery. Expansion in
production capacity enabled the industry to meet
the increased global demand for gloves following
tensions in the Middle-East and outbreak of SARS.
The industry’s aggressive promotions to expand to
Graph 1.8
Production and Exports of the Electronics  
Industry
Annual change (%)
Production of electronics in Malaysia
Electronics exports of Malaysia
Worldwide sales of semiconductors
-40
-20
0
20
40
J
J 
D
J
J 
D
2003
2002


4.H-14
14
new export markets also contributed to the
increase in demand for gloves. While the US
remained as Malaysia’s largest export market for
rubber products, exports to other countries,
namely P.R.China, Hong Kong China, Japan and
Singapore, also grew strongly to account for a
bigger market share.
Output of petroleum products recovered, driven
by strong demand from Asian countries, especially
from P.R.China, Japan and Singapore. Similarly,
output of wood products turned around to record
positive growth due to higher output of plywood
and particleboard. The increase was largely
attributable to higher export demand for veneer
and plywood arising from the recovery in
construction activities in Malaysia’s traditional
markets, especially Japan, P.R.China and Chinese
Taipei. Exports of furniture also increased due to
higher demand from the US, Singapore, Saudi
Arabia, Australia and P.R.China. While the export
performance remained favourable, the furniture and
wood products industries faced keen competition
from other countries in the region and cheaper
substitute products, such as PVC and steel.
The textiles and wearing apparel industry
registered another year of lackluster performance
due mainly to intensive competition from low cost
countries. Shipments by major importers,
particularly the US, the largest buyer of Malaysian
textiles and apparel, continued to contract.
Production in the transport equipment industry
was subdued in 2003 due entirely to lower
assembly of motor vehicles.  Demand for motor
vehicles in the domestic market slowed down as
consumers held back purchases due to uncertainty
over car prices following the phase-in of the
automotive industry into the AFTA framework. The
decline in assembly of motor vehicles was, to some
extent, offset by higher production of motor vehicle
parts and accessories, and assembly of motorcycles
and scooters arising from the higher demand for
locally-assembled motorcycles and scooters.
Output in the construction-related materials
industries expanded strongly, supported by higher
export demand and continued expansion in
construction activity. Growth was particularly strong
in the second half-year due to sharply higher
production of iron and steel as manufacturers
increased their exports to take advantage of the
strong demand and higher prices in the export
market. As a result, exports of metal products
increased strongly, particularly to the US, P
.R.China,
Japan, Singapore, Thailand and Australia.
Production of non-metallic mineral products also
increased during the year due to increased demand
from the construction sector, especially for
production of cement, fabricated construction
materials and structural clay products. However,
production of glass declined as it was affected by
lower export demand as well as subdued demand
from the domestic car industry.
Production in the fabricated metal products
industry increased further, reflecting higher
production of structural metals, wire and wire
products as well as tin cans and metal products. The
expansion was supported mainly by on-going
activity in the construction sector and increased
demand for packaging materials from the food
processing industry. On the other hand, production
of brass, copper and aluminium declined due to the
lower demand from the electrical products industry.
Meanwhile, growth in the paper products
industry moderated during the year due to lower
production of pulp, paper and paperboard, while
the manufacture of containers, boxes of paper and
paperboard remained flat. Performance of both the
sub-sectors was affected by the oversupply in the
market. Nevertheless, the production of the pulp,
paper and articles sub-sector continued to expand
strongly. Notwithstanding the moderation in
production, exports of paper and pulp products
increased further due to higher exports to Thailand,
P.R.China, the Philippines, Australia and US. Output
in the food and beverages sub-sector was higher,
supported by consumer spending and higher
demand from Singapore and Brunei.
Construction Sector
In 2003, the construction sector expanded at a
more moderate pace of 1.9% (2002: 2.3%) due
mainly to a slowdown in the civil engineering sub-
sector following the completion of several
privatised projects. Growth was mainly supported
by the residential sub-sector, while activity in the
non-residential sub-sector remained subdued
amidst the continued overhang of office and retail
space, although the excess supply was reduced
during the year.
Activity in the residential sub-sector was higher as
demand for houses remained strong, especially with
the incentives introduced in the Economic Package.
Favourable financing conditions, namely low


15
The Malaysian Economy in 2003
interest rates and attractive loan packages offered
by the banking institutions, helped support interest
in the residential sub-sector both for new property
as well as the secondary market. Construction of
new houses gained momentum during the first nine
months of the year, as reflected in a 17% increase
in housing starts. Reflecting house purchasers’
preference for bigger houses due to a rise in
affordability following higher disposable income
Table 1.4
Residential Property Indicators
2002
2003
Units
Residential property transactions
Units
162,269
164,723
Value (RM billion)
21.1
23.0
Approvals1
198,970
205,518
Developers’ licences
New
1,170
1,062
Renewals
397
436
Sales and advertising permits
New
1,134
1,103
Renewals
1,666
1,707
Loans by banking system
- Value (RM billion)
Outstanding
100.4
116.6
Approvals
29.2
30.0
1 Units approved for construction by private developers.
Source: NAPIC, Valuation and Property Services Department, Ministry of
Housing and Local Government and Bank Negara Malaysia
Construction sector grew at a moderate rate due to slower
growth in the civil engineering sub-sector.
and lower interest rates, the average price of
residential units transacted was higher at
RM139,700 (2002: RM130,300). Prices of
residential properties, including terraced houses as
well as high-rise units, remained firm during the
year, supported by continued demand for houses in
prime locations.
Demand for residential houses was stimulated by
innovative financing packages with attractive terms
provided by financial institutions. To encourage home
ownership, the Economic Package announced by the
Government on 21 May 2003 provided the following
incentives for one year, beginning 1 June 2003:
•
Stamp duty waiver on the Sale and Purchase
Agreements, loan and transfer documents for
houses costing RM180,000 and below;
•
Income tax relief on interest payments for new
buyers of completed houses, and first time
owners of houses costing between RM100,000
to RM180,000;
•
Subsidy of RM600 for new buyers of houses
costing below RM100,000; and
•
Exemption from real property gains tax.
In line with the Government’s objective to provide
affordable houses to the low-income group,
Syarikat Perumahan Negara Berhad (SPNB) has
targeted to build at least 150,000 units of medium-
cost and affordable houses within a five-year
period.  With the liberalisation of the Foreign
Investment Committee (FIC) guidelines in 2001, the
FIC has approved the purchase of 1,617 units of
residential properties (representing an increase of
30.1%) valued at RM771 million by foreigners in
Malaysia during the year. However, the purchase of
commercial properties by foreigners declined.
To reduce the cost of purchasing low-cost houses
and to improve purchasers' access to financing, the
following measures were announced during the year:
•
EPF contributors who purchase low-cost houses
built by SPNB will be provided with end financing
from the Malaysia Building Society Berhad;
•
State governments will exempt land premiums
for the construction of low-cost houses; and
•
The exemption from stamp duties in respect of
Sale and Purchase Agreements for low-cost houses
executed between the purchaser and the
developer on or after 1 July 2002 was gazetted in
February 2003.  In this connection, loan and
transfer documents associated with the Sale and
Purchase Agreements were eligible for exemption.
On the supply side, housing units approved for
construction by private developers in Peninsular
Malaysia increased by 3.3% in 2003, with approvals
picking up by 23% in the second half-year as
developers anticipated higher demand in response to
the incentives in the Economic Package. At the same
time, new sales and advertising permits issued
recorded a strong pick-up of 18% in the second half
of the year (first half: -20.1%). However, renewals of
permits continued to increase in 2003, reflecting a
longer duration required to sell the properties.
In the civil engineering sub-sector, growth was
significantly slower due to the completion of several
privatised projects, mainly power generation plants.
Nevertheless, ongoing road projects such as the
Kajang Ring Road, Guthrie Corridor Expressway,


4.H-16
16
Penchala Link of the SPRINT Expressway, New Pantai
Expressway, Kajang-Seremban Expressway and the
Butterworth Outer Ring Road, supported civil
engineering activity during the year. Construction
work was also ongoing for projects related to water,
ports, sewerage and power generation plants. In
view of the experience acquired in the domestic civil
engineering sub-sector, Malaysian construction
companies have diversified their earnings base and
expanded overseas, particularly in the construction of
highway projects and other infrastructure projects.
These companies are able to compete in the global
market, particularly in India and the Middle East.
Infrastructure projects by the public sector, as
reflected in the Federal Government development
expenditure, remained strong during the year,
especially in the transportation sub-sector.  Among
the major ongoing public projects supporting growth
was the SMART Intelligent Tunnel for Flood
Mitigation in Kuala Lumpur and the Kuala Lumpur
Convention Centre.
Construction activity in the non-residential sub-
sector remained subdued as reflected in lower
ongoing activity in projects related to purpose-built
office and shopping complex. In particular,
completion of new office space in the Klang Valley
slowed down during the last three years. In the
first nine months of 2003, only 93,000 square
metres of office space were completed compared
with 200,000 square metres in 2002 (2001:
178,000 sq. m; 2000: 1.4 million sq. m).  Large
shopping complexes that were completed in the
Klang Valley include the Berjaya Times Square,
Ikano Power Centre, IKEA, Maju Junction and the
Great Eastern Mall. The share of new starts to total
incoming supply for Malaysia as a whole increased
from 2% to 8% in the first nine months of 2003.
The average occupancy rate for office space and
retail complexes stabilised at 79% and 78%
respectively as at end-September 2003, reflecting
continued demand, particularly for projects located
in choice locations.
Table 1.5
Incoming Supply and Planned Supply of Property
Incoming
Planned
Incoming
Planned
Supply1
Supply2
Supply1
Supply2
June-03p
Sept-03p
 Units/’000 sq.m.
Units/’000 sq.m.
Residential (units)
573,117
533,784
569,994
537,919
Purpose-built office (‘000 sq.m.)
1,969
1,890
1,945
1,865
Shopping complexes (‘000 sq.m.)
1,479
1,715
1,535
1,639
Retail shops (units)
31,424
34,537
32,507
34,413
Industrial properties (units)
8,616
22,236
8,299
22,174
1 Consists of properties that are under construction, including those where certificates of fitness/temporary certificates of fitness have not been issued.
2 Approved but not started.
p Preliminary
Source: NAPIC, Valuation and Property Services Department
2,000
0
4,000
6,000
8,000
10,000
12,000
14,000
2000
2001
2002
3Q 2003p
70
75
80
85
90
Net lettable area
('000 sq.m)
Occupancy rate (%)
Graph 1.9
Supply and Occupancy Rate of Purpose-Built 
Office Space in Malaysia: 2000 - 2003
Existing stock
Completion
Occupancy rate (%)
Occupied space
Incoming supply
p Preliminary
1,000
0
2,000
3,000
4,000
5,000
6,000
7,000
2000
2001
2002
3Q 2003p
70
75
80
85
90
Net lettable area
('000 sq.m)
Occupancy rate (%)
Graph 1.10
Supply and Occupancy Rate of Retail Space in
Malaysia: 2000 - 2003
Existing stock
Completion
Occupancy rate (%)
Occupied space
Incoming supply
p Preliminary


17
The Malaysian Economy in 2003
Rentals for prime office space in the Klang Valley
stabilised at RM45 per square metre per month
during the year. In the case of shopping complexes,
the average monthly rental rates of prime retail space
also remained stable at RM226 per square metre.
Rentals of office and retail space in secondary
locations remained low to attract tenants.
In the case of hotels, there were 111 new hotels
completed during the year, providing 7,838
additional rooms. However, the hotel industry was
adversely affected by SARS, especially during the
second quarter of 2003, when tourist arrivals fell by
59% to below 500,000 in April. Arrivals for the year
as a whole declined to 10.6 million from 13.3 million
in 2002, thus resulting in the average occupancy rate
of hotels declining to 53% (2002: 58%).
Availability of adequate financing continued to play
an important role in supporting growth of the
construction sector. In recent years, there has been a
discernible shift in the source of financing for the civil
engineering sub-sector. The civil engineering sub-
sector has increasingly tapped the capital market by
issuing private debt securities (PDS) and also through
recourse to Bank Pembangunan dan Infrastruktur
Malaysia Berhad (BPIMB) to meet its financing
requirements. PDS issued for infrastructure projects
amounted to RM6 billion out of the total RM42.8
billion PDS issued for the year, representing 14% of
total PDS issued (2002: 8%). Similarly, total loans
approved by BPIMB for infrastructure projects rose to
RM5 billion in 2003 (2002: RM2.8 billion). However,
loans outstanding of the banking system for
infrastructure projects declined to RM3.4 billion
(2002: RM5.2 billion). For residential property, the
banking system continued to be the main source of
financing. Total housing loans approved by the
banking system increased by 2.9% to RM30 billion.
RM/sq.m
RM/sq.m
1  Refers to Kuala Lumpur and Selangor
Source: CH Williams Talhar & Wong Sdn. Bhd.
Graph 1.11
Average Monthly Rentals for Prime Office and 
Retail Space in the Klang Valley1
Prime office space (LHS)
Prime retail space (RHS)
38
40
42
44
46
48
50
1998
1999
2000
2001
2002
2003
100
150
200
250
Table 1.6
Office and Retail Space - Unoccupied Space, Incoming Supply and Planned
Supply by State (as at end-September 2003p)
Office Space
Retail Space
Unoccupied
Incoming
Planned
Unoccupied
Incoming
Planned
Space
Supply1
Supply2
Space
Supply1
Supply2
( ‘000 sq.m. )
WP Kuala Lumpur
1,414
1,085
1,028
286
746
649
Selangor
488
55
0
186
138
63
WP Putrajaya
0
295
155
0
66
0
Johor
260
140
493
326
228
789
Pulau Pinang
292
45
39
279
172
52
Negeri Sembilan
24
28
118
41
61
64
Perak
41
49
6
50
4
0
Melaka
25
0
0
56
0
0
Kedah
21
34
1
64
51
14
Pahang
14
15
9
33
0
8
Terengganu
10
0
0
6
7
0
Kelantan
9
4
16
2
63
0
Perlis
1
34
0
0
0
0
Sabah
112
142
0
25
0
0
WP Labuan
38
0
0
15
0
0
Sarawak
57
20
0
40
0
0
Total
2,806
1,946
1,865
1,409
1,536
1,639
1 Consists of properties that are under construction, including those where certificates of fitness/temporary certificates of fitness have not been issued.
2 Approved but not started.
p Preliminary
Source: NAPIC, Valuation and Property Services Department


4.H-18
18
Value 
added
Crude palm 
oil
Rubber
Saw logs
Cocoa
Annual change (%)
2002
2003p
Graph 1.12
Agriculture Production
-25
-20
-15
-10
-5
0
5
10
15
20
p Preliminary
Annual change (%)
Graph 1.13
Agriculture Exports
Total 
Agriculture 
Exports
Palm oil
Saw logs
Sawn 
timber
Rubber
p Preliminary
0
20
40
60
2002
2003p
In addition, loans approved by other housing credit
institutions as a group also increased during the
year. In tandem with higher approvals, housing
loans outstanding of the banking system as well as
other housing credit institutions rose by 16.1% and
10.4% respectively.
In 2003, construction activity was higher with the
return of foreign workers who were repatriated in
2002. Nonetheless, over-dependence on foreign
labour remained an issue in raising productivity in
the sector.  Meanwhile, the Construction Labour
Exchange Centre Berhad was set up in 2003 to act
as a centre for training and screening of foreign
workers as well as supplying and transferring excess
foreign workers to contractors who require these
workers from time to time.
Another development during the year was the
launch of the Building Materials Cost Index by the
Construction Industry Development Board in
collaboration with the Department of Statistics,
Malaysia. The Index gives an indication of pressures
arising from input cost. While the Index showed that
overall prices of building materials have remained
steady from the second half of 2002 until September
2003, some construction companies faced shortages
of building materials.  The shortage was mainly in
steel bars as millers preferred to export their
products to take advantage of the higher prices
overseas.
In line with the Government’s efforts to streamline
the approval and delivery process of the Government
machinery, the Ministry of Housing and Local
Government implemented a two-tier One-Stop
Centre at the local authority and state government
levels for building plan approvals and issuance of
Certificate of Fitness for Occupation (CFO). In
addition, the number of technical departments
involved in certifying CFOs was also reduced from
seven to four.
Agriculture sector
In 2003, the agriculture, forestry and fishery
(agriculture) sector recorded the strongest growth in
11 years against a backdrop of robust exports and
high prices. Value added growth picked up to 5.5%
driven mainly by significant increases in crude palm
oil and rubber output. Growth was also supported
by increases in production of saw logs and, to a
lesser extent, other agricultural commodities, namely
vegetables, fruits, livestock and fish, reflecting the
positive effects of measures taken by the
Government to increase domestic sources of growth
through increased food production. Meanwhile,
cocoa output declined significantly during the year.
Given the substantial increases of between 11-42%
in the prices of major commodities during the year
and improved export volume, export receipts from
agricultural commodities rose significantly by 28.1%.
Thus, the share of agriculture exports to total exports
rose from an average of 6.5% in the period
2000-2002 to 8.4% in 2003.
The strong performance of the agriculture sector
during the year was attributable to both supply and
demand factors. Crude palm oil and rubber
registered double-digit growth as farmers maximised
production by increasing yields through good
agriculture practices (including higher usage of
fertilisers), encouraged by more favourable prices.
Production of palm oil was also supported by
favourable weather conditions as well as the coming
on stream of new mature areas with high yielding


19
The Malaysian Economy in 2003
trees. Meanwhile, higher rubber production was due
to intensive tapping, including in areas that were
previously abandoned. At the same time, external
demand for these commodities was strong amidst
supply shortages in the global market.
The stronger performance of the agriculture sector in
2003 generated significant spill-over effects,
particularly on the rural population.  Given that the
agriculture sector employs about 14% of the total
workforce in Malaysia and that a sizable proportion
of them are smallholders, the higher incomes helped
support the increase in consumption among the rural
community. The plantation sector also benefited from
the stronger economic performance, resulting in
sharp increases in profits.
Crude palm oil (CPO) remained as the major
commodity, accounting for about 4.1 percentage
points of the increase in the value added of the
agriculture sector in 2003. CPO recorded a bumper
production of 13.35 million tonnes or an increase of
12.1%.  Growth was primarily due to expansion in
total mature area (3.1%), mainly in Sabah (6.3%) and
Sarawak (13%) as well as good agriculture practices.
Table 1.7
Agriculture Sector: Value Added, Production and Exports
2002
2003p
Volume
Annual
Volume
Annual
and
change
and
change
Value
(%)
Value
(%)
Value Added (RM million at 1987 prices)
18,438
3.0
19,453
5.5
Production1
of which:
Crude palm oil
      11,909
0.9
13,355
12.1
Rubber
           589
7.7
698
18.4
Saw logs
      20,649
9.1
21,381
3.5
Cocoa beans
             48
-17.4
36
-24.0
Exports (RM million)
26,327
31.9
33,728
28.1
of which:
Palm oil
(‘000 tonnes)
      10,854
3.7
12,509
15.2
(RM/tonne)
           1,367
44.9
1,617
18.3
(RM million)
        14,838
50.2
20,224
36.3
Rubber
(‘000 tonnes)
           928
12.9
945
1.9
(sen/kilogramme)
           269
17.0
379
41.0
(RM million)
        2,492
32.1
3,582
43.8
Saw logs
(‘000 cubic metres)
5,104
5.6
5,508
7.9
(RM/cubic metre)
359
13.9
366
1.9
(RM million)
1,832
20.3
2,015
10.0
Sawn timber
(‘000 cubic metres)
2,474
2.6
2,816
13.8
(RM/cubic metre)
990
5.0
926
-6.5
(RM million)
2,450
7.8
2,607
6.4
1
All in ‘000 tonnes, except for saw logs in ‘000 cubic metres.
p
Preliminary
Source: Department of Statistics, Malaysia
Malaysian Palm Oil Board
Forestry Departments (Peninsular Malaysia, Sabah and Sarawak)
Malaysian Cocoa Board
 Hectares
Tonnes
Graph 1.14
Oil Palm: Area, Production and Yield
Production in million tonnes (RHS)
Mature area in '000 hectares (LHS)
Yield of CPO in tonnes/mature hectare (RHS)
500
1,000
1,500
2,000
2,500
3,000
3,500
1999
2000
2001
2002
2003p
0
2
4
6
8
10
12
14
16
p Preliminary for mature area and yield


4.H-20
20
As a result, CPO output, which usually peaks in the
third quarter in a normal year, recorded monthly
production of above one million tonnes for an
extended period during April – December 2003. On
a regional basis, Peninsular Malaysia accounted for
almost 60% of total national output, or 7.94 million
tonnes of CPO, while Sabah and Sarawak produced
the remaining 5.41 tonnes. In terms of global
ranking, Malaysia maintained its position as the
leading palm oil producer and exporter in 2003,
accounting for 49% of the world’s output and 58%
of total exports.
Average export prices of Malaysian palm oil rose by
18.3% to RM1,617 per tonne in 2003. Against a
backdrop of supply shortages in the global oils and
fats markets, prices of most oilseeds, oils and meals
rallied in 2003, especially since August 2003. In line
with these developments, Malaysian CPO local
prices averaged RM1,577 per tonne in 2003 (2002:
RM1,364). The stronger prices reflected mainly
imbalances in the global vegetable oils and fats
markets arising from a marginal increase in output
of major oilseeds, especially soybean, amidst
stronger demand from major consumers of edible
oils. Soybean harvest in the United States was
adversely affected by drought during the year.  The
shortages in soybean, rapeseed and sunflower oils
led to large price premiums of these oils over palm
oil and this triggered import substitution by price
sensitive buyers.  Export demand for palm oil from
the major buyers of soybean oil (palm oil’s closest
substitute), namely P.R.China, the European Union
(EU) and Middle East, picked up strongly during
the year.
Demand from P.R.China, the EU, Pakistan and
emerging markets in the Middle East, rose between
4% and 29% during the year, on account of lower
domestic production amidst an expansion in their
refining capacities. In the case of P.R.China, the
higher offtake was also due to its higher import
quota for palm oil following its accession into
WTO. However, imports by India, which is one of
Malaysia’s major buyers, declined in 2003 due to
higher tariffs for palm oil products and imposition
of new import regulations, which made palm oil
less competitive against other major oilseeds.
Nonetheless, with double-digit increases in price
and export volume, palm oil generated an
additional export revenue of RM5.4 billion in 2003,
with total export receipts amounting to RM20.2
billion.  Despite the strong external demand,
Malaysian palm oil stocks remained almost
unchanged at 1.17 million tonnes (end-2002
stocks: 1.14 million tonnes) given that output had
also increased significantly during the year.
The palm oil industry made significant strides
during the year. Malaysia gained market shares for
palm oil-based products in five new markets,
namely Chechnya, Antigua, Mayotte, Cape Verde
and the Central African Republic. In the area of
research and development, the Malaysian Palm Oil
Board (MPOB) launched 35 new technologies and
products for commercialisation in the palm oil
industry in 2003.  To enhance utilisation of palm oil
products, MPOB together with local palm oil
related agencies conducted research in
collaboration with research organisations and
institutional users in several consuming countries.
Joint venture projects have been conducted with
P.R.China, Egypt, Oman, Poland, Russia, Ukraine,
South Africa, Pakistan, Turkey and Kuwait. In
addition, Malaysia participated actively in the
international scientific and trade meetings to
promote facilitation of international trade for palm
oil products.
Natural rubber production, which recorded its
first positive annual growth in seven years in 2002,
continued to expand strongly by 18.4% in 2003, to
reach nearly 700,000 tonnes. Smallholders
accounted for almost 90% of total national output
as remunerative prices motivated intensive tapping
activities, which led to a substantial increase in
output of 23.3%. The increase in production was
also contributed by tapping of trees that were
previously abandoned. In contrast, production by
estates declined further by 10.8% (2002: -14.7%)
due mainly to continued conversion of rubber land
into other economic activities during the year. Total
tapped area for Malaysia expanded by about
48,000 hectares or 7% to 737,600 hectares.
0
500
1,000
1,500
2,000
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2000
2001
2002
2003
Price 
(RM/tonne) 
Stocks
CPO Local delivered price
0
300
600
900
1,200
1,500
Stocks 
('000 tonnes) 
Graph 1.15
Palm Oil Price and Stocks


21
The Malaysian Economy in 2003
In line with developments in the global natural
rubber industry, the Malaysian rubber prices (RSS1)
strengthened significantly by 37% to 401 sen per
kilogramme in 2003 (2002: 292 sen). The increase
in prices gained momentum during the course of
the year, rising from 364 sen in the first quarter to
486 sen by the fourth quarter. RSS1 price peaked in
November to record a monthly high of 512 sen,
with the highest daily traded price at 543 sen on
5-6 November before consolidating to close the
year at 473 sen. The strong price performance
during the year was due to the surge in demand
from P.R.China, active purchases by European
traders as well as tight supplies in the major
producing regions, which were affected by the wet
weather, especially in the latter part of the year.
Purchases by P
.R.China picked up significantly for the
second consecutive year (60.2%; 2002: 51.4%),
fuelled mainly by strong demand from the local
automotive industry. The market was further
supported by the decision of the Chinese
government to raise the import quota for natural
rubber by an additional 200,000 tonnes to
accommodate the higher demand by the major tyre
manufacturers.  P.R.China remained as Malaysia’s
largest export market to account for 21.9% share of
total rubber exports (2002: 13.9%).  Besides
P
.R.China, the other major buyers were Korea,
Germany and the Middle East, which together
accounted for 52% of total rubber exports.
Reflecting both higher prices and export volume,
export receipts rose by 43.8% to RM3.6 billion
in 2003.
A significant development in the international natural
rubber sector in 2003 was the signing of the
agreement for the establishment of the International
Rubber Consortium Limited (IRCo) on 6 October by
Malaysia, Thailand and Indonesia. IRCo was formed
with the objective to undertake strategic market
operations, as and when deemed necessary, as well
as to complement agreed measures by these
countries under the Supply Management Scheme
and the Agreed Export Tonnage Scheme, which were
endorsed earlier in 2001. These schemes have
contributed positively to improving the overall
sentiment of the rubber market.
Given the importance of the natural rubber sector in
terms of employment of the rural community as well
as its strong linkages to the downstream rubber-
based industries, rubber has been identified as one of
the strategic crops for sustainable growth of the
Malaysian agriculture sector. In 2003, further
measures were taken to develop the natural rubber
sector, including a study on the medium-term master
plan. An interim report of the study has been
completed. Apart from traditional planting of rubber
to produce latex to sustain the encouraging growth
of the rubber wood-based industries, the
Government has announced incentives to encourage
private sector investment. This includes encouraging
cultivation of latex-timber clone rubber for both latex
and timber production. This clone would also assist
in reducing anticipated shortage in the supply of
rubber wood for the manufacture of furniture, as
80% of earnings from Malaysian furniture exports
are rubber wood-based.
Logging activities in all regions, namely Sarawak,
Sabah and Peninsular Malaysia, intensified in 2003.
Total production of saw logs increased by 3.5% to
21,381 cubic metres in response to stronger external
and domestic demand. Demand from the domestic
wood-based industries turned around to record a
growth of 0.9% in 2003 (2002: -6%), whilst
shipments of logs increased by 7.9%.  Exports
increased despite strong competition from other
hardwood producing countries such as Indonesia,
Vietnam, Brazil and Africa. Purchases by the major
regional buyers, namely Thailand, India, P
.R.China
and Chinese Taipei, which accounted for about 63%
of total exports, rose by 24%. Amidst the strong
regional demand and keen competition in the
international markets, prices of Malaysian logs
remained relatively stable at RM366 per cubic metre
(2002: RM359). Consequently, export revenue from
saw logs increased by 10% in 2003.  Meanwhile,
export volume of sawn timber rose by 13.8%,
especially to markets in the EU, but growth in export
receipts moderated during the year due entirely to
lower export prices (-6.5%).
On the international front, the Malaysian timber
industry continued to face pressures by the “green”
sentiment in Europe, especially in the Scandinavian
countries. This was reflected in the unilateral
restriction imposed by the Norwegian government
on imports of tropical timber for public projects,
unless certified by the Forest Stewardship Council
(FSC). The timber industry has also to contend with
new regulations and standards that are imposed by
developed countries ostensibly to protect the
environment as well as the safety and health of
consumers. Since October 2001, the Malaysian
timber industry has responded to the “green”
sentiment with the setting up of its own certification


4.H-22
22
scheme operated by the Malaysian Timber
Certification Council (MTCC). By end-2003, seven
states have been awarded the Certificate for Forest
Management, and 38 timber companies have been
given permits to use the MTCC logo to provide the
assurance of sustainable and legal source of forest
products to buyers of Malaysian timber and timber
products. Another significant development during
the year was the acceptance of the MTCC scheme by
Denmark as one of the accepted certification
schemes in its Environmental Guidelines for
Purchasing Tropical Timber. Given the wider
acceptance and recognition of Malaysia’s timber
certification efforts, a total of 6,629 cubic metres of
MTCC-certified sawn timber (2002: 732 cubic
metres) and 45 cubic metres of mouldings were
exported to a number of countries, particularly to
Europe, in 2003.
Production of other agriculture commodities,
comprising vegetables, fruits, livestock and fishery,
registered a mildly positive growth during the year.
The increase in vegetables (4.5%) and fruits (3.1%)
production was supported mainly by an expansion in
the cultivated area. The increase in cultivated area for
these crops was in line with the expansion in the
area allocated for the Permanent Food Production
Park (PFPP) scheme. As at end-2003, more than
2,160 hectares of land were developed under the
scheme, with the bulk or 1,681 hectares allocated
for the planting of vegetables. Similarly, growth in
the livestock sub-sector increased by 5.5%, mainly
on account of higher poultry production, as demand,
particularly from the domestic food processing
industries was higher. The fishery sub-sector also
expanded further by 2.6%, supported mainly by
higher landings of marine fish.
Output of cocoa beans declined sharply by 24% to
36,240 tonnes, attributable mainly to lower
cultivated area from 48,035 hectares in 2002 to an
estimated 46,395 hectares in 2003.  The reduction
reflected mainly conversion of cocoa land to other
crops as well as adverse effects from the wet
weather conditions, particularly in the final quarter
of 2003. Cocoa yields were lower as the higher
amount of rainfall affected the fruit-setting period
for the main crop and intensified the black pod
infection. Amidst the need to increase production
of cocoa beans to meet the requirements of local
cocoa grinders as well as to reduce dependency on
imported cocoa beans, rehabilitation programmes
involving mainly smallholders continued during the
year. Under the Cocoa Smallholders’ Development
Programme, a total of 6,916 hectares or 15% of
total acreage under the cocoa smallholdings area
were developed as at end-2003.
Export prices of cocoa rose further by 20.9% during
the year to RM6,314 per tonne due to supply
disruptions in a major producing country following
unfavourable political developments. However, the
Malaysian cocoa sector was unable to capitalise
fully from the high prices of cocoa as domestic
production also fell during the year. Hence, export
revenue from cocoa declined to RM83 million
(2002: RM110 million).
Mining Sector
The mining sector expanded by 4.8% in 2003, as
strong domestic and external demand amidst
expansion in production capacity stimulated higher
production of crude oil and natural gas. Following
higher shipments of oil and gas as well as the
significant increase in export prices, gross foreign
exchange revenue from exports of minerals
increased substantially by 33.1% in 2003.
Crude oil production (excluding condensates) rose
by 5% to 625,800 barrels per day (bpd) compared
with 2002, close to the year’s production target of
626,000 bpd under the National Depletion Policy.
The increase in production during the year was
driven by increased domestic demand for petroleum
products and higher external demand, particularly
from India, Australia, Thailand, P
.R.China and US,
which together accounted for about 65% of
Malaysia’s total export of oil. Exports to these
countries increased by 34% during the year. Higher
output emanated from existing oil fields as well as
four new oil fields that came on stream during the
year. The increase in export volume and sharply
1999
2000
2001
2002
2003
Annual change (%)
Graph 1.16
Mining Production
Crude oil
Natural gas
Value added
-3
-6
0
3
6
9
12


23
The Malaysian Economy in 2003
higher export prices (22%), lifted gross receipts from
crude oil exports by 35% to RM15.7 billion (2002:
RM11.6 billion), to account for 4% of gross exports.
Malaysian crude oil prices (Tapis Blend) strengthened
significantly to average US$29.79 per barrel (2002:
US$25.55) in tandem with higher global crude oil
prices. Prices during the year were, to a large extent,
driven by market sentiments as well as fundamental
factors. In early 2003, geopolitical concerns in the
Middle East, supply disruptions in the major
producing countries, namely, Venezuela, Nigeria and
Iraq, and lean inventories in the major consuming
countries, especially in the US, sustained Malaysian
export prices at a high level of above US$30 per
barrel in the first quarter of the year. In the second
half-year, Malaysian crude oil prices averaged US$30
per barrel, in line with the international oil prices of
West Texas Intermediate and North Sea Brent, which
averaged US$30.64 and US$28.96 per barrel,
respectively.
Table 1.8
Mining Sector: Value Added, Production and Exports
2002
2003p
Volume
Annual
Volume
Annual
and
change
and
change
Value
(%)
Value
(%)
Value added (RM million at 1987 prices)
15,826
3.7
16,581
4.8
Production
Crude oil and condensates
698,462
4.9
736,000
5.4
(barrels per day)
of which:
Crude oil (barrels per day)
596,216
2.9
625,775
5.0
Natural gas - net
(million standard cubic feet)
1,706,141
2.9
1,794,388
5.2
Tin-in-concentrates
(tonnes)
4,215
-15.2
3,606
-14.2
Exports (RM million)
22,364
-4.6
29,777
33.1
of which:
Crude oil
(‘000 tonnes)
16,192
7.4
17,913
10.6
(US$/barrel)
24.81
-2.8
30.27
22.0
(RM million)
11,600
4.3
15,662
35.0
Liquefied natural gas
(‘000 tonnes)
15,007
-2.7
17,402
16.0
(RM/tonne)
659
-8.6
766
16.2
(RM million)
9,888
-11.1
13,328
34.8
Tin
(‘000 tonnes)
27,076
-0.7
15,164
-44.0
(RM/tonne)
15,713
-7.0
18,732
19.2
(RM million)
425
-7.7
284
-33.2
p Preliminary
Sources: PETRONAS
Department of Statistics, Malaysia
Department of Minerals and Geoscience, Malaysia
Decisions by the Organisation of Petroleum Exporting
Countries (OPEC) in managing global oil supplies was
a dominant factor in determining oil prices,
particularly during the post-Iraq war period. In the
first half of 2003, OPEC, which accounts for about
1999
2000
2001
2002
2003p
Annual change (%)
Graph 1.17
Mineral Exports
Total mineral exports 
Crude oil
LNG
-20
-40
0
20
40
60
80
p Preliminary


4.H-24
24
The services sectors remained resilient despite the occurrence of
SARS. Activity picked up strongly in the second half-year, largely
due to stronger domestic demand, aided by the Economic Package.
40% of world supply, raised its output quota twice,
by 1.3 million bpd and 2.4 million bpd respectively to
25.4 million bpd to ease the shortfall in supply.
Subsequently, in November, OPEC reversed part of its
earlier increases by cutting the output quota by
900,000 bpd to 24.5 million bpd amidst concerns of
increasing supplies by non-OPEC members. This,
together with the pick-up in global growth and the
seasonally higher demand during the fourth quarter,
helped to sustain the high oil prices towards end-
year. P.R.China accounted for almost 35% of the
increase in global oil demand during 2003. Reflective
of these developments, the Malaysian crude oil prices
remained relatively strong during the year to close at
US$32.15 per barrel as at end-December.
Natural gas production expanded by 5.2% in 2003
as the sector was able to respond to the higher
demand given an increase in production capacity,
especially with the commencement of the MLNG
Tiga plant in May 2003 and the coming on stream of
four new gas fields during the year. Domestic
Table 1.9
Malaysia: Crude Oil and Natural Gas Reserves1
As at end
2002
2003p
Crude oil
Reserves (billion barrels)
3.61
3.69
Reserve/Production (year)
16.0
16.0
Natural gas
Reserves
(trillion standard cubic feet)
87.76
89.67
Reserve/Production (year)
35.7
30 - 40
1
The National Depletion Policy was introduced in 1980 to safeguard the
exploitation of the national oil reserves by postponing the development and
control the production of major oil fields (with reserves of 400 million barrels
or more).
p Preliminary
Source: PETRONAS
due mainly to depleting tin reserves in existing tin
mines, which resulted in low productivity.
During the year, four new oil fields, two each in
Peninsular Malaysia and Sarawak, commenced
operations, thus bringing the total number of oil
fields in production as at end-2003 to 51. With the
commencement of four new gas fields in Peninsular
Malaysia and Sarawak, a total of 18 gas fields were
in operation by end-2003.
A significant development in the Malaysian oil sector
in 2003 was the discoveries of deepwater oil reserves
in offshore Sabah towards the latter part of the year.
Prior to these discoveries, oil was also found in
offshore Sabah in July 2002. A total of six new
production-sharing contracts were signed in 2003.
Services Sector
In 2003, the services sector remained resilient,
recovering rapidly from the adverse effects of the
Severe Acute Respiratory Syndrome (SARS) that
demand remained favourable, particularly from the
power generation sub-sector, which consumed 66%
of total domestic gas production. Higher offtake by
all LNG buyers, namely Japan, Korea and Chinese
Taipei as well as the increase in export prices (RM766
per tonne; 2002: RM659) led to the sharp increase of
34.8% in export receipts generated from LNG.
Production of tin-in-concentrates declined by 14.2%
in 2003, despite higher prices and an increase in the
number of active tin mines. Decline in production was
occurred in the early part of the year. Overall, the
effects of SARS were found to be transitory and
affected the retail, tourism and travel-related sectors,
mainly in the second quarter of the year. Tourist
arrivals fell significantly for a brief period in April-May
(average of 500,000) before gradually picking up in
the following months to reach the pre-SARS level of
above one million tourists by November. Amidst the
sharp decline in tourist arrivals and weaker consumer
sentiment, growth in the services sector slowed
down to 2.9% during the second quarter. The quick
containment of the disease globally and the pro-
active measures undertaken by the Government to
assist the affected industries and to boost consumer
confidence, contributed to the recovery in the
services sector in the second half-year, which grew by
4.5% (first half-year: 3.7%). While growth in final
services moderated largely due to the impact of
SARS, growth in the intermediate services was more
robust, supported by stronger trade-related activities.
Overall, growth in the services sector was sustained
at 4.1% during the year, but its share to GDP
declined slightly to 56.4% from 57% in 2002.
Within the final services sector, growth in the
wholesale and retail trade, hotels and


25
The Malaysian Economy in 2003
restaurants sub-sector moderated to 1.5% in
2003.  The sub-sector contracted in the second
quarter by 2% as consumers avoided public places,
whilst the hotel occupancy rate in some areas fell to
30% due to a decline in tourist arrivals and the
cancellation of several meetings, incentives,
conventions and exhibitions (MICE).  Nevertheless,
the Economic Package introduced in May helped the
tourism and travel-related industries to tide over the
difficult period as well as stimulate domestic
demand. The strong pent-up demand, amidst the
improving consumer confidence and recovery in
tourist arrivals to the pre-SARS level, helped support
-4
-2
-8
-10
-12
-6
0
2
4
6
8
10
12
14
16
18
1Q
00
2Q 3Q 4Q 1Q
01
2Q 3Q 4Q 1Q
02
2Q 3Q 4Q 1Q
03
2Q 3Q 4Q
-60
-40
-50
-20
-30
-10
0
20
10
40
60
50
30
80
70
90
Graph 1.18
Trends in Wholesale and Retail Trade, Hotels  
and Restaurants Sub-sector vis-a-vis Private  
Consumption and Tourist Arrivals
Value added of the sub-sector (LHS) 
Tourist arrivals (RHS)
Private consumption (LHS)
Annual change (%)
Annual change (%) 
Table 1.10
Growth in the Services Sector at Constant 1987 Prices
2002
2003p
2002
2003p
1H
2H
Year
Annual change (%)
% share of GDP
Services
4.1
3.7
4.5
4.1
57.0
56.4
Intermediate services
4.3
4.2
6.1
5.2
22.8
22.8
Transport, storage and communication
2.6
4.5
6.6
5.6
8.5
8.5
Finance, insurance, real estate and
5.3
4.1
5.7
4.9
14.3
14.3
    business services
Final services
4.1
3.3
3.4
3.4
34.2
33.6
Electricity, gas and water
3.9
7.3
5.1
6.2
4.0
4.0
Wholesale and retail trade, hotels and
2.6
0.6
2.4
1.5
14.9
14.4
   restaurants
Government services 1
6.7
6.4
4.9
5.6
7.2
7.3
Other services 2
4.6
3.3
3.2
3.2
8.0
7.9
1
Include general public services (general public administration, external affairs and public order and safety), defence, health, education and others.
2
Include imputed rent from owner-occupied dwellings; community, social and personal services; products of private non-profit services to households and domestic
services of households.
p Preliminary
Source: Department of Statistics, Malaysia
the recovery in the sub-sector. By September, the
average hotel occupancy rate rose above 50%. In
addition, the upward trend in the equity market
amidst stable employment conditions, disbursement
of bonus payments and year-end festivities, further
reinforced consumer sentiment, resulting in the
expansion of the sub-sector in the second half-year.
Value added growth was also affected by greater
competition among retailers especially
hypermarkets. Although the trend of lower prices
had benefited consumers in general, the price
competition had squeezed retailers’ margins.
Coupled with the evolving consumer preference to
shop in hypermarkets and large multi-concept
shopping centers, the year saw the exit of several
small- and medium-sized retailers and
rationalisation of existing retailers through mergers
and acquisitions.
The other services sub-sector which includes
community, social and personal services as well as
imputed rent from owner-occupied dwellings,
expanded at a moderate rate of 3.2% (2002: 4.6%).
The moderation reflects slower growth in the
community, social and personal services as
entertainment and gaming activities were affected by
SARS during the second quarter. Education and
private healthcare services were also affected, albeit
to a lesser extent. These sectors performed better for
the year as a whole. The total number of students
pursuing higher private education in Malaysia rose to
almost 300,000 as at end-2003 (end-2002: 294,600),
reflecting increases in students from both Malaysia


4.H-26
26
and abroad. Similarly, the private healthcare industry
continued to expand in response to increased
demand by locals and foreigners for better
healthcare services. The survey by the Association of
Private Hospitals in Malaysia showed that the number
of foreign patients treated in the private hospitals
rose to 102,946 as at end-2003 (end-2002: 84,585).
The Government services sub-sector expanded by
5.6% in 2003 (2002: 6.7%). The growth reflected
higher expenditure on emoluments following the
salary adjustment for civil servants with the
implementation of the Skim Saraan Malaysia in the
last quarter of 2002. Consonant with the
strengthening economic activity, the utilities sub-
sector registered a higher growth of 6.2%
(2002: 3.9%), reflecting mainly increased electricity
demand, as well as higher gas and water
consumption. The coming on stream of five power
plants by the Independent Power Producers also
contributed to the increase in electricity generation
during the year.
Within the intermediate services sector, growth in
the transport, storage and communication sub-
sector picked up strongly by 5.6% in 2003
(2002: 2.6%), owing largely to robust activities in
the telecommunications industry. The
telecommunications industry benefited from
economies of scale following the rationalisation of
Table 1.11
Selected Indicators for the Services Sector
2002
2003p
Annual change (%)
Electricity production index
10.3
5.8
Loans outstanding in the banking system
4.6
4.8
Insurance premiums
13.3
14.0
KLSE (turnover, volume)
12.0
101.7
LRT ridership1
3.5
8.8
Tourist arrivals
4.0
-20.4
Airport passenger traffic
4.2
1.3
Air cargo handled
16.3
6.9
Bulk cargo throughput at five major ports2
4.9
9.7
Container throughput at six major ports3
23.8
14.9
%
Hotel occupancy rate
57.9
53.3
Penetration rate:
- Internet dial-up
10.5
11.4
- Broadband
0.08
0.44
- Mobile phone
36.9
43.9
- Fixed line
18.8
18.1
1
Include STARline and PUTRAline.
2
Include Port Klang, Johor Port, Penang Port, Sabah Ports and Bintulu Port.
3
Include Port Klang, Johor Port, Port of Tanjung Pelepas, Penang Port,
Sabah Ports and Bintulu Port.
p Preliminary
Source:
Department of Statistics, Malaysia; Malaysia Airports Holdings Berhad; Kuala
Lumpur Stock Exchange; Malaysian Communications and Multimedia
Commission; Ministry of Finance; Port authorities; Syarikat Prasarana Negara
Berhad; Malaysia Tourism Promotion Board; and Bank Negara Malaysia
the cellular industry as well as the various measures
undertaken to promote new areas of growth in
telecommunications. In the cellular segment,
growth accelerated in 2003 due to further
expansion in the subscriber base (11 million; end-
2002: 9 million) as well as increased usage of both
traditional voice telephony and new applications in
mobile data. During the year, Short Messaging
Service (SMS) traffic rose significantly, boosted by
the wider usage of SMS in various applications,
such as entertainment and ticket reservation as well
as the downloading of data and other information.
Growth in mobile data was further reinforced by the
introduction of the Multimedia Messaging Service
(MMS) in the second half-year, which allows mobile
phone users to enhance their messages by
incorporating sounds and images. With the
continued popularity of mobile phones, fixed line
subscribers declined further.
Various measures undertaken to promote new areas
of growth in the telecommunications industry, such as
greater usage of e-commerce and on-line services for
the purchase of goods and services, supported growth
in the industry. In addition, the reduction in the access
fee for broadband and strong demand for high-speed
Internet access resulted in the number of broadband
subscribers rising five fold to 110,400 as at end-2003,
while the number of Internet subscribers increased by
10.1% to 2.9 million.
In the transportation industry, lower tourist arrivals
affected the air passenger segment.  Growth in the
other segments was supported by higher trade and
domestic tourism activities, particularly in the second
half of the year. Following the increase in both
indigenous and transhipment cargo, activity at the
ports continued to remain strong.  Total container
cargo handled at the six major ports increased by
14.9% in 2003 (2002: 23.8%). Air cargo business was
also enhanced by the introduction of the I-port
programme in the two major ports, facilitating more
efficient transfer of goods between ports and airports
in the country. Aggressive campaigns undertaken by
the Government to promote domestic tourism as well
as the rapid expansion of the no-frills budget airline to
many local destinations led to the continued increase
in domestic passengers, compensating for the decline
in international passengers during the year.
Growth in the finance, insurance, real estate and
business services sub-sector was sustained at
4.9% in 2003  (2002: 5.3%).  Growth emanated
from increased bank lending amidst lower lending


27
The Malaysian Economy in 2003
rates, more robust insurance activities, as well as the
pick-up in the stock market and real estate activities
in the latter part of the year. The low interest rates
and attractive financing packages offered by financial
institutions, additional funds provided by the
Government under the Economic Package, as well as
improved infrastructure for the small- and medium-
enterprises stimulated lending activities during the
year. Value added growth in the finance sector was
supported by interest income and strong growth in
fee-based income of financial institutions. The
significant increase in insurance premiums from both
conventional insurance and takaful products further
supported the growth in the sub-sector.
DOMESTIC DEMAND CONDITIONS
Domestic demand conditions strengthened further in
2003, as the economy successfully weathered the
uncertainty in the external environment, including
the outbreak of SARS and the geopolitical tensions in
the first half of the year. Growth was driven mainly
by stronger private sector activities and supported by
public sector expenditure. The improved external
environment in the second half-year, which led to
rising consumer and business confidence, as well as
the positive effects of the Government’s Economic
Package translated into higher private sector
activities. The low interest rate environment, stable
employment prospects, high commodity prices,
improvement in corporate cash flow positions as well
as further liberalisation of foreign equity ownership
in the manufacturing sector reinforced the positive
spill-over benefits from the Economic Package. As a
result, the private sector resumed its role as the main
driver of growth in 2003, led by the strengthening in
consumer spending and a recovery in private
investment. Meanwhile, growth in public sector
expenditure moderated with the Government
continuing to provide an enabling environment to
support private sector activities. Overall, growth in
aggregate domestic demand (excluding stocks)
strengthened to 4.8% from 4.2% in 2002.
The public sector continued to play an important role
in stimulating the economy. The pro-growth measures
taken in early 2003 were instrumental in mitigating
the impact of SARS and contributed towards the
momentum of growth in the second half-year. Overall,
the pace of expansion of public sector expenditure
moderated to 5.5% in 2003, in line with the move
towards gradual fiscal consolidation.
Graph 1.19
Real Domestic Demand Aggregates
Aggregate domestic demand (excl. stocks)
Private consumption
Public consumption
Private investment
Public investment
-60
-40
-20
0
20
40
93
94
95
96
97
98
99
00
01
02
03
Annual change (%)
Domestic demand conditions strengthened further in 2003. The
private sector resumed its lead role in driving growth, supported
by higher consumption and the turnaround in private investment.
Growth in public sector expenditure moderated but was
supportive of private sector activities.
Public consumption was sustained, increasing by
7.9% in 2003, due mainly to the continued high
expenditure on supplies and services, emoluments
and defence. The higher expenditure on supplies and
services was largely due to the measures to improve
the public sector delivery system. Meanwhile, the
higher expenditure on emoluments was partly due to
the implementation of the Malaysian Remuneration
System for employees in the public sector (effective
November 2002) as well as the special critical
allowance for staff in Government hospitals who
were directly involved in addressing SARS-related
cases.
Reflecting the public sector’s role of providing a
supportive environment for private sector activities,
public investment continued to increase in 2003,
albeit moderately. The increase in public investment
reflected higher outlays to improve and upgrade the
country’s infrastructure, including roads and


4.H-28
28
highways, and rail, port and airport facilities. Higher
outlays were also expended on the construction and
upgrading of hospitals as well as rural and health
clinics. In addition, expenditure on agriculture and
rural development increased in 2003 in line with the
Government’s effort to modernise the agriculture
sector and to narrow income disparities between
urban and rural areas by encouraging agro-based
industries. A large share of the expenditure
continued to be channelled towards education and
training, especially skills development and training in
technical fields and on information and
communication technology to facilitate the move
towards a knowledge-based economy.
Total capital expenditure of the NFPEs remained high
in 2003, on account of upgrading and capacity
expansion programmes. Petroliam Nasional Berhad
(PETRONAS) continued to invest in exploration and
production projects as well as the construction of
liquefied natural gas tankers and petroleum tankers.
In the case of Tenaga Nasional Berhad, the bulk of
the expenditure was for upgrading of the
transmission system and power generation, while a
large portion of Telekom Malaysia Berhad’s
expenditure was focussed on upgrading and capacity
expansion to improve telecommunication
infrastructure and services.
The private sector resumed its role as the main
engine of growth for the Malaysian economy in
2003, contributing 2.5 percentage points to real GDP
growth. Private sector expenditure increased
significantly by 4.3% (2002: 0.7%), reflecting the
up-turn in private investment and a further
strengthening of consumer spending. Private
consumption increased at a faster pace of 5.1% in
2003, after a hesitant start, particularly at the height
of the geopolitical tensions and the SARS outbreak
during the second quarter. Private consumption,
which was less robust in April and May, regained
strength from June as confidence improved following
the containment of the SARS threat and the
announcement of the Economic Package to promote
domestic demand. Measures to enhance household
disposable income included a voluntary reduction in
the EPF contribution rate for employees and various
tax exemptions. Lower interest rates following the
reduction in the policy rate by Bank Negara Malaysia
further improved consumer confidence. As a result,
consumer spending gathered momentum and
returned to its normal trend in the third quarter. The
rise in consumer spending also reflected the effects
of pent-up demand, with increased purchases of cars
and consumer durables as well as higher expenditure
on hotels and restaurants during the quarter. Retail
sales also turned around to register a positive growth
in the third quarter and strengthened further in the
latter part of the year, reinforced by seasonal factors
such as festivities, year-end bonus payments and
back-to-school shopping. Other factors supporting
higher consumer spending during the year included
the positive wealth effect from the improved stock
market performance as well as higher rural income
due to the large multiplier impact of higher
commodity prices.
Of significance, private investment turned around
to record positive growth beginning from the third
quarter of 2003. For the year as a whole, private
investment increased by 1.1% following two years of
contraction. The expansion in private sector
investment reflected the improvement in business
confidence, particularly in the second half-year. In
addition, improved capacity utilisation due to rising
external demand and higher production underpinned
Table 1.12
Private Consumption Indicators
2002
2003
1Q
2Q
3Q
4Q
Year
Sales of passenger
cars (incl. 4WD)
‘000 units
375.4
85.1
83.2
89.6
76.5 334.4
Annual change (%)
9.4
-7.4 -14.9
-9.5
-11.7 -10.9
Tax collection
Sales tax
(RM billion)
9.2
1.5
2.1
2.0
2.4
8.0
Service tax
(RM billion)
2.2
0.4
0.7
0.4
0.6
2.0
Narrow Money (M1)
Annual change (%)
10.3
8.4
10.0
11.9
14.6
14.6
Loans disbursed by
banking system
Consumption credit
(excl. passenger cars)
Annual change (%)
38.1
11.2
5.9
12.3
11.4
10.2
Retail trade,
restaurants and
hotels
Annual change (%)
-1.4
6.5
7.8
6.9
12.1
8.4
MRA retail sales
Annual change (%)
3.0
-0.1
-2.9
3.9
8.4
3.6
Credit card operation
Turnover spending
(RM billion)
26.8
7.2
7.1
8.0
8.6
30.9
Annual change (%)
25.0
18.8
13.8
15.5
14.2
15.5
MIER Consumer
Sentiments Index
- 105.2 106.9 112.8 115.5
-
KLSE Composite Index 646.3 635.7 692.0 733.5 793.9 793.9
Commodity prices
CPO (RM/tonne)
       1,364 1,585 1,486 1,444 1,793 1,577
Crude oil (USD/barrel)
26
33
28
28
32
30
Rubber (sen/kg)
292
364
367
387
486
401


29
The Malaysian Economy in 2003
capital spending activities, particularly in the
manufacturing sector. Other factors supporting the
improvement in investment activities were the low
interest rates as well as improved profitability and
cash flow positions of companies in line with higher
sales and profits.
Business investment improved in most sectors of the
economy except for the transportation sector where
capital outlays had tapered off following the
completion of large projects, and the
telecommunication sector. Manufacturing
investment turned around significantly to register a
positive growth of 3.2% in 2003 (2002: -32.8%),
reflecting the improvement in business conditions
and the high capacity utilisation rates (82% in 2003).
Capital outlays in the manufacturing sector were
mainly in the form of investment in machinery and
equipment as industries needed to expand
productive capacity in response to high demand and
utilisation rates.
A positive development during the year was the
significant improvement in the value of proposed
investment applications and approvals in the
manufacturing sector, signalling the improved
business confidence and the need to add new
capacity. The total value of applications received
increased by 37.1% to RM25.8 billion, while the
value of approved investment increased significantly
by 62.8% to RM29.1 billion. Of the total value of
investment approvals, approximately 77% was for
new investment, while the balance was for
reinvestment. Unlike in the past years when the
electrical and electronics industry accounted for a
large share of the total approved investment, a large
Table 1.13
Private Investment Indicators
2003
1Q
2Q
3Q
4Q
Year
Sales of commercial
vehicles (incl. 4WD)
 ‘000 units
59.6
14.9
16.2
19.4
20.1
70.6
 Annual change (%)
12.2
4.2
7.4
24.5
37.2
18.5
Applications to
MITI
No. of projects
878
208
225
272
228
933
Capital investment
(RM billion)
18.8
12.2
5.1
4.2
4.3
25.8
Foreign
11.7
5.7
1.7
1.8
2.3
11.6
Local
7.0
6.4
3.4
2.4
2.0
14.1
Approvals by MITI
No. of projects
792
292
199
261
213
965
Capital investment
(RM billion)
17.9
5.3
2.7
12.0
9.1
29.1
Foreign
11.6
2.1
1.7
6.0
5.8
15.6
Local
6.3
3.2
0.9
6.0
3.3
13.5
MSC-Status Companies
No. of companies
191
41
42
39
39
161
Approved investment
(RM billion)
2.7
0.3
0.4
0.3
0.5
1.6
Loans disbursed by
banking system
Manufacturing sector
Annual change (%)
0.9
1.9
3.0
7.3
7.0
4.8
Construction sector
Annual change (%)
41.8
-1.3
-34.3
11.2
3.5
-8.5
Business services
Annual change (%)
-7.4
7.4
-20.6
27.1
22.9
6.7
Private Debt
Securities
Total funds raised
(RM billion)
26.7
16.2
12.0
6.4
8.3
42.8
Initial Public Offerings
(KLSE)
Total funds raised
(RM billion)
6.8
0.2
0.2
0.6
3.0
4.0
MIER Business
Conditions Survey
Business Conditions
Index
-
99.3 104.9 109.8 109.9
-
Capacity Utilisation
Rate (%)
-
79.6
78.0
79.6
81.1
-
2002
Average net profit  
per company
Private Investment (RHS)
Graph 1.20  
Higher Investments with Higher Profits
ROE
-20
-10
0
10
20
30
40
50
60
1995
1996
1997
1998
1999
2000
2001
2002
2003
RM million,%
-60
-40
-20
0
20
40
60
80
100
120
140
160
180
Annual change (%) 
2003
Mining
15%
Services 
20%
Construction
23%
Manufacturing 
30%
Agriculture 
12%
Graph 1.21
Private Investment by Sector (% share)


4.H-30
30
proportion of the approved investment in 2003 was
in the basic metal products industry, which
accounted for a significant share of 30% of total
approved investment. This was followed by the
transport equipment sector (24%) and the electrical
and electronics industry (17%).
There has been some shift in the pattern of
investment towards higher value added and higher
technology projects, involving highly-skilled manpower
and higher capital investment. For example, in the
consumer electronics sub-sector, companies have
shifted production from traditional products to higher
value added products, such as digital audio-video
equipment, multimedia speakers, plasma television
sets and home theatres, while in the electronics sub-
sector, approved projects were for high-end computer
and computer peripheral products and high-end
telecommunications equipment. Some companies
have also set up their own research and development
centres to improve design capabilities and reduce
costs. This shift towards higher value added and
Annual change (%)
Utilisation rate (%)
Graph 1.22  
Manufacturing Investments and Capacity  
Utilisation Rates
Manufacturing investments
Utilisation rate
1999
2000
2001
2002
2003
-40
-30
-20
-10
0
10
20
30
40
50
70
72
74
76
78
80
82
84
higher technology is reflected in the gradual rise in the
capital intensity as measured by the ringgit value of
capital investment per employee (CIPE). The CIPE has
increased from RM0.08 million in the 1980s to
RM0.24 million in the 1990s and RM0.38 million in
2003.
Reflecting the increased confidence of foreign
investors, the value of approved foreign investment
increased significantly by 35.1% to RM15.6 billion and
accounted for 53.7% of the total approved
investment. Of this amount, 28% was reinvestment by
the existing foreign investors and 72% was for new
activities. This indicated that Malaysia remained an
attractive investment location despite the emergence
of competition from other regional countries. The five
most important sources of foreign investments in
Malaysia in 2003 were United Arab Emirates, United
Kingdom, the United States, Japan and Singapore,
which together accounted for 80% of total foreign
investments in approved projects. One of the
approved projects includes a high technology project
from the United Kingdom to develop a stratosphere-
based high altitude surveillance and communication
platform, which may eventually be a worldwide
system of surveillance and communications as it
complements contemporary satellite aerial
infrastructure.
Meanwhile, local manufacturers have become more
aggressive in their business expansion plans as their
share of the value of investment applications have
exceeded that of their foreign counterparts for the
first time since 1997. The value of approved domestic
investment more than doubled to RM13.5 billion,
reflecting the positive response to the Government’s
Graph 1.24
Approved Manufacturing Investment
by Industry, 2003 (% share)
Basic metal
products 30% 
Transport
equipment 24% 
Others
21%
Electrical & electronic
products 17% 
Fabricated metal
products 4%
Wood & wood
products 4% 
0
5
10
15
20
25
30
35
40
45
50
97
98
99
00
01
02
03
0
200
400
600
800
1,000
1,200
Graph 1.23 
Private Investment in the Manufacturing Sector
RM billion
No. of projects
Domestic investment
Foreign investment
No. of projects (RHS)
Applications:
Domestic investment
Foreign investment
No. of projects (RHS)
Approvals:


31
The Malaysian Economy in 2003
policy to encourage domestic investment to drive
growth. This development also reflected the success of
the government’s efforts in encouraging local
manufacturers to upgrade their productive capacity as
well as collaborate with foreigners in new business
ventures. Excluding a single large investment in the
basic metal products industry, local investments were
concentrated in the high value-added non-resource
based industries, namely, the transport equipment,
electrical and electronics products and fabricated
metal products industry.
Investment in the construction sector continued to
register a moderate increase during the year. A large
part of construction investment reflected activities in
the residential sub-sector, which was supported by the
conducive property market environment in response to
the low interest rates offered by the banking
institutions and the Government’s Economic Package
for the property sector. Meanwhile, capital investment
in the sector was also supported by activity in several
ongoing privatised road projects, namely the New
Pantai Expressway, Kajang Ring Road, Guthrie Corridor
Expressway, SPRINT Highway (Penchala Link), Kajang-
Seremban Expressway, Jelutong Highway and
Butterworth Outer Ring Road.
Stronger investment activities in the services sector
were visible in the utilities as well as the retail,
wholesale and business sub-sectors. Capital spending
in the utilities sub-sector continued to increase in 2003,
supported by activities in water supply projects as well
as the development works of several power plants. The
power plants that came onstream during the year
included the Teknologi Tenaga Perlis Power Plant, Prai
Power Plant and Panglima Power Plant, while the
construction of the new 2,100MW power plant in
Tanjung Bin was in progress. The consolidation of the
telecommunications industry affected investment in
this sub-sector. The rationalisation exercises of
telecommunication operators and the merger of
service providers contributed to lower capital spending.
Investment in the sub-sector was mainly towards
improving the existing network quality and increasing
coverage areas in response to intense competition,
particularly in the cellular services sector. Investment in
the transport sub-sector was largely supported by the
development of ports, reflecting mainly the capacity
expansion of Port of Tanjung Pelepas, West Port and
Kuantan Port. In recent years, capital spending in the
sub-sector had been on a declining trend due to the
completion of several major rail projects. The KL
Monorail was completed and started commercial
operations in the second half of 2003.
Capital spending in the retail business reflected the
establishment of new outlets in the expansion
programmes by major hypermarket operators and
established retailers. Various incentives introduced by
the Government have attracted companies to
establish shared services centres in Malaysia, which
provide information technology services, software
development, customer management and data
processing for the companies’ global or regional
operations. The setting up of these shared services
centres includes additional capital spending in
technology and logistic infrastructure. A major
development project during the year was the
intensification of the Proton City mixed development
project.
New capital expenditure in the mining sector was
largely by the oil and gas sub-sector, boosted by
higher upstream activities in exploration and
production. Higher demand for crude oil, coupled
with the increase in crude oil prices, encouraged
companies to increase capital expenditure for
production facilities. Sustained investment in the
agriculture sector was largely attributed to activities
in crop plantation, with a larger contribution from
palm oil plantations, buoyed by stronger demand for
crude palm oil and high prices. The capital
expenditure was mainly to improve efficiency in crop
harvesting processes and for new planting as well as
replanting activities. The increase in investment in the
agriculture sector was also reflected in higher imports
of agricultural equipment during the year. In
addition, higher investment committed under the
National Agricultural Policy continued to encourage
participation from the private sector, primarily for
food production.
Notwithstanding stronger consumption spending in
2003, gross national savings (GNS) increased by
18.1%. Higher incomes from the improvement in
external demand and strong export earnings from
high commodity prices led to a significant expansion
in gross national income in nominal value.
In the private sector, both households and the
corporate sector enjoyed stronger cash flows,
benefiting from higher disposable incomes as a result
of the measures in the Economic Package, the
significant improvement in domestic activities and
external demand, and sharply higher commodity
prices. This enabled private consumption to
strengthen further in 2003, while private sector
savings registered a strong increase of 34.7% during
the year, with the main contributor being corporate


4.H-32
32
savings. Higher corporate savings was reflected in a
marked increase of RM13.9 billion in new deposits
placed by businesses in the banking institutions,
compared with a net withdrawal of RM154 million in
2002.  Despite higher public consumption, public
sector savings increased further by 4.4% due mainly
to better revenue performance of both the Federal
Government and the non-financial public enterprises.
Overall, the share of GNS to GNP rose to 36.9% in
2003 compared with 34.4% in 2002. This high rate
of savings has enabled Malaysia to finance its
economic growth from domestic sources.  With the
recovery in investment still in its early stage, gross
domestic capital formation (including stocks)
registered modest growth. The savings-investment
balance as reflected in the current account of the
balance of payments, therefore, recorded a higher
surplus of RM50.8 billion or 13.7% of GNP
. The
savings-investment surplus is expected to moderate
as the recovery in investments would strengthen in
line with stronger economic growth.
PRICES AND EMPLOYMENT
Consumer Prices
Inflation remained low and stable in 2003. The
overall inflation rate, as measured by the annual
change in the Consumer Price Index (CPI), was
slightly lower at 1.2%, compared with 1.8% in the
previous year. Core inflation, which is inflation
excluding price-controlled and price-volatile items as
well as items that are subject to one-off price
Table 1.14
Savings-Investment Gap
2002
2003p
(RM million)
Public gross domestic
capital formation
53,698
56,304
Public savings
63,496
66,313
Deficit / surplus
9,798
10,009
Private gross domestic
capital formation1
31,317
29,329
Private savings
52,013
70,081
Deficit / surplus
20,696
40,752
Gross domestic capital formation
85,015
85,633
(% of GNP)
25.3
23.2
Gross national savings
115,509
136,394
(% of GNP)
34.4
36.9
Balance on current account
30,494
50,761
(% of GNP)
9.1
13.7
1 Includes the change in stocks. Previously, the change in stocks was distributed
between the public and private sector gross domestic capital formation.
p Preliminary
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
adjustments, remained broadly stable at 0.6% in
2003 (2002: 0.5%).  Several factors combined to
ensure that inflation was benign. While domestic
demand strengthened, excess capacity in selected
sectors and the absence of wage cost pressures,
amidst improving labour productivity, helped to
contain price pressures.  Small price adjustments, in
March 2003, in retail prices of petrol, diesel and
cooking gas and telephone rental contributed to
about 0.4 percentage point to the overall inflation
during the year.
Transport and communication prices moderated
significantly in 2003 due in part to the higher base in
2002, despite higher prices of petroleum and
petroleum-related products. Prices for clothing and
footwear, furniture, furnishing and household
equipment continued to decline during the year
0.5
0.0
1.0
1.5
2.0
2.5
Annual change (%)
Headline
Core inflation
0
1
2
3
4
5
6
7
8
9
Beverages &
tobacco  
Food
Overall
Transport &
communication 
Gross rent,
fuel & power 
-20
-10
0
10
20
30
40
Non-commodity
related 
Commodity 
related
Overall
Measures of Consumer Price Inflation
2000
2001
2002
J F MA M J J A S O N D J F MAM J J A S O N D J F MAM J J A S O N D
Producer Price Index
Annual change (%)
2000
2001
2002
Consumer Price Index
Annual change (%)
J F MAM J J A S O N D J F MA MJ J A S O N D J F MAM J J A S O N D
Graph 1.25
Inflation: Annual Rate of Change
2000
2001
2002
J F MAM J J A S O N D J F MAM J J A S O N D J F MAM J J A S O N D


33
The Malaysian Economy in 2003
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
Overall CPI
Food
Beverages and tobacco
Clothing and footwear
Gross rent, fuel and power
Furniture, furnishings and household equipment and operation
Medical care and health expenses
Transport and communication
Recreation, entertainment, education and cultural services
Miscellaneous goods and services
percentage point
Graph 1.26
Contribution to Annual Change in the Consumer Price Index
2002
2003
Table 1.15
Price Indicators
Weight
2002
2003
Annual change
%
Consumer Price Index
(2000=100)
100.0
1.8
1.2
of which:
Food
33.8
0.7
1.3
Beverages and tobacco
3.1
4.2
1.6
Clothing and footwear
3.4
-2.3
-2.0
Gross rent, fuel and power
22.4
0.7
0.9
Furniture, furnishings and
household equipment
and operation
5.3
-0.4
-0.6
Medical care and health
expenses
1.8
2.4
1.7
Transport and communication
18.8
6.6
1.6
Recreation, entertainment,
education and cultural services
5.9
0.2
0.6
Miscellaneous goods and services
5.5
1.1
1.3
Consumer Price Index
Durable Goods
9.4
-0.8
-1.1
Semi-Durable Goods
5.4
-1.6
-1.4
Non-durable Goods
40.2
1.6
1.6
Services
45.0
3.0
1.3
Producer Price Index
(1989=100)
100.0
4.4
5.8
of which:
Local Production
79.3
5.7
7.0
Imports
20.7
-0.7
0.8
House Price Index
(1990=100)
-0.6
-
of which:
Klang Valley
-0.3
-
Johor Bahru
-6.0
-
Penang Island
-5.2
-
Source:
Department of Statistics, Malaysia
NAPIC, Department of Valuation and Property Services
amidst increased capacity and rising competition
from imported goods.
Stronger demand was reflected mainly in higher
prices for food, rental, fuel and power. Generally,
higher prices for food items reflected stronger
demand amidst higher commodity prices, and higher
prices for selected imported food items. Meanwhile,
the increase in rental was moderate. Rental for
lower-end houses rose by 1%, while the increase for
the higher-end houses was 0.8%.
Producer Prices
Producer prices, as measured by the Producer Price
Index (PPI), rose at a higher annual rate of 5.7% in
2003 (2002: 3.7%), reflecting largely higher prices
for commodity-related products, following higher
prices of crude palm oil, rubber and crude petroleum.
Excluding commodity-related products, producer
prices remained subdued, increasing by 0.5% (2002:
0.1%). Prices paid for imported goods increased by
0.8% (2002: -0.7%), reflecting mainly higher
petroleum prices and the appreciation of major
currencies against the ringgit.
Labour Market Developments
The domestic labour market conditions remained
stable and healthy. In 2003, overall growth in total
employment and the labour force expanded
moderately by the same rate of 3.3% to 10.2 million
workers and 10.5 million persons respectively. The
unemployment rate remained low at 3.5%. Further


4.H-34
34
Annual change (%) 
%
0
2
4
6
8
10
1999
2000
2001
2002
2003
0
1
2
3
4
Graph 1.28
Output and Employment
GDP
Labour force
Source: Department of Statistics, Malaysia
 
Economic Planning Unit 
 
Bank Negara Malaysia
Total employment
Unemployment rate (RHS)
measures were undertaken in 2003 to improve the
quality of labour, narrow the skills mismatches and
address the changing demands of the economy.
The Beveridge Curve, which tracks the pattern of
unemployment and vacancies in the labour market,
shifted downwards and inwards in 2003, indicating
lower turnover in the labour market and increased
efficiency in the worker-job matching process. This
was corroborated by the findings of other surveys. The
Salary, Benefits and Employment Conditions Survey in
the Manufacturing Sector conducted by the
Federation of Malaysian Manufacturers (FMM) showed
that the overall average monthly turnover rate was
lower at 1.76% in 2003 (2002: 4.1%). Similarly, the
Salary and Fringe Benefits Survey undertaken by the
Malaysian Employers Federation (MEF), which also
Labour market conditions remained favourable, supported by
higher growth in productivity.
Table 1.16
Labour Market Indicators
1999
2000
2001
2002
2003e
Labour force (‘000)
9,177.8
9,572.5
9,892.1
10,198.8
10,535.3
(annual change in %)
3.7
4.3
3.3
3.1
3.3
Employment (‘000)
8,869.6
9,271.2
9,532.5
9,840.0
10,166.2
(annual change in %)
3.5
4.5
2.8
3.2
3.3
Unemployment rate (%)
3.4
3.1
3.6
3.5
3.5
Labour productivity (GDP/Employment)
(annual change in %)
2.6
3.9
-2.4
0.9
2.0
Real wage per employee in manufacturing sector
(annual change in %)
3.1
5.0
1.6
3.2
2.6
e Estimate
Source: Department of Statistics, Malaysia, Economic Planning Unit and Bank Negara Malaysia
Unemployment Rate (%)
Source: Economic Planning Unit 
 
Ministry of Human Resources 
 
Bank Negara Malaysia   
Vacancy rate
(%) 
Graph 1.27
Beveridge Curve for Malaysia (1998 - 2003)
0.2
0
0.4
0.6
0.8
1.0
1.2
1.4
1.6
3.1
3.2
3.3
3.4
3.5
3.6
3.7
1999
2000
2001
2002
1998
2003
included firms from the non-manufacturing sectors,
showed that the overall average monthly turnover rate
remained low at 1.76% in 2003 (2002: 1.66%).
The low turnover in the labour market was also
reflected in data on vacancies and retrenchment for
2003, while data on placements and unplaced job
seekers mirrored the efficiency in the job matching
process. Growth in the number of vacancies
reported, which were mainly in the manufacturing,
agriculture, services and construction sectors,
moderated by 40% to 96,918 (2002: 162,787).
Retrenchments, which occurred mainly in the
manufacturing and tourism-related sectors, were also
lower by 20% (21,206 persons; 2002: 26,452). The
main reasons for retrenchment included reduction in
demand for products, company reorganisation and
closure of company. Other reasons included
completion of projects, reduction in production and


35
The Malaysian Economy in 2003
employment, and outsourcing. Growth in the
number of placements during the year moderated by
16%, although the slowdown in the growth of
vacancies was higher. Concurrently, the number of
registered unplaced job seekers reached 28,404 at
end-2003, the lowest since January 2001. Both
developments indicate greater efficiency in the
matching of workers to jobs available.
Given some underemployment in selected sectors,
the pick-up in economic activity did not exert undue
pressure on wages in 2003. Available indicators on
wages showed that increases in wage rates
continued to moderate in 2003:
•
Data from the Monthly Manufacturing Survey
conducted by the Department of Statistics
indicated that, on an annual basis, real wage per
employee increased by 2.6% (2002: 3.2%).
•
The Salary and Fringe Benefits Survey undertaken
by the MEF showed that the increase in the
average private sector salary was slightly lower at
5.8% in 2003 (2002: 6%). On a sectoral basis,
the average salary increase in the non-
manufacturing sector was higher (6.1% in 2003
and 2002) than the manufacturing sector (5.5%;
2002: 5.9%). The average minimum monthly
salary offered to those with a basic degree was
marginally lower at RM1,669 (2002: RM1,675).
•
The Salary, Benefits and Employment Conditions
Survey in the Manufacturing Sector conducted by
the FMM showed that the increase in overall
average salary paid to employees was also
moderate at 5.5% in 2003, while the average
basic salary of a fresh graduate was RM1,861.
•
There were only two industrial strikes relating to
demand for higher wages in 2003, the same as in
the previous year.
Labour productivity, as measured by the ratio of
GDP to total employment, improved significantly
with growth doubling to 2% in 2003 (2002: 0.9%).
The productivity growth was attributed to the
improvement in output across most major sectors in
Agriculture, 
forestry 
and fishing 
Manufacturing 
Source: Economic Planning Unit
Construction 
Services 
Number ('000 persons)
Graph 1.29
Total Employment by Sector
2000
2001
2002
2003
0
1,000
2,000
3,000
4,000
5,000
6,000
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2000
2001
2002
2003
Number of workers
Graph 1.30 
Retrenchment in Selected Sectors
Total retrenchment
Retrenchment in manufacturing sector
Retrenchment in services sector
Retrenchment in agriculture sector
Retrenchment in construction sector
    
Source: Ministry of Human Resources
Number of employees
Graph 1.31 
Reasons for Retrenchment
1 Closure of companies
2 Sale of companies
3 Relocation to foreign countries
4 Relocation locally
5 High production cost
6 Reduction in demand for products
7 Company reorganisation and automation
8 Others
Source: Ministry of Human Resources
  2002
1
2
3
4
5
6
7
8
  2003
2,000
4,000
6,000
8,000
10,000
12,000
0


4.H-36
36
Source: Pembangunan Sumber Manusia Berhad
0
100,000
200,000
300,000
400,000
500,000
600,000
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Number of training places 
Graph 1.32
HRDF: Number of Training Places Approved
line with the stronger economic activities. Of
significance, productivity in the manufacturing sector
turned around to register a positive growth of 3%
(2002: -0.8%) due to increased use of capital. The
agriculture and services sectors recorded higher
productivity growth of 5.7% and 0.7% respectively
(2002: 3.1% and 0.5% respectively). Higher
productivity in the agriculture sector was due to good
weather, which is a critical factor in determining the
output of agricultural produce, improved agricultural
practices and greater automation.
Over the longer term, the Government continues to
encourage firms to adopt better work practices,
increase mechanisation and automation as well as
introduce structural changes, in order to increase
efficiency and productivity to alleviate the shortage of
workers, particularly for the lower end jobs. In the
interim, the Government continued to approve the
recruitment of new foreign workers from designated
countries, namely Bangladesh, Cambodia, P
.R.China,
India, Indonesia, Kazakhstan, Kyrgyz Republic, Lao
People’s Democratic Republic, Myanmar, Nepal,
Pakistan, the Philippines, Sri Lanka, Thailand,
Turkmenistan, Uzbekistan and Vietnam. During the
year, the Government concluded a total of six
Memoranda of Understanding, namely, with
Bangladesh, P
.R.China, Sri Lanka, Thailand, Pakistan and
Vietnam to regulate the recruitment process and
procedures, while agreements in principle were reached
with Nepal and Kyrgyz Republic.
In 2003, approval was given for the recruitment of
516,355 new foreign workers (2002: 545,725) mainly
in the agriculture, manufacturing and construction
sectors. A large majority of the new workers originate
from Indonesia, while the rest are mainly from Nepal,
Vietnam, India, Myanmar and Thailand. In total, the
number of registered foreign workers in the country
increased by 17% to 1,239,862 (2002: 1,057,156)
constituting about 12% of the total labour force. The
majority are engaged in the manufacturing sector,
followed by the agriculture, services (including domestic
services) and construction sectors. About 70% of the
foreign workers are from Indonesia, while those from
Nepal and Bangladesh constitute the second and third
largest group at about 8% and 7% respectively.
The policy on the employment of foreign nationals was
further liberalized to address the need for certain
specialized skills. In this regard, the period of
employment of foreign workers engaged in the 3'D'
areas (Difficult, Dirty and Dangerous) was extended
from five years up to a maximum of ten years. Similarly,
the policy on expatriate employment in the
manufacturing sector was liberalised.
In view of the strategy to diversify into new growth
areas, especially manufacturing related and research
and design services as well as high-technology
industries, employment opportunities were more
abundant in higher value added sectors which require
highly specialised skills. In this regard, the Brain-Gain
programme was launched in 2001 to attract Malaysians
overseas with special expertise in fields such as
medicine and health, ICT, accountancy and finance, to
return to work in Malaysia. The programme has
attracted 599 professionals, of which 234 were
approved.
Meanwhile, under the Economic Package, a Retraining
Fund of RM100 million was established with the
objective to provide unemployed graduates with
training to acquire skills that are in demand, such as ICT
and accountancy. As at end-2003, a total of 7,338
graduate trainees had benefited from training provided
under the Fund, commonly known as the Graduate
Training Scheme II (GTS II). Financial assistance granted
to the trainees under the GTS II amounted to RM55.7
million. As funds under the earlier special schemes
implemented in 2001 for unemployed graduates and
retrenched workers were still available, the schemes
were continued into 2003. As at end-2003, a total of
38,942 persons had participated in the various
attachments and training schemes for unemployed
graduates, commonly known as Graduate Training
Scheme I, while another 11,135 participants benefited
from the scheme for retrenched workers and the
unemployed.
In line with the push for knowledge-based and services-
led growth, the Human Resource Development
Fund (HRDF) played an important role to foster
increased training of staff by employers. In the period


37
The Malaysian Economy in 2003
1993-2003, a total of 3.9 million training places costing
a total of RM1.4 billion were approved (2003: 441,721
training places with financial assistance of RM206
million). The scope of the HRDF has been expanded to
meet changing demands. Reimbursement for promoted
courses were increased to the full amount of the levy
(85% previously), while additional schemes for smaller
companies and the SMEs were introduced. The
utilisation period of the HRDF by employers was
extended to five years, from two years previously. The
scope of the HRDF would be further expanded to
include training in related services such as ports and
logistics, health services, marketing, ICT and research
and development.
The Skills Development Fund (SDF) is another
skills training initiative that has been in place since
2001. Its aim is to enhance the participation of the
private sector as training providers and increase
accessibility to technical education and vocational
training by providing financial assistance to the
trainees. The SDF is open to all, including school
leavers, retrenched workers as well as workers
undergoing training at public and private training
institutes. The objective is to ensure that the
jobseekers acquire the skills required by employers. In
2003, besides an additional allocation of RM500
million under the Economic Package, guidelines on
the provision of financial assistance were reviewed to
enable more persons to pursue skills training under
the SDF. As a result, using the existing allocation
(excluding the RM500 million), the SDF was able to
provide financial assistance to a total of 45,856
applicants compared with 36,700 applicants a
year ago.
Apart from training polices, which are basically
government driven, an encouraging development is
that the private sector is also actively involved in the
drive to raise the quality of labour through the
adoption of productivity linked wage systems (PWLS).
Besides embedding rewards with performance and
higher productivity, such flexible practices have
helped employers to better manage costs and share
success with employees. The Salary and Fringe
Benefits Survey undertaken by the MEF in 2003
showed that the majority of respondent companies
adopted the PWLS.
EXTERNAL SECTOR
Balance of Payments
A stronger external environment and improved
investor sentiment, particularly in the second half
of the year, contributed to the strengthening of
the external position in 2003.  The overall
balance of payments registered a significantly
higher surplus on the back of a larger current
RM billion
RM billion
Current Account
Goods exports
Goods imports
Balance on services 
and income
Current account 
balance (RHS)
Graph 1.33
Malaysia: Balance of Payments
-100
-50
0
50
100
150
200
250
300
350
400
450
2001
2002
2003e
0
10
20
30
40
50
60
RM billion
Capital and Financial Account
-25
-20
-15
-10
-5
0
5
10
2001
2002
2003e
Portfolio investment 
Balance on capital and financial account
Other investment - private sector
Official long-term capital
Direct investment 
RM billion
Net International Reserves
Net international reserves
Balance on current account
Balance on capital and financial account
-50
0
50
100
150
200
2001
2002
2003
e  Estimate


4.H-38
38
account surplus, sustained inflows of foreign direct
investment and higher inflows of portfolio funds.
Errors and omissions, including exchange gain
from the revaluation of Bank Negara Malaysia’s
international reserves due to the appreciation of
the major currencies against the US dollar (RM11.9
billion), was RM0.4 billion. After adjusting for the
errors and omissions, the overall balance of
The external position strengthened further, supported by a
stronger current account surplus. Inflows of FDI were sustained
while inflows of portfolio investment were higher. The external
debt of the official sector was reduced.
Table 1.17
Balance of Payments
2002
2003e
Item
+
 -
Net
+
 -
Net
RM million
Goods
358,504
286,387
72,117
398,998
301,297
97,701
Trade account
 357,682
303,063
54,619
398,882
317,746
81,136
Services
        56,536
62,532
-5,996
51,594
66,620
-15,026
Balance on goods and services
415,040
348,919
66,121
450,592
367,917
82,675
Income
8,129
       33,190
-25,061
13,116
35,730
-22,614
Current transfers
2,513
       13,079
-10,566
1,929
11,229
-9,300
Balance on current account
425,682
395,188
30,494
465,638
414,876
50,761
% of GNP
9.1
13.7
Capital account
-
-
Financial account
-11,941
-12,063
Direct investment
4,935
4,242
Portfolio investment
-6,506
4,176
Other investment
-10,370
-20,481
Balance on capital and financial account
-11,941
-12,063
Errors and omissions
-4,362
360
of which:
Exchange revaluation gain (+) or loss (-)
6,627
11,927
Overall balance
14,191
39,059
Bank Negara Malaysia
international reserves, net
131,394
170,453
(US$ million)
34,577
44,856
e Estimate
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
payments recorded a large surplus of RM39.1
billion or US$10.3 billion. Consequently, the net
international reserves of Bank Negara Malaysia
increased to RM170.5 billion or US$44.9 billion at
end-2003. The reserves increased further to
RM194.9 billion or US$51.3 billion as at 15 March
2004. This level of reserves represented 7.8
months of retained imports and 5.2 times coverage
of the short-term external debt. Malaysia’s reserves
are usable and unencumbered.
Current Account
In 2003, the current account recorded a larger
surplus of RM50.8 billion or 13.7% of GNP due to
a higher trade surplus. The stronger growth in
manufacturing exports and robust expansion in
export of commodities, which have low import
content, contributed to the larger trade surplus.
The larger surplus in the goods account generated
more than sufficient foreign exchange earnings to
finance the deficits in the services (4.1% of GNP),
income and current transfers accounts. The
services account deficit widened due to the impact
of SARS, which lowered travel receipts. On the
other hand, the income account deficit was
reduced, reflecting higher profits and dividends
accrued to Malaysian companies from their
investments abroad and higher returns from other
investment. Net outflows in the current transfers


39
The Malaysian Economy in 2003
account declined as a result of lower remittances
by foreign workers.
Amidst the improvement in the external
environment, gross exports expanded strongly by
11.5% in 2003 (2002: 7%). The stronger export
performance was due to higher manufactured
exports, as well as robust growth in exports of
primary commodities.
Growth in manufactured exports strengthened to
8.2% (2002: 5.9%), supported mainly by strong
demand for electronics, chemical products,
petroleum products, metal products and rubber
Annual change (%)
Graph 1.34
Export Performance of the Manufacturing 
Sector
-10
-5
0
5
10
15
20
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
2002
2003
Export Value
Export Volume
Export Prices
Graph 1.35 
Export Performance of Electronics and 
Non-electronics Industries
Annual change (%)
Manufactured exports
Electronics
Non-electronics
-15
-10
-5
0
5
10
15
20
25
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
2002
2003
Table 1.18
Gross Exports
2003p
RM  million
Annual change (%)
% share
Manufactured goods
326,950
8.2
82.0
Of which:
Electronics, electrical machinery and appliances
223,547
5.2
56.0
  Electronics
167,620
6.3
42.0
 
Semiconductor
85,184
16.3
21.4
 
Electronic equipment & parts
82,436
-2.4
20.7
  Electrical machinery & appliances
55,927
1.9
14.0
 
Consumer electrical products
19,747
-6.5
5.0
 
Industrial & commercial electrical products
20,414
3.5
5.1
 
Electrical industrial machinery and equipment
13,886
9.6
3.5
 
Household electrical appliances
1,880
36.7
0.5
Chemicals & chemical products
21,236
23.3
5.3
Manufactures of metal
11,303
28.5
2.8
Petroleum products
9,416
23.6
2.4
Optical and scientific equipment
9,213
13.0
2.3
Textiles, clothing and footwear
8,771
2.3
2.2
Wood products
6,698
6.1
1.7
Rubber products
5,060
12.3
1.3
Agricultural commodities
33,728
28.1
8.4
Of which:
Palm oil
20,224
36.3
5.1
Rubber
3,582
43.8
0.9
Sawn timber
2,607
6.4
0.7
Saw logs
2,015
10.0
0.5
Minerals
29,777
33.1
7.5
Of which:
Crude oil
15,662
35.0
4.0
LNG
13,328
34.8
3.3
Tin
284
-33.2
0.1
Other exports
8,427
25.5
2.1
Total
398,882
11.5
100.0
p   Preliminary
Source: Department of Statistics, Malaysia


4.H-40
40
products. Growth in electronics exports was largely
driven by the upturn in the global electronics cycle,
whilst the chemical products sector benefited from
higher export prices for iron and steel.  Overall, the
increase in export receipts was attributed entirely to
higher volume as prices continued to decline.
Exports of primary commodities rose markedly by
30.4%, driven mainly by the strong export
performance of agriculture (28.1%) and minerals
(33.1%).  Commodity exports was supported by
stronger prices (17.1%) and higher export volume
(11.9%) during the year. Strong demand for
commodities amidst the tight global supplies of
many major commodities during the year supported
the rise in prices.
Total receipts from agriculture exports rose to
RM33.7 billion with the main contributor to growth
being palm oil, which generated RM20.2 billion
foreign earnings following strong average export
prices of RM1,617 per tonne and higher export
volume of 12.5 million tonnes. Palm oil prices
increased due mainly to imbalances in the global
edible oils markets, arising from shortages in the
United States
ASEAN excl.
Singapore
Others
% share
0
5
10
15
20
25
Singapore
Japan
People's Republic of China,
Hong Kong China,
Korea & Chinese Taipei
European Union
2003
2000
Graph 1.36
Export of Manufactured Goods by Destination
Table 1.19
External Trade
2002
2003p
2002
2003p
RM billion
US$ billion
Gross export (f.o.b)
357.7
398.9
94.1
105.0
Annual change (%)
7.0
11.5
7.0
11.5
Annual change (%)
Volume1
6.1
7.2
6.1
7.2
Prices1
-0.4
1.0
-0.4
1.0
Gross import (c.i.f)
303.1
317.7
79.8
83.6
Annual change (%)
8.1
4.8
8.1
4.8
Annual change (%)
Volume1
6.1
1.1
6.1
1.1
Prices1
1.4
2.3
1.4
2.3
Trade balance
54.6
81.1
14.4
21.4
1 Volume and prices for 2003 are estimates.
p Preliminary
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
The significantly large trade surplus was due to stronger growth
in manufacturing exports and robust expansion in commodity
exports which have low import content.
the spillover effects of the strong electronics
performance as well as higher demand for organic
chemicals, resins and plastic products. Higher exports
of rubber products were driven largely by increased
global demand for rubber gloves. Exports of metal
products also rose strongly as manufacturers
increased their export volume to take advantage of
supply of major oilseeds amidst rising demand.
Malaysian palm oil also benefited from import
substitution by several price sensitive buyers given
the large price discounts of palm oil against other
major oilseeds, particularly soybean oil, its closest
substitute. The major export markets for Malaysian
palm oil in 2003 were P
.R.China, the Middle East,
India and the EU, which together accounted for 60%
of total Malaysian palm oil exports. With substantially
higher revenue, palm oil accounted for about 60%
of total agriculture export receipts and 5% of total
gross exports. The strong agriculture exports during
the year was also supported by increases in the
exports of other commodities, including rubber and
timber and timber products.
Export revenue from minerals turned around sharply
to record a growth of 33.1% to RM29.8 billion,
driven mainly by the significantly higher oil prices.
Malaysian crude oil export prices strengthened
significantly to average US$30.27 per barrel in
tandem with higher global crude oil prices. In line
with the upward trend in oil prices, liquefied natural
gas (LNG) prices also trended upwards to average
RM766 per tonne in 2003. The commencement of
the MLNG Tiga plant during the year also boosted
the exports of Malaysian gas. Thus, revenue from


41
The Malaysian Economy in 2003
crude oil and LNG exports rose to RM15.7 billion and
RM13.3 billion respectively.
Gross imports registered a moderate growth of
4.8% (2002:  8.1%) attributable to imports of capital
and intermediate goods, which picked up in the
fourth quarter. Import prices increased by 2.3%,
reflecting higher prices of imports of manufactured
goods, mineral fuel and chemicals.
Imports of intermediate goods, which were the main
driver of import growth, continued to grow by 6.4%.
Intermediate imports are inputs for the production of
manufactured exports, particularly electronic and
electrical products. Capital imports, excluding lumpy
items, increased by 6%, reflecting growth in investment
activity, particularly in the second half of the year.
Imports of lumpy items were lower due to fewer
deliveries of new aircraft. The continued strength of the
services sector as well as increased automation of
businesses induced the turnaround in imports of office
equipment to record positive growth. Increased
exploration activity in the oil and gas industry in the
wake of higher prices of petroleum led to the increase
in imports of construction and mining equipment.
Imports of telecommunication equipment declined by
9.5% against a background of industry consolidation
following the mergers of selected cellular service
providers. In line with higher disposable income,
imports of consumption goods increased by 1.1%
reflecting higher imports of consumer goods and
transport equipment.
The growth in intra-regional East Asian (excluding
Japan) trade since 1997 has reshaped trading
patterns, with P
.R. China providing the main impetus
to this growth. P.R. China is the sixth largest exporter
in the world and 30% of the P
.R. China’s exports is
exported to the region. Approximately 36% of P
.R.
China’s imports are sourced from East Asia.
Table 1.20
Gross Imports by End Use
2003p
 RM
Annual
 million
change (%)
% share
Capital goods
43,508
0.7
13.7
Capital goods (except transport equipment)
40,837
7.1
12.9
Industrial machinery and equipment
9,862
-0.4
3.1
Office equipment
7,404
26.6
2.3
Telecommunication equipment
5,213
-9.5
1.6
Transport equipment
2,671
-47.1
0.8
Intermediate goods
233,046
6.4
73.3
Food and beverages, mainly for industry
5,831
7.3
1.8
Industrial  supplies, n.e.s.
66,130
3.4
20.8
Metals & metal products
18,594
6.2
5.9
Chemicals
7,285
1.1
2.3
Fuels and lubricants
13,623
23.2
4.3
Parts and accessories of capital goods
(except transport equipment)
141,283
8.0
44.5
Electronics
95,314
7.1
30.0
Parts and accessories of telecommunication equipment
6,587
-9.8
2.1
Parts and accessories of transport equipment
6,179
-16.0
1.9
Consumption goods
18,866
1.1
5.9
Food and beverages, mainly for household consumption
6,777
-1.5
2.1
Transport equipment, non-industrial
337
90.9
0.1
Consumer goods, n.e.s.
11,752
1.3
3.7
Consumer durables
2,646
-2.0
0.8
Consumer  semi-durables
3,985
-5.1
1.3
Consumer non-durables
5,121
8.9
1.6
Dual use goods
7,057
15.2
2.2
Motor spirit
2,981
17.2
0.9
Passenger motor cars
4,075
13.8
1.3
Others
6,547
-4.4
2.1
Re-exports
8,722
-4.3
2.7
Gross Imports
317,746
4.8
100.0
n.e.s. Not elsewhere specified.
p Preliminary
Source: Department of Statistics, Malaysia


4.H-42
42
Consequently, Malaysia’s share of trade with major
trading partners, namely, the US and Japan, has
declined, while the share with the EU remained
unchanged. Malaysia’s trade with the US, Japan and
the EU as a group declined to account for a share of
43.1% of total trade (2002: 44.8%) while East Asian
trade increased to 44.9% (2002: 44%) of total trade.
Efforts continue to be made towards diversifying
markets particularly into non-traditional markets,
such as the South Asia and West Asia regions, and
increasing market share in East Asian countries. The
diversification of markets, which is measured by the
normalised Herfindahl-Hirschmann index, improved
in 2003.  In the normalised Herfindahl-Hirschmann
index, a ratio closer to zero reflects increasing
diversification. The index for exports declined to 0.15
in 2003 from 0.16 in 2002.  Similarly, the index for
imports also declined to 0.15 from 0.16.
The United States (US) remained as Malaysia’s most
important trading partner although its share of total
trade declined to 17.7% (2002:18.8%). Exports to
the US consist mainly of electronics components, in
particular integrated circuits, rubber, optical and
scientific instrument, furniture and parts and
apparatus. Approximately 65% of imports from the
US are intermediate inputs for the electrical and
electronics industry. Other imports include optical
and scientific instruments, plastics and chemicals. As
exports to the US increased while imports declined,
the bilateral trade surplus widened to RM29.2 billion
(2002: RM20.1 billion).
Singapore maintained its position as the second
most important trading partner of Malaysia despite
the decline in the share of trade to 14% (2002:
14.7%). The bulk of exports to Singapore were
electronics, with integrated circuits and micro-
assemblies accounting for 26%, parts and
accessories 13% and diodes and transistors 4.8%.
The lower share of exports to Singapore (15.7%;
2002: 17%) was attributable to the increased direct
trade and usage of local ports. On the imports side,
every one out of three imported products were
electronics and electrical goods while petroleum
and petroleum related products made up 18%. The
trade surplus with Singapore increased to RM25.5
billion as exports grew at a faster pace relative
to imports.
Graph 1.37
Exports Diversification Index
The export diversification index is a modified version of Herfindahl-Hirschmann 
index. It is normalized to obtain a numeric range from 0 to 1. A lower index 
signifies higher degree of diversification. 
0.10
0.12
0.14
0.16
0.18
0.20
0.22
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Rest of the world 
11.2%
Direction of Exports: 2003
Graph 1.38 
Direction of Exports:  1995
1  ASEAN excluding Singapore
2  Hong Kong China, South Korea and Chinese Taipei
1  ASEAN excluding Singapore
2  Hong Kong China, South Korea and Chinese Taipei
European Union  
14.2%
United States 
20.7%
NIEs2
11.3% 
People's
Republic of China 
2.7% 
Japan 
12.7%
ASEAN1
6.9%
Singapore 
20.3%
European Union  
12.1% 
United States 
19.6%
Rest of the world 
13.6% 
ASEAN1 
8.9% 
Singapore 
15.7%
Japan 
10.7%
NIEs2 
12.9% 
People's Republic 
of China 
6.5% 


43
The Malaysian Economy in 2003
Supported by a higher export growth relative to
imports, the trade balance with Japan, which has
been in Japan’s favour, improved to register a
smaller deficit of RM11.6 billion (2002: -RM14.1
billion). Export growth of 7.4% was underpinned
by increased export receipts from LNG, petroleum
and chemical products on the back of higher crude
oil and LNG prices. Imports grew marginally by
0.9% reflecting growth in imports of machinery
and transport equipment, manufactured articles
and crude materials.
Trade with the European Union (EU) turned around
to record a growth of 9.2% in the wake of an
improvement in economic performance of EU
countries. Malaysia continued to record a trade
surplus of RM11 billion (2002: RM9.5 billion) with EU
countries. Germany remained the leading trading
partner, accounting for 3.3% of total trade.
Exports to the North East Asia region (excluding
Japan), which accounted for 19.4% of total exports,
expanded by 18.3%. The impetus to this growth
stemmed from the continued strong export growth
of 29.6% to the P
.R.China and 26.7% to Hong Kong
China. The driver of this growth was the continued
relocation by multinational companies to the
P
.R.China and increased outsourcing activity.
Table 1.21
Direction of External Trade
2003p
Exports
Imports
Trade balance
RM million
% share
RM million
% share
RM million
ASEAN countries
98,225
24.6
76,345
24.0
21,879
Singapore
62,786
15.7
37,283
11.7
25,503
Thailand
17,538
4.4
14,549
4.6
2,989
Indonesia
8,091
2.0
11,168
3.5
-3,077
Philippines
5,459
1.4
11,835
3.7
-6,376
Other ASEAN countries
4,351
1.1
1,510
0.5
2,841
European Union (EU)
48,264
12.1
37,216
11.7
11,047
United Kingdom
8,872
2.2
5,991
1.9
2,881
Germany
9,145
2.3
14,787
4.7
-5,642
Netherlands
13,036
3.3
2,151
0.7
10,886
Other EU countries
17,210
4.3
14,287
4.5
2,923
United States
78,007
19.6
48,757
15.3
29,250
Japan
42,643
10.7
54,273
17.1
-11,630
The People’s Republic of China
25,878
6.5
27,739
8.7
-1,861
Hong Kong China
25,778
6.5
8,580
2.7
17,199
Chinese Taipei
14,351
3.6
15,698
4.9
-1,347
South Korea
11,550
2.9
17,308
5.4
-5,758
India
9,629
2.4
2,555
0.8
7,074
Australia
9,932
2.5
4,803
1.5
5,129
Rest of the world
34,626
8.7
24,473
7.7
10,153
Total
398,882
100.0
317,746
100.0
81,136
p Preliminary
Source: Department of Statistics, Malaysia
P
.R.China remained the biggest trading partner of the
region. About a quarter of Malaysia’s exports to
P
.R.China consisted of integrated and printed circuits,
semiconductor devices and light emitting diodes.
Another source of increase in export growth came
from demand for resource exports, particularly palm
oil and rubber.
Reflecting increasing intra-regional trade and better
economic performance of ASEAN countries
(excluding Singapore), the share of trade with
member countries expanded to 10.4% in 2003
(2002: 9.6%). The market share of imports from
ASEAN countries rose to 12.3% against a
background of increasing sourcing from low cost
suppliers such as Thailand, Indonesia and the
Philippines.
Services Account
Policies to promote exports of services have been
successful in reducing the services deficit in the
balance of payments to as low as -1.8% of GNP in
2002. In 2003, however, the services account
deficit widened to RM15 billion or -4.1% of GNP due
mainly to lower tourism receipts as travel, especially
into the Asian region, was severely affected by SARS.
Nevertheless, gross receipts from new sources of
foreign exchange income, namely education,


4.H-44
44
Tourist arrivals
in million 
Receipts in
RM million 
Graph 1.39
Tourist Arrivals and Tourism Receipts
Tourist arrivals
Tourism receipts
p Preliminary
0
2
4
6
8
10
12
14
1996
1997
1998
1999
2000
2001
2002
2003p
0
5,000
10,000
15,000
20,000
25,000
30,000
computer and information services, as well as ports
and airports continued to increase.
Despite the impact of SARS, travel remained the
largest contributor to services receipts in 2003,
accounting for 43.4% of total services receipts.
Tourist arrivals totalled 10.6 million visitors in 2003
(2002: 13.3 million visitors) with lower tourist
receipts of RM21.3 billion (2002: RM25.6 billion).
This resulted in the net surplus of the travel account
declining sharply to RM11.6 billion (2002: RM17.1
billion). The outbreak of SARS caused visitor arrivals
to decline by 51.6% in the second quarter. Tourist
arrivals from P.R.China and Singapore declined most
significantly. Tourist arrivals recovered strongly in
the fourth quarter with arrivals exceeding the
monthly average of one million attained in the
pre-SARS period.
For 2003 as a whole, the decline in receipts from the
tourism sector, however, was mitigated by new
sources of services export income, namely earnings
from education and healthcare services. The number
of foreign students increased by 8.5% to 39,577
students in 2003. Foreign students were mainly from
Indonesia and P
.R.China. Receipts from education
tourism are still small, accounting for about 1.4% of
total travel receipts and 0.6% of total services
receipts, although the spillover effects on the
economy through consumption spending and travel
are large.  Revenue from 102,946 foreign patients
seeking treatment in Malaysia in 2003 increased by
Table 1.22
Services and Income Accounts
2002
2003e
RM billion
Net
+
–
Net
Services  Account
Transportation
-11.6
10.5
23.8
-13.3
Travel
17.1
22.4
10.8
11.6
Other Services
-11.2
18.2
31.2
-13.0
Government services n.i.e.
-0.3
0.5
0.8
-0.3
RM billion
-6.0
51.6
66.6
-15.0
US$ billion
-1.6
13.6
17.5
-4.0
% of GNP
-1.8
-4.1
Income Account
Compensation of employees
-1.2
2.2
3.1
-1.0
Investment income
-23.9
10.9
32.6
-21.7
RM billion
-25.1
13.1
35.7
-22.6
US$ billion
-6.6
3.5
9.4
-6.0
% of GNP
-7.5
-6.1
e  Estimate
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Travel 
43.4%
Other services 
35.3%
Government 
transactions 
0.9% 
Transportation 
20.4%
Graph 1.40
2003: Components of Gross Receipts in the 
Services Account (% share)
Transportation
35.7%
Government  
transactions
1.2%
Other services
46.9%
Travel
16.2%
Graph 1.41
2003: Components of Gross Payments in the 
Services Account (% share) 


45
The Malaysian Economy in 2003
64.2%.  Foreign patients were mainly from Indonesia
(72.5%), other ASEAN countries, West Asian
countries and Japan.
On the payments front, travel outflows increased to
RM10.8 billion (2002: RM9.9 billion), reflecting
higher expenditure on business travel and education
abroad. Payments for travel abroad by Malaysians,
including business travel, expanded by 17.9% to
RM7.7 billion in 2003 in line with the pick-up in
economic activity. Meanwhile, education outflows
increased by 1.3% with a larger number of students
studying aboard.
There was a broadening of tourism products in
2003, with more niche products in areas such as
sports, eco-tourism, agro-tourism and meetings,
services related to infrastructure and oil and gas
exploration resulted in higher payments for contract
and professional charges. Payments for insurance
and financial services increased as larger external
trade transactions led to higher demand for
imported support services. Receipts from computer
and information services improved in line with the
expansion in business process outsourcing and ICT
services.
For the third consecutive year, the income account
deficit declined by 9.8% to RM22.6 billion or -6.1%
of GNP in 2003  (2002: -RM25.1 billion or -7.5% of
GNP). This improvement was attributable to profits
and dividends accruing to Malaysian companies
from their investments aboard, particularly in the oil
and gas and utilities sectors, which increased by
Higher profits and dividends of Malaysian companies operating
abroad contributed to an improvement in the income account.
incentives, conventions and exhibitions being
promoted. The main strategy of the new tourism
products was to increase the length of stay of
visitors. Promotion of tourism products and
services was undertaken through joint
collaboration by the public and private sectors.
Connectivity of air services was facilitated through
allowing greater use of charter flights and budget
fares offered by no-frills airlines. More gateway
points, such as Langkawi, Penang, Kuching and
Kota Kinabalu, enabled the travel industry to
expand into new as well as established markets.
The new markets targeted for promotion included
Pakistan and Iran.
The deficit in the transportation account widened
to RM13.3 billion in 2003 (2002: -RM11.6 billion),
as payments abroad increased while receipts were
sustained. Gross outflows reflected higher freight
charges as well as increased volume of trade. Gross
receipts were sustained, supported mainly by
earnings from cargo services and charter services
provided by domestic shipping companies and
airlines.  The increase in cargo handled was
underpinned by the increase in transhipment cargo
sourced from India, P.R.China, Myanmar, Indonesia
and Thailand.
In line with the improvement in the economy, the
higher demand for other services led to a higher net
payment of RM13 billion in the other services
account (2002: -RM11.2 billion). In particular,
imports of design, technical and project consultancy
190.6% to RM2 billion (2002: RM0.7 billion). It
accounted for 17.9% of the total gross investment
income inflows. Secondly, income from other
investments turned around to record a net inflow of
RM2.4 billion (2002: -RM0.9 billion), reflecting
largely the better returns from higher external
reserves while interest payments on external debt
declined.
On the payments side, gross profits and dividends
accruing to foreign direct investors also increased.
This was attributable mainly to higher earnings in
the electronics and electrical industries following
improved export performance, as well as the oil and
gas sector on the back of higher oil prices. While
profits and dividends accounted for 78.8% of the
gross investment income outflow, a substantial
portion is retained in Malaysia for further
reinvestment. Retained earnings were estimated at
42.5% of total profits and dividends, and credited
as inflows of foreign direct investment in the
financial account.
In 2003, the net outflow in the current transfers
account declined by 12% to RM9.3 billion. The
significant decline in current transfers payments by
14.1% in 2003 (2002: +28%), was largely due to
lower remittances by foreign workers following the
return of the illegal workers under the Amnesty
Program conducted in 2002. There were about 1.2
million registered foreign workers in Malaysia in
2003, more than half of whom were employed in
the plantation and manufacturing sectors.


4.H-46
46
Financial Account
In 2003, the financial account remained stable
with a net outflow of RM12.1 billion (2002:
-RM11.9 billion). Outflows of short-term capital,
comprising portfolio investment and other private
sector investment, were significantly lower
following improved investor sentiment in the equity
market as well as interest differentials in Malaysia’s
favour. In the long-term capital account, large
repayments of external loans by the official sector
and modest drawdown of loans helped to contain
the increase in Malaysia’s external debt position.
Private long-term capital, comprising mainly
foreign direct investment, was sustained at a
moderate level.
In terms of gross inflows, about half of the FDI
continued to be in the form of reinvested earnings,
particularly from the manufacturing sector. With
respect to new inflows of FDI as recorded by the
Cash BOP Reporting System of Bank Negara
Malaysia, both the services and manufacturing
sectors continued to receive significant shares of
about 38% and 37% respectively, while the share
of the oil and gas sector was about 15%. Large
inflows into the services sector continued to be
sustained. There was an increase in foreign
participation in Malaysia’s network of wholesale and
retail trade sub-sector, ranging from automotive
distribution, petrol station to hypermarkets. Foreign
interests were also higher in the higher value-added
Table 1.23
Balance of Payments: Financial Account
2002
2003e
2002
2003e
RM billion
US$ billion
Financial Account
-11.9
-12.1
-3.1
-3.2
Direct Investment
4.9
4.2
1.3
1.1
In Malaysia
12.2
9.4
3.2
2.5
Abroad
-7.2
-5.2
-1.9
-1.4
Portfolio Investment
-6.5
4.2
-1.7
1.1
Other Investment
-10.4
-20.5
-2.7
-5.4
Official sector
4.7
-11.2
1.2
-3.0
Of which:
Federal Government (net)
8.0
-3.7
2.1
-1.0
Gross borrowing
10.5
3.1
2.8
0.8
Repayment
2.5
6.9
0.6
1.8
NFPEs (net)
-3.3
-7.3
-0.9
-1.9
Gross borrowing
3.5
5.2
0.9
1.4
Repayment
6.8
12.4
1.8
3.3
Private sector
-15.1
-9.3
-4.0
-2.4
e Estimate
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
The financial account remained stable, reflecting sustained
inflows of FDI and higher portfolio investment. The official sector
reversed to record a large net loan repayment. Overseas
investment generated higher profits and dividends to Malaysia.
Gross foreign direct investment (FDI) in Malaysia
was higher in 2003 at RM21.8 billion (2002:
RM20.5 billion), reflecting largely broad-based
inflows into the services and manufacturing sectors,
as well as the oil and gas sector. On a net basis,
however, FDI moderated to RM9.4 billion or 2.5%
of GNP in 2003 (2002: RM12.2 billion), due largely
to the acquisition of foreign interests in the oil and
gas sector by a Malaysian company upon the expiry
of joint venture contracts, as well as large loan
repayments to parent companies abroad.
services sector, especially the transport sub-sector,
airlines and port management, as well as
knowledge-based activities in the form of MSC-
related investment and electronic data processing
industries. In 2003, 219 regional facilities for
foreign- and local-owned companies were
established, encouraged by investment incentives
provided by the Government. Of these, 12 were
operational headquarters (OHQs), 37 regional
offices, 32 international procurement centres (IPCs),
134 representative offices and 4 regional
distribution centres (RDCs).
Foreign interests in the manufacturing sector
continued to remain high, with larger new FDI
inflows into electrical and electronics and
petroleum-related industries. Inflows were also
broad-based into food processing, industrial
refrigeration and printing industries as well as
high-end aerospace industry.
Malaysian direct investment abroad remained
large, albeit at a moderately lower level, at RM5.2
billion in 2003 (2002: -RM7.2 billion) after several
major overseas acquisitions in 2002. Investment
abroad was mainly to diversify and reinforce
principal activities in Malaysia. Notably, the scope of
investment has become increasingly broad-based. A
large share of overseas investments was channelled
into both the oil and gas and services sectors,
followed by the manufacturing sector. In the oil and
gas sector, Malaysia continues to operate through


47
The Malaysian Economy in 2003
Recent Trends in Foreign Direct Investment in Malaysia
Introduction
Foreign investments continue to account for about one-third of total private investment in Malaysia.  The
trend in gross FDI has remained stable since 2000 after a moderation during the Asian financial crisis. This
stability is largely due to existing multinational companies (MNCs) expanding and diversifying their
operations, with funding mainly from retained earnings. The pattern of FDI flows has also changed in
favour of the higher value-added services sector, as the services sector is transformed and accounts for a
larger share of GDP
. As the services sector tends to be less capital intensive, the scale of the gross value of
new flows tends to be smaller while the value-added and contribution to growth is higher.
The Government continues to ensure that policies remain supportive of attracting new foreign
investments and that Malaysia remains a place of choice for companies seeking opportunities in the Asian
region. Policy initiatives include a series of Investment Guarantee Agreements (IGA), tax and non-tax
incentives, sequential sector liberalization, improving administrative processes and the delivery system of
the public sector and lowering the overall cost of doing business. Equally important is the commitment to
sound macroeconomic policies.
Definition, Methodology and Compilation of FDI Data
In the compilation of FDI statistics in the balance of payments, Malaysia adopts international standards in
terms of definition, methodology and measurement. FDI, based on the IMF’s Balance of Payments Manual,
Fifth Edition, is defined as “....foreign holdings of at least 10% ownership in the enterprise with a lasting
interest”.
Actual FDI flows are reported in the financial account of the balance of payments, released on a quarterly
basis by the Department of Statistics, Malaysia (DOS). DOS data refers to actual investments that have
taken place in Malaysia in all sectors. This data differs from the data on applications and approvals
released on a quarterly basis by the Malaysian Industrial Development Authority (MIDA), which records
mainly investments in the manufacturing sector and covers investors who have applied for the various tax
incentives. MIDA’s data also does not cover investments in the oil and gas sector.
Data in the financial account of the balance of payments covers all the three components of FDI, namely
equity capital, reinvested earnings and other capital (mainly inter-company loans). In addition to the
quarterly survey by DOS, Bank Negara Malaysia maintains the Cash Balance of Payments (CBOP) Reporting
System. Under this system, Bank Negara Malaysia is able to provide data on actual FDI flows on all cross-
border transactions between residents and non-residents which are effected through the banking system,
inter-company accounts and overseas accounts.
While the CBOP data does not capture the retained earnings by existing foreign enterprises in Malaysia
(since there are no cross-border transfers through the banking system), it provides a good indicator on the
trends of new FDI flows. The CBOP data is also available on a more timely basis, with a six-week lag.
Recent FDI Trends in Malaysia
On a gross basis, FDI continues to be sustained at a high level of about RM18-20 billion in recent years
(Graph 1). Inflows of FDI have contributed to the establishment of new industries and products,
introduction of new processes and production technology, the growth of support services, research and
development and access to new markets.
FDI flows during the post-crisis period remained stable as MNCs with operations in Malaysia continued to
reinvest their retained earnings to expand, upgrade and diversify their production lines, in spite of the
increased competition from low-wage economies in the region. Reinvested earnings accounted for nearly
half of gross FDI for the period 1998 - 2002 (Graph 2).


4.H-48
48
Graph 1
Gross FDI Flows (1990-2002)
Gross FDI (LHS)
Source: Department of Statistics, Malaysia; Bank Negara Malaysia's estimates
Gross FDI as % GDP (RHS)
%
25
20
15
10
5
0
90
92
91
94
93
96
95
98
99
97
00
01
02
12
10
8
6
4
2
0
RM billion
Graph 2
Gross FDI Components
Source: Department of Statistics, Malaysia; Bank Negara Malaysia's estimates
Other capital
Equity capital
1993 - 1997
1998 - 2002
Reinvested earnings
31%
29%
46%
28%
26%
40%
Graph 3
Gross FDI by Sector
Source: Department of Statistics, Malaysia; Bank Negara Malaysia's estimates
Manufacturing
Oil & Gas
1993 - 1997
1998 - 2002
Others (mainly services)
66%
13%
21%
38%
38%
24%
As a share of GDP
, gross FDI has been sustained at 6% in the post-crisis years, compared with an average
of 8% in the mid-1990s when FDI flows peaked. This was the result of two major developments:
•
Between 1990 and 2002, the capital investment per employee (CIPE) in the manufacturing sector has
increased by 66%, indicating a discernible trend towards higher value-added and high-technology
projects and the employment of highly skilled manpower. However, in recent years (2001 - 2003), the
CIPE in the manufacturing sector has declined as the bulk of increased investment was mainly
from the expansion, upgrading and diversification of existing projects. Going forward, the
growth in CIPE is likely to be sustained following the Government’s efforts to promote investment in
new high-growth sectors such as biotechnology and the agro-based industry.
•
As a higher share of FDI flows are targeted at the higher value-added services sector and knowledge-
based activities, FDI inflows tend to be lower per investment project. The value of FDI in services
has tended to be on a smaller scale and low in import content but having a larger multiplier impact on
income and employment. FDI in the services sector usually includes new technology and brings in
specialised expertise that contributes towards raising productivity.  The structural change in FDI flows is
consistent with the transformation of the Malaysian economy towards services as another engine of
growth and the move towards a knowledge-based economy.
Changing pattern of FDI flows
This trend, however, does not mean that FDI flows into the manufacturing sector have become less
significant. FDI inflows into the manufacturing sector remain high, but the rapid growth of new inflows
into other sectors has led to a relative decline in its share to 38% in 1998 - 2002, compared with 66% in
1993 - 1997 (Graphs 3 & 4). Both services and oil and gas sectors have experienced a significant increase
in their share of FDI flows, accounting for 38% and 24% respectively in 1998 - 2002.


49
The Malaysian Economy in 2003
FDI in services is increasingly broad-based, extending beyond the financing, insurance and business
services sub-sector into other major sub-sectors such as wholesale and retail trade and hotels, transport
and communications as well as utilities. In the financial sector, a number of foreign banks have set up
their treasury, back-office and data processing operations in Malaysia to facilitate their group operations in
this region. Malaysia already hosts a number of regional facilities for both foreign and local companies. As
of end 2003, the Government has approved 1,695 regional facilities for foreign- and local-owned
companies. Of these, 71 are operational headquarters (OHQs), 473 regional offices, 141 international
procurement centres (IPCs), 1,006 representative offices and 4 regional distribution centres (RDCs).
In the IT sector, Malaysia’s IT hub, the Multimedia Super Corridor (MSC), has continued to expand. By
February 2004, there were 283 foreign companies operating in the MSC, accounting for 29% of the
MSC-status companies that employed more than 20,000 knowledge workers. To continue to attract
greater foreign participation, the Multimedia Development Corporation, the MSC administrator, has
offered a generous package of financial incentives. MSC-status companies also enjoy privileges in terms of
administrative ease to source capital and borrow funds globally.
FDI in Regional Perspective
Regionally, with the exception of Hong Kong China and Singapore, Malaysia ranks ahead of many
regional economies in terms of inflows of FDI despite declining FDI flows to emerging economies
Graph 5
FDI as at end-2002: stock (bar) and flow
as % GDP (line)
300
Stock, %GDP
Flow, %GDP
250
200
150
Singapore
Thailand
Malaysia
P
.R.China
Indonesia
Korea
100
50
Note: HK figures were exaggerated by inflows redirected to P
.R.China via
Hong Kong China by Chinese Taipei investors as well as P
.R.China's
'round-tripping capital' (UNCTAD)
Source: UNCTAD
0
266
143
20
15
10
5
0
-5
1994
1995
1996
1997
1998
1999
2000
2001
2002
59
36
32
24
15
9
5
HK
Spore
Msia
China
Indo
Thai
Phil
Korea
India
Graph 4
FDI in Services
Source: Cash BOP Reporting System, Bank Negara Malaysia
Wholesale & retail trade and hotels
Financing, insurance and  
business services
1999
2002
Transport and
communications
Utilities
1%
0%
2%
20%
79%
5%
42%
51%


4.H-50
50
(Graphs 5 & 6). The high presence of MNCs in Malaysia is testimony of the advantages Malaysia can offer
in the global production or marketing chain. Based on the US data, the US non-bank MNCs have achieved
a higher rate of return on their investment in Malaysia (5.6%), compared with an average of 3.5% in the
Asian economies in 2000.
The UNCTAD World Investment Report 2003
listed Malaysia as one of the top ten
economies that had defied the global FDI
slowdown in 2002. Similarly, the A.T.Kearney
FDI 2003 report stated that Malaysia has
enhanced its attractiveness as a destination
for FDI, by improving to 23rd position
(previous: 42nd) in the overall FDI confidence
index. More specifically, Malaysia is in the
top ten positions for FDI in primary industries
as well as improving its standing in sectors
such as electronics, mining, petrochemical,
stone/glass and chemicals/plastics sectors
and consultancy.
FDI Policies
Malaysia’s strength in fundamentals such as trade openness, legal protection of patents, low tax
rates, commitment to market pricing, a highly educated workforce, an efficient and diversified
financial system for raising long-term capital, strong corporate governance, well-developed
infrastructure and a wide array of tax incentives continue to be recognised as strong points in
attracting FDI. While previous policies were more broad-based in nature, incentives have been
repackaged and are increasingly customized and tailor-made for specific investors and industries.
There are three broad philosophies governing policies specific to FDI:
•
Tax and non-tax incentives to promote specific industries;
•
Sequential liberalization of sectors in terms of market access, regulations governing employment
of expatriates, equity ownership and relaxing rules and regulations; and
•
Improvement in the administrative processes and minimize costs of establishing and
operating a business enterprise in Malaysia.
Within this framework, there are a wide range of measures that are specific, targeted and,
most importantly, benefit investors. Further, as the investment framework is goal-oriented
rather than incentive-oriented, incentives are regularly fine-tuned to meet investor needs
through the existing mechanism for consultation between the Government and the MNCs.
This is acknowledged by the 2003 World Competitiveness Yearbook, which ranked Malaysia as
second best in the world in terms of firms’ perception of the ability of the Government to adapt
policy to changes in the economy. In addition to fiscal and other specific incentives, the sequential
sector liberalization measures offers new opportunities to foreign investors, in both the goods and
services sectors.
Graph 6
Top 10 Developing Economy FDI Recipients  
in 2002
US$ billion
Source: UNCTAD
P
.R.China
Brazil
Hong Kong
China
Mexico
Bermuda
Singapore
India
Malaysia
Cayman
Islands
Kazakhstan
10
53
17
14
14
9
8
3
3
3
3
0
30
20
50
60
40


51
The Malaysian Economy in 2003
The Government has adopted a holistic approach to lower the cost of doing business as well as to
encourage efficiency and technological enhancement through strategic alliances with foreign
investors in key economic sectors. The Government also recognizes the importance of forging closer
links between indigenous small and medium enterprises (SMEs) and the large foreign-owned
companies. Thus, the current policy emphasis on developing a strong and vibrant SME sector should
be viewed as complementary efforts to attract FDI. By broadening the indigenous industrial base, the
economy stands to gain by spreading the benefits of FDI more equitably. At the same time, foreign
investors will have access to high quality goods and services that are provided by the domestic
economy at low cost. Going forward, a balanced growth strategy involving the synergy between
domestic- and foreign-owned companies will equip the country to respond effectively to an
increasingly competitive global environment.
joint ventures in exploration and extraction. During
the year, Malaysia’s investments in the oil and gas
sector were channelled mainly into the ASEAN and
selected African countries.
In the services sector, overseas investments were
made mainly in the utilities, transportation, retail and
travel-related sub-sectors. There were also some
investments by companies in the construction
industry following their success in bidding for large
infrastructure, roads and highway projects abroad.
While the share of the manufacturing sector in
overseas investment is smaller, investments were
broad-based across sub-sectors, ranging from
electrical and electronics, and textiles to high value-
added activities such as petroleum-related
manufacturing and aerospace industry. Several
multinational companies from the electrical and
electronics industry in Malaysia have also invested
abroad, mainly through the extension of inter-
company loans to their subsidiaries in lower-cost
countries.  Malaysia’s investment abroad has
continued to yield positive results. Profits and
dividends accrued to Malaysian companies from their
investments abroad increased to RM2 billion in 2003
(2002: RM0.7 billion).
Portfolio investment turned around to record a net
inflow of RM4.2 billion in 2003 (2002: -RM6.5
billion). In the first half of the year, portfolio
investment recorded a net outflow of RM1.3 billion
as sentiments in the regional markets were
dampened by uncertainties over the global economic
outlook due to geopolitical tensions in the Middle
East and SARS. Nonetheless, the net outflow was
significantly lower compared with the first and
second half of 2002.
The sharp increase in portfolio investment of RM5.5
billion in the second half of the year reflected
improving investor confidence following news of
better growth and more favourable prospects for
the Malaysian economy. The bulk of the portfolio
inflows was channelled into the equity market,
following the sovereign upgrade by a rating agency
in October.
The other investment account recorded a
significantly higher net outflow of RM20.5 billion
in 2003, mainly due to the reversal from a net
drawdown of external debt in 2002 to a large net
repayment in 2003. Meanwhile, net outflows by
the private sector continued to moderate for the
fourth consecutive year. The official sector
recorded a large net repayment of RM11.2 billion
in 2003, in line with the Government’s prudent
external debt strategy and commitment towards
fiscal consolidation. Taking advantage of the
favourable global interest rate regime, the
Government also prepaid and refinanced some
loans, thereby reducing its debt servicing cost.
Similarly, the Non-financial Public Enterprises (NFPEs)
also recorded a higher net repayment as their
earnings capacity improved during the year.
In 2003, other investment by the private sector,
comprising mainly borrowing and lending as well as
placement and withdrawal of deposits by the
banking and non-bank private sector with unrelated
counterparties, improved markedly to record a lower
net outflow of RM9.3 billion (2002: -RM15.1 billion).
Significantly lower net outflows were recorded by the
non-bank private sector while the banking sector
sustained a smaller net inflow. The net borrowing of
foreign currency by the banking sector, albeit lower,
continued to reflect the arbitrage opportunities as
interest rate differentials remained in favour of
Malaysia. Similarly, there were lower outflows in the
non-bank private sector due largely to lower trade
credits extended by Malaysian exporters to importers


4.H-52
52
abroad, representing a shift in exporters’ decision to
take advantage of the current favourable monetary
and financial environment.
External Debt
Prudent external debt management strategy
remained an integral part of macroeconomic policy
in 2003. Malaysia continues to maintain an active
external debt management strategy, which
incorporates the guiding principles that minimise
risk with balanced currency and maturity profile.
Corporations sourcing external funds for operations
in Malaysia are generally required to utilise the
funds for productive activities that will generate
foreign exchange income. This will provide a
natural hedge for debt servicing. They are also
encouraged to raise loans with longer maturity,
while short-term borrowings by the non-bank
billion). The increase in external debt reflected
mainly a small net borrowing by the private sector
and the exchange revaluation loss, arising from the
weakening of the US dollar. External debt of the
public sector, comprising the Federal Government
and NFPEs, declined in 2003 due to significantly
higher net repayment and prepayment. The external
debt to GNP and exports of goods and services
ratios improved further to 50.7% and 40.4%
respectively (2002: 55.3% and 44.3% respectively).
Accordingly, the overall debt service ratio (excluding
prepayments) declined to 6.1% in 2003 (2002:
6.7%). Of significance is that the share of short-
term debt to total debt continued to remain low,
accounting for only 18.4% of total external debt.
The ratio of short-term debt to international
reserves also improved further, to account for
20.2% of reserves (end-2002: 24.4%).
External debt remained stable at a manageable level. Higher
repayments and moderate new borrowings by the public sector
resulted in a lower share of public sector debt to total debt.
private sector to finance long-term investment is
discouraged. Prudential regulations to achieve
these objectives have been effective in keeping the
nation’s external debt low and its risk profile
balanced.
In 2003, total external debt outstanding increased
marginally by 0.9% to RM187.2 billion (US$49.3
The outstanding medium and long-term external
debt was sustained at RM152.8 billion (US$40.2
billion) at the end of 2003 (2002: RM153.6 billion).
Amidst lower drawdown (-12.1%), repayment of
medium and long-term loans increased significantly
by 25.1%. For the first time since 1992, the public
sector recorded a large net repayment of RM11
billion (2002: +RM4.7 billion), reflecting net
repayments by both the Federal Government (-RM3.7
billion) and NFPEs (-RM7.3 billion). Meanwhile, the
private sector debt turned around to register a net
borrowing of RM3.1 billion (2002: -RM4 billion).
Nevertheless, after taking into account an exchange
revaluation loss of RM4.1 billion following the
appreciation of major currencies, particularly the euro
and yen against the US dollar, and a reclassification
of a domestic foreign currency loan raised previously
from an offshore bank in the Labuan International
Offshore Financial Centre into an external loan, the
medium and long-term loans declined only
marginally by RM0.8 billion.
In 2003, short-term external debt (maturity of one
year or less) rose by RM2.4 billion to RM34.5 billion
(US$9.1 billion), reflecting largely the increase in
external borrowing by the banking sector, particularly
in the second quarter. The increase was attributed
mainly to the hedging activities of banks in relation
to trade-related transactions. Towards year end, as
foreign currency deposits at commercial banks rose
Table 1.24
Outstanding External Debt
2002
2003p
RM
US$
RM
US$
million
million
million
million
Total debt
185,643
48,853
187,250
49,276
Medium and long-term 153,587
40,418
152,788
40,207
Short-term1
32,055
8,436
34,462
9,069
As % of total debt
17.3
17.3
18.4
18.4
As % of international
reserves
24.4
24.4
20.2
20.2
As % of GNP
Total debt
55.3
55.3
50.7
50.7
Medium and long-term
debt
45.8
45.8
41.4
41.4
As % of exports of
   goods and services
Total debt
44.3
44.3
40.4
40.4
Medium and long-term
debt
36.6
36.6
32.9
32.9
Debt service ratio (%)
6.7
6.7
6.1
6.1
1 Excludes currency and deposits held by non-residents with resident banking
institutions.
p Preliminary
Source: Ministry of Finance and Bank Negara Malaysia


53
The Malaysian Economy in 2003
during the fourth quarter, banking institutions began
to wind down the interbank foreign borrowings that
were  taken to cover the forward sales of foreign
exchange by exporters.  Meanwhile, short-term
borrowings by the non-bank private sector,
comprising mainly revolving credits, overdraft
facilities and term loans, declined marginally in 2003.
The decline was due mainly to the repayment of
these facilities by several large companies, particularly
from the oil and gas sector.
The bulk of the medium and long-term debt
continued to be denominated in US dollars (stabilised
at 77% as at end 2003), as settlements for trade and
investment were mainly in US dollars. The appreciation
of the yen and euro in 2003 has therefore led to only
a small exchange revaluation loss equivalent to 2.6%
of the total medium and long-term debt. In 2003, the
share of yen denominated debt declined marginally to
13% (2002: 14%) due partly to a bullet payment of a
yen denominated loan by the Federal Government,
while that of the euro increased marginally to 5%
(2002: 4%). The remaining 5% of the debt was
denominated in other international currencies,
including the pound sterling, Swiss franc and
Singapore dollar.
Public sector external debt: The outstanding
external debt of the public sector declined by RM3.8
billion to RM96.8 billion (US$25.5 billion), as at end
2003, reflecting higher repayment by both the
Federal Government and NFPEs. Consequently, the
share of the public debt to total external debt
declined to 51.7% (2002: 54.2%). During the year,
the Federal Government maintained its practice to
source its funding requirements mainly from
non-inflationary domestic sources.
In 2003, three main strategies were undertaken by
the Federal Government to manage its external
debt. Firstly, the Federal Government did not rely on
new borrowings from the international capital
market, despite the nation’s low debt position.
Thus, the Government’s gross external borrowing
declined significantly by RM7.3 billion (US$1.9
billion) to RM3.1 billion (US$0.8 billion) in 2003.
Secondly, the Government increased its repayments,
including the prepayments of external loans, to
RM6.9 billion (2002: -RM2.4 billion). During the
year, the Government prepaid two external loans,
namely a Floating Rate Note due 2005 and a
syndicated loan due 2005/07, which together
amounted to RM1.6 billion. Thirdly, taking
advantage of the tighter margins arising from
improved credit position and investor confidence,
the Federal Government refinanced a number of its
more costly term and syndicated loans. In January, a
¥1.4 billion term loan due 2006 was raised at Libor
+ 57.5 basis points to refinance the 3.17% ¥4.1
billion term loan due 2006. In March, the
Government refinanced a US$250 million and ¥54
billion dual currency syndicated loan at a lower
margin of Libor + 38 basis points (previously Libor +
125 basis points).  Nevertheless, after taking into
account a reclassification of a domestic foreign
currency loan into an external loan and the
exchange revaluation loss during the year, the
outstanding external debt of the Federal
Government increased marginally to RM37.3 billion
or US$9.8 billion (2002: RM36.3 billion).
0
20
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
40
60
80
100
120
140
160
180
200
RM billion
0
10
20
30
40
50
60
70
%
Graph 1.42a
Outstanding External Debt
Federal Government
NFPEs
Private sector
Short-term1
Debt/GNP (RHS)
1 Excludes currency and deposits held by non-residents with resident banking 
 institutions
0
5
10
15
20
25
30
RM billion
0
1
2
3
4
5
6
7
8
%
Graph 1.42b
Debt Servicing
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Interest payment
Repayment
Debt service ratio (RHS)


4.H-54
54
Reflecting Malaysia’s strong fundamentals, the interest
spread on Malaysia’s benchmark securities narrowed
further in 2003. The spread on Malaysia’s Global Bond
due 2011 narrowed to 36 basis points at the end of
2003 (end-2002: 145 basis points).  Similarly, the
spread on the Global Bond due 2009 narrowed
steadily in 2003 to 85 basis points at
end-2003 (end-2002: 183 basis points). During the
year, Standard & Poor’s raised its long-term foreign
currency sovereign credit rating on Malaysia to A-
from BBB+ and assigned a stable outlook to the rating
on 7 October 2003. Meanwhile, Moody’s Investor
Service, Fitch and Japan Credit Rating Agency Ltd. also
reaffirmed the respective sovereign ratings for
Malaysia. In addition, Rating And Investment
Information Inc. upgraded Malaysia’s long-term
foreign currency rating to A- from BBB+, with a stable
outlook on 30 January 2004. On 6 February 2004,
Moody’s also changed the outlook for Malaysia’s
foreign currency ratings to positive.
The NFPEs’ external debt declined further to RM59.6
billion in 2003 (US$15.7 billion; 2002: RM64.3 billion).
The low interest rate environment and continued
strengthening of the NPFEs’ earnings performance
have allowed the NFPEs to streamline their debt
position. The NFPEs recorded a higher net repayment
of RM7.3 billion (2002: -RM3.3 billion), reflecting
significantly larger repayments, including the
prepayment and refinancing of several higher cost
loans. These repayments (-RM12.4 billion), including
the settlement of several large loans, were effected
mainly by NFPEs in the oil and gas, transportation and
telecommunication sectors.  Inflows of external
borrowing had also increased to RM5.2 billion (2002:
RM3.7 billion). These loans were raised mainly to
finance capital investment and overseas investment as
well as for refinancing of more costly loans.
Private sector external debt: Private sector debt
(including short-term debt) continued to account for a
significant share of Malaysia’s external debt, at 48.3%
of total debt in 2003 (2002: 45.8%). The private
sector medium and long-term external debt increased
by 5.6% to RM55.9 billion (US$14.7 billion) as at end-
2003. During the year, the larger drawdown of
external debt, amounting to RM12.7 billion (2002:
RM9.7 billion) was mainly by investment holding
companies and companies in the manufacturing and
plantation sectors. These funds were mainly to finance
capital expenditure and overseas investment.
Meanwhile, repayments by the private sector declined
to RM9.6 billion in 2003 (2002: RM13.7 billion). While
the medium and long-term external debt is marginally
higher, the overall risk remains low as the bulk of
private sector external debt has a natural hedge. Most
of these loans were used to finance productive export-
oriented activities with foreign exchange revenue to
service the debt.  In addition, about two-thirds of the
private sector external borrowing were sourced by
non-resident controlled companies from their
shareholders or related companies abroad. These loans
were generally provided on flexible terms, including
longer maturity and at concessionary interest rates.
In addition to the existing published detailed
information on external debt, Malaysia has
subscribed to the new IMF Special Data
Dissemination Standard (SDDS) on external debt
since 30 September 2003. The new SDDS external
debt data requirement is consistent with the
framework for international investment position
statistics in the fifth edition of the Balance of
Payments Manual. Under the new template of
external debt data, currency and deposits held by
non-residents with resident banking institutions were
included in the coverage of external debt. While
Bank Negara Malaysia has adopted this coverage for
external debt in the SDDS templates, for the time
being, publications by Bank Negara Malaysia will not
include currency and deposits held by non-residents
with resident banking institutions. Instead, the Bank
will continue to show this item as part of external
liabilities of the banking system in its monthly
statistics. However, to be consistent with the new
SDDS format, adjustment to the external debt tables
in all Bank Negara Malaysia’s publications will be
made during the course of 2004.
International Reserves
The international reserves held by Bank Negara
Malaysia comprises gold and foreign exchange
holdings, IMF reserves position and holdings of
1999
Yield Spread
2000
2001
2002
2003
Graph 1.43
Spread of Sovereign Bonds and Selected NFPE 
Bond Over US T-bills
Global bond (2009)
Global bond (2011) 
Petronas bond (2006)
0
50
100
150
200
250
300
350
400
450
F A J A O D F A J A O D F A J A O D F A J A O D F A J A O D


55
The Malaysian Economy in 2003
Special Drawing Rights (SDR). In 2003, net
international reserves increased by RM39.1 billion, or
US$10.3 billion, to a record level of RM170.5 billion
or US$44.9 billion as at end-2003. This is the largest
annual increase in the last decade. The significant
build-up in international reserves over the course of
2003 reflected the more robust economic activities,
improved export performance and inflows of foreign
direct investment and portfolio investment.
As at 15 March 2004, reserves increased further to
RM194.9 billion or US$51.3 billion. The level of
international reserves is sufficient to finance 7.8
months of retained imports and to cover 5.2 times
the short-term external debt.
More significant is that the international reserves
held by the Bank are fully usable and
unencumbered. There are no foreign currency loans
with embedded options, and no undrawn,
unconditional credit lines provided by or to other
central banks, international organisations, banks
and other financial institutions. Bank Negara
Malaysia also does not engage in options in foreign
currencies vis-à-vis the ringgit.
In 2003, foreign exchange inflows were largely
generated by the sharp increase in trade surplus as
well as early repatriation of export earnings in view
of interest rate differentials that were in Malaysia’s
favour. The accumulation of reserves was also due to
sustained inflows of foreign funds for direct
investment as well as into the equity market. The net
outflows of portfolio funds in the first half of the
year due to geopolitical uncertainty and the SARS
outbreak reversed in the second half of the year as
economic performance strengthened and the
corporate earnings outlook improved. The increase in
reserves also reflected the net revaluation gains
during the year.
The increase in reserves during the year occurred
amidst higher outflows arising from larger payments
for imports of goods and services and repatriation of
profits and dividends underpinned by stronger
economic activities. There was also a higher
repayment of external loans by the public sector,
including settlements of several large loans by the
The net reserves increased to US$51.3 billion as at 15 March 2004,
and reflected the more robust economic activities, improved
export performance and inflows of foreign direct investment and
portfolio investment.
Table 1.25
Net International Reserves
As at end
Change
                                           2001
2002
2003
2003
RM million
SDR holdings
487.8
585.0
685.0
100.0
IMF reserves position
3,193.5
3,315.5
3,652.0
336.5
Gold and foreign
exchange
113,542.3 127,515.1 166,139.3 38,624.2
Gross International
Reserves
117,223.6 131,415.6 170,476.3 39,060.7
Less Bank Negara
Malaysia external
liabilities
20.7
21.9
23.8
1.9
Net International
Reserves
117,202.9 131,393.7 170,452.5 39,058.8
US$ million equivalent
30,842.9
34,577.3
44,855.9 10,278.6
Months of retained
imports
5.1
5.4
6.8
Reserves/Short-term
external debt (times)
4.9
4.1
4.9
NFPEs in 2003. The outflows in terms of overseas
investments by Malaysian companies, especially in
the oil and gas sector, while remaining high, have
yielded returns in the form of profits and dividends
and interests earned amounting to RM2 billion in
2003 (2002: RM0.7 billion) and generated export
revenues from new markets.
Malaysia’s reserves also yielded revaluation gains
arising from quarterly adjustments of the reserves in
all quarters of 2003 as a result of the appreciation of
the major currencies against the US dollar during the
year. Net revaluation gain for the year amounted to
2003
RM billion
2002
Months/Times
Graph 1.44  
Net International Reserves (End-month)
Net international reserves, RM billion (LHS)
Import cover (RHS)
Reserves/short-term external debt (RHS)
D 
J
F
M
A
M
J
J
A
S
O
N
D
120
130
140
150
160
170
180
0
1
2
3
4
5
6
7
8


4.H-56
56
RM11.9 billion or US$3.1 billion, compared with the
net revaluation gain of RM6.6 billion or US$1.7
billion in 2002, exceeding the revaluation loss in
2001 (-RM4.1 billion or -US$1.1 billion) and 2000
(-RM5.3 billion or -US$1.4 billion).
In managing the reserves, a prudent approach is
adopted to achieve the objectives of ensuring
capital preservation and liquidity while optimising
returns. The reserves, which comprise gold and
major foreign currencies, are well diversified.
Malaysia, as a member of the IMF, can hold reserves
with the Fund in the form of SDR, through
participation in the Operational Budget. Under the
Operational Budget, the Fund invites member
countries which are viewed as ‘strong’ and have
surpluses in their balance of payments to make
resources available to members which are facing
balance of payments difficulties. In return, the
contributing members agree to receive a claim on
the Fund (termed as the reserves position with
the IMF) that can be drawn in the event of a
balance of payments need.
During the year, reflecting Malaysia’s strength in the
balance of payments and gross reserves position,
Malaysia was included in the IMF’s Operational
Budget. This was reflected in an increase in the net
purchase of SDR5 million, resulting in an increase in
Malaysia’s net creditor position with the IMF, and
the consequent increase in Bank Negara Malaysia’s
Table 1.26
International Reserves for Selected Regional
Economies
Reserves
Reserves
Reserves
Reserves
as at
in months
as cover
as cover
Country
end-2003, of imports
of short-
of total
(US$
term
external
billion)
external
debt*
debt*
Chinese Taipei
206.6
19.5
4.6
3.4
Hong Kong China
118.4
21.9
0.5
0.3
Indonesia
36.3
13.4
n.a.
0.3
Korea
155.4
10.4
2.6
1.0
Malaysia
44.9
6.8
4.9
0.9
Philippines
16.9
5.2
2.7
0.3
P
.R. China
403.3
11.7
6.0
2.2
Singapore
96.3
9.0
n.a.
n.a.
Thailand
42.1
6.8
3.7
0.8
* Except for Malaysia, external debt data refers to amount outstanding as at
end 3Q 2003.
n.a. Not available.
Source: National authorities; Asian Development Bank
reserves position. In ringgit terms, the reserves
position with the IMF increased by RM336.5 million
at the end of 2003. Meanwhile, the receipts of
remuneration from the IMF resulted in Malaysia’s
SDR holdings increasing by SDR8 million to SDR121
million at the end of 2003.
Bank Negara Malaysia releases information on the
international reserves position and the statement of
the Bank’s assets and liabilities on a fortnightly basis
with a one-week lag. The Bank also fulfils the IMF’s
SDDS requirements of publishing the reserves data
template at end-month with a one-month lag. The
SDDS template not only covers detailed information
on international reserves, but also includes the
release of forward-looking information on the size,
composition and usability of official reserves and
In managing the reserves, a prudent approach is adopted to
achieve the objectives of ensuring capital preservation and
liquidity while optimising returns.
other foreign currency assets, and the future and
potential (contingent) inflows and outflows of
foreign exchange of the Federal Government and
the Bank over the next 12 months.
Flow of Funds
The economy registered a higher resource surplus of
RM50.8 billion or 13.7% of GNP in 2003 (2002: a
surplus of RM30.5 billion or 9.1% of GNP). In terms
of balance of payments, the higher resource surplus
reflected higher exports over imports following
improved external demand in the second half of the
year. While exports grew strongly by 8.6% (2002:
6.6%), imports rose at a slower pace of 5.4%
(2002: 6.5%). From the perspective of the country’s
saving-investment gap, the higher resource surplus
reflected the significantly higher net savings
position of the private sector. The inter-sectoral flow
of funds between various sectors of the economy
for the year is shown in Tables 1.27 and 1.28.
The disposable income of the public sector
increased by 5.9% to RM120.2 billion in 2003.
However, this higher disposable income was offset
by higher public consumption and investment
expenditure arising from the government’s efforts to
sustain economic activity in the face of adverse
external developments in the first half of 2003.
Consequently, the resource surplus of the public
sector was marginally higher at RM10 billion in
2003 (2002: RM9.8 billion). The resource surplus
reflected entirely the surpluses from the NFPEs of


57
The Malaysian Economy in 2003
Table 1.27
Flow of Funds: 2002
Domestic Economy
Public
Private
Banking
Sector
Sector
System
RM billion
Disposable Income
-325.0
113.5
211.5
0
Consumption
209.5
-50.0
-159.5
0
Investment
83.8
-53.7
-30.1
0
Change in Stocks
1.3
-1.3
0
Exports of Goods and Non-Factor Services
415.0
-415.0
0
Imports of Goods and Non-Factor Services
-348.9
348.9
0
Net Factor Payment Abroad
-25.1
25.1
0
Net Transfers
-10.6
10.6
0
Non-Financial Balance
0.0
9.8
20.7
0.0
-30.5
0
Foreign Financing
Direct Investment
4.9
-4.9
0
Net Foreign Borrowings
4.7
-27.9
23.2
0
Net Change in Foreign Assets
Bank Negara Malaysia
-14.2
14.2
0
Banking System
6.3
-6.3
0
Domestic Financing
Change in Credit
11.5
27.7
-39.3
0
Change in Money Supply, M3
-31.6
31.6
0
Net Borrowings from Non-Bank Sector
-26.1
26.1
0
Net Errors and Omissions
-19.9
15.5
4.4
0
Sum
0
0
0
0
National
Accounts
Sum
Rest of
the
World
Table 1.28
Flow of Funds: 2003
Domestic Economy
Public
Private
Banking
Sector
Sector
System
RM billion
Disposable Income
-360.1
120.2
239.9
0
Consumption
223.7
-53.9
-169.8
0
Investment
87.1
-56.3
-30.8
0
Change in Stocks
-1.5
1.5
0
Exports of Goods and Non-Factor Services
450.6
-450.6
0
Imports of Goods and Non-Factor Services
-367.9
367.9
0
Net Factor Payment Abroad
-22.6
22.6
0
Net Transfers
-9.3
9.3
0
Non-Financial Balance
0.0
10.0
40.8
0.0
-50.8
0
Foreign Financing
Direct Investment
4.2
-4.2
0
Net Foreign Borrowings
-11.2
-12.8
24.0
0
Net Change in Foreign Assets
Bank Negara Malaysia
-39.1
39.1
0
Banking System
7.7
-7.7
0
Domestic Financing
Change in Credit
12.9
32.4
-45.3
0
Change in Money Supply, M3
-48.5
48.5
0
Net Borrowings from Non-Bank Sector
-11.7
11.7
0
Net Errors and Omissions
-27.8
28.2
-0.4
0
Sum
0
0
0
0
0
National
Accounts
Rest of the
World
Sum


4.H-58
58
RM24.7 billion, which helped offset the resource
gap of the general government of RM14.7 billion.
The bulk of the resource gap of the general
government was financed through net domestic
borrowings (RM12.9 billion). Government
borrowings and the resource surplus of the NFPEs
were utilised to make a net repayment of foreign
borrowings of RM11.2 billion, while RM11.7 billion
was transferred to the private sector during the
year.
The resource surplus of the private sector increased
twofold to RM40.8 billion or 11% of GNP in 2003
from RM20.7 billion or 6.2% of GNP in 2002.
Higher disposable income of RM239.9 billion during
the year (2002: RM211.5 billion) following
continued strong growth in economic activity,
enabled the private sector to increase consumption
expenditure (6.5%). At the same time, private
investment expenditure turned around (2.4%), the
first positive growth since 2000. The resource
surplus of the private sector together with net
inflows of FDI (RM4.2 billion), net borrowings from
the banking system (RM32.4 billion) and net
transfers from the public sector (RM11.7 billion), led
to a larger increase of resources amounting to
RM89.1 billion (2002: RM79.4 billion) being
available to the private sector.
A sizeable pool of resources available to the private
sector was placed with the banking system,
resulting in a net placement of deposits of RM48.5
billion. Some of the excess resources were also
utilised for repayments of foreign borrowings by the
private sector (RM12.8 billion). For the economy as
a whole, the large current account surplus and
continued inflows of FDIs, were more than sufficient
to accommodate these outflows. Consequently, the
net international reserves of BNM rose by RM39.1
billion to RM170.5 billion as at the end of 2003.


Monetary and Fiscal
Developments 
60-61
Monetary Policy in 2003
61
White Box: Monetary Policy Statement
62-68
Monetary Developments in 2003
68-69
Exchange Rate Developments
69-77
Fiscal Policy and Operations


4.H-60
60
MONETARY POLICY IN 2003
In 2003, Bank Negara Malaysia maintained an
accommodative monetary policy to support
growth. The assessment at the beginning of the
year was that the economy was operating below
potential. In an environment of the near absence
of demand pressures and excess capacity in many
sectors, inflation was forecast to remain low in
2003 with the output gap positive. The
accommodative monetary policy therefore
reinforced fiscal policy and other measures aimed
at promoting domestic economic activities. The
low inflation and stronger fundamentals provided
the flexibility to the Central Bank to maintain this
accommodative monetary stance. During the year,
efforts were also intensified to improve access to
financing to the private sector, in particular to the
Small and Medium Enterprises (SMEs).
With low and stable inflation, monetary policy remained
accommodative to support economic growth.
The monetary framework in 2003 continued to
operate under a pegged exchange rate regime.
The ringgit remained fixed at RM3.80=US$1, an
arrangement that has been in place since
September 1998. In 2003, the ringgit remained
close to its fair value and has been well supported
by strengthened economic fundamentals.
During the year, the policy rate of Bank Negara
Malaysia, the 3-month intervention rate, was
reduced once on 21 May. Interest rate policy in
the first quarter was based on two
considerations. First, the cumulative reductions in
interest rates by 600 basis points since 1998 had
resulted in lower interest rates and ample
liquidity. Liquidity conditions in the banking
system created competitive pressures on banks to
price loans at below the quoted base lending
rates. The lower lending rates had been effective
in raising demand for credit. Amidst stable
employment and higher incomes, supported by
higher commodity prices and strong performance
in selected export sectors, the prevailing
accommodative monetary policy reinforced fiscal
policy in sustaining domestic demand. Growth in
domestic demand was reflected in the further
expansion in monetary aggregates and bank
lending indicators during the first quarter.
Stronger expansion was also seen in loans
extended to small businesses.
Second, an important consideration to leave the
policy rate unchanged in the first quarter was to
provide a reasonable return to savers. In an
environment of ample liquidity, maintaining a
reasonable return to savers continued to remain
an important consideration. During this period,
consumer and business sentiment was affected by
the uncertainties from tensions prior to the Iraq
war and subsequently, greater uncertainty
following the outbreak of the Severe Acute
Respiratory Syndrome (SARS) in April. The stance
of monetary policy in early 2003 was therefore
aimed at balancing the need to promote
consumption and investment while maintaining a
reasonable real rate on savings.
Towards mid-2003, however, developments in the
regional and global economies indicated
increased risks on the growth prospects.
Economic and financial indicators showed that the
global economic recovery was slower than
expected, with growth in the United States
remaining well below trend in the first half-year
due to subdued investment. Deflationary
concerns and continued financial market
volatilities pointed to a more modest recovery for
the global economy for 2003. The dampened
global outlook and the implication of SARS on a
number of sectors threatened to weaken
domestic demand and increase the downside risks
to economic recovery in Malaysia. Given this, on
21 May, Bank Negara Malaysia reduced the policy
rate by 50 basis points to 4.5% as a pre-emptive
move to mitigate the effects of a more adverse
external environment on the domestic economy.
The impact of SARS on economic recovery was
expected to be transitory. Its impact was primarily
on the services sub-sectors of tourism, transport
and retail services. To ease the burden on the
affected industries and workers in these sectors,
other measures were implemented, including a
Special Relief Guarantee Facility of RM1 billion
Monetary and Fiscal Developments


Monetary and Fiscal Developments
4.6.3-61
61
and special relief for housing loan repayments to
workers in these sectors. These specific measures
were part of the overall package introduced on
21 May, to address the impact of SARS on the
economy as well as to stimulate further structural
changes. Implementation of the measures
including the reduction in interest rates, as a
comprehensive package was designed to give
maximum impact to the package.
These coordinated policy measures promoted and
reinforced a stronger recovery in the domestic
economy in the second half-year when global and
regional growth gained momentum. A number of
positive developments on the global front lent
further support to domestic policies. The reduction
in geopolitical uncertainty in the Middle East and
the abatement of SARS resulted in markedly
strengthened domestic consumer and business
sentiment in the third quarter. More favourable
trends emerged in the third quarter, with indicators
that the global economic growth was
strengthening. Growth in the United States in the
third quarter, picked up to well above trend
following the recovery in investment and a build-up
in inventory. On the domestic front, lower interest
rates, amidst improving sentiment, led to stronger
demand for credit. Demand for financing, which
moderated in May on uncertainties of the effects of
SARS, recovered strongly since June. Monetary
indicators for the second half-year also expanded at
a stronger pace, reflecting stronger demand for
liquidity. Overall, the accommodative monetary
policy reinforced other policies to contribute to
stronger growth in output. For the year as a whole,
real GDP growth strengthened to 5.2%, with the
growth momentum into 2004 sustained. Inflation
has continued to remain low at 1.2% while core
inflation, that is inflation due to demand pressures,
was lower at 0.6%.
Monetary Policy Statement
An important development during the year was the issuance of the Monetary Policy Statement (MPS)
by Bank Negara Malaysia at pre-determined intervals. On 27 August 2003, Bank Negara Malaysia
issued its first MPS together with the announcement of the second quarter GDP data. The second
and third MPS was issued at the release of the third quarter GDP data on 19 November 2003 and the
fourth quarter GDP data on 25 February 2004.
The MPS is a forward looking statement, outlining the monetary policy stance in the near term and
the rationale for the policy thrust. The objective of issuing this statement is part of the overall
strategy to provide greater understanding of the monetary policy objectives and measures in light of
a more complex and dynamic environment. In particular, it would help anchor expectations on
growth and inflation. Signalling the Bank’s policy intent through direct communication is aimed at
increasing the understanding and appreciation of money market participants, and thereby, facilitate a
more rapid transmission of the policy rate in the pricing of credit and longer-term rates, and thus
enhance the overall efficiency of the monetary transmission mechanism. The MPS is released four
times a year and would coincide with the release of Malaysia’s quarterly GDP performance. Between
the fixed scheduled dates, additional press statements would be issued if a policy change is
warranted.
The issuance of the MPS is part of the ongoing process to enhance market understanding of the
Bank’s financial and economic assessments, operations and policy objectives. Since 1998, in a drive to
ensure symmetric information to the public, the Bank has disseminated a wider range of information,
which included among others, on-line information on its daily liquidity forecasts and money market
operations. Over the years, there has also been significant enhancement of the coverage of
information available through the Bank’s website, and reduction in the time lag of data releases to
the public.


4.H-62
62
MONETARY DEVELOPMENTS IN 2003
In 2003, low interest rates, ample liquidity and a
strengthened banking sector supported stronger
economic activity. Funds available in the banking
system increased during the year as a result of the
expansionary fiscal operations and stronger
balance of payments position. The underlying
ample liquidity continued to result in competitive
pricing of loans to selected sectors.
the average lending rate (ALR) declined further,
and at end-year was 39 basis points lower than
the end-2002 level. While the BLR of finance
companies declined by 55 basis points, the ALR of
finance companies, nevertheless, declined by a
larger magnitude of 64 basis points as fixed rates
on hire purchase for passenger cars had been on
a declining trend. The lower hire purchase rates
were due to greater competition for loans in the
passenger car market.
Monetary conditions remained supportive of economic expansion.
Low interest rates, ample liquidity and a strengthened banking
sector contributed to increased financing to the private sector.
Following the 50 basis point reduction in the
policy rate in May, the lending rates of banking
institutions declined further. The commercial
banks reduced their Base Lending Rate (BLR) by
39 basis points. As the component of lower cost
new loans increased relative to the existing loans,
Deposit rates declined by a smaller margin, with
the one to 12-month fixed deposit rates of the
commercial banks declining by 20-30 basis points.
Notwithstanding the reduction in nominal deposit
rates, the real rates of return (end year nominal
rates of return less inflation rate) on deposits with
Table 2.1
Interest Rates and Liquidity
2000
2001
2002
2003
2003
At end period (%)
Change (%)
3-month Intervention Rate
5.5
5.0
5.0
4.5
-0.5
Interbank rates
Overnight
2.77
2.76
2.71
2.72
0.01
1- month
3.05
2.97
2.99
2.99
0.00
Base lending rate (BLR)
Commercial banks
6.78
6.39
6.39
6.00
-0.39
Finance companies
7.95
7.45
7.45
6.90
-0.55
Average lending rate (ALR)
Commercial banks
7.46
6.67
6.50
6.11
-0.39
Finance companies
11.14
10.24
9.75
9.11
-0.64
Fixed deposit rates
Commercial banks
3-month
3.48
3.21
3.20
3.00
-0.20
12-month
4.24
4.00
4.00
3.70
-0.30
Finance companies
3-month
3.52
3.22
3.20
3.00
-0.20
12-month
4.27
4.01
4.00
3.68
-0.32
Savings deposit rates
Commercial banks
2.72
2.28
2.12
1.86
-0.26
Finance companies
3.44
2.94
2.65
2.18
-0.47
Average during the period (%)
Change (%)
Nominal interest rate differential
Malaysia - United States
-3.32
-0.49
1.31
1.66
0.35
Malaysia - Singapore
0.73
1.31
2.23
2.27
0.04
At end period (RM billion)
Change (RM b)
Resource surplus (+)/gap (-)1
73.7
67.4
76.2
105.8
29.6
Adjusted resource surplus (+)/gap (-)2
36.1
20.8
24.6
45.8
21.2
At end period (%)
Change (%)
Loan-deposit ratio
84.3
85.9
84.9
80.9
-4.0
Financing-deposit ratio3
92.3
95.7
95.1
91.7
-3.4
1
Deposits less loans.
2
Deposits less loans and holdings of private debt securities.
3
Includes holdings of private debt securities.


Monetary and Fiscal Developments
4.6.3-63
63
commercial banks were higher at end-2003, at
0.66% for savings deposits (at end-2002: 0.42%)
and ranging from 1.8% for the 3-month fixed
deposit to 2.5% for the 12-month maturity (1.5%
and 2.3% at end-2002). Savings and fixed deposits
of individuals increased by 8.8% in 2003 and as a
share of GDP, remained stable at 57% at end-2003.
Following significantly improving cash flows, total
deposits of businesses increased significantly, by
14.9%, and as a share of GDP, rose to 46.9% at
end-2003 (at end-2002: 44.4%).
By international standards, lending rates in Malaysia
remained competitive, and the spread between
lending and deposit rates was among the lowest.
Low interest rates, amidst higher disposable income,
particularly in the second half-year, led to stronger
demand for financing by the private sector from
both the banking sector and the capital market to
finance consumption and business expansion. In
addition, a larger amount of funds was also raised
by businesses in the PDS market to restructure and
refinance debts, to strengthen their balance sheets
and to prepare for future investment opportunities.
Cumulatively, loans disbursed by the banking
system for working capital, trade financing and
fixed investment, and funds raised in the capital
market increased by 9% compared with the
previous year. While the banking system remained
the main source of finance for the economy, there
was further diversification in the sources of
financing. Loan disbursements by the banking
system which rose by 7.3%, accounted for 89.7%
of total gross financing in 2003 while funds raised
from the capital market rose at a stronger rate of
BLR-CB 
ALR-CB 
BLR-FC 
ALR-FC 
Graph 2.1 
Lending Rates: Commercial Banks and 
Finance Companies
J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N D
1998
1999
2000
2001
2002
2003
5
6
7
8
9
10
11
12
13
14
15
16
%
    6.00
6.11
6.90
9.11
Graph 2.2 
International Comparison of Interest Rates as at end-2003
Spread between Lending and Deposit Rates
2.53
2.91
3.00
3.31
4.63
4.96
4.85
4.93
5.91
8.75
0
2
4
6
8
10
United Kingdom
Malaysia
United States
Thailand
Singapore
Korea
Philippines
Chinese Taipei
Hong Kong China
Indonesia
Prime Lending Rates
4.00
4.25
5.00
5.63
6.00
6.50
7.04
9.34
9.35
18.00
0
2
4
6
8
10
12
14
16
18
20
United States
Hong Kong China
Singapore
Malaysia
Thailand
Chinese Taipei
United Kingdom
Korea
Philippines
Indonesia
%
%
11.9%
31.9%
5.8%
9.8%
Annual growth
9.0%
200
250
300
350
400
450
500
550
1999
2000
2001
2002
2003
RM billion
Graph 2.3 
Private Sector Gross Financing through the 
Banking System and the Capital Market 
Loans disbursed
PDS issued
Equity issued


4.H-64
64
26.6% to account for a small share of 10.3% of
financing to the private sector.
The success of the measures to promote growth and
depth in the PDS market was reflected in the rising ratio
of PDS outstanding as a percentage of GDP to 34.7% at
end-2003, while the ratio of bank loans to GDP trended
down to 120.9%. This is a significant development
compared to the 1998 level (PDS at 16.5% and banking
system loans at 147.2% of GDP respectively). In 2003,
businesses with strong credit profiles took advantage of
the low interest rate environment to lock in their funds in
long-term PDS. As a result, gross PDS financing increased
significantly by 60.5% during the year (-15.4% in 2002).
With the expansion of the PDS market, banking
institutions have also increased indirect financing of
the business sector through holdings of PDS,
accounting for approximately 7% of the loan base.
On a net basis, banking system outstanding loans
and holdings of PDS increased by 5.9%. The greater
diversification in financing sources and the focus on
promoting domestic sources of growth has led to a
shift in the profile of banking system loans. In
particular, with measures undertaken to enhance the
contribution of SMEs in the domestic economy and
the drive to promote private consumption growth,
banking institutions have accorded emphasis on
SMEs and the household sector.
Efforts by Bank Negara Malaysia to strengthen the
SME financing infrastructure have been important in
providing adequate and cost-effective funding to
support the growth of SMEs. Reflecting this,
outstanding loans to SMEs grew strongly by 10% in
2003 to reach a record high of RM82 billion. This
amount represented 38.4% and 17.3% respectively
of business and total loans outstanding. Meanwhile,
disbursements to SMEs amounted to RM87.1 billion.
Financing of SMEs via the special funds has expanded
significantly. As at end-2003, RM5.3 billion had been
approved to more than 14,000 borrowers,
representing an increase of 58.5% for the year as a
whole. Meanwhile, disbursements amounted to
RM4.1 billion, an increase of 82.9% over the
previous year. Excluding both the Special Relief
Table 2.2
Banking System1: Loan Indicators
During the year (RM billion)
Annual growth (%)
2000
2001
2002
2003
2001
2002
2003
Total
Loan applications
208.8
190.6
217.2
227.6
-8.7
14.0
4.8
Loan approvals
134.8
125.6
137.6
152.7
-6.8
9.5
11.0
Loan disbursements
360.7
373.5
411.6
441.7
3.5
10.2
7.3
Loan repayments
347.1
365.4
402.7
430.5
5.3
10.2
6.9
Change in loans outstanding2
21.2
16.1
19.8
21.8
3.9
4.6
4.8
Businesses
Loan applications
n.a.
n.a.
135.3
124.9
n.a.
n.a.
-7.7
Loan approvals
79.1
63.5
68.5
77.2
-19.7
7.9
12.7
Loan disbursements
270.2
270.4
282.0
303.4
0.1
4.3
7.6
Loan repayments
269.4
276.8
275.8
299.6
2.8
-0.4
8.6
Change in loans outstanding2
2.0
-5.6
-3.1
-5.1
-2.5
-1.4
-2.3
SMEs
Loan applications
n.a.
n.a.
n.a.
44.5
n.a.
n.a.
n.a.
Loan approvals
n.a.
n.a.
n.a.
25.7
n.a.
n.a.
n.a.
Loan disbursements
n.a.
n.a.
n.a.
87.1
n.a.
n.a.
n.a.
Change in loans outstanding2
2.9
4.0
…
7.4
5.7
…
10.0
Other businesses
Loan applications
n.a.
n.a.
n.a.
80.4
n.a.
n.a.
n.a.
Loan approvals
n.a.
n.a.
n.a.
51.5
n.a.
n.a.
n.a.
Loan disbursements
n.a.
n.a.
n.a.
216.4
n.a.
n.a.
n.a.
Change in loans outstanding2
-0.9
-9.6
-3.1
-12.5
-6.1
-2.1
-8.7
Households
Loan applications
n.a.
n.a.
81.9
98.5
n.a.
n.a.
20.2
Loan approvals
53.1
59.2
66.9
72.0
11.5
13.0
7.6
Loan disbursements
76.0
87.0
105.1
114.5
14.5
20.8
8.9
Loan repayments
65.1
71.5
83.7
94.1
9.9
17.0
12.4
Change in loans outstanding2
17.1
23.1
26.2
26.2
14.8
14.7
12.8
1 Includes Islamic banks.
2 The annual growth is for loans outstanding at end-period.
n.a.  Not available.


Monetary and Fiscal Developments
4.6.3-65
65
Guarantee Fund (SRGF) and the Rehabilitation Fund
for Small Businesses (RFSB), which were recently
introduced in 2003, the allocations for the remaining
four funds have been fully utilised, with a utilisation
rate of 109.7%. With the Central Credit Reference
Information System (CCRIS) in place, banking
institutions have been able to accelerate loan
processing and assess the viability of SMEs, given the
comprehensive and current credit profiles of all
borrowers available in the system.
Almost half the loan disbursements were channelled
to large businesses in the main sectors of the
economy, namely the manufacturing, wholesale and
retail trade; agriculture; and finance, insurance and
business services sectors. New loan approvals and
loan disbursements to large businesses were
significantly higher in the second half-year.
Nevertheless, there was a decline in outstanding
loans of large businesses. Better corporate health
and improving cash flow positions led to a greater
reliance on internal funds, and less on bank
borrowings to fund business activities. In addition,
the bulk of loans disbursed were primarily for short-
term working capital purposes. As a result, the high
level of disbursements was matched by a similar
volume of repayments, which resulted in a neutral
effect on loans outstanding.
Table 2.3
Special Funds for SMEs administered by Bank Negara Malaysia
RM million
%
Type of Fund
Allocations
Approvals Disbursements Repayments
Loans
Utilisation
Ratio of undrawn
Outstanding
Rate2
portion to approvals
As at end-2003
Fund For Food
1300.0
1410.8
1298.8
600.8
698.0
108.5
7.9
New Entrepreneurs Fund 2
1150.0
1077.2
806.7
36.1
770.6
93.7
25.1
Fund For Small and Medium Industries 2
2000.0
2284.9
1588.4
177.9
1410.4
114.2
30.5
Bumiputera Entrepreneurs Project Fund
300.0
437.7
361.5
269.1
92.4
145.9
17.4
Special Relief Guarantee Facility1
1000.0
40.3
0.0
0.0
0.0
4.0
100.0
Rehabilitation Fund for Small Businesses
800.0
0.0
0.0
0.0
0.0
0.0
0.0
Total
6550.0
5250.9
4055.4
1083.9
2971.4
80.2
22.8
Change since end-2002
Fund For Food
0.0
115.1
174.4
152.8
23.5
New Entrepreneurs Fund 2
650.0
425.0
480.9
26.6
454.2
Fund For Small and Medium Industries 2
1350.0
1236.0
1078.2
124.3
953.7
Bumiputera Entrepreneurs Project Fund
0.0
121.0
104.1
122.7
-18.5
Special Relief Guarantee Facility1
1000.0
40.3
0.0
0.0
0.0
Rehabilitation Fund for Small Businesses
800.0
0.0
0.0
0.0
0.0
Total
3800.0
1937.4
1837.6
426.4
1412.9
1
This is only a guarantee fund.
2
As a percentage of total loans approved to the fund’s total allocations.
2002
2003
Graph 2.4 
Loan Disbursements by Sector: Value and Share
Others
(RM107 b; 26%)
Passenger
cars
(RM26 b; 6%) 
Credit cards
(RM25 b; 6%)
Residential
property
(RM30 b; 7%) 
Finance,
insurance and
business services
(RM24 b; 6%) 
Construction
(RM30 b; 7%)
Wholesale and retail
trade, restaurants
and hotels
(RM65 b; 16%)  
Manufacturing
(RM105 b; 26%)
Manufacturing
(RM110 b; 25%)
Wholesale and
retail trade,
restaurants and
hotels
(RM70 b; 16%)  
Construction
(RM28 b; 6%)
Finance,
insurance and
business
services
(RM37 b; 8%)  
Residential
property
(RM36 b; 8%) 
Credit cards
(RM31 b; 7%)
Passenger
cars
(RM25 b; 6%) 
Others
(RM106 b; 24%)


4.H-66
66
On an outstanding basis, bank lending to the
household sector expanded at a high annual rate of
12.8% in 2003. The low interest rates and
competitive financing packages offered by banking
institutions continued to stimulate demand for loans
from households, with the bulk of credit channelled
towards the purchase of residential property. In the
residential property market, the value of loan
applications increased by 24.8% while loan
disbursements were higher by 20%.
Credit card spending, as reflected by loan
disbursements, grew at a rate of 20%. Outstanding
balances on credit cards increased by 15.5%
(2002: 19.5%) to RM12.2 billion, representing 2.6%
of total loans outstanding at end-year (at end-2002:
2.3%). While credit card spending on goods and
services continued to increase, households are not
over leveraged. Total overdue balances amounted to
14.1% of outstanding credit card balances at end-
2003, which was lower than the average over the
previous five years of 14.6%. Similarly, balances
overdue for more than 3 months were relatively
contained at 4.4% compared to the average over the
previous five years of 7.2%.
On the whole, as the majority of household loans
were relatively long-term in nature, the continued
growth in these loans has led to an increase in the
share of household loans as a percentage of total
loans outstanding to 48.8% at end-2003 (at end-
2002: 45%) and as a percentage of GDP, to 58.9%.
These percentages are similar to those recorded
among regional countries, and lower than those
registered in several of the advanced economies.
While the household debt exposure has become a
cause for concern in some countries, indicators
suggest that the Malaysian household balance sheet
has remained strong and debt servicing is sustainable
with the potential for further expansion in
consumption growth. Underpinning the resilience of
the household balance sheet, is the high savings rate,
increasing disposable income, a stable property
Table 2.4
Banking System1: Loans Outstanding
Annual change
% share of
2002
2003
total loans at
RM billion
end-2003
Banking system loans, of which
extended to:
Business enterprises
-3.1
-5.1
45.1
Individuals
26.2
26.2
48.8
By sector:
Agriculture, hunting, forestry
and fishing
-0.1
-1.1
2.2
Mining and quarrying
-0.3
0.1
0.2
Manufacturing
-1.2
-0.2
12.9
Electricity, gas and water supply
1.6
-1.7
1.1
Wholesale and retail trade,
restaurants and hotels
1.0
2.1
8.3
Broad property sector
10.8
14.7
39.8
   Construction
-1.7
-2.7
6.2
   Purchase of residential property
14.2
16.2
24.6
   Purchase of non-residential
property
…
1.1
6.1
   Real estate
-1.6
…
2.9
Transport, storage and
communication
-0.4
1.0
2.3
Finance, insurance and
business services
-2.5
-0.6
6.2
Consumption credit
12.0
8.9
18.8
  Of which:
Credit cards
1.8
1.6
2.6
Purchase of passenger cars
9.6
6.5
13.0
Purchase of securities
0.2
-1.7
4.2
Purchase of transport vehicles
-0.5
0.3
0.7
Community, social and
personal services
-0.3
-0.7
1.0
Others
-0.4
0.9
2.3
Total loans outstanding 2
19.8
21.8
100.0
1
Includes Islamic banks.
2
Includes loans sold to Cagamas.
Numbers may not add-up due to rounding.
4
6
8
10
12
14
1999
2000
2001
2002
2003
3
5
7
9
11
13
15
RM billion
%
Overdue balances
Share of balances overdue for more than 3 months 
to total balance (RHS)
Share of overdue balances to total balance (RHS)
Current balances
Graph 2.5
Banking System: Outstanding Credit Card
Balances (at end-period)
Cash advances
% of cash advances to total transactions (RHS)
Purchases
5
10
15
20
25
30
35
1999
2000
2001
2002
2003
RM billion
0
2
4
6
8
10
12
14
16
18
%
Graph 2.6
Banking System: Credit Card Transactions


Monetary and Fiscal Developments
4.6.3-67
67
market, an improvement in the stock market as well
as stable labour market conditions. As a leverage
indicator, the ratio of household deposits to loans
remained at greater than one, demonstrating that
households continued to accumulate wealth. Lower
lending rates have also been instrumental in
sustaining households’ financial net worth and the
capacity of the sector to service debt. With falling
rates, interest payments incurred on new loans have
been lower and refinancing activity has also
increased, allowing consumers to pay down earlier
higher cost loans.
The non-performing loans (NPLs) of the household
sector has also remained manageable. As a
proportion of total household loans, the gross NPL
ratio for the sector declined to 8% at end-2003
(12.2% at-end 1998 and 8.5% at end-2002). In
particular, the gross NPL ratio for the purchase of
residential property remained unchanged at 8.7%.
The default rate on credit card loans, an emerging
concern in some economies, had declined to a level
less than one-third the rate registered at the height
of the financial crisis in 1998.
Bank Negara Malaysia’s efforts to improve the
financial infrastructure to facilitate bank lending
have also ensured that banking institutions assign
appropriate risk evaluation in lending to this
sector, thereby maintaining the quality of
household debt. In particular, the implementation
of risk-based measures included setting up CCRIS
and effecting credit card guidelines. To facilitate
the assessment of risks across non-bank credit
institutions, such as charge card companies, the
information in CCRIS is also extended to these
institutions, with the necessary “firewalls” to
protect customer information. These risk
management measures have enhanced the
capacity of lenders to extend loans without
creating unnecessary vulnerabilities in the real and
financial sectors.
In tandem with higher financing by the banking
system, broad money, M3, expanded at a faster
annual rate of 9.7% at end-2003 (at end-2002:
6.7%). The growth in M3 was also due to stronger
external operations arising from a higher trade
surplus, sustained foreign direct investment and
higher portfolio inflows; as well as expansionary
Government operations. Growth in M3 was broadly
consistent with nominal demand during the year.
In terms of components, transaction balances,
consisting of currency in circulation and demand
deposits, grew strongly by 14.6% at end-2003 (at
end-2002: 10.3%), in line with higher consumption
spending, higher turnover of the KLSE CI, and
improved business activity. Among broad quasi-money
0
50
100
150
200
250
1997
1998
1999
2000
2001
2002
2003
RM billion
0
2
4
6
8
10
12
14
%
Graph 2.7
Banking System: Loans to Households
(at end-period)
Total household loans
Share of household NPLs to total loans (RHS)
Share of household NPLs to household loans (RHS)
0
2
4
6
8
10
12
14
16
M1=14.6
M1=14.6
M3=9.7
M3=9.7
M2=11.1
M2=11.1
%
Graph 2.8
Money Aggregates: Annual Growth
J
F M A M J
J
A
S
O N D J
F M A M J
J
A S O N D
2002
2003
Table 2.5
Broad Money, M3
Change (RM billion)
2002
2003
M3
31.6
48.5
Currency
1.8
2.2
Demand deposits
6.7
11.2
Broad quasi money
23.1
35.1
Fixed deposits
12.6
17.1
Savings deposits
5.6
5.6
NIDs
3.6
2.0
Repos
2.5
8.0
FX deposits
-1.2
2.4
Determinants of M3
Net claims on Government
11.5
12.9
Claims on private sector
27.7
32.4
Loans
19.3
21.7
Securities
8.4
10.7
Net external operations
1.2
19.5
Bank Negara Malaysia
7.6
27.1
Banking system
-6.3
-7.6
Other influences
-8.9
-16.3


4.H-68
68
Developments in the ringgit foreign exchange
market were driven mainly by the depreciation of
the US dollar and the consequent realignments in
the currencies of most major and several regional
economies. Throughout the year, the US dollar was
mainly affected by concerns over the large US
current account deficit and the positive interest rate
differentials in favour of other major economies.
The corresponding adjustments to the US dollar
were seen mainly in major currencies, including the
Australian dollar, the Canadian dollar and the euro,
which appreciated by 32.7%, 21.7% and 20% in
2003. The yen and pound sterling appreciated to a
lesser degree of 11% and 11.1% respectively.
Given the pegged exchange rate regime, the ringgit
depreciated against the euro (-16.7%), the pound
components, the increase was mainly in terms of
fixed deposits and to a lesser extent, repos. The
increase in fixed deposits was primarily in the 9-12
month maturity and was spread out during the
year, reflecting to some extent, the desire of
depositors to hold fixed deposits as an asset class.
In contrast to the previous year, business deposits
recorded the biggest increase and were mainly short-
term fixed deposits. The stronger financial position of
corporations was in line with improving profitability
and cash flow, higher trade surplus and faster
repatriation of export proceeds. Meanwhile, higher
personal disposable income and financial wealth of
households sustained the growth in deposits of this
sector, which grew at a stronger rate in 2003
compared to the previous year.
Amid considerable volatility in international currency markets,
the ringgit peg continues to provide a stable and predictable
environment to promote trade and investment as well as
supporting the structural changes in the Malaysian economy.
EXCHANGE RATE DEVELOPMENTS
In 2003, the system of a fixed exchange rate for
ringgit at RM3.80 to US$1 was maintained with
strengthening economic fundamentals. The fixed
exchange rate regime has been in place for the sixth
year since it was introduced in September 1998.
Amidst volatility in the foreign exchange markets
and debates on effects of the volatility of major
currencies on the ringgit peg, the ringgit continues
to fulfil its intended objective of supporting the
expansion of trade and investments in Malaysia.
Table 2.6
Movement of the Ringgit
RM to one unit of foreign currency1
Annual change (%)
Change (%)
1997
1998
2002
2003
2002
2003
End-June ’97-
2 Sep.’98 -
End-June2
Sept. 23
End-Dec.
End-Dec. 2003 End-Dec. 2003
SDR
3.5030
5.1177
5.1474
5.6264
-7.3
-8.5
-37.7
-9.0
US$
2.5235
3.8000
3.8000
3.8000
0.0
0.0
-33.6
0.0
S$
1.7647
2.1998
2.1887
2.2342
-6.2
-2.0
-21.0
-1.5
100 yen
2.2088
2.7742
3.2020
3.5546
-9.6
-9.9
-37.9
-22.0
Pound sterling
4.1989
6.3708
6.0924
6.7678
-9.5
-10.0
-38.0
-5.9
Swiss franc
1.7368
2.6450
2.7386
3.0632
-16.9
-10.6
-43.3
-13.7
Euro4
–
–
3.9811
4.7783
-15.4
-16.7
–
–
100 Thai Baht
9.7470
9.3713
8.8096
9.5947
-2.4
-8.2
1.6
-2.3
100 Indonesian rupiah
0.1038
0.0354
0.0425
0.0449
-14.1
-5.3
131.4
-21.1
100 Korean won
0.2842
0.2827
0.3197
0.3180
-9.8
0.5
-10.6
-11.1
100 Philippine peso
9.5878
8.8302
7.1462
6.8431
3.1
4.4
40.1
29.0
1
US$ rates are the average of buying and selling rates at noon in the Kuala Lumpur Interbank Foreign Exchange Market.
Rates for foreign currencies other than US$ are cross rates derived from rates of these currencies against the US$ and the RM/US$.
2
End-June 1997 represents pre-Asian Financial Crisis levels.
3
Ringgit was fixed at US$1 = RM3.8000 on 2 September 1998.
4
The euro began to be traded on 4 January 1999 (EUR 1= RM4.5050).
sterling (-10%) and the yen (-9.9%), along with the
US dollar in 2003. The ringgit depreciated to a
lesser extent against most regional currencies in the
range of 2 – 8%. Against the Korean won and the
Philippine peso, the ringgit appreciated. The ringgit
remained stable against the Chinese renminbi and
the Hong Kong dollar, as these currencies are also
pegged to the US dollar.
Despite considerable volatility in the foreign
exchange market, the pegged exchange rate regime
has remained sustainable with the ringgit close to


Monetary and Fiscal Developments
4.6.3-69
69
STG
Euro
US$
100 Yen
Graph 2.9 
Exchange Rate of the Malaysian Ringgit 
against Major Currencies
(Weekly average)
Ringgit fixed at US$1=RM3.80
RM/foreign currency
RM/foreign currency
3
2
4
5
6
7
8
2
3
4
5
6
7
8
M
J
S D M J
S D M
J
S D M J
S D M J
S D
J
S D
M
1998
1999
2000
2001
2002
2003
75
85
95
105
115
D J FM A MJ JA S O NDJ F M A MJ J AS O ND J FM A M JJ AS O ND
2001
2002
2003
75
85
95
105
115
Index (Dec. 2000=100)
Index
(End-month)
Peso
S$
Rupiah
Won
Baht
Graph 2.10
Exchange Rate of the Malaysian Ringgit 
against Selected Regional Currencies
Note: An increase in the index represents an appreciation of the currency
 
against the ringgit.
•
Impact on overall external debt and debt
servicing due to the ringgit depreciation had been
manageable, given that only 23% of Malaysia’s
total external debt is denominated in currencies
other than the US dollar.
Under these circumstances, the ringgit peg, on
balance, continues to provide significant advantages
to the overall economy. The stability of the exchange
rate has been effective in improving the longer-term
competitiveness of the Malaysian corporate sector by
creating incentives for structural adjustments to
increase productivity, thereby enhancing the country’s
future growth prospects.
FISCAL POLICY AND OPERATIONS
The Government presented on 20 September 2002 a
moderately expansionary budget for 2003. The fiscal
deficit was, therefore, budgeted at 4% of GDP
, lower
than the fiscal deficit of 5.6% in 2002. The
Malaysian economy was expected to strengthen in
2003, benefiting from the recovery in the major
industrial countries and stronger growth in the
region, with the sustained growth in intra-regional
trade. The private sector was envisaged in the Budget
to play a larger role in sustaining domestic-driven
growth. Private sector investment was projected to
return to positive growth due to expected
improvement in the financial position of
corporations, following the structural adjustments
undertaken since the crisis, emerging business
opportunities in selected sectors as well as the
improved business environment. A major thrust of
the 2003 Budget was, therefore, designed to provide
the enabling environment and incentives to revitalise
the private sector to resume its role as the main
engine of growth. Policies in the Budget thus focused
on the enhancement of the supportive incentives to
promote private sector ventures, especially into new
growth areas.
The 2003 Budget contained both expenditure
allocation and tax incentives to generate higher
growth in the promoted sectors. In terms of budget
allocation, emphasis was given towards enhancing
the quality of education and upgrading manpower
skills. The tax incentives included the reduction in
corporate tax for small- and medium-scale
enterprises (SMEs) from 28% to 20% for chargeable
income of up to RM100,000 and tax incentives for
manufacturers of machinery and auto parts makers
to promote high value activities in the manufacturing
sector. At the same time, an option was introduced
its fair value. There are no signs of the ringgit being
misaligned. On the domestic front:
•
Inflation and unemployment remained low;
•
Current account surplus in the balance of
payments remained at sustainable levels;
•
Continued increase in reserves throughout 2003;
•
External debt has been kept at manageable
levels with low debt servicing to export ratio;
and
•
Highly capitalized banking system with further
improvements to asset quality ratios.
On the external front, developments were benign
on Malaysia’s exchange rate regime:
•
Depreciating with the US dollar had benefited
exports, offsetting the impact on imports;
•
Depreciation had a minimum impact on
imported inflation since the ringgit did not
depreciate against the US dollar and imports
denominated in currencies other than the
US dollar accounted for only a small share of
total imports. In addition, the share of imported
components in the CPI basket remained small,
at about less than 10%; and


4.H-70
70
for pioneer status holders to qualify for reinvestment
allowance if their Pioneer Status were surrendered
for cancellation. For the agriculture sector, various
incentives were introduced for consolidation of
smallholdings, cultivation of rubber wood trees,
deep-sea fishing, food processing and modernisation
of poultry farming.
The actual outturn of fiscal deficit for 2003 was
5.3% of GDP
, due mainly to counter-cyclical
expenditure to support growth. Revenue
performance was strong in 2003 with higher
proceeds from the sale of Government’s shares in
selected public listed companies. During the year, the
Government unlocked some of its assets to optimise
returns from its ownership of high-value assets and
to achieve greater flexibility in fiscal management. At
savings rate amidst ample liquidity in the banking
system, the Government financed its fiscal deficit
through non-inflationary domestic sources. Given the
low interest rate environment, new issues of MGS
with maturities of 5 and 10 years were raised at
coupon rates ranging between 3.702-3.917% and
between 4.24-4.41% for those with maturity of 15
years. As part of prudent debt management, the
Government exercised vigilance on its external
indebtedness. Recourse to external borrowings was
limited to drawdown of loans committed earlier and
refinancing of several loans at lower cost, thereby
reducing future debt servicing obligations.
The Federal Government debt amounted to 48.2%
of GDP as at end-2003 while the debt servicing
remained low at 14% of operating expenditure or
Fiscal policy remained supportive of growth in 2003. While
budgetary operations remained expansionary, fiscal management
focused at ensuring a balance between sustaining the near-term
growth and achieving fiscal consolidation.
the same time, such exercise would provide the
opportunity towards gradual increases in the “free
float” and liquidity of companies with large
Government shareholdings and thus benefit trading
in the Malaysia Securities Exchange Berhad.
Higher-than-expected expenditure in 2003 was due
mainly to the increased expenditure to minimise the
spill-over effects from the less favourable global and
regional developments in the first half of 2003. An
Economic Package amounting to RM7.3 billion was
aimed at containing the adverse impact from tensions
in the Middle East and the outbreak of Severe Acute
Respiratory Syndrome (SARS) in the region.
The positive impact of the Economic Package
measures coupled with other factors including low
interest rates, high commodity prices and improved
cashflow position of companies, strengthened
aggregate domestic demand. Together with the
recovery in external demand, the private sector’s
contribution to economic growth rose to 2.5
percentage points in 2003 (0.4% in 2002). Stronger
consumption spending and recovery in external
demand supported higher investment activities.
Private sector investment turned around to register
the first positive growth since 2000.
While fiscal expansion contributed to GDP growth, it
did not exert pressure on domestic consumer prices
and interest rates. Taking advantage of the high
2.7% of GDP
. Similarly, external debt of the Federal
Government declined in 2003 to 9.5% of GDP (2002:
10.1%), enhancing Malaysia’s external position.
Consolidated Public Sector
In 2003, the consolidated public sector registered a
slightly smaller overall deficit of 0.4% of GDP
. The
improved position emanated from better revenue
performance of the general government and the
non-financial public enterprises (NFPEs) as well as
lower development expenditure of the NFPEs.
Development expenditure of the general government
was higher mainly to finance the Economic Package
introduced in May 2003 to mitigate the adverse
impact of global economic uncertainties and regional
health threat on domestic economic activities.
Federal Government Finance
The Federal Government registered an overall deficit
of 5.3% of GDP in 2003 (2002: -5.6%), higher than
the 4% targeted in the 2003 Budget. The larger-
than-planned deficit was due to higher counter-
cyclical expenditure as well as proactive response to
the risk of a private sector pull-back due to global
political uncertainties and SARS. The threat of
global slowdown in the first half of the year
prompted the Government to implement stronger
expansionary measures to sustain the growth
momentum. Despite the higher fiscal deficit, the
total debt of the Federal Government remained
manageable at 48.2% of GDP as at


Monetary and Fiscal Developments
4.6.3-71
71
end-2003. Debt servicing expenditure also
remained low in terms of operating expenditure
and GDP. External debt to GDP ratio declined in
2003 as the bulk of financing was raised from
non-inflationary domestic sources.
In 2003, Federal Government revenue increased by
11.1% to RM92.8 billion, accounting for 23.7% of
GDP. The better revenue performance was due to
significantly higher non-tax revenue, which
accounted for a larger share of total revenue (30%).
Higher receipts were registered in almost all
components; investment income, licence and
permits, petroleum royalties and service fees . In
particular, investment income was higher due to
proceeds from the sale of the Government’s shares
in selected public listed companies. The
Government disposed of some of its assets to
optimise returns from the ownership of high-value
assets and achieve a greater flexibility in fiscal
management.
Collection from taxes declined slightly by 2.9%
(-RM2 billion), mainly attributable to lower receipts
Table 2.7
Consolidated Public Sector Finance
2002
2003e
2004f
RM million
General government1
Revenue
96,763
110,408
109,389
Operating expenditure
75,450
84,809
88,538
Current surplus of general
government
21,312
25,600
20,850
Current surplus of NFPEs2
45,324
44,627
41,890
Public sector current
surplus
66,637
70,227
62,741
% of GDP
18.5
17.9
15.0
Net development expenditure
69,125
71,951
66,687
General government
36,828
43,727
37,563
NFPEs
32,297
28,225
29,124
Overall balance
-2,488
-1,725
-3,946
% of GDP
-0.7
-0.4
-0.9
1
Comprises Federal Government, state governments, statutory bodies
and local governments.
2
Refers to 35 NFPEs in 2003 and 2004.
e Estimate
f
Forecast
Source: Ministry of Finance, state governments and non-financial public
enterprises
Table 2.8
Federal Government Finance
2002
2003p
2004r
RM million
Revenue
83,515
92,804
89,966
Operating expenditure
68,699
75,224
79,642
Current account
14,816
17,580
10,324
% of GDP
4.1
4.5
2.5
Net development expenditure
35,069
38,508
29,084
Gross development
expenditure
35,977
39,353
29,960
Less: Loan recoveries
908
845
876
Overall balance
-20,253
-20,928
-18,760
% of GDP
-5.6
-5.3
-4.5
Sources of financing:
Net domestic borrowing
6,076
23,250
–
Gross borrowing
18,000
41,850
–
Less: Repayment
11,924
18,600
–
Net foreign borrowing
8,019
-3,709
–
  Gross borrowing
10,465
3,144
–
  Less: Repayment
2,446
6,853
–
Special receipts
62
0
–
Realisable assets1 and
adjustments
6,096
1,387
–
Total
20,253
20,928
–
1
Includes changes in Government’s Trust Fund balances.
A positive (+) sign indicates a drawdown in the accumulated realisable assets.
p Preliminary
r
Revised
Source: Ministry of Finance
Graph 2.11
Federal Government Finance
Federal Government Debt
Debt as 
% of GDP
Overall balance as
% of GDP
0
20
40
60
80
100
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003p
RM billion
Current account
Revenue
Operating expenditure
Gross development expenditure
-80
-60
-40
-20
0
20
40
60
80
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003p
-8
-6
-4
-2
0
2
4
6
8
Overall balance
(RHS)
Domestic debt
External debt
Debt level remained
manageable
-5.3%
p Preliminary


4.H-72
72
from income taxes and sales tax on petroleum
products. The collection of tax revenue was affected
by the negative impact of geopolitical developments
and the outbreak of SARS on business activities.
Other contributory factors included tax incentives
and exemptions introduced in the 2003 Budget and
measures introduced in the May Economic Package.
These tax initiatives included the reduction of the
tax rate from 28% to 20% on chargeable income
of up to RM100,000 for small and medium-scale
companies and the suspension of income tax
instalment payments for travel agencies beginning 1
June to 31 December 2003. Additionally, the lower
company income tax collection was due to the
implementation of the current year tax assessment
system in 2000 and self-assessment system in 2001.
As companies overpaid income taxes during the
transition period, these were set off against tax
expenses in 2003. Meanwhile, petroleum
income tax rose by 10.9% due mainly to higher
crude oil prices.
Import and excise duties collected were higher
reflecting the stronger aggregate domestic demand.
Other indirect taxes collected, namely sales and
service tax, were lower. In particular, the lower sales
tax was due to the higher tax exemption for
petroleum products. In 2003, a higher tax exemption
was provided to oil companies to stabilise the retail
prices of petroleum products. The weighted average
price of Malaysian crude oil was higher at US$30.30
per barrel in 2003, compared with US$25.24 per
barrel in 2002. The decline in service tax collected
(-7.9%) was mainly the result of tax exemption. In
the restaurants and hotels sub-sector, the exemption
Table 2.9
Federal Government Revenue
2002
2003p
2002
2003p
RM million
Annual change (%)
Tax revenue
66,860
64,891
8.7
-2.9
% of GDP
18.5
16.6
Direct taxes
44,351
43,016
5.4
-3.0
Income taxes
42,237
40,690
5.2
-3.7
Companies
24,642
23,990
18.6
-2.6
Petroleum
7,636
8,466
-22.5
10.9
Individuals
9,889
7,984
4.8
-19.3
Others
69
251
-1.4
263.5
Real property gains tax
319
264
40.7
-17.1
Stamp duties
1,732
2,008
5.0
15.9
Others
63
53
-26.2
-15.9
Indirect taxes
22,509
21,875
16.1
-2.8
Export duties
803
1,157
-7.3
43.9
Import duties
3,668
3,919
14.9
6.9
Excise duties
4,745
5,031
14.9
6.0
Sales tax
9,243
7,965
25.7
-13.8
Service tax
2,214
2,038
14.9
-7.9
Others
1,836
1,765
-4.5
-3.8
Non-tax revenue
16,655
27,913
-7.9
67.6
Total revenue
83,515
92,804
5.0
11.1
% of GDP
23.2
23.7
p Preliminary
Source: Ministry of Finance
Graph 2.12 
Composition of Federal Government Revenue, 2003 (% share)
Direct taxes
46.4%
Companies
25.9%
Petroleum
9.1%
Excise duties
5.4%
Export duties
1.2%
Import duties
4.2%
Others
1.9%
Service tax
2.2%
Sales tax
8.6%
Individuals
8.6%
Others
2.8%
Non-tax revenue 
30.1% 
Indirect
taxes
23.6%
Total Revenue:  RM92.8 billion
on service tax was granted for the period June-
December 2003. In the 2003 Budget, courier services
and selected professional services provided to
companies within the same group were given
tax exemption.
The expansionary budgetary operations and the
Government’s Economic Package implemented in
May to support growth and strengthen further the
long-term productive capacity of the economy


Monetary and Fiscal Developments
4.6.3-73
73
resulted in gross expenditure rising by 9.5% to
RM114.6 billion.
Operating expenditure, which accounted for two-
thirds of total Federal Government expenditure,
increased by 9.5% to RM75.2 billion. The total wage
bill, which was the largest component of operating
expenditure (29%), was higher, due to the
implementation of the Malaysian Remuneration
System as well as the payment of monthly critical
allowances for doctors and medical staff arising from
the outbreak of SARS. While debt-service charges
increased, their share to operating expenditure was
contained at 14% (2002: 14.1%).
Outlays on supplies and services were higher due to
measures introduced to enhance productivity and
efficiency (increased expenditure for professional
services and small repairs and maintenance). Other
transfer payments were higher due mainly to grants
and transfers to Government agencies for
development and maintenance purposes. Payment
for subsidies in 2003 was lower. As part of the
Government’s policy to reduce the subsidy on
petroleum products, the retail prices of petrol, diesel
and liquefied petroleum gas (LPG) were raised by two
sen with effect from 1 March.
During the year, gross development expenditure
rose by 9.4% to RM39.4 billion. The bulk of the
outlays were extended to the social and economic
services sectors (80%).
As in the past, the thrust of expenditure was on
human resource development. In 2003, education
and training expenses continued to be the largest
component of development expenditure (26% of
total). Expenses were channelled mainly towards
constructing and upgrading schools, matriculation
centres, polytechnics and other institutions of
higher learning as well as for computerisation
programmes and the acquisition of teaching aids.
Meanwhile, the construction of new hospitals as
well as upgrading existing hospitals and rural and
health clinics were the main factors accounting for
the increase in spending for health. Expenditure on
housing was also higher as the Government
continued to implement housing programmes for
public sector personnel and the lower income
group. The Government also increased spending on
social and community services, mainly for youth
programmes, small projects in new local housing
estates, development work carried out in Putrajaya
and Cyberjaya and acquisition of vehicles for
community work.
In the economic services sector, a higher amount
was spent on transportation, mainly in constructing
new roads and bridges, upgrading existing roads
and improving and increasing the capacity of the
railroad system, ports and airports. Spending under
the trade and industry sub-sector was focussed on
the provision of infrastructure facilities, promotion
of small and medium-sized industries (SMIs),
industrial research and technological development
and promotion of tourism. Under the Economic
Package announced in May, a total of RM500
million was allocated to development financial
institutions (DFIs) as equity to support their efforts
in financing small businesses. Outlays on agriculture
and rural development remained high, reflecting
flood- mitigation projects and the continuous
modernisation programme involving the building
and upgrading of infrastructure facilities such as
rural roads, the water supply network and
electrification.
The increase in expenditure for general administration
was largely to cater for ICT development in various
Government agencies to further improve the quality
and delivery of services. Spending for defence and
internal security was mainly under the modernisation
programme for the armed forces and police.
Federal Government total debt outstanding
increased by 14.4% to RM188.8 billion or 48.2% of
GDP as at end-2003. Higher borrowings from the
domestic market resulted in domestic debt
outstanding rising to RM151.5 billion as at end-2003
Table 2.10
Federal Government Operating Expenditure by
Object
2002
2003p
2002
2003p
RM million
% share
Emoluments
20,242
21,721
29.5
28.9
Supplies and services
11,269
13,968
16.4
18.6
Asset acquisition
968
1,409
1.4
1.9
Debt service charges
9,669
10,546
14.1
14.0
Pensions and gratuities
5,134
5,870
7.5
7.8
Subsidies
3,677
2,679
5.4
3.6
Other grants and transfers1
15,949
16,324
23.2
21.7
Other expenditure2
1,791
2,706
2.6
3.6
Total
68,699
75,224
100.0
100.0
% of GDP
19.0
19.2
1
Includes grants and transfers to state governments as well as public agencies
and enterprises.
2
Includes grants to international organisations, insurance claims and gratuities
and others.
p Preliminary
Source: Ministry of Finance


4.H-74
74
or 38.6% of GDP (35.7% of GDP). The bulk of
Government’s financing requirements (93%) was
financed from domestic sources. Recourse to external
borrowings was limited to the drawdown of loans
while several external loans were refinanced to take
advantage of tighter spreads arising from Malaysia’s
improved ratings. Overall, the prevailing low interest
rate environment enabled the Government to raise
funds at low cost and hence, minimised future debt
servicing. The regular issue of Government securities
in the domestic market also facilitated the
development of a more reflective benchmark yield
curve while deepening the domestic bond market.
In 2003, total gross borrowings of the Federal
Government amounted to RM45 billion, compared
with RM28.5 billion in 2002. The higher gross funds
raised was to finance both the fiscal deficit as well as
to roll-over maturing debt. Net borrowings of the
Federal Government rose to RM19.5 billion, from
RM14.1 billion in 2002. As revenue was more than
adequate to finance operating expenditure, the net
funds raised were used only to finance development
expenditure. During the year, the Treasury Housing
Loans Fund recorded a net borrowing to meet the
higher demand for housing loans by civil servants.
The high domestic savings rate, coupled with ample
liquidity in the banking system, allowed the Federal
Government to raise funds required from the
domestic market, without crowding out private
sector. Malaysian Government Securities (MGS) with
maturities of 5 and 10 years were issued at coupon
rates ranging between 3.702-3.917% (3.15-
4.053% for funds raised in 2002) and between
4.24-4.41% for those with a maturity of 15 years.
There were no issues of 15-year MGS in 2002.
During the year, the Federal Government floated
twelve issues of MGS totalling RM39.9 billion by
open tender through principal dealers and private
placements and raised a single issue of the
Government Investment Issues (GIIs) amounting
to RM2 billion. The Government reopened eight
of its existing conventional issues to increase their
respective issue sizes and enhance liquidity in
order to develop the secondary market. The
Table 2.11
Federal Government Development Expenditure
by Sector
2002
2003p
2002
2003p
RM million
% share
Defence and security
4,333
6,026
12.0
15.3
Economic services
12,433
13,799
34.6
35.1
Agriculture and rural
development
1,364
1,621
3.8
4.1
Trade and industry
3,474
3,463
9.7
8.8
Transport
5,401
7,354
15.0
18.7
Public utilities
1,808
920
5.0
2.3
Others
387
442
1.1
1.1
Social services
18,043
17,704
50.2
45.0
Education
12,436
10,194
34.6
25.9
Health
1,503
2,684
4.2
6.8
Housing
1,808
1,928
5.0
4.9
Others
2,296
2,897
6.4
7.4
General administration
1,168
1,824
3.2
4.6
Total
35,977
39,353
100.0
100.0
% of GDP
10.0
10.0
Numbers may not add up due to rounding.
p Preliminary
Source: Ministry of Finance
Table 2.12
Federal Government Debt Outstanding
Annual change
At end-
2002
2003p
2003p
Nominal value in RM million
Domestic debt
7,284
22,803
151,483
Treasury Bills
0
0
4,320
Government Investment
   Issues
1,000
2,000
7,000
Malaysian Government
   Securities
6,100
21,250
130,800
Treasury Housing Loans
   Fund
1,180
2,628
9,363
Market loans
-996
-3,075
0
External debt
11,955
1,001
37,284
Market loans
10,992
-485
28,189
Project loans
963
1,486
9,095
Total
19,239
23,804
188,767
% of GDP
48.2
p Preliminary
Source: Ministry of Finance
Graph 2.13 
Federal Government Outstanding Debt 
as at end-2003p (% share)
External debt 
accounted for only 
19.8% of the total 
Federal Government 
debt
Treasury Bills
2.3%
Total debt : RM188.8 billion
 Domestic : RM151.5 billion 
 External : RM37.3 billion
Government Investment Issues 
3.7%
Malaysian
Government
Securities 
69.3%
Housing loan 
5.0%
p Preliminary
Domestic debt


Monetary and Fiscal Developments
4.6.3-75
75
issuance of Treasury Bills (TBs) facilitated the
roll-over of maturing bills. MGS issued continued
to be absorbed mainly by provident, pension and
insurance funds (76% of the outstanding MGS),
while the ownership of GIIs and TBs was mainly
dominated by the banking sector (94% and 76%
of the respective amounts outstanding). After
taking into account repayments, the net domestic
borrowing of the Federal Government as at end-
2003 amounted to RM23.3 billion.
To contain the cost of debt servicing and
minimise exposure to external risks, the
Government kept its external debt level low in
2003 by prepaying and refinancing some of its
existing loans. In this regard, new external
borrowings were limited to project loans
committed earlier. A total of RM1.7 billion was
drawn down from bilateral sources, especially
from Japan under the New Miyazawa Initiative,
as well as multilateral sources. In line with its
prudent debt management philosophy, the
Government refinanced a number of its existing
term and syndicated loans to take advantage of
the tighter spreads. In January, a ¥1.4 billion
Term Loan due 2006 was raised at Libor + 57.5
basis points to refinance the 3.17% ¥4.1 billion
Term Loan due 2006. In March, the Government
refinanced a US$250 million and ¥54 billion dual
currency syndicated loan at a lower margin of
Libor + 38 basis points (previously, Libor + 125
basis points). Another dual currency syndicated
loan amounting to US$1.25 billion and ¥11.6
billion was rolled over in December with a
tighter spread of 33 basis points (from 52 basis
points). The Government also prepaid two of its
external loans during the year, namely a Floating
Rate Note due 2005 and a syndicated loan due
2005/07 totalling US$433 million. Overall, the
Federal Government registered a net repayment
of RM3.7 billion in 2003. During the year, the
reclassification of a domestic syndicated foreign-
currency loan raised in the Labuan International
Financial Centre as external debt and exchange
revaluation loss, led to a slightly higher external
debt. However, with the Government’s restraint
on recourse to external borrowings and the
prepayment exercise, the share of external debt
outstanding to GDP declined to 9.5% of GDP
(10.1% of GDP in 2002).
The debt servicing expenditure remained within
prudent levels. Debt charges as percentage of
operating expenditure, revenue and GDP were
kept low at 14%, 11.4% and 2.7% respectively
in 2003 (2002: 14.1%, 11.6% and 2.7%
respectively). The external debt service ratio of
the Federal Government also remained low at
1.3% in 2003 (2002: 1%) while foreign exposure
declined to account for 20% of the total debt
outstanding (2002: 22%). Proactive and sound
debt management enabled the Government to
avoid a bunching of repayments. As at end-2003,
about 60% of loans outstanding had a remaining
maturity exceeding three years and most were at
fixed interest rates, reducing exposure to
fluctuations in interest rates.
State Governments
Based on preliminary estimates, the consolidated
financial position of state governments recorded
a small overall deficit of 0.6% of GDP in 2003.
While the revenue performance remained strong,
operating and development expenditures
increased during the year. The overall deficit was
financed by Federal Government loans and the
drawdown of accumulated financial assets of the
state governments.
During the year, the higher consolidated state
revenue was derived from state sources. The higher
commodity prices, particularly for crude oil and crude
palm oil, had a positive impact on the states’ own
sources of revenue through petroleum royalty and
sales tax on crude palm oil. Meanwhile, receipts from
Table 2.13
Holdings of Federal Government Domestic Debt
2002
 2003p
2002
 2003p
 Nominal value in
% share
RM million
Treasury Bills
4,320
4,320
100.0
100.0
Insurance companies
65
67
1.5
1.6
Banking sector
3,744
3,266
86.7
75.6
Others
512
986
11.8
22.8
Government Investment
Issues
5,000
7,000
100.0
100.0
Insurance companies
320
390
6.4
5.6
Banking sector
4,680
6,611
93.6
94.4
Malaysian Government
Securities
109,550 130,800
100.0
100.0
Social security and insurance
institutions
85,325
99,260
77.9
75.9
of which:
Employees Provident
Fund
72,980
84,678
66.6
64.7
Insurance companies
9,313
11,597
8.5
8.9
Banking sector
14,629
19,008
13.4
14.5
Others
9,597
12,532
8.8
9.6
Numbers may not add up due to rounding.
p Preliminary


4.H-76
76
the Federal Government were sustained to assist
the states in providing infrastructure, utilities and
other essential amenities. The increase in operating
expenditure reflected mainly higher payments for
emoluments following the implementation of the
Malaysian Remuneration System for public sector
employees, as well as the acquisition of assets to
facilitate higher efficiency in the delivery of
services. A major portion of the higher
development expenditure was on expanding and
upgrading public utilities, housing, agriculture and
on rural development as well as for industrial
development.
Non-Financial Public Enterprises
Preliminary estimates of the consolidated financial
position of the 35 NFPEs indicated a higher overall
surplus position (4.4% of GDP). The improvement
was due to higher revenue and lower development
expenditure with the completion of several big
projects and the reprioritisation of planned
projects.
The higher consolidated revenue of the NFPEs
reflected increased earnings from oil and gas-
related services, utilities and agriculture-based
sectors. These sectors benefited from stronger
economic activities and higher commodity prices,
especially for crude oil. Significant earnings were
also recorded from overseas operations. Higher
operating expenditure was due to increased raw
material costs, especially crude oil and fuel, and
measures taken to improve services, including the
upgrading of technology.
The capital outlay of the NFPEs was channelled
towards expanding capacities, both at home and
abroad. Petroliam Nasional Berhad continued to
invest in exploration and production projects in
Malaysia and overseas, namely in Egypt, Sudan
and Vietnam. The bulk of expenditure was also for
Production Sharing Contracts within Malaysia.
Other projects included the final stage construction
of MLNG Tiga Plant and on-going building of
liquefied natural gas and petroleum tankers. In the
case of Tenaga Nasional Berhad, expenditure was
mainly for generation capacity and transmission
Table 2.14
Consolidated State Government Finance
2002
2003e
2004
Budget
RM million
Revenue
8,341
8,787
9,676
State sources
6,239
6,729
7,120
Federal grants
and transfers
2,102
2,058
2,556
Expenditure
5,090
6,009
6,397
Current surplus
3,251
2,778
3,278
% of GDP
0.9
0.7
0.8
Net development expenditure
3,772
4,973
4,595
Gross development
expenditure
4,161
5,503
4,756
Less:  Loan recoveries
389
530
161
Overall balance
-520
-2,196
-1,316
% of GDP
-0.1
-0.6
-0.3
Sources of financing:
Federal loans
752
773
496
Realisable assets1
-231
1,423
821
Total
520
2,196
1,316
1
A positive (+) sign indicates a drawdown in the accumulated realisable
assets.
e Estimate
Source: State governments
Table 2.15
List of NFPES, 20031
1
1st Silicon (Malaysia) Sdn. Bhd.
2
Bintulu Port Sdn. Bhd.
3    Cement Industries (Sabah) Sdn. Bhd.
4    Central Spectrum (M) Sdn. Bhd.
5    Felda Agricultural Services Sdn. Bhd.
6    Golden Hope Plantations Bhd.
7    Indah Water Konsortium Sdn. Bhd.
8    Keretapi Tanah Melayu Bhd.
9    Kontena Nasional Bhd.
10   Kuching Port Authority
11   Kulim (Malaysia) Bhd.
12   Kumpulan Guthrie Bhd.
13   MA (Sepang) Sdn. Bhd.
14   Malaysia Airline System Bhd.
15   Malaysia Airports Sdn. Bhd.
16   Marconi (Malaysia) Sdn. Bhd.
17   Multimedia Development Corporation Sdn. Bhd.
18   Northport (Malaysia) Bhd.
19   Penang Port Sdn. Bhd.
20   Penerbangan Malaysia Bhd.
21   Petroliam Nasional Bhd.
22   PPES Works (Sarawak) Sdn. Bhd.
23   Rakyat Berjaya Sdn. Bhd.
24   Sabah Energy Corporation Sdn. Bhd.
25   Sabah Ports Sdn. Bhd.
26   Sarawak Electricity Supply Corporation
27   Sebor (Sabah) Sdn. Bhd.
28   Sergam Bhd.
29   Silterra Malaysia Sdn. Bhd.
30   Sinora Sdn. Bhd.
31   Syarikat Prasarana Negara Bhd.
32   Telekom Malaysia Bhd.
33   Tenaga Nasional Bhd.
34   TH Plantations Sdn. Bhd.
35   UDA Holdings Bhd.
1
List of NFPEs for monitoring and reporting purposes was revised in 2003.
NFPEs are defined as companies in which the Government has an equity of at
least 51 per cent and sales turnover of at least RM100 million or having a
significant impact on the economy, including large borrowing needs and
capital expenditure.


Monetary and Fiscal Developments
4.6.3-77
77
network. Major expenditure included the
construction of the Port Dickson Phase 1
Combined Cycles Power Plant and the East-West
Grid Interconnection in Sabah. A large share of the
development expenditure of Telekom Malaysia
Berhad was focussed on upgrading and expanding
capacity to improve the telecommunication
infrastructure and services. Projects undertaken
included the underwater cable network connecting
the Asia Pacific region, Phase VI of the Digitaline II
project to facilitate data transmission for
businesses and the Government Corporate
Information Network Superhighway to support
various information technology-related
applications for businesses.
Table 2.16
Consolidated NFPEs Finance1
2001
2002
2003e
RM million
Revenue
105,075
126,562
149,970
Current expenditure
65,392
80,951
104,556
Current account
39,683
45,611
45,414
% of GDP
11.9
12.6
11.6
Development expenditure2
24,033
32,297
28,225
Overall balance
15,651
13,313
17,188
% of GDP
4.7
3.7
4.4
1
Refers to 35 NFPEs in 2003.
2
Includes grants from the Federal Government.
e Estimate
Source: Ministry of Finance and non-financial public enterprises




80-85
The International Economic Environment
85-96
Malaysia Economy in 2004
89-91
White Box: Liberalisation and Simplification of
Foreign Exchange Administration Rules
96-97
Monetary Policy in 2004
98
Fiscal Policy in 2004
99-100
Financial Sector Policy in 2004
101-102
White Box: Report on SME Development Framework
Outlook and Policy


80
THE INTERNATIONAL ECONOMIC ENVIRONMENT
Developments in 2003
The global economy strengthened considerably in
2003, led by the United States (US). Growth has also
been synchronised across major industrial economies,
with the recovery in Japan and Europe adding
support to global growth. Growth in 2003 was
characterised by two distinct phases, with the first
half-year dampened by uncertainties related to the
Iraq war and the Severe Acute Respiratory Syndrome
(SARS) outbreak in Asia. Since mid-2003, however,
revival of growth in Japan and euro zone and
stronger growth in the US led to a better-than-
expected global growth of 3.2% for the year.
Expansionary fiscal and accommodative monetary
policies in the advanced economies and Asian
countries supported growth. At the same time, the
sources of growth have broadened from
consumption-led to include an upturn in investment
and inventory rebuilding.
The global recovery was accompanied and supported
by improvements in international trade and financial
markets. World trade grew by 3.5-4.5% in 2003,
largely attributable to import demand from developing
countries. Reflecting the rising global demand, the
international prices for non-oil primary commodities
rose during the year. In the financial markets, major
equity markets rallied, supported by rising investor
confidence and improved corporate financial
positions. The lower cost of capital amidst sustainable
demand led to a revival in the global investment cycle.
During the year, the global foreign exchange markets
were dominated by the significant weakening of the
US dollar due to the concerns on the widening US
fiscal and current account imbalances. In Asia, there
was strong expansion in domestic demand resulting in
a significant increase in intra-regional trade.
In the US, the pace of recovery gained strong
momentum in the second half to register a growth of
5.8% (first half: 2.1%). Despite weak labour market
conditions, household spending remained an
important driver of growth, with consumption
increasing strongly by 4.9% in the second half-year.
While the tax cuts provided a significant stimulus,
spending also benefited from the low interest and
mortgage rates as well as rising household wealth
from renewed strength in the stock market. More
important, business spending on equipment and
software recovered following productivity-driven
increases in profits and improved corporate balance
sheets. Latest data showed real GDP sustaining its
growth momentum to expand by 4.1% in the final
quarter of 2003. Overall, the growth was well
supported by positive contributions from
consumption, investment, exports and inventory
increases.
Growth in Japan picked up in the second quarter of
2003 and accelerated in the fourth quarter, led by
strong growth in exports from rising regional trade
and recovery in investment spending. The euro area
recovered gradually, supported by fiscal spending and
improvement in net exports. In the United Kingdom
(UK), growth remained resilient, underpinned by both
private and public consumption.
Outlook and Policy
Table 3.1
World Economy : Key Economic Indicators
Real GDP Growth (%)
Inflation (%)
2002 2003e
2004f
2002 2003e
2004f
World Growth
3.0
3.2
4.1
–
–
–
World Trade
2.9
3.5 - 4.5 5.0 - 6.0
–
–
–
Major Industrial
Countries
United States
2.4
3.1
3.9
1.6
2.1
1.3
Japan
-0.4
2.7
2.0
-0.9
-0.3
-0.6
Euro Area
0.9
0.4
1.6
2.3
2.0
1.6
United Kingdom1 1.7
2.3
2.3
2.2
2.8
2.5
East Asia
6.2
6.2
6.6 - 6.8
1.3
1.8
2.4 - 2.7
Asian NIEs
4.5
2.9
5.0 - 5.2
0.8
1.2
1.4 - 1.5
Korea
6.3
2.9
5.2
2.7
3.5
3.0
Chinese Taipei
3.6
3.2
4.7
-0.2
-0.3
0.4
Singapore
2.2
1.1
3.5 - 5.5 -0.4
0.5
0.5 - 1.5
Hong Kong China2 2.3
3.3
6.0
-3.0
-2.6
-1.0
The People’s
Republic of
China
8.2
9.1
8.3
-0.8
1.2
3.0
ASEAN3
4.0
4.5
4.9 - 6.0
5.3
3.8
3.0 - 4.3
Malaysia
4.1
5.2
6.0 - 6.5
1.8
1.2
1.5
Thailand
5.4
6.7
6.3 - 7.3
0.7
1.8
1- 2
Indonesia
3.7
4.1
4.0 - 5.0 11.9
6.6
4.5 - 6.5
Philippines
4.4
4.5
4.9 - 5.8
3.1
3.4
4.0 - 5.0
1 Refers to retail price excluding mortgage interest.
2 Refers to composite price.
3 Includes Singapore.
e Estimate
f Forecast
Source:
International Monetary Fund, Datastream,
OECD Economic Outlook, National Sources


Outlook and Policy
81
In the Asian region, despite geopolitical
uncertainties and the negative impact of SARS in the
first half of 2003, regional growth was sustained at
6.2%, twice the global average. The main impetus to
growth emanated from exports, driven mainly by the
upturn in the global electronics cycle and sustained
favourable prices for non-oil primary commodities
reinforced by strong domestic demand. In tandem
with improvements in the global economic
environment, the trade momentum accelerated in
the second half, resulting in a doubling of the export
growth rate to 18.6% for the year (2002: 9.5%). Of
significance, intra-regional trade accounted for about
half of the regional economies’ export growth, with
exports to the People’s Republic of China (P
. R.China)
accelerating by 33%.
Global prospects have improved, supported by reinforcing and
broad-based growth across major industrial countries.
During the year, regional growth was reinforced by
the underlying strength in domestic demand,
supported by accommodative monetary and fiscal
policies. In several countries, economic stimulus
packages that were introduced to mitigate the
impact of SARS led to the broad recovery in private
consumption and travel-related industries in the
second half of the year. Of importance, financial
indicators in the region improved during the year.
Bank balance sheets strengthened while corporate
sector debt levels were lower and external debt
positions improved. The improved assessment of
credit risk in the region in 2003 was reflected in the
raising of ratings for P
. R. China, Indonesia, Malaysia,
Singapore and Thailand by international credit rating
agencies.
Among regional countries, growth continued to be
led by P. R. China, with a strong expansion of 9.1%,
followed by Thailand and Malaysia at 6.7% and
5.2%, respectively. While growth was higher in Hong
Kong China, the growth of the Asian Newly
Industrialised Economies (NIEs) as a whole slowed
down to 2.9% (2002: 4.5%), due mainly to a
contraction in private consumption in Korea and the
adverse impact of SARS on the economies of
Singapore and Chinese Taipei.
Prospects for 2004
The outlook for the global economy has become
increasingly optimistic, following the strong upturn in
the second half of 2003. Amidst improved prospects,
most growth projections have been revised upwards.
For 2004, world output and world trade are
projected to grow at a faster pace of 4.1% and
5-6%, respectively. The Asian regional economies’
share in global trade has also increased. Measured in
terms of the share of world exports of goods and
services, the region’s share has increased from 16.3%
in 1994 to 19.6% in 2002. Favourable export
performance, continued growth in private
consumption and expansion in investment are
expected to lead to higher growth for the Asian
regional economies in 2004.
Amidst a low inflation environment, the growth
momentum in the US is expected to be supported by
expansionary monetary and fiscal policy that have
been in place for some time, as well as productivity
gains, investment and inventory rebuilding. Growth
in the euro area is expected to recover gradually as
expansionary fiscal policies continue to be adopted in
major euro area economies. While the economic
recovery in Japan is affected by long-term structural
problems, deflationary pressures have begun to ease
and signs of sustainable recovery have emerged since
the second half of 2003. In the UK, economic growth
is expected to remain resilient, underpinned by public
and private consumption.
Industrial Countries
In 2004, growth of the US economy is expected to
remain strong and more broad-based, with real GDP
Annual change 
(%)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
US
Japan
Euro
UK
Graph 3.1
Major Industrial Countries: Real GDP Growth  
(2003-2004) 
2003e
2004f
3.1
3.9
2.7
2.0
0.4
1.6
2.3
2.3
e  Estimate
f  Forecast


82
growth strengthening to 3.9% from 3.1% in 2003.
Consumption growth is expected to continue, albeit
at a more moderate pace as benefits of mortgage
refinancing and tax cuts abate. Investment is
expected to provide a higher contribution to growth
although excess capacity still remains in certain
sectors of the economy. The upturn in equipment
and software spending is expected to lead
investment growth. Gains in corporate profits and
capacity expansion are expected to stimulate
business expenditure, while expected inventory
rebuilding from decade low levels is expected to add
to growth.
In the euro area, real GDP is expected to expand by
1.6% in 2004. Domestic demand has remained
subdued due to weak labour markets and
uncertainties related to social welfare reforms.
However, the low interest rate environment coupled
with rising real disposable income should provide
some impetus for growth. In addition, investment
activity is expected to recover owing to
improvements in global demand and further
Recovery in Japan is expected to be sustained. Major
contributory factors are the robust exports, stronger
investment activity supported by improved business
confidence, corporate profitability as well as
increased consumption arising from personal income
growth and more stable employment conditions.
Deflationary conditions and long-term structural
weaknesses in the corporate and banking sectors are
still being addressed.
Inflation is expected to remain benign in major
industrialised countries in 2004. While inflation is
projected to remain low at 1.3%, higher global crude
oil prices could exert upward inflationary pressures,
particularly in the US. Meanwhile, in the euro area,
the stronger euro would contribute to offsetting the
impact of higher crude oil prices. Despite improving
growth prospects, deflationary pressures are
expected to remain in the Japanese economy.
Overall, for 2004, oil prices are expected to remain
marginally higher than the OPEC band (US$22-28
per barrel), attributable mainly to rising demand in
inventory rebuilding. Despite improvements in
business confidence, growth in Germany is expected
to remain modest due to weak labour market
conditions and moderate private consumption
growth. While euro area exports are expected to
grow further with strengthening global demand, a
sharp and sustained appreciation of the euro could
adversely affect exports, corporate profitability and
growth. Sustainable recovery in the euro area would
largely be dependent on a revival in domestic
demand.
In UK, the economy is expected to remain resilient as
the global economic recovery becomes more
entrenched. Growth is estimated at 2.3%, growing
above trend in 2004. Investment is expected to
recover with increased corporate profitability, while
fiscal expenditure is expected to rise modestly.
Consumption is expected to continue to grow, but at
a more moderate pace with the slowdown in growth
of disposable income. Recovery of export growth will
be influenced by exchange rate movements and
demand conditions in the euro area. While house
prices have been rising at a rapid rate, recent
increases in borrowing costs are expected to mitigate
further price increases.
tandem with the strengthening of global growth. In
February 2004, OPEC announced that with effect
from 1 April 2004, the production ceiling will be
lowered by one million barrels per day, given a
projected supply surplus in the second quarter of the
year due to seasonally low demand. Also,
uncertainties in oil production, particularly in Iraq,
and positive investor sentiments on the commodities
market, are expected to contribute to price increases.
East Asian Economies
Prospects are for growth in the Asian region to be
stronger between 6.6-6.8% in 2004. The majority
of regional countries are expected to register faster
growth, with P
. R. China leading growth in the
region. Overall, regional growth is expected to be
broad based, with both external and domestic
demand providing the impetus to faster growth.
On the external front, growth is expected to benefit
from the further strengthening of the electronics
upcycle. Besides demand for consumer electronics,
which was the main factor for growth of
semiconductor sales in 2003, higher business
spending on IT replacement and a revival of
investment are projected to enhance sales. On the
Growth momentum to continue in US, with recovery gaining
strength in Japan and Europe and growth in Asia to be driven by
recovery in investment.


Outlook and Policy
83
supply side, the industry is expected to register
strong capacity expansion, particularly in equipment
investment, which was last seen during the
electronics upturn in 2000. With capacity utilisation
above 90% in 2003, investment in equipment and
machinery is forecast to increase by 36-42% on an
annual basis in 2004 (2003: 12.4%). The rise in
investment activity during the year is envisaged to
emanate from stronger foreign direct investment
year. Reflecting efforts to diversify the economy, a
key measure taken in recent years by most regional
countries is to spearhead investments in the services
sector. Of importance, domestic investments through
the promotion of small and medium enterprises
(SMEs) are expected to pick up during the year.
Consonant with higher growth, most regional
countries are forecast to record fiscal improvements.
For 2004, the global outlook is biased on the upside,
with stronger recovery in demand. Growth is
expected to be supported by continued expansion in
consumption and private investment and the
strengthening of the labour market in the US and the
positive impact of tax and labour market reforms in
Europe. Hence, prospects for regional growth in Asia
remain favourable.
In 2004, real GDP growth of the Asian Newly
Industrialised Economies (NIEs) as a group, is
expected to strengthen to 5-5.2%, underpinned by
robust export performance and a pick up in domestic
demand.
In Korea, real GDP is projected to register growth of
5.2% in 2004. Exports would remain the main driver
of economic expansion. Tax incentives, increased
investment expenditure, and measures to improve
labour-management relations as well as nurture
2003
Annual change (%) 
Graph 3.2
Regional Countries: Real GDP Growth
2004
0
2
4
6
8
10
P.R. China
Korea
Hong Kong China
Chinese Taipei
Singapore
Thailand
Philippines
Indonesia
Malaysia
9.1
5.2
6.0
4.7
3.2
3.3
2.9
1.1
4.5
4.1
5.2
6.7
3.5~5.5
6.0~6.5
4.0~5.0
4.9~5.8
6.3~7.3
8.3
Higher and broad based regional growth in 2004, with expansion
in exports, consumption and investment.
inflows and the further strengthening of regional
production networks. Therefore, intra-regional trade
is expected to continue expanding.
On the domestic front, private consumption is
expected to strengthen further in 2004, supported
mainly by rising disposable incomes and low interest
rates in most regional countries. With the exception
of Korea, lending to the household sector in most
other regional countries remains below pre-crisis
levels, implying the potential for further expansion.
The impact of the bird flu on economic growth
would be marginal as the livestock industry accounts
for a small share of GDP
, ranging from 0.1% in Japan
to 15% in Cambodia. A key development during the
year is the expansion in investment activity, which
began to pick up in the second half of 2003. The
benefits of past restructuring of the corporate sector
have led to higher profitability as well as increased
bank lending and equity capital, all of which are
expected to enhance investment activity during the
SMEs are expected to lead to the improvement in job
prospects. Hence, private consumption is expected to
improve in the second half of the year.
Growth in Hong Kong China is forecast to pick up
further in 2004 to reach 6%, the highest in four
years. A boost to economic expansion is expected to
emanate from the Closer Economic Partnership
Arrangement (CEPA) with P
.R.China, which came into
effect on 1 January 2004. The agreement, covering a
wide range of goods and the opening up of 17
services sectors, is the first extensive bilateral FTA in
the region. Further strengthening of the domestic
economy and strong demand from P
.R.China would
support employment and the services sector
including the tourism and financial sectors.
Led by investment and exports, growth in Chinese
Taipei is expected to be higher at 4.7%. Higher
investment spending is forecast for the year, due to
government expenditure on construction projects


84
and a rebound in private investments in the
manufacturing sector. In line with the strengthening
of the global electronics upcycle, exports are poised
to benefit from the country’s competitive advantage
in contract manufacturing, namely in wafer
fabrication, notebooks and consumer electronics.
In Singapore, growth is expected to strengthen in
the range of 3.5-5.5% in 2004, attributable mainly
to the recovery in global IT spending. A revival in
consumer demand is projected to emanate mainly
from positive sentiments arising from improvements
in labour market conditions and the low interest rate
environment.
The ASEAN economies as a whole is expected to
expand at a faster pace of 4.9-6% in 2004, with
higher contribution from the domestic and external
sectors. Within the group, Thailand is forecast to
record the strongest growth in output, with growth
of 6.3-7.3%. Following rising capacity utilisation,
faster investment growth is expected, with the bulk
of investments comprising private sector investments
in the manufacturing sector, and reinforced by public
sector infrastructure projects.
In the Philippines, real GDP growth is projected to
expand by 4.9-5.8%, attributable mainly to higher
electronics exports. Continued strong overseas
remittances as well as favourable farm output are
expected to contribute to growth in private
consumption. Growth in Indonesia is expected to
increase between 4-5%, with private consumption to
remain as the primary source of growth. With
increased access to financing at lower interest rates
amidst declining inflation, private consumption is
expected to register a sustained rise.
P
. R.China is forecast to register the highest growth
of 8.3% in 2004. While exports and private
consumption are expected to increase, investment
expenditure is expected to moderate in line with the
government’s policy to achieve a more balanced and
sustainable growth.
In 2004, inflation in the regional countries is
expected to remain low between 2.4-2.7%. Inflation
in the Asian NIEs as a group, however, is expected
to increase marginally to between 1.4-1.5%. In
Korea, inflation is projected to moderate, reflecting a
stabilisation in food and oil prices and receding
demand pressures. In all other NIEs, consumer prices
are forecast to trend upwards, attributable to the
pick up in general economic activity. While
deflationary pressures are expected to ease in Hong
Kong China, a turnaround is forecast for Chinese
Taipei, with price increases in 2004, compared with
price declines registered in the last two years.
Meanwhile, inflation in the ASEAN countries as a
group is expected to remain stable in the range of
3-4.3% in 2004. In Indonesia, price pressures are
projected to subside further, with slower growth in
wages amidst excess capacity conditions. In contrast,
inflation in the Philippines is estimated to increase
further, reflecting rising demand pressures as
economic growth strengthens. In Thailand, modest
price pressures are forecast, arising from continued
buoyant domestic demand conditions.
Interest Rates and Exchange Rates
In 2003, the major industrial countries continued to
maintain accommodative monetary policies. Weak
economic conditions, particularly in the first half of
the year, led several major central banks to reduce
interest rates.
In the US, the Federal Reserve Board (Fed)
reduced interest rates by 25 basis points on 25 June
2003 following heightened risk of deflation. The
Fed’s actions had brought the Federal funds rate to
1.0%, its lowest level in more than 40 years, and
marked a cumulative reduction of 550 basis points
since the Fed began its easing cycle in early 2001. By
end-year, however, amidst a stronger recovery in
growth, the threat of falling inflation had receded.
Meanwhile, signs of economic weakness in the euro
zone especially in early 2003 prompted the
Rate,%
Graph 3.3 
Major Industrial Countries: Official Interest Rates
United Kingdom
(Base lending rate)
United States
(Fed funds Rate)
Euro area
(Repo rate)
Japan
(Overnight rate)
0
1
2
3
4
5
6
7
1999
2000
2001
2002
2003
2004
2.00
4.00
1.00
0.0


Outlook and Policy
85
European Central Bank to reduce rates by 25 basis
points in March 2003 and a further 50 basis points in
June 2003. Consequently, the benchmark repo rate
declined to 2%, reflecting a cumulative 275 basis
point reduction since May 2001 to counter the
slowdown in the euro area.
In the UK, the Bank of England (BOE) eased its base
lending rate twice by 25 basis points in February and
July 2003 on concerns about the downturn in the
manufacturing sector and that domestic and external
demand would be lower than earlier anticipated.
However, with the sharp increases in house prices
and rapid growth in consumer loans seen in the
second half-year, the BOE raised rates in November
2003 and again in February 2004, mainly to
constrain the pace of household debt accumulation.
Meanwhile, in Japan, with official short-term interest
rates virtually at zero, the Bank of Japan continued
to engage in quantitative easing measures
throughout 2003 to inject liquidity into the banking
system in order to counter deflation and lend support
to the economic recovery.
For the remaining part of 2004, while growth has
gathered momentum, excess capacity still exists in
the global economy. Excess capacity in the industrial
sector and high unemployment in the labour markets
are reflective of output gaps. Thus, despite rising
commodity prices, inflation levels remain subdued in
many economies. Nonetheless, in some countries,
house price increases and excessive credit growth
have surfaced to influence the stance of monetary
policy. Overall, the timing and magnitude of
monetary policy actions would depend on country-
specific factors, including the strength of economic
growth, inflation trends and developments in the
currency and financial markets.
In the foreign exchange markets, the US dollar
depreciated further against all major currencies in
2003, extending its decline, which began in early
2002. Consequently, by end-2003 the US dollar
depreciated further by about 20% against the euro
and about 11% against both the Japanese yen and
pound sterling. Underlying the depreciating trend
has been the pressure from a widening current
account deficit and declining capital inflows into US
dollar assets. Against the backdrop of a weaker US
dollar, the euro appreciated in 2003 and ended the
year at a record high of E1=US$1.2595. This trend
continued into early 2004, with the dollar
weakening further against the other major
currencies.
MALAYSIAN ECONOMY IN 2004
The Malaysian economy is expected to strengthen
further in 2004, building on the strong growth
momentum in the second half of 2003 and
brighter prospects for global growth in 2004. Real
GDP is expected to expand by 6-6.5% (2003:
5.2%), underpinned by stronger domestic demand
and reinforced by more favourable external
demand. Growth will mainly be private sector-
driven, while the public sector gradually
consolidates. The growing consumer and business
confidence since the second quarter of 2003,
strengthened economic fundamentals and the
positive impact of pro-growth fiscal and monetary
measures are expected to mutually reinforce robust
consumer spending and the upturn in private
investment activities.
The projections for growth in 2004 are based on a
stronger global economic growth of 4.1% and led
by synchronised recovery across all regions, an
upturn in the global electronics cycle and firm prices
for crude palm oil and crude oil. With the growth in
Asia stronger than the global average, Malaysia is
also expected to benefit from the continued
expansion in intra-regional trade. The expectation of
the stronger pace of growth is also premised on the
strength and dynamism of the private sector
performance, especially the strength of the upturn
in domestic investment. Evidence of higher new
investments and capacity expansion are indicative
that the recovery in economic growth is sustainable.
Euro, Sterling
Yen
US$/£
US$/Euro
¥/US$
Graph 3.4
Movement of the US Dollar against Major
Currencies
0.80
1.00
1.20
1.40
1.60
1.80
2.00
2000
2001
2002
2003
2004
100
105
110
115
120
125
130
135
140
1999


86
While possible downside risks remain, the strong
underlying fundamentals will provide strong
foundations for economic resilience and future
growth.
While the external environment has improved
significantly, Malaysia will continue to fine-tune the
strategies to strengthen the domestic sources of
growth to reduce vulnerability to external risks and
strengthen economic resilience. Hence, while
continuing to promote exports and foreign direct
investment, greater focus has been directed at
enhancing the contribution of domestic
consumption and investment to growth.
Private consumption has become an important
component of the economy. Measures to promote
domestic consumption have resulted in a higher
share of private consumption to GDP (46.4%; 1999:
43.6%). However, the share of private consumption
to GDP is relatively low compared to other countries
in the region, which have higher shares of between
Meanwhile, private investment is expected to be an
increasingly important driver of growth. Several
measures have been implemented recently to
enhance the contribution of investment to growth,
particularly investment by the SMEs. The SME sector
Graph 3.5
International Comparison - Household Debts1 
(% of nominal GDP, 2003)
Thailand
Singapore
Malaysia
Hong Kong China
Korea
Australia
Japan
Euro Area
Canada
UK
US
58.9
0
20
40
60
80
100
%
1 Financial liabilities of households with the banking system
Real GDP to expand by 6-6.5% in 2004, underpinned by stronger
domestic demand and reinforced by robust external demand.
Private sector will lead growth, while the Government continues
to provide a supportive environment.
will continue to be developed and integrated into the
mainstream of industrial and technological
development to actively support the domestic
industries. This will strengthen the inter-linkages in
the economy and contribute towards the
development of a more vibrant domestic economy.
In this regard, the key strategies in the 2004 Budget
reinforced the measures in the Economic Package to
strengthen the domestic sources of growth and to
facilitate the private sector to assume its lead role as
the engine of growth. The thrust of the 2004 Budget
strategies focused on providing a supportive
environment for private sector initiatives, while
gradually cutting back public expenditure. Towards
this end, various tax and non-tax incentives were
directed at enhancing domestic sources of growth in
niche areas, with continuing emphasis on the services
sector (especially private education, health and
tourism), developing SMEs as a key growth catalyst,
and agriculture as the third engine of growth.
Additional incentives were provided to encourage
manufacturers to move up the value chain to
undertake higher value-added activities such as
research and development. Measures also continue
50-70% of GDP. In terms of the average propensity
to consume (APC), Malaysia’s APC is also lower
(within the range of 0.45-0.49 in the last five years)
compared with that of the other countries in the
region (above 0.55). Thus, given the steady income
levels and the high savings rate, there is potential to
further enhance the contribution of domestic
consumption to growth, without increased risks to
the economy.
As at end-2003, household debt to GDP accounted
for 58.9% (end-2002: 56.8%). This level remains
comparatively low compared with other countries.
The debt service burden accounted for only 16.4%
of GDP. Including credit card repayments, the ratio
would be 24%. While household debt has
increased, the repayment capability of households
has continued to improve. This is reflected in the
continued decline in the household NPLs to 8% as
at end-2003, from 8.5% as at end-2002. The ability
of the household sector to service their debts is also
reflected in the sustained increase in disposable
income and accumulation of savings. Household
deposits, as a percentage of GDP, remained high at
66.6% at end-2003 (end-2002: 67.3%).


Outlook and Policy
87
to focus on enhancing the country’s efficiency and
productivity and overall competitiveness to enable
Malaysian companies to compete globally. These
include incentives directed at reducing the cost of
doing business and increasing innovation through
higher research and development activities.
Reflecting the gradual fiscal consolidation, the
Government’s fiscal deficit is expected to narrow to
4.5% of GDP in 2004 from 5.3% in 2003. With
inflation remaining subdued, monetary policy in
2004 would continue to be directed at sustaining the
growth momentum. The current low interest rate
environment will remain to reinforce the private
sector-led growth. In this regard, efforts would
continue to focus on improving the flow of credit to
sectors with growth potential, particularly the SMEs
and to new growth areas. In addition to the banking
system, new avenues are also being developed to
increase the SMEs’ access to capital market funding.
In 2004, growth would also be supported by higher
productivity. Given the infrastructure in place and
efforts to improve skills to better leverage on
technology, productivity is expected to increase. An
important factor that would enhance productivity is
the efficiency of the delivery system for public sector
services. In this regard, Bank Negara Malaysia further
liberalised the foreign exchange rules as part of its
continuous effort to reduce regulatory cost and
improve overall efficiency of both businesses and
banking institutions. The changes are to achieve
three main objectives:
•
To promote efficiency and risk management;
•
To facilitate management of funds and risk
diversification; and
•
To deepen the capital market.
Domestic Demand
The positive factors that supported domestic
demand in 2003 are expected to continue to drive
the growth momentum in 2004. The pace of
growth of private investment, which had turned
positive in 2003, is expected to accelerate this year,
with a more significant contribution to growth.
Private consumption would strengthen further. The
growth enhancing effects of fiscal policy and low
interest rates will continue to support private sector
activities.
Growth would also be reinforced by the
improvement in external demand with the
strengthening of the economies of Malaysia’s main
trading partners. While a more robust growth of
exports is anticipated, the contribution from net
exports to growth would be modest as a stronger
increase in imports is expected with the recovery in
private investment and stronger economic
expansion. Against this backdrop, the private sector
is expected to resume the lead role, with its
contribution to growth doubling from 2.5
percentage points in 2003 to 4.9 percentage points
in 2004. Reflecting the policy of fiscal consolidation,
public expenditure would show a modest decline.
Growth in private consumption, which displayed
resilience in 2003, is expected to strengthen to
8.1% in line with growing consumer confidence.
The propensity to consume would be further
enhanced by continued firm commodity prices,
Table 3.2
Real GDP by Expenditure (1987=100)
2003p
2004f
Annual change (%)
Domestic Demand1
4.8
5.0
Private sector expenditure
4.3
8.7
Consumption
5.1
8.1
Investment
1.1
11.5
Public sector expenditure
5.5
-1.3
Consumption
7.9
4.2
Investment
3.6
-5.7
Net exports of goods and services
20.5
0.8
Exports
6.3
12.1
Imports
5.0
13.3
Gross Domestic Product
5.2
6.0 - 6.5
1
Excluding stocks.
p
Preliminary
f
Forecast
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Table 3.3
Contribution of Demand Components to Real
GDP Growth
2003p
2004f
% point of
contribution
Domestic Demand1
4.3
4.5
Private sector expenditure
2.5
4.9
Consumption
2.4
3.7
Investment
0.1
1.1
Public sector expenditure
1.8
-0.4
Consumption
1.1
0.6
Investment
0.7
-1.0
Change in stocks
-1.1
1.5
Net exports of goods and services
2.0
0.1
Exports
6.9
13.3
Imports
4.9
13.2
Gross Domestic Product
5.2
6.0 - 6.5
Note: Figures may not necessarily add up due to rounding.
1
Excluding stocks.
p
Preliminary
f
Forecast
Source: Department of Statistics, Malaysia and Bank Negara Malaysia


88
higher export earnings, the low interest rate
environment, stable job market and the positive
wealth effect of higher equity prices. The  income
levels of households are also expected to increase in
line with the improvement in business conditions
and productivity gains. The stimulus measures
already in place would continue to filter through
with positive effects on consumer spending
capacity. The reduction in EPF contribution by
employees would continue to enhance the
disposable income of individuals in the first half-
year. In addition to the improving income levels, the
high savings rate would also provide the support for
higher spending capacity.
gas sector is expected following the discovery of
deep sea oil and for ongoing exploration work by
the oil companies.
New investment activities are also expected in the
new growth areas in the information and
communications technology and shared services
sub-sectors (such as operational headquarters and
back-room operations) with the additional
allocation of funds under Malaysian Venture
Capital Management (MAVCAP), the expansion of
Multimedia Development Corporation’s role as a
one-stop agency for selected services sectors and
the additional incentives for operational
Robust external demand, improved cash flow position of
companies, higher capacity utilisation and low interest rates will
reinforce and strengthen the pace of private investment, while
firm commodity prices and stable job market continue to drive
private consumption.
Private investment is expected to expand at a
stronger pace of 11.5% in 2004 as the rise in
private capital spending gains further momentum
due to more positive business sentiment, improved
corporate cash flow positions and high capacity
utilisation rates. The IT replacement cycle would also
lead to increases in investment in equipment and
software. Private sector capital formation would be
supported by higher capital outlay, particularly in
the manufacturing, oil and gas and services sectors.
Investments would also be supported by a steady
inflow of new foreign direct investment and
reinvestment.
Positive developments in the manufacturing sector,
including the markedly higher approvals of
manufacturing projects by the Ministry of
International Trade and Industry (MITI) and high
capacity utilisation rates are expected to drive
investment activities in the sector. A contributory
factor is the additional tax incentives given to local
companies to reinvest in the production of
machinery and equipment and heavy industries.
Investment in the construction sector would be
sustained, mainly from the development of several
residential housing projects as well as ongoing
privatised road projects. In addition, large capital
spending would emanate from other major
infrastructure projects in the transport and utilities
sub-sectors such as building of new power plants,
expansion of port facilities and development of
water projects. Higher investment in the oil and
headquarters. Meanwhile, investment in the
agriculture sector is expected to be sustained with
the measures announced in the Economic Package
and the 2004 Budget to promote large-scale mixed
farming and further modernise the agriculture
sector.
In 2004, a modest decline in public sector
expenditure is expected. The public sector, while
gradually consolidating, would remain supportive
of growth. Public sector consumption is
budgeted to increase moderately by 4.2% due to
increased spending on supplies and services to
improve the quality and delivery of public services.
Meanwhile, public investment would be reduced
by 5.7% to a more sustainable level in 2004
following the accelerated implementation of
development projects in 2001-2003. Although
development expenditure would decline, its impact
on growth would be compensated by private
sector expenditure, which has a larger multiplier
impact on the economy. Also, increased efficiency
in expenditure allocation and improved
effectiveness in the delivery of Government
services would generate positive multiplier effects
on private sector activities. More importantly, the
Federal Government’s development expenditure
will be mainly channelled to projects and
programmes with strong linkages and value added
potential, including infrastructure facilities,
agriculture and rural development as well as
education and human resource development.


Outlook and Policy
89
Liberalisation and Simplification of Foreign Exchange Administration Rules
Malaysia maintains a liberal foreign exchange administration system. Within this liberal system,
approval requirements for inflows and outflows are mainly prudential in nature to ensure financial
stability. Regulations are implemented in a transparent and pragmatic manner. Foreign exchange
administration regulations are also applied where appropriate to prevent any recourse to the Malaysian
banking system for money laundering and terrorism financing.
In line with the policy of gradual and progressive liberalisation of the financial sector, liberalisation and
further simplification of several major foreign exchange administration policies aimed at enhancing the
business environment as well as efficiency and competitiveness of business operations in Malaysia
were made effective from 1 April 2004. These changes form part of Bank Negara Malaysia’s (the
Bank) on-going initiatives towards contributing to the deepening of the capital market and enhancing
efficiency of the regulatory delivery system.
(i)
Rules Affecting Reporting of Foreign Exchange Transactions
While maintaining the requirement for exporters to repatriate receipts arising from export of goods
(export receipts) when contractually due, which must not exceed six months from the date of export,
the rules on reporting of such transactions are being abolished or simplified to reduce the
administration cost to businesses.
•
completion of Forms P (for payments abroad) and R (for receipts from abroad) by residents was
discontinued since 1 January 2004. Information as contained in Forms P and R is being
provided by the remitting or receiving banks to the Bank through an on-line system.
•
In simplifying business operations, the reporting requirement to the Bank is further relaxed
effective 1 April 2004. The requirement for submission of annual reports for export of goods by all
exporters is abolished. Only exporters with annual gross exports exceeding RM50 million need to
submit quarterly reports. The process for submission of such reports is being simplified further. The
reporting mechanism will be designed taking into account business operations of companies.
(ii)
Foreign Currency Accounts of Residents
Rules on maintenance of foreign currency accounts (FCA) are liberalised further following the
relaxation implemented in April 2003. The liberalisation of limits for companies is aimed at enhancing
the cash flow management for supporting value chain expansion in Malaysia. Rules on FCA of
individuals are also relaxed to provide flexibility in the management of income and saving.
•
Effective 1 April 2004, the overnight export FCA limit for Approved Operational Headquarters is
increased further to USD100 million from USD70 million.
•
The overnight limits for export FCA of other resident exporters are also raised. The revised limits,
based on the average monthly export receipts are as follows -
Average monthly export
Overnight limits
receipts
(USD million)
Exceeding RM100 million
100
Exceeding RM50 million up to RM100 million
60
Up to RM50 million or for new exporters
30
•
In addition, resident exporters are given the option to merge their export and non-export FCA in
accordance with overnight limits imposed on export FCA.


90
•
Resident companies with domestic borrowings may also open FCA for non-export receivables
(receivables other than from export of goods) to retain such receipts with onshore licensed banks
with no overnight limit. For resident companies that do not have domestic borrowings, they may
also maintain non-export FCA with licensed offshore banks in Labuan, but up to an aggregate
overnight limit of USD500,000.
•
In the case of resident individuals, FCA remains permitted to facilitate education and employment
 overseas. However, effective 1 April 2004, the limits for these FCA are increased from
USD100,000 to up to an aggregate overnight limit of USD150,000 each with onshore licensed
banks and licensed offshore banks in Labuan.
•
Resident individuals with funds abroad (no conversion from ringgit) may maintain non-export FCA,
onshore or offshore, including licensed offshore banks in Labuan, without any limit.
•
Resident individuals in Malaysia who have foreign currency funds are free to invest in any foreign
currency products offered by onshore licensed banks.
(iii)
Ringgit Credit Facilities to Non-Residents
Rules on lending in ringgit to non-residents are liberalised effective 1 April 2004 to facilitate non-
resident businesses in Malaysia. This liberalisation does not impact current rules on non-
internationalisation of ringgit:
•
To enhance access to ringgit funds for business requirement in Malaysia, all permitted ringgit
lending limits for various purposes, by banking institutions to a non-resident (excluding
stockbroking company, custodian bank and correspondent bank) are consolidated into one
aggregate limit and raised to RM10 million.
The non-resident may use the ringgit credit facilities for any purpose in Malaysia, excluding for
financing or refinancing the purchase or construction of immovable properties.
•
Effective 1 April 2004, residents (banks and non-banks) may extend ringgit credit facilities in
aggregate up to three property loans to a non-resident to finance or refinance the purchase or
construction of immovable properties in Malaysia, excluding the purchase of land only.
Prior to 1 April 2004, only financial institutions and employers may extend property loans to a non-
resident.
•
In the case of non-resident stockbrokers or custodian banks, onshore licensed banks are now
allowed to extend up to an aggregate overnight overdraft facility of RM200 million (RM10 million
previously) to facilitate settlement for purchase of shares listed on Malaysia Securities Exchange
Berhad.
(iv)
Investment Abroad by Resident Individuals
•
Effective 1 April 2004, to provide flexibility for better management of funds, resident individuals
employed or staying abroad with own foreign currency funds may invest in any foreign currency
assets, including those offered by onshore licensed banks and licensed offshore banks in Labuan.
(v)
Investment Abroad by Domestic Institutions
•
For greater geographical diversification and in simplifying approval process, unit trust
management companies may, effective 1 April 2004, invest abroad up to the full amount of


Outlook and Policy
91
Net Asset Value (NAV) subscribed by non-residents and up to 10% of the NAV per fund
subscribed by residents. Different funds of a unit trust management company or of different
companies may also be pooled to benefit from economies of scale when investing abroad. Such
investments abroad are required to be in compliance with the Securities Commission’s prudential
guidelines.
•
Insurance companies and takaful operators may also invest abroad up to 5% of their Margin of
Solvency (MOS) and up to 5% of their total assets respectively. In addition, insurance companies
and takaful operators may also invest abroad up to 10% of the NAV of investment-linked funds
that they market. These investments are required to be in compliance with prudential insurance
and takaful regulations issued by the Bank Negara Malaysia.
•
Fund/asset managers may invest abroad up to the full amount of investments by their non-
resident clients and up to 10% of investments by resident clients. These funds may be pooled to
benefit from economies of scale when investing abroad. Such investments are required to be
based on the mandate of their clients and in compliance with the Securities Commission’s
prudential guidelines.
(vi)
Issuance of Bonds Denominated in Ringgit by Multilateral Development Banks and
Foreign Multinational Corporations
To deepen the development of the domestic bond market, Multilateral Development Banks (MDB),
where Malaysia is a member, and foreign multinational corporations (MNC) may, based on the
merits of each case, issue ringgit-denominated bonds in Malaysia.
(vii) Forward Foreign Exchange Contracts
Effective 1 April 2004, rules on hedging are liberalised to facilitate overall economic management
of currency risks as follows:
•
MDB and MNC issuers of ringgit-denominated bonds, will be allowed to enter into forward foreign
exchange contracts with onshore licensed banks to hedge their currency risks.
•
Similarly, non-resident investors subscribing to these ringgit-denominated bonds issued by MDB
and MNC can also enter into forward foreign exchange contracts with onshore licensed banks to
hedge their currency risks arising from the investment in these ringgit-denominated bonds.
•
Forward sales by residents of any foreign currency receivables for ringgit with onshore licensed
banks or approved merchant banks can now be undertaken up to the tenure of the underlying
transaction as long as the transaction is supported by firm underlying commitment to receive such
currency (previously foreign currency receivables, other than export receipts, could be sold forward
up to 12 months only).
•
Residents may also enter into forward foreign exchange contracts to sell foreign currency yet to be
received for another foreign currency with onshore licensed banks and approved merchant banks
up to the tenure of the underlying transactions.
•
Resident companies may temporarily retain up to the amount of foreign currency receipts received
earlier than the maturity date of the forward foreign exchange contract in their onshore FCA,
pending maturity of the forward foreign exchange contract.
•
Residents may enter into interest rate swaps with onshore licensed banks, approved merchant
banks and licensed offshore banks in Labuan.


92
0
5
10
15
20
25
1998
1999
2000
2001
2002
2003
RM million
Graph 3.7
Manufacturing Sector: Overseas investment and 
Approved Foreign Investment in Malaysia
Overseas investment
Approved foreign investment in Malaysia
Source: Ministry of International Trade and Industry 
 
Bank Negara Malaysia
Sectoral Outlook
On the production side, growth is expected to be
supported by stronger performance across all sectors,
except agriculture and construction. The
manufacturing and services sectors are expected to
remain as the main drivers of growth. The agriculture
sector is also projected to expand although at a more
moderate pace following the strong performance in
2003. Growth in the construction sector would be
moderate amidst weaker civil engineering activities.
In the manufacturing sector, ongoing structural
shift has become more evident as the sector’s
Table 3.4
Real GDP by Sector (1987=100)
2003p
2004f
Annual
change (%)
Agriculture
5.5
2.6
Mining
4.8
5.5
Manufacturing
8.2
10.2
Construction
1.9
1.5
Services
4.1
5.2
Real GDP
5.2
6.0 - 6.5
p Preliminary
f Forecast
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Broad based growth across sectors benefiting mainly from
strengthening global electronics cycle, higher trade and tourist
arrivals, as well as firm commodity prices.
competitive advantages adjust from labour-intensive
to higher technology-driven manufacturing
processes. Greater efficiency in the use of resources is
being realised through manufacturing companies
operating more at a regional level, as seen in the
relocation of some of the more labour-intensive
industries to lower-cost countries. Key indicators such
as the contribution of the manufacturing sector in
terms of value added and employment, flows of
investment as well as the retrenchment trend clearly
suggest that the manufacturing sector continues to
remain resilient.
The recent trend in overseas investment is a
reflection of Malaysian companies seeking greater
synergy based on locational advantages.
Consequently, notwithstanding the investments
abroad, the share of the manufacturing sector in
terms of value added (GDP) and total employment
have remained significant at 31% and 28%
respectively in 2003. Employment in the
manufacturing sector continues to expand, while
retrenchments have moderated further in 2003.
While retrenchments due to relocation accounted
for one-fifth of total retrenchments in the
manufacturing sector, it only amounted to 0.2% of
total employment in the manufacturing sector for
the period 2001-2003. Furthermore, new jobs
created by approved foreign investment in the
manufacturing sector (2003: 77,182 workers)
have outpaced the retrenchment in the sector
(2003: 14,967 workers). More importantly, outflows
of overseas investment in the manufacturing sector
(2003: RM2.3 billion) remain small compared
with approved FDI in the sector in Malaysia
(2003: RM15.6 billion).
% share
Graph 3.6
Manufacturing Sector: Share of Value Added  
and Employment 
15
20
25
30
35
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
Employment
Value added
Source: Department of Statistics, Malaysia
 
Economic Planning Unit


Outlook and Policy
93
As part of the efforts to expedite the structural shift,
promotion of manufacturing-related services was
intensified with the establishment of the
Manufacturing Related Services Division in both MITI
and MIDA. Consequently, there was an increase in
the number of applications received and approvals in
2003 for the establishment of OHQs, IPCs, RDCs and
regional offices (Table 3.5). Going forward, the
manufacturing sector will continue to move away
from labour-intensive production and give greater
emphasis to higher value added production with
knowledge-based labour of higher productivity
and skills.
Value added in the manufacturing sector is projected
to pick up further to 10.2% in 2004 (2003: 8.2%),
supported by the pick up in the global electronics
industry and improved domestic demand. Of
significance, the global semiconductor industry is
expected to strengthen, supported by broad-based
expansion across all geographical regions and
products. This is premised on expectations of a
strong increase in the global semiconductor capital
and investment spending of 27.9% in 2004 (2003:
5.7%). Most industry experts are more optimistic on
the prospects for the industry and have revised
upward their growth forecast for 2004. In the recent
dialogues between Bank Negara Malaysia and the
private sector, manufacturers in the electronics sector
in Malaysia also expressed a more optimistic outlook
for the industry in 2004.
Latest indicators suggest an upturn in the global
semiconductor cycle. Global semiconductor sales,
which have been expanding since the latter part of
2002, have strengthened sharply to register a growth
of above 20% in the last quarter of 2003. In the US,
shipment and sales of semiconductors have risen
strongly, while the book-to-bill ratio has improved to
above one since the fourth quarter of 2003. The
unfilled orders of electronic products and
communication devices in the US have also risen
steadily since early 2003.
Growth in the electronics industry would be driven
mainly by the wireless and PC markets, due to rising
demand for wireless applications as well as the PC
replacement cycle, as companies invest again
following their huge spending prior to the Y2K period.
This would be further augmented by the growth in
the consumer electronics products segment as
demand for new technology and multi-functional
devices such as camera phones, PDAs and DVDs gains
momentum.
Consonant with the pick up in the global electronics
industry and the spillover effects on the chemical
products industry, growth in the export-oriented
industries is projected to expand at a more rapid rate
of 13.8% (2003: 11.9%). Similarly, growth in the
domestic-oriented industries is expected to strengthen
to 8.3% (2003: 6.1%), due to improved demand for
motor vehicles and construction-related materials.
The services sector is expected to expand at a faster
rate of 5.2%, reflecting higher expansion across most
sub-sectors. Growth would be supported by higher
trade and tourism activities and improved consumer
spending. Of significance, growth in the wholesale and
retail trade, hotels and restaurants sub-sector is
expected to pick up. Similarly, growth in the transport,
storage and communications sub-sector is expected to
trend higher in line with the robust expansion in trade,
increased number of business and leisure passengers as
well as the expected strong growth in the cellular
segment of the telecommunications industry mainly
induced by new innovations. With the expected
increase in bank lending and other financial and
business services activities, the finance, insurance, real
estate and business services sub-sector is expected to
record a stronger growth in 2004. The services sector
will also be supported by the rapid expansion in new
growth areas, such as the shared services industry,
namely call centres, data centres, operational
headquarters, regional distribution centres and
international procurement centres, as well as specialised
types of ICT services.
The agriculture sector is expected to expand further,
albeit at a more moderate pace of 2.6% in 2004 as
growth in the major commodities, particularly palm oil
and rubber, is expected to moderate following the
double-digit growth in 2003. While yields are likely to
remain strong amidst sustained high prices for palm oil,
increased production would emanate mainly from the
expansion in mature areas. Rubber production is
forecast to increase to above 700,000 tonnes, with the
bulk of the increase contributed by the smallholdings
Table 3.5
Approved Manufacturing-related Services
2000
2001
2002
2003
End-Period
Operational Headquarters (OHQs)
41
50
59
71
International Procurement
Centres (IPCs)
55
78
109
141
Regional Distribution
Centres (RDCs)
-
-
-
4
Regional Offices
357
404
436
473
Representative Offices
673
783
872
1,006
Source: MIDA


94
sector, as continued high prices are likely to induce
increased tapping activity. Within the other
agriculture group, production of selected
commodities is expected to increase, led by cocoa
(24.3%) and livestock (6.5%). Growth is also
expected to emanate from some of the food crops,
such as vegetables and fruits, reflecting the efforts by
the Government to increase domestic food crops
production through the Permanent Food Production
Park scheme. Meanwhile, paddy production is
estimated to be higher on account of wider usage of
high yielding paddy seeds.
Growth in the mining sector is expected to
strengthen to 5.5% in 2004, led by higher gas
output. The new Malaysian Liquefied Natural Gas
(MLNG) plant is expected to operate at a higher
capacity utilisation to meet the increased demand.
Meanwhile, production of crude oil (including
condensates) is expected to remain stable at 733,000
barrels per day (2003: 736,000 bpd).
Growth in the construction sector is envisaged to
increase at a moderate rate of 1.5%, due to lower
activity in the civil engineering sub-sector following
the completion of several infrastructure projects by
both the Government and the private sector.
Meanwhile, activities in the residential sub-sector is
expected to remain strong in view of the increase in
new housing starts during the first nine months of
2003, as well as ongoing work on projects under
construction. Demand for residential property,
especially for affordable housing, would remain
favourable, encouraged by the incentives granted
under the Economic Package, especially the stamp
duty exemption, tax relief and the waiver on the real
property gains tax until the first half of 2004.
Meanwhile, activity in the non-residential sub-sector
is expected to remain subdued, although on an
improving trend, as the average occupancy rates for
office space and retail complexes have stabilised
since the third quarter of 2003.
Prices and Employment
Inflation is expected to remain low at 1.5% in 2004,
while core inflation is estimated at 1%. Adequate
capacity, increasing competition and low inflation
abroad are expected to keep domestic inflation
benign.
In line with the stronger GDP growth in 2004, overall
growth in employment is also expected to
strengthen with encouraging growth in new job
opportunities. Consequently the unemployment rate
is expected to improve to about 3.4%. Meanwhile,
efforts would continue to be focused on improving
the quality and productivity of labour to ensure
workers are constantly prepared to meet challenges
associated with structural changes taking place in the
economy, in particular with regard to enhancing skills
in the higher value added manufacturing-related
services as well as services-led and knowledge-led
growth areas.
Balance of Payments
The balance of payments is expected to remain
strong in 2004, with a sustained high current
account surplus, reflecting the continued large
surplus in merchandise trade and improvement in the
services account. The current account of the balance
of payments is expected to remain large at 12.7% of
GNP in 2004 despite the projected stronger growth
in imports (15.4%). Strong export growth (11.1%),
underpinned by the systemic upswing in global
demand, is expected to contribute to a large surplus
in the trade account. The impetus to this growth
stems from the strong expansion in manufactured
exports (12%), in particular electronics exports, and
continued growth in agriculture exports. The
continued high level of agriculture and mineral
exports, which have low import content, will provide
further support to the large trade surplus.
In tandem with the pick up in global
semiconductor demand and expanding intra-
regional trade, growth in manufactured exports
is expected to strengthen further to 12% in 2004
(2003: 8.2%), with higher exports from both
electronics and non-electronics products. Exports
of electronic products would expand at a more
rapid rate of 14.7%, underpinned by increased
demand for PC, wireless products and consumer
electronic products such as DVDs and digital
cameras. Similarly, non-electronics exports are
1.5
1.0
0
1
2
3
4
5
6
1998
1999
2000
2001
2002
2003
2004f
Annual change (%)
CPI Inflation
f Forecast
Core Inflation 
Graph 3.8
Consumer Prices


Outlook and Policy
95
expected to increase further by 9.2%, reflecting
expansion in exports of rubber products, chemicals,
paper and pulp products, and furniture and parts.
Notwithstanding the strengthening external demand,
export prices would continue to remain subdued due
to global competition.
Exports of commodities, comprising agriculture and
minerals, are expected to moderate to 5.5% in 2004,
following two successive years of strong export
growth averaging above 20%. Agriculture export
earnings are projected to grow by 8.8% in 2004,
supported by high prices and increases in volume.
Palm oil and rubber exports will be the main
contributors, accounting for almost 70% of total
agriculture exports. Export prices of major agriculture
commodities are expected to remain high due to
favourable global demand amidst continued supply
shortages of some commodities, especially during the
first half-year. Of significance, export price of palm oil
is projected to remain strong, averaging RM1,650 per
tonne given the expected shortage in global supplies
of major oilseeds, especially soybean oil. Similarly,
rubber prices are expected to record a higher average
of 385 sen per kilogramme in line with expectations
of continued strong pick up in global rubber
Table 3.6
Balance of Payments
2003e
2004f
2003e
2004f
RM billion
US$ billion
Goods
97.7
96.4
25.7
25.4
Trade account
81.1
76.5
21.4
20.1
Exports (% change)
11.5
11.1
11.5
11.1
Imports (% change)
4.8
15.4
4.8
15.4
Services
-15.0
-11.9
-4.0
-3.1
Balance on goods and services
82.7
84.5
21.8
22.2
Income
-22.6
-24.7
-6.0
-6.5
Current transfers
-9.3
-9.8
-2.4
-2.6
Current account balance
50.8
50.0
13.4
13.2
(% of GNP)
13.7
12.7
13.7
12.7
Financial account
-12.1
-3.2
Errors and omissions
0.4
0.1
of which:
Exchange revaluation gain
11.9
3.1
Overall balance
39.1
10.3
e Estimate
f
Forecast
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Sustained balance of payments position with continued large
current account surplus and long-term capital inflows. Trade
surplus to remain large due to strong expansion in electronics
exports and continued growth in agriculture exports.
demand, particularly from the tyre manufacturers. In
addition, the upliftment of import quotas by
P
.R.China, effective January 2004 in line with their
commitments under the WTO, would lend further
support to the international rubber market.
Exports of minerals are projected to grow
marginally by 1.8%, as the higher receipts from LNG
would be largely offset by the sharp decline in crude
oil exports. Despite the relatively high crude oil prices
of US$28.50 per barrel, prices would still be lower
than in 2003. Malaysian crude oil prices would be
broadly in line with trends in the global oil markets in
2004, which would be characterised by a more
balanced demand and supply situation. Strict
management of oil supplies by OPEC members
would also influence global oil prices during the year.
Meanwhile, LNG exports are projected to remain
strong, expanding by 15.3%. The MLNG Tiga plant
would be operating at a higher capacity to
accommodate the increased demand.
Import growth is expected to emanate mainly from
higher imports of intermediate goods (15.5%),
consonant with forecast of stronger production and
exports in the manufacturing sector, in particular the
electronic segment. Capital imports are expected to
make a strong recovery (12.7%) in line with the
revival in investment activity. Higher capital goods
imports are mainly for capacity expansion in the
manufacturing, oil and gas, the airlines and shipping
sectors. The stronger growth in consumption imports
would reflect the projected higher consumer
spending. The higher growth would also reflect the
low base in consumption imports in 2003 due to the
impact of SARS.
The large surplus in the goods account will be more
than adequate to finance the net payments in the
services, income and current transfers accounts. The
services account deficit is envisaged to narrow to
3% of GNP, reflecting mainly the expected
improvement in performance of the tourism sector.
Earnings from the export of education and
healthcare services are expected to be higher with
improved quality of services and closer collaboration
between the Government and the private sector in
export promotion. Port earnings are expected to


96
increase in line with the increase in transhipment
cargo, while freight income is expected to improve
following the capacity expansion by Malaysian
shipping companies and airlines. The higher
volume of trade and increases in freight rates are
also expected to lead to higher payments for
transportation. Gross receipts in the other services
account are expected to increase in line with the
increasing trend in export of ICT products and
services such as software and business process
outsourcing services. The tax incentives for
Operational Headquarters and International
Procurement Centres and the widening of the
range of activities to include research and
development, design, marketing, distribution,
quality control, testing, labelling and packaging
that can be undertaken in free industrial zones or
licensed manufacturing warehouses are expected
to encourage higher export of value added
services.
The income account deficit is projected to be
sustained at 6.3% of GNP, reflecting higher profits
and dividends accruing to multinational companies
(MNCs) from their investments in Malaysia. The
projected larger outflow in investment income is
due to the strong export performance by the
electronics industry as well as other export-
oriented industries. Given the favourable
international outlook, profits and dividends
accruing to Malaysian companies investing abroad
are also expected be on an upward trend.
The financial account is expected to improve on
the back of continued long-term capital inflows,
especially higher foreign direct investment (FDI). As
reflected in higher approvals granted by MITI in
2003, FDI inflows are expected to remain sizeable
with the implementation of major projects in the
manufacturing sector. The bulk of the FDI in the
manufacturing sector is expected to be in the form
of reinvestment by the MNCs for capacity
expansion in view of the strong upturn in
electronics demand as this sector was already
operating at near full capacity in 2003. The
services sector is expected to continue to be a
major recipient of new FDI inflows, especially in
areas such as logistics, distribution and
manufacturing-support services in view of the
strong linkages between the growth of
manufacturing and services sectors. Meanwhile,
foreign investment in the oil and gas sector are
likely to pick up on prospects of more
joint-venture agreements with the national
oil company.
Malaysia’s overseas investment is likely to remain
significant. These overseas investments will
continue to be broad-based and channelled into
the oil and gas, services and manufacturing
sectors. These funds are likely to be targeted at
both developing and developed countries in the
form of acquisitions and new investments to
provide greater synergy to their operations in
Malaysia.
MONETARY POLICY IN 2004
Prospects for the global economy in 2004 have
turned more favourable. Against the more broad-
based growth in the industrial countries and
stronger regional economies, the Malaysian
economy is expected to grow at a faster pace of
6-6.5% in 2004. The firm recovery in export
demand would further reinforce sustained growth
in domestic demand. The increasing level of
consumer and business confidence should lead to
stronger private sector activities and further
consolidation in fiscal expenditure. Notwithstanding
rising aggregate domestic and external demand,
Table 3.7
Exports and Imports
2003p
2004f
RM billion
Gross exports
398.9
443.3
(% change)
11.5
11.1
Manufactures
327.0
366.3
(% change)
8.2
12.0
of which:
Electronics
167.6
192.3
(% change)
6.3
14.7
Electrical products
55.9
60.8
(% change)
1.9
8.7
Chemical & chemical products
21.2
23.6
(% change)
23.3
11.3
Minerals
29.8
30.3
(% change)
33.1
1.8
Agriculture
33.7
36.7
(% change)
28.1
8.8
Gross imports
317.7
366.8
(% change)
4.8
15.4
Capital goods
43.5
49.0
(% change)
0.7
12.7
Intermediate goods
233.0
269.1
(% change)
6.4
15.5
Consumption goods
18.9
22.6
(% change)
1.1
19.9
p Preliminary
f
Forecast
Source: Department of Statistics, Malaysia and Bank Negara Malaysia


Outlook and Policy
97
the existence of excess capacity and ongoing
capacity expansion allow for the increase in
demand and output to be met without creating
pressures on supply and prices.  Conditions of
continued low inflation provide flexibility for
monetary policy in 2004 to continue to be
supportive of the stronger growth momentum.
With the investment cycle in its early stage, a low
interest rate environment remains important to
reinforce the private sector-led expansion, while
providing flexibility for fiscal consolidation and
strengthening growth.
Inflation risks for Malaysia remain low, as the
economy is operating in an environment of excess
capacity. Stronger economic expansion in 2004 is
expected to narrow the output gap in some sectors
money market.  As in 2003, the Bank will rely on
market-determined instruments and direct
borrowings in its conduct of liquidity operations.
The overall policy thrust is to ensure a stable and
predictable environment to support business
expansion.  Over and above this, the objective of
monetary policy will also aim at improving the
efficient flow of credit to productive investments in
sectors and industries that have the potential to
raise the overall output and competitiveness of the
Malaysian economy.
Going forward, risks and uncertainties remain. The
twin deficits in the US and global current account
imbalances continue to pose risks, such as
disruptive global capital flows and exchange rate
volatilities causing large changes in relative prices
With low inflation and growth in early cycle, the thrust of
monetary policy in 2004 will continue to be directed at sustaining
the growth momentum. The low interest rate environment will
continue to provide support for private sector-led expansion.
while new investments will add on to output
potential.  With stronger recovery in demand and
the return of business confidence, signs of a revival
in business investment have emerged, with the
expansion in capacity taking place in sectors
experiencing high capacity utilization.  Meanwhile,
intense competition in the product market has
induced producers to increase efficiency in the use
of capital, labour and technology to contain costs.
The intense competitive pressure has moderated
wage increases while driving high productivity
growth.  Overall, stepped up capital investment
and ongoing productivity improvements together
with low inflation abroad would contribute to
sustaining low inflation.  The absence of
inflationary expectations has accorded greater
flexibility for interest rates to continue to remain
low to ensure growth is soundly entrenched.
Stronger economic growth, a large surplus in the
current account of the balance of payments and
some capital inflows create challenges for the
Central Bank to manage liquidity to maintain
stable conditions in the money market.  New
liquidity is expected to emanate from the strong
export performance and continued inflows of
long-term capital. Given these expansionary
influences on domestic liquidity, monetary
management in 2004 will actively balance excess
liquidity to maintain stable conditions in the
that affect the pace and spread of global economic
recovery. Global growth in the short term is still
heavily dependent on the growth in the US despite
stronger growth in the Asian region. These factors
could affect the consumer and business sentiments
and disrupt the momentum of global and regional
growth. The challenge to monetary policy
therefore would be to respond proactively to
emerging signals of impending developments in
the macroeconomic conditions. In this regard,
Malaysia enjoys a high degree of freedom for
flexible responses and more importantly, monetary
policy continues to have significant room to
manoeuvre to cushion the impact of possible
adverse external circumstances on domestic
economy.
The Monetary Policy Statement (MPS), which was
first released in August in 2003, will continue to
be issued on a quarterly basis together with the
announcement of the GDP data. This is part of the
Bank’s continuing effort to provide comprehensive
information to the public on the Bank’s policies.
The issuance of the MPS would provide a direction
of the Bank’s policy intent and thus contribute
towards stable and efficient conditions in the
financial markets.  It represents another
mechanism to fulfil its objectives of maintaining
monetary and financial stability to achieve
sustained long-term growth.


98
FISCAL POLICY IN 2004
The 2004 Budget was formulated at a time when the
outlook for the global growth was improving and
domestic private sector demand gaining strength.
Prospects of improved business and consumer
confidence were expected to pave the way for the
public sector to moderate its expansionary influence
and the private sector to take the lead in driving
growth. The Budget strategies announced on 12
September 2003, therefore, aimed at enhancing the
macroeconomic fundamentals and ensuring a more
broadly balanced economic structure with new
domestic economic activities contributing towards
sustainable longer-term growth. The thrust of the
Budget strategies, therefore, focused on facilitating
the private sector to assume its lead role as the
engine of growth, while engineering a gradual cut-
back in expenditure.  Against this background, the
overall financial position was budgeted to register a
smaller deficit of RM13.8 billion or 3.4% of GDP in
2004, after factoring in the potential net revenue loss
arising from the tax changes introduced in the 2004
Budget.
In a recent review of the 2004 Budget, it was
estimated that tax revenue collection for 2004
projected in the Budget could be on the high side,
given the lower actual tax collection for 2003.
Notwithstanding the downward revision in revenue
collection, it was deemed appropriate to maintain the
Federal Government development expenditure
(excluding contingent reserves) as budgeted in
September 2003. Development expenditure was
already scaled down to be significantly lower, a decline
of 21.1% to RM30 billion from estimated expenditure
of RM38 billion in 2003.  With the revision to revenue,
the fiscal deficit for 2004 is expected to be 4.5% of
GDP
, against the fiscal deficit of 5.3% registered in
2003.  While the pace of deficit reduction is more
gradual, the objective of fiscal consolidation remains
on track. Given the ample liquidity in the financial
system, the bulk of financing would continue to be
raised from the domestic market with no risk of
crowding out private sector financing. Recourse to
external borrowings will be determined mainly by the
need to establish international market presence and
for benchmarking purposes.
While development expenditure would be lower,
emphasis would be on improving productivity and the
delivery systems of the government to reduce the cost
of doing business and to support private sector
investment and initiatives.  Development expenditure
during the year would be targeted at enhancing the
longer-term productive capacity and competitiveness
of the economy.  The changing composition of fiscal
spending is expected to generate higher multiplier
effects on the economy. Given these strategies, the
decline in public sector demand is projected to be
marginal in 2004 (-0.4%), while private sector
demand is expected to show a stronger growth. The
private sector is expected to contribute 4.9 percentage
points to real GDP growth.
In terms of budget allocation, emphasis would
continue to be given towards enhancing the quality of
education and manpower skills. Special attention
would be directed towards modernising and nurturing
the agriculture and rural sectors to position them as
significant growth-generating sectors of the economy.
Priority would also be placed on the implementation
of programmes to improve the socio-economic well-
being of Malaysians, especially those in the lower
income group.
The 2004 Budget measures contained wide-ranging
tax and non-tax incentives directed at accelerating
growth in new growth industries; reducing the cost of
doing business; and increasing innovation through
higher research and development activities to enhance
the ability of companies to compete internationally. In
order to promote private sector activities, focus
continued to be placed on the development of small
and medium-sized enterprises (SMEs). Measures
implemented included raising the threshold for
chargeable income subjected to a corporate tax rate
of 20% from RM100,000 to RM500,000,
establishment of a SMEs debt restructuring committee
and enhancement of the size of micro-credit schemes
by RM1 billion. Other measures proposed to spur
further domestic-led growth included various schemes
to more aggresively promote Malaysian products,
establishment of a one-stop agency to promote the
services sector and tax incentives and financing
schemes to further modernise the agriculture sector
and promote investments in related downstream
activities.
The 2004 Budget also contained various tax
measures to reduce the cost of doing business.
Measures included allowing deduction on
entertainment expenses incurred in sales promotions;
reducing or abolishing import duties of selected
goods such as computer batteries, wooden and
plastic goods; as well as reducing or abolishing
export duties on several agricultural produce and
commodities.


Outlook and Policy
99
FINANCIAL SECTOR POLICY IN 2004
The policy thrust in 2004 will continue to focus on
building capacity of domestic financial institutions
and enhancing the resilience and stability of the
financial sector while ensuring that all sectors of the
economy continue to have adequate access to
financing. Attention is also given to strengthening
the framework for consumer protection and
promoting greater consumer awareness on banking
and insurance products and services.
The benchmarking exercise, initiated in 2000, which
enables banking institutions and insurance companies
to measure their performance by highlighting
operational and strategic opportunities as well as areas
for strategy building and skill enhancements will be
further refined.  Regular dialogues with the board and
senior management of banking institutions will
continue to be held to discuss on performance, trends
and issues that may have impact on the
competitiveness and overall strength of their
respective institutions. Another area of focus is on
improving the service quality of the banking
institutions and insurance companies. The findings
from the nationwide customer satisfaction survey that
was conducted in 2003 will be discussed with the
industry and strategies at the industry and institutional
level will be formulated to elevate quality of service.
It is also expected that a number of domestic
commercial banks will merge with their finance
company subsidiaries with the coming into force of
the amendments to the Banking and Financial
Institutions Act 1989 allowing for such mergers.
Domestic banking groups could improve operational
efficiency by reaping higher economies of scale and
enhance access to banking and finance companies
business nationwide. The framework for creation of
investment banks is also expected to be finalised in
2004. The framework would enable the investment
banks to undertake the whole range of capital
market activity under one entity, including equity
brokerage business.
Initiatives to strengthen the capacity of domestic
banking institutions will be complemented by
enhancement to prudential regulations as well as a
more comprehensive surveillance infrastructure.  On
the prudential front, efforts would be focused on the
formulation of a comprehensive framework to
regulate and supervise group structures involving
financial conglomerates as well as to improve
capability and expertise of the banking institutions
and the supervisors to meet the challenges in
implementing the new Basel Capital Accord. The
surveillance infrastructure will be enhanced to
provide early warning signal on any imbalances in the
financial sector.
As the banking sector remains the main source of
financing in the economy, initiatives would be taken
to further improve access to financing by all
segments of the economy. Focus would be towards
strengthening existing infrastructure to enhance
access to financing by the SMEs. Initiatives to
encourage consumer activism and enhance the
consumer protection framework would remain a
priority. The Financial Mediation Bureau (FMB),
would be established during the year. This is a one-
stop centre to provide customers with avenue of
legal redress against all financial institutions to deal
with their grievances on banking institutions,
insurance companies, development financial
institutions under Bank Negara Malaysia supervision
and payments system operators. A framework to
improve the level of transparency and disclosure on
all retail financial products offered by the banking
institutions to facilitate a more effective and well
informed decision making by customers would be
introduced during the year. To further strengthen
the consumer protection framework in an
increasingly market-oriented financial system, the
legislation that will introduce a deposit insurance
system in Malaysia is expected to be tabled before
Parliament in 2004.
Bank Negara Malaysia is also mandated to ensure
that the payment systems and instruments in the
country are safe and efficient and that there is
continued public confidence in the use of payment
instruments.  This would entail mitigating risks in the
financial system, promoting efficiency of the
payment systems, enhancing security features of
payment systems and instruments as well as
exercising oversight over such systems and
instruments. In addition, Bank Negara Malaysia will
encourage and educate consumers to avail
themselves of the wide variety of electronic payment
facilities and products in line with the move towards
a cashless society.
In the Islamic banking sector, key policy thrusts in
2004 will continue to focus on enhancing the
effectiveness and efficiency of the Islamic banking
system as an enabler of economic growth and
development. The policy thrusts in 2003 to
strengthen the financial infrastructure, enhance the


100
regulatory framework, strengthen the Shariah and
legal infrastructure as well as enhancing intellectual
capital development and consumer awareness will
continue to be pursued in 2004. In the development
of the financial infrastructure, the window
institutional structure of banking institutions
participating in the Islamic Banking Scheme would be
further strengthened to provide for the effective
regulation of Islamic banking operations based on its
unique characteristics.  The Islamic banking
landscape will also be transformed with the issuance
of up to three new Islamic banking licences to
foreign financial institutions in 2004.
To enhance the effectiveness of the Shariah
governance framework, Guidelines on the Shariah
Committee for Islamic banking institutions would be
introduced to delineate the roles and responsibilities,
qualifications and the terms of appointment of the
Shariah advisory body at Islamic banking institutions.
To support the sound and progressive development
of the Islamic banking industry, initiatives in
strengthening the legal infrastructure would continue
to be pursued in 2004. These initiatives include
expanding the scope of arbitration framework for
Islamic banking and finance cases, the review of the
Islamic Banking Act 1983 to strengthen the legal
framework for Islamic banking operations and the
finalisation of tax issues on Islamic banking and
finance under the Law Review Committee to accord
a neutral tax treatment between Islamic financial
products and conventional financial products.
Promoting financial soundness and building financial
resilience of the Islamic banking system will be
emphasised through the refinement of prudential
regulatory standards to incorporate specific features
of Islamic banking and enhancing market depth
through the introduction of variable rate financing
mechanism and the mudharabah and musyarakah
implementation framework as well as the
development of an Islamic reference rate.
Policy thrusts for development financial institutions
(DFIs) will be guided by the strategic directions set
out in the Financial Sector Masterplan.  The focus of
policy is to strengthen further the foundation on
which DFIs can operate efficiently and effectively,
through building the capacity of the DFIs and
providing the enabling environment for the DFIs to
operate efficiently and effectively. Emphasis will be
accorded towards ensuring DFIs remain committed
and focussed on mandated roles, to increase the
responsiveness of DFIs to the developmental
requirements, especially of the SMEs and identified
priority sectors. In addition, current initiatives to
enhance the capability and capacity of DFIs as
specialised institutions in providing advisory services
to their targeted clients, in particular, SMEs, would
continue in 2004.  This will be complemented with
initiatives to strengthen the risk management
practices of the DFIs.
Financial sector policies in 2004 will continue to
focus on strengthening the resilience, stability,
efficiency and effectiveness of the financial system to
ensure that the financial sector continues to play an
effective role in supporting economic growth as well
as meeting the nation’s social objectives. Efforts are
focussed not only on the creation of a sound and
resilient financial sector but also on capacity building
of the financial sector to elevate it to a higher level of
performance, efficiency and excellence.


Outlook and Policy
101
Report on SME Development Framework
In October 2002, an Inter-Ministry SME Steering Committee was formed to take forward the
recommendations by Bank Negara Malaysia contained in its report, Proposed Comprehensive Framework
for the Development of Small and Medium Enterprises (SMEs). The proposed framework outlines
recommendations for the creation of an enabling environment for development of SMEs across all
sectors of the economy. The proposals are aimed at strengthening the infrastructure for SME
development, building the capacity of the SMEs and improving their access to financing towards
increasing their capacity to contribute to the economy.
Strengthening the Infrastructure for SME Development
Since its inception, the Steering Committee has conducted assessments on the existing infrastructure
for SME development. The underlying objective was to identify areas of resource duplication among the
various Government ministries and agencies, and to address gaps in the existing infrastructure for SME
development. This undertaking involved: -
•
A review of the roles and responsibilities of the ministries and agencies involved in SME
development;
•
An assessment on the need to form a central coordinating body for SME development;
•
An evaluation of the feasibility of enacting an SME Law to coordinate efforts for SME development.
For greater focus and enhanced coordination, the Steering Committee proposed that a permanent
institutional framework be established in order to enhance the Government’s capacity and ability to
continuously promote the development of competitive and resilient SMEs across all sectors. Having a
formal structure dedicated to the development of SMEs would result in greater synergies and
synchronisation of efforts among the various stakeholders involved in SME development, while ensuring
that SME development issues across all sectors are appropriately identified and addressed.
Following the Steering Committee’s presentation of its recommendations to the Cabinet Committee for
National Competitiveness, the Government will establish a National SME Development Council. The
SME Council will function as the highest policy-making body to chart the future direction and strategies
for SME development and will be chaired by the Prime Minister. Membership to this high-level SME
Council will comprise Ministers from stakeholder ministries, as well as appointed representatives of
private sector organisations involved in SME development, with Bank Negara Malaysia serving as the
Secretariat.
Bridging the Gap
To further enhance the coordination and comprehensiveness of SME development, the Steering
Committee has embarked on several initiatives to address the gaps in the current infrastructure for
SME development: -
•
Establishment of a standard definition for SMEs across all sectors. Currently, the definition of an
SME varies amongst the various Government ministries and agencies based on their respective
criteria. Standardising the definition of SMEs within the national context will enable effective policy
setting to target sectors within the economy, facilitate the provision of technical assistance and
improve the channeling of financial benefits and other incentives under various policies. It allows for
the physical identification of SMEs at the micro-level, encourages the formation of SME associations
at the macro-level, and facilitates better articulation of the problems and prospects of the sector.
The standardisation of definition of SMEs will also support the collection of relevant and comparable
SME data for database-building purposes.


102
•
Establishment of a comprehensive national SME Database. The absence of a central database with
relevant SME and entrepreneurship statistics makes it difficult to gauge the present stage of SME
development, their operating conditions, financial viability and developmental needs. To cultivate
the potential of SMEs as a source of endogenous growth, and to facilitate informed policy decision-
making with regard to SME development, SME policymakers need to be able to measure, monitor
and evaluate the performance and contribution of SMEs to the nation’s overall economic growth
process. The availability of a comprehensive national SME Database will greatly assist in the process
of monitoring and evaluating the level of SME development, determining their development needs
and providing critical input for the formulation of development policies.
•
Formulation of a coordinated framework for the marketing and promotion of SMEs across all
sectors. The emphasis is on the overall marketing and promotion of SMEs in terms of products,
services, and the SMEs themselves. SMEs also need special assistance in the areas of product
development and improvement, design, packaging and branding of their products. The formulation
of a comprehensive and coordinated framework will ensure the efforts of the various stakeholders
are concerted towards assisting SMEs to penetrate new markets, increase awareness on branding
and intellectual property, enhance business networking, linkages and strategic alliances between
SMEs and other larger firms.


The Financial Sector
104-107
Sources and Uses of Funds of the Financial System
107-119
Management of the Banking System
110-111
White Box: The International Center for Leadership in Finance
119-122
Supervisory Activities
122-127
White Box: Banking Measures Introduced in 2003
128-140
Performance of the Banking System
141-149
White Box: Financial Sector Masterplan
150-151
White Box: The Proposed Deposit Insurance System in Malaysia
152-157
Other Financial Institutions
157-172
Financial Markets
164-165
White Box: Key Capital Market Measures in 2003
172-178
Developments in Payment and Settlement Systems
173-175
White Box: Payment Systems Act 2003
178-180
Malaysia’s Anti-Money Laundering and Counter Financing of 
Terrorism (AML/CFT) Programme 


104
SOURCES AND USES OF FUNDS OF THE
FINANCIAL SYSTEM
Total assets of the financial system expanded
significantly by 12.1% to RM1,564 billion in 2003 in
line with the improvement in overall economic
performance. As a share of GDP
, total assets of the
financial system increased to 399% of GDP
(2002: 386%).
Assets of both the banking system and the non-
bank financial intermediaries (NBFIs) expanded in
2003. Total assets of the banking system increased
by 13.2% (2002: 6.8%), while assets of the non-
bank financial intermediaries (NBFIs) grew by 8.4%
(2002: 8.6%). The bulk of the increase in assets
within the banking system was due to the stronger
growth in assets of the commercial banks. This
reflected mainly the increase in deposits with other
financial institutions (19.5%), investment in
securities (15%) and loans and advances (7.2%).
The growth in assets of the NBFIs was driven
principally by an expansion in the assets of the
provident, pension and insurance funds (+RM30.5
billion), which accounted for 65.1% of the increase
in the total assets of NBFIs.
During the year, the bulk of new resources was
contributed by deposits placed with the financial
The Financial Sector
Bank Negara Malaysia
12.8%
Commercial banks
40.3%
Finance companies
9.1%
Merchant banks
2.8%
Discount houses
1.9%
Development financial institutions
5.1%
Other financial intermediaries
5.8%
Life insurance funds
4.1%
General insurance funds
1.1%
Provident, pension
and insurance funds
22.2%
Other provident and pension funds
3.0%
Employees Provident Fund
14.0%
p Preliminary 
Graph 4.1
Assets of the Financial System as at end-2003p (% share)
Total Assets: RM 1,564.0 billion
institutions and contributions to the provident,
pension and insurance funds. Deposits mobilised by
the financial institutions grew at a higher rate of
11.8% in 2003, compared with 6% in 2002. The
banking institutions (comprising commercial banks,
finance companies, merchant banks and discount
houses) continued to be the largest mobiliser of
deposits in 2003, accounting for 71.1% of the
increase in deposits raised by the financial system in
2003 (2002: 83.5%) and 81.4% of total
outstanding deposits of the financial system as at
end-2003 (2002: 82.6%). The strong deposit
growth was due to improved economic conditions,
which resulted in higher disposable income and
financial wealth of households and business
enterprises.
In terms of holders, deposits were mainly held by the
non-financial private sector (comprising individuals
and business enterprises), which accounted for
71.2% of the total outstanding deposits as at end-
2003 (79.6% as at end-2002). The deposits of this
group grew by 16.6% in 2003, with higher deposits
by individuals (47.2% of total outstanding deposits).
In 2003, deposits of business enterprises also
increased significantly by 14.6% (2002: 2.7%), while
deposits by individuals grew at 7.7% (2002:6.9%).
As in previous years, fixed deposits continued to
account for the bulk of the increase in deposits


105
The Financial Sector
placed by the non-financial private sector, with
holders continuing to exhibit preference for
deposits with shorter maturities, given the smaller
Table 4.1
Assets of the Financial System
Annual change
As at
end-
2002
2003p
2003p
RM billion
Banking system
58.5
122.2
1,046.7
Bank Negara Malaysia
 12.5
38.6
200.8
Commercial banks1
33.2
66.7
629.6
Finance companies
8.9
11.3
142.0
Merchant banks
0.3
2.8
44.1
Discount houses
3.6
2.8
30.2
Non-bank financial intermediaries
42.6
46.8
517.3
Provident, pension and insurance
funds
27.0
30.5
347.7
Employees Provident Fund
15.2
18.0
220.2
Other provident & pension funds
4.5
1.5
46.2
Life insurance funds
6.7
9.8
64.1
General insurance funds
0.6
1.2
17.2
Development financial institutions2
11.1
6.7
79.1
Other financial intermediaries3
4.5
9.6
90.5
Total
101.1
169.0
1,564.0
1 Includes the Islamic banks (since 1999).
2 Includes Bank Simpanan Nasional (National Savings Bank), Bank Kerjasama
Rakyat Malaysia Berhad, Bank Pertanian Malaysia, Malaysian Industrial
Development Finance Berhad (MIDF), Borneo Development Corporation,
Sabah Development Bank Berhad, Sabah Credit Corporation, Export-Import
Bank Malaysia Berhad, Bank Pembangunan dan Infrastruktur Malaysia
Berhad, Bank Industri dan Teknologi Malaysia Berhad, Malaysia Export Credit
Insurance Berhad, Credit Guarantee Corporation Malaysia Berhad (CGC) and
Lembaga Tabung Haji (Pilgrims’ Funds Board).
3 Includes unit trusts run by Amanah Saham Nasional Berhad (ASNB) and
Amanah Saham Mara Berhad, cooperative societies, leasing and factoring
companies, venture capital companies and housing credit institutions
(comprising of Cagamas Berhad, Borneo Housing Mortgage Finance Berhad
and Malaysia Building Society Berhad).
p Preliminary
interest differentials between short- and longer-term
deposit rates.
Contractual savings with provident and pension
funds, as well as contributions to insurance funds,
continued to be one of the major sources of funds
for the financial system, expanding by 8.3% to
account for 19% of the total funds mobilised by the
financial system as at end-2003. Meanwhile, capital
and reserves of the financial system increased by
17.8% in 2003 (2002: +10.2%), reflecting
mainly improved financial performance of the
banking institutions.
The increase in the total resources of the financial
system in 2003 was invested mainly in loans and
advances and securities. Total loans and advances
grew by RM40.4 billion or 7.2% in 2003
(2002: RM35.2 billion or 6.7%). This development
was due mainly to increased demand from the
household sector, as reflected by the higher
demand for loans for the purchase of residential
property and consumption credit. In addition,
financing available to SMEs was also higher during
the year, with outstanding loans increasing by
Graph 4.2
Sources and Uses of Funds of the Financial  
System as at end-2003p (% share)
14.7%
10.0%
19.0%
10.6%
5.7%
25.2%
38.3%
3.1%
1.1%
45.4%
14.4%
1.9%
0.4%
10.2%
Capital and reserves
Currency
Deposits
Borrowings
Funds from other financial institutions
Pension, provident and insurance funds
Other liabilities
Currency
Deposits with other financial institutions
Bills
Loans and advances
Securities
Gold and foreign exchange reserves
Other assets
USES
SOURCES
p Preliminary 
Total: RM1,564.0 billion
Table 4.2
Sources and Uses of Funds of the Financial
System
Annual change
As at
end-
2002
2003p
2003p
RM billion
Sources:
Capital and reserves
12.6
24.0
158.8
Currency
1.8
2.3
29.4
Deposits
 36.3
74.8
709.4
Borrowings
9.7
3.1
48.0
Funds from other financial institutions1
2.3
18.0
88.9
Insurance and provident funds
23.0
22.7
297.1
Other liabilities
15.5
24.1
232.4
Total
101.2
169.0
1,564.0
Uses:
Currency
0.3
-1.1
6.3
Deposits with other financial
institutions
13.9
36.7
224.6
Bills
2.7
-2.2
16.7
Treasury
1.6
-2.1
3.5
Commercial
1.1
-0.1
13.2
Loans and advances2
35.2
40.4
600.8
Securities
24.0
51.2
393.4
Malaysian Government
0.9
19.9
124.3
Foreign
0.5
0.3
3.5
Corporate
21.2
32.3
259.0
Others
1.4
-1.3
6.6
Gold and foreign exchange reserves
14.0
38.6
166.1
Other assets
11.1
5.4
156.1
1 Includes statutory reserves of banking institutions.
2 Excludes loans sold to Danaharta.
p Preliminary


106
10% on annual basis, the highest growth
registered since July 2001.
Investment in securities by the financial system
continued to expand in 2003, recording a significant
increase of 15% in 2003 (2002: 7.5%). The bulk of
Table 4.3
Non-Financial Private Sector Deposits1 with the
Financial System2
Annual change
As at
end-
2002
2003p
2003p
RM billion
Deposits3 with:
Commercial banks
16.1
37.3
355.2
Finance companies
3.0
0.2
64.1
Merchant banks
0.2
2.4
13.9
Discount houses
3.2
2.3
10.7
Bank Simpanan National
0.7
0.2
8.3
Others4
0.1
6.6
29.9
Total
23.3
49.0
482.1
Demand deposits
5.9
13.5
77.5
Fixed deposits
9.5
17.8
300.0
of which:
Up to 1 year
15.5
14.3
258.1
More than 1 year
-6.0
3.5
41.9
Savings deposits
5.8
11.3
75.4
NIDs5
0.5
0.3
2.7
Repos6
1.6
6.1
26.5
1 Refers to deposits placed by business enterprises (excluding NFPEs) and
individuals.
2 Excludes provident and pension, insurance and unit trust funds.
3 Refers to demand, savings and fixed deposits, negotiable instruments of
deposits and repos.
4 Includes development financial institutions, cooperative societies and housing
credit institutions.
5 Refers to negotiable instruments of deposits.
6 Refers to repurchase agreements.
p Preliminary
Graph 4.3
Non-Financial Private Sector Deposits with the Financial System as at end-2003p (% share)
p Preliminary 
By Institutions
Total Deposits: RM482.1 billion
By Types of Deposits
Total Deposits: RM482.1 billion
Finance companies
13.3%
Merchant banks
2.9%
Discount houses
2.2%
Bank Simpanan Nasional
1.7%
Others
6.2%
Commercial Banks
73.7%
Demand deposits
16.1%
Savings deposits
15.6%
NIDs
0.6%
Repos
5.5%
Up to 1 year
53.5%
More than 1 year
8.7%
Fixed deposits
62.2%
the increase was in equities and reflect improving
optimism and opportunity for high returns in the
equity market. Provident, pension and insurance
funds continued to be the main investors in
securities, accounting for 51.4% of the increase in
investments in securities. Meanwhile, gross holdings
of gold and foreign exchange reserves also recorded
a significant rise of RM38.6 billion or 30.3% in 2003
(2002: RM14 billion or 12.3%), on account of larger
foreign exchange inflows generated from the large
trade surplus, short and long-term capital inflows,
and unrealised revaluation gains on reserves.
Table 4.4
Direction of Credit1 to the Non-Financial Private
Sector
Annual change
As at
end-
2002
2003p
2003p
RM billion
Loans and advances
20.8
31.2
563.1
Agriculture
0.0
-0.4
13.6
Mining and quarrying
-0.2
0.1
1.1
Manufacturing
0.1
0.9
55.8
Construction and real estate
-1.5
4.4
80.9
Purchase of residential properties
17.1
16.8
147.8
Retail, wholesale, restaurants
and hotels
2.3
-0.3
21.0
Transport, storage and
communications
1.3
0.5
14.7
Business services
-2.6
1.7
21.6
Consumption credit
0.1
10.1
96.4
Purchase of shares
0.1
-1.7
19.3
Others
4.1
-0.9
90.9
Investments in corporate securities
48.1
2.1
259.0
Total
68.9
33.3
822.1
1 Excludes credit to non-financial public enterprises.
p Preliminary


107
The Financial Sector
p Preliminary 
Graph 4.4
Direction of Credit to the Non-Financial Private Sector as at end-2003p (% share)
Total Credit: RM822.1 billion
Mining and quarrying 0.1%
Agriculture 1.7%
Manufacturing 6.8%
Construction and real estate 9.8%
Purchase of residential property 18.0%
Retail, wholesale, hotels and restaurants 2.6%
Transport, storage and communications 1.8%
Business services 2.6%
Consumption credit 11.7%
Purchase of shares 2.3%
Others 11.1%
Investment in  
corporate securities
31.5%
Loans and advances
68.5%
MANAGEMENT OF THE BANKING SYSTEM
The thrust of banking policies in 2003 continued to
focus on enhancing the efficiency and
competitiveness of the domestic banking institutions
while reinforcing the resilience of the banking system
to preserve financial stability. Policies implemented
over the years to restructure and strengthen the
banking system, supported by improved economic
performance contributed to the strengthening of the
banking system in 2003. The risk weighted capital
ratio of the banking system remained above 13%
throughout 2003, while non-performing loans were
on a declining trend. This had enabled the banking
enhancing the foundations and environment for the
banking institutions to efficiently deliver quality
products and services, encouraging greater innovation
and maintaining financial stability. An important
strategy was to ensure that the banking system
continued to be a facilitator of growth, particularly in
providing financing and other ancillary services to the
small and medium enterprises (SMEs).
Progress of Financial Sector Restructuring
The financial sector restructuring that started during
the Asian financial crisis is virtually completed.
Following the closure of Corporate Debt
The design of banking policies in 2003 was aimed at enhancing
the foundations and environment of the banking institutions to
efficiently deliver quality products and services, encouraging
greater innovation and maintaining financial stability.
system to effectively support economic activities.
New loan approvals and disbursements expanded
strongly by 11.2% and 7.2% respectively, while total
outstanding loans grew by 4.8% in 2003. Overall,
financing provided by the banking system through
extension of loans and its holdings of private debt
securities expanded at an annual rate of 5.9%.
The completion of financial restructuring and stronger
balance sheets have enabled the banking institutions
to focus on harnessing their operational efficiency and
meeting the needs of their customers. In this regard,
the design of banking policies in 2003 was aimed at
Restructuring Committee in August 2002, another
important landmark in the financial sector
restructuring process in 2003 was the winding-down
of the operations of Danamodal Nasional Berhad on
31 December 2003, five years after its establishment
in 1998. During its operations, Danamodal injected a
total of RM7.6 billion into 10 banking institutions
affected by the Asian financial crisis, significantly
lower than the initial budget allocation of RM16
billion. Danamodal has recovered RM6.6 billion of
the capital investment, while the remaining RM1
billion capital in one institution is expected to be fully
divested in 2004. Prior to the winding-down,


108
Danamodal had redeemed its entire RM11 billion
5-year zero-coupon unsecured redeemable bonds on
21 October 2003. As at end-2003, Danamodal had
remaining assets of RM2.2 billion.
The timely establishment of Danamodal ensured the
success of the overall resolution of banking sector
problems arising from the Asian financial crisis. The
funds injected by Danamodal helped to increase the
capital of weak but viable banking institutions. With
the improved capital position, coupled with
operational restructuring, these institutions were
able to resume their lending activities. Danamodal’s
early action and strict adherence to the “first-loss”
principle where the existing shareholders absorbed
all the losses before the recapitalisation, has kept
the total cost of recapitalisation low, at
approximately 0.2% of GDP.
Danaharta, which completed acquiring non-
performing loans (NPLs) from the financial sector in
2001, has made significant progress in its recovery
operations. Of the RM52.4 billion adjusted loan rights
acquired in its portfolio, Danaharta expects to recover
RM30.6 billion over its lifespan, which translates into
an overall expected recovery rate of 58%. As at
end-2003, RM22.4 billion or approximately 73% has
been collected, of which RM19 billion has been
converted into cash, whilst the rest are still in the form
of non-cash assets, namely restructured loans,
securities and properties. The remaining expected
recoveries totalling RM8.2 billion is still pending
implementation of the respective recovery strategies.
In 2003, Danaharta has cumulatively distributed
recoveries amounting to RM13.4 billion in cash and
66,472,441 units of securities to the Government and
36 financial institutions. The distribution to the
financial institutions is done in respect of the 80:20
surplus recovery sharing agreement between the
financial institutions and Danaharta.
Given the progress of its operations and the
commendable recovery rate achieved, Danaharta
has paid in full, its RM1.3 billion loans from
Khazanah Nasional Berhad and Employees’
Provident Fund by June 2003, earlier than
scheduled. In addition, Danaharta has also
successfully redeemed the first two tranches of
zero-coupon bonds with a total face value of RM2.6
billion on 31 December 2003. The remaining 13
tranches, with a total face value of RM8.5 billion,
would be maturing in every subsequent quarter up
to 31 March 2005. As at end-2003, Danaharta has
cash and cash equivalents amounting to RM5.9
billion. With its existing financial position and the
remaining assets to be recovered, Danaharta is in
the position to redeem its remaining bonds of
RM8.5 billion without having to call upon the
Government guarantee.
Thrust of Policy Measures in 2003
The main thrust of policy measures in 2003 was the
continuation of efforts to strengthen the capability
and capacity of domestic banking institutions. In
particular, efforts to enhance the efficiency and
competitiveness of domestic banking institutions
were further intensified during the year, with
particular focus on harnessing human capital in the
banking institutions. These initiatives were
complemented by measures taken to safeguard
financial stability.
Given the importance of financing in ensuring
sustainable and balanced economic growth, the
thrust of policy in 2003 was also to ensure that all
sectors of the economy had adequate and continued
access to financing. Towards this end, policies were
directed at facilitating access to credit by developing
the financial infrastructure to meet the financing
needs of various sectors of the economy, particularly
the SMEs which are important in generating
domestic investment and growth. In addition, a
microfinancing programme with an extensive
outreach was established during the year for
microenterprises.
The growing sophistication of the financial markets
and products requires consumers to have greater
Table 4.5
Danaharta: Loan Recovery as at 31 December 2003
Adjusted loan
Expected
rights acquired1
recovery rate
(RM billion)
(%)
Acquired Managed Acquired Managed
NPLs
NPLs
NPLs
NPLs
Plain loan restructuring
2.2
5.5
62
87
Settlement
2.7
6.7
89
78
Schemes of arrangement
2.9
6.9
66
77
Schemes under Special
Administrators
2.5
2.9
51
35
Foreclosure
9.9
4.5
28
46
Others
1.7
3.0
60
53
Legal action
0.2
1.0
-
-
Total
21.9
30.5
49
66
Overall
52.4
58
1
Comprising total loan rights acquired of RM47.7 billion and accrued interest
of RM4.7 billion.
Note: Total may not add-up due to rounding.
Source: Pengurusan Danaharta Nasional Berhad.


109
The Financial Sector
awareness and understanding of banking products
and services, so that they can make well-informed
financial decisions. In this regard, the framework for
consumer awareness and protection was further
strengthened in 2003. The work on this area is
aimed at laying the foundation for a more
competitive operating environment and where
banking consumers will be able to make well-
informed decisions and be fully responsible for their
decisions.
Enhancing Domestic Capacity
In a more competitive environment, domestic banking
institutions need to be aware and understand the
drivers of performance to meet consumer demands in
an effective and efficient manner. More importantly,
the banking institutions need to be in a position to
provide high quality services at competitive prices to
benefit the overall economy. Against these objectives,
Bank Negara Malaysia continued to accord priority
towards strengthening the capability of domestic
banking institutions as well as improving the efficiency
of the overall banking system. After three years, the
capacity building efforts is showing positive results,
with the domestic banking institutions improving not
only their financial performance but equally important,
their quality of services and product innovativeness as
well as increasing usage of technology in delivering
products and managing risks.
To gauge the level of service quality of the banking
institutions, Bank Negara Malaysia implemented a
4-year programme to assess the requirements,
expectations and satisfaction level of consumers on
the quality of the products and services provided by
banking institutions and insurance companies. As
part of the programme, a nationwide survey was
conducted in 2003 involving 5,000 banking and
insurance customers, comprising individuals, SMEs,
large corporations and multinationals. The survey
covers various aspects of banking products and
services, both conventional and Islamic banking, as
well as insurance and takaful products and services.
The analysis of the survey result will provide a
snapshot of the current level of customers’ needs
and satisfaction, and highlight the areas for
improvement to enhance the level of customer
service in the banking and insurance sectors.
The domestic banking groups are also concentrating
on maximising the benefits of consolidation,
particularly through rationalising and streamlining
their internal operations and improving operational
efficiency. This had led to the offering of a broader
range of financial products and services to meet
various customer needs under one roof. Towards this
end, an important policy initiative in 2003 was the
amendment to the Banking and Financial Institutions
Act 1989 to allow the merger of commercial bank
and finance company within a domestic banking
group into a single legal entity. This single entity will
hold two licences, one to carry on banking business
and the other to carry on finance company business.
This change in the legal framework provides an
opportunity for the banking groups to further
improve their group structure and rationalise their
operations, and thus enhancing their efficiency.
As a service provider, the banking institutions rely
significantly on human intellectual capital. At the top
level of the management, highly skilled senior
managers are vital to drive the strategic direction and
position the banking institutions to maximise
opportunities presented by the continuously evolving
financial landscape. At the same time, staff with
appropriate skills at all levels of the institution is
necessary to implement the business strategies as
well as realise the improvements in business
processes and systems. As the business environment
and consumer demands are constantly evolving,
continuous upgrading of skills of staff is necessary.
Recognising this, Bank Negara Malaysia initiated two
important measures to provide avenues for
continuous learning for the banking institutions to
utilise in order to strengthen the competency of their
staff. The establishment of the International Centre
for Leadership in Finance (ICLIF) was aimed at
achieving this objective, to accelerate the
development of skilled leaders of financial institutions
and corporations. Towards this end, ICLIF is working
with renowned international business schools and
leading institutions to provide executive management
programmes tailored to developing leadership
capability and leaders in the financial services sector.
Equally important is the need to provide an avenue
for the other levels of staff in the banking
institutions to continuously upgrade their skills and
expertise in the face of evolving financial market
conditions. Increasingly, staff in banking institutions
need to possess specialised skills, particularly in the
areas of risk management, credit assessment and
system development. Towards this end, work has
been initiated to reposition the Institut Bank-Bank
Malaysia (IBBM) to continuously meet the learning
needs of the middle managers, executives and non-
executives of banking institutions. In addition,


110
The International Centre For Leadership In Finance
The financial sector has a vital role in promoting growth and economic transformation towards a more
diversified economic structure. These aspirations on the financial sector formed the main thrusts of the
Financial Sector Masterplan (FSMP), a ten-year plan that was launched in 2001 to develop a more resilient,
competitive and dynamic financial sector with best practices that supports and contributes positively to the
growth of the economy. In the first phase of the FSMP
, efforts are focused on enhancing the capability and
capacity of the domestic financial institutions to face the challenges in the changing and more demanding
economic and financial environment. This is vital in ensuring that the domestic financial institutions become
more innovative, technology-driven and strategically more focused, and able to compete effectively and
efficiently, thereby remaining relevant and meeting the changing needs of the economy.
As the financial services sector becomes increasingly more complex and competitive, financial institutions
need to make the necessary adjustments to become more productive and innovative in order to meet the
greater demands from businesses and individuals and remain competitive. In this respect, the quality of
human resource and leadership capability in the financial sector becomes increasingly crucial in defining
the success of the institutions. The training needs of middle management and staff of financial
institutions are well served by learning institutions such as Institut Bank-Bank Malaysia (IBBM) and
Malaysian Insurance Institute (MII). To complement this, there is a critical need for avenues for leaders and
senior management of financial institutions to pursue continuous training, particularly in strategic and
leadership management, and thereby drive the strategic direction of the institutions and transform the
institutions into high-performing organisations. For this, requisite leadership skills for the changed
environment require continuous learning. This includes having the ability to create a culture of high
performance within the organisation to drive the institution towards excellence and contribute towards
the long-term growth of the institution and the financial sector as a whole. The leadership needs to be
able to identify and capitalise on new emerging opportunities so that they can adapt rapidly to changes
and maximise on the opportunities presented by the changing environment. This was the motivation for
developing the infrastructure for high-level training for top management of organisations to create a high
quality human resource pool of top management for the financial sector and corporations.
Bank Negara Malaysia established the International Centre for Leadership in Finance (ICLIF) with the
objective of providing a focused and coordinated approach towards the development of world class leaders
in the financial and business sectors in Malaysia and the region. ICLIF was officially launched on 28 October
2003 and is established as a company limited by guarantee with a trust fund of RM500 million
(USD132 million), whereby the income generated from the fund will be utilised to finance the operations of
ICLIF. The establishment of ICLIF represents one of Bank Negara Malaysia’s contributions in providing an
avenue for top management of financial institutions and corporations to seek continuous learning whilst
having the opportunity to network, participate in shared learning experiences and able to form strong
alumni contacts. In this connection, the mandate for ICLIF is to develop excellence in leaders with regional
insights by providing learning opportunities and experience through effective development programmes.
ICLIF also strives to serve the needs of the financial institutions in the region and thus, complements efforts
in promoting Malaysia as a regional training centre of excellence for the financial services sector.
As ICLIF aims to accelerate the development of intellectual capital and managerial capabilities of senior
management of financial institutions and corporations, it adopts a multi-disciplinary approach and offers
programmes on strategic management as well as those that are relevant across the whole spectrum of
the financial services industry, covering banking, insurance and Islamic financial industry. ICLIF aims to
take a proactive approach in identifying the needs of the industry, which then serve as input in designing
the programmes. ICLIF’s planned programmes are divided into three broad categories:


111
The Financial Sector
•
Structured executive management programmes, in the areas of strategic management, customer and
marketing management, people management, business technology and knowledge management,
and risk management;
•
Seminars and workshops on topical issues, as well as providing a platform for the top management of
financial industry and corporations, regulators and academicians to discuss current economic and
financial issues; and
•
Specialised programmes in Islamic financial services and other specialist areas.
A distinctive feature of ICLIF is the strategic alliances it has formed with renowned international business
schools and learning institutions to provide programmes that are adapted to the regional context and to
the needs of the financial industry and corporations. Through these partnerships, ICLIF has entered into
arrangements with a number of international business schools to design and deliver structured executive
management programmes at ICLIF. The strategic partners provide the resource persons for the
programmes while ICLIF provides the necessary infrastructure and facilities. This approach will enable the
participants to have access to high quality management programmes at reasonable cost and thereby
provide greater opportunities for the leaders from the financial and corporate sectors to benefit from
world-class knowledge sharing and networking.
As part of achieving these objectives, ICLIF has developed a unique leadership competency model to
analyse and understand competencies that are necessary towards the development of excellent
corporate leaders in the regional context. These skills and behaviours will form the foundation in the
design and delivery of ICLIF’s leadership development learning programmes. One of these programmes
is the Global Leadership Development Program (GLDP), which is ICLIF’s flagship programme. The GLDP
represents ground-breaking design in terms of an executive education programme by drawing faculty
from leading learning institutions and consultants, which enables ICLIF to combine the best ideas and
thoughts on the various key leadership issues and concerns. These participating institutions and
consultants are the Peter F. Drucker Graduate School of Management-Claremont Graduate University,
Marshall School of Business-University of Southern California, Stanford Graduate School of Business
and Tower Perrins. The GLDP primarily focuses efforts on developing the best leaders across industries
by combining an optimal mix of theory and practical application in its leadership development
techniques. The programme also provides an opportunity for the participants to strengthen their
networking circle and participate in shared learning experiences and discussions with leaders of other
organisations. The GLDP will be held twice a year and comprise three parts, with Part 1 and 2
conducted in Malaysia while Part 3 comprises a focused two-week study programme to the United
States of America to provide a unique experience for the participants to be exposed to the best
learning institutions and corporate organisations in the United States of America. The first GLDP was
held from 9 to 13 February 2004 and attended by 20 top management of financial institutions and
corporations in Malaysia and from the region.
ICLIF is governed by its own Board of Directors, with the Governor of Bank Negara Malaysia as its
Chairman. In addition to the Board of Directors, ICLIF also has an Advisory Council, comprising eminent
persons from Malaysia and abroad, to provide strategic direction on training matters and the
development of high quality programmes. It evaluates the learning needs of the financial services and
corporate sectors in the region in developing programmes that meet the objectives of ICLIF.
The establishment of ICLIF aims to reinforce the notion that investments in human capital, including the
pursuit of leadership excellence, is a continuing process in this ever-changing environment. ICLIF will
therefore be focused on making positive contributions towards developing excellent leaders and become
a regional centre of excellence for leadership training in finance.


112
IBBM, as a training provider, aims to complement
professional institutes, universities and management
consultancy firms. Thus, to remain effective as a
premier training provider for the financial sector,
IBBM is giving priority to two broad areas, namely
provision of focused training and accreditation,
particularly in the specialised areas, and to act as an
effective training adviser to the banking institutions.
To achieve this objective, IBBM has developed
several broad strategies, which include building a
new education and qualification portfolio,
improving the institutional structure to support
future requirements and building capacity to deliver
specialised courses.
Another initiative pursued to strengthen the
banking institutions is the setting up of investment
banks. Policy proposals have been developed with a
view to place the new institutions in a stronger and
more competitive position vis-à-vis the regional and
global players. At the same time, a prudential
regulatory framework is being formulated, taking
driven by the low interest rate environment and
improved economic outlook, was effectively met by
the banking institutions.
There has been a marked shift in the lending
pattern of the banking institutions to the household
sector and small businesses. The share of loans to
the household sector has increased from 33.4% at
end-1997 to 48.7% at end-2003. This shift in
lending pattern has supported the growth in private
consumption and has positive spillover effect on the
other sectors of the economy. From the financial
stability perspective, the shift towards high-volume
low-value loans also diversifies the distribution of
credit risks within the banking system, minimising
the potential occurrence of large losses stemming
from the failures of a few large borrowers. At the
same time, Bank Negara Malaysia is mindful that a
continuous build up in household debts that is not
accompanied with an increase in the level of
household income could affect the sustainability of
the debt servicing capacity of the household sector
To promote endogenous sources of growth, attention was
directed at providing improved access to financing by SMEs.
into consideration existing regulations, the different
nature of the new institution and international
regulatory frameworks for comparable institutions.
This includes the envisaged structure for the
investment banks and their permissible activities.
Central to this is defining the appropriate capital
and liquidity frameworks that seek to converge the
manner in which risks are measured under the
existing frameworks. The capital and liquidity
frameworks are being formulated to best reflect the
nature of risks to be undertaken by the new
institution in order to give a fair representation of
the solvency position and risks undertaken by
investment banks.
Ensuring Continuous Access to Financing
With policy priority being accorded to generate
domestic sources of economic growth, access to
financing is critical to promote and sustain both
private consumption and investment. As the banking
system remains the largest provider of funds in the
economy, policy initiatives during the year were
directed at ensuring that the lending activities of the
banking system were supportive of economic growth
as well as facilitating access to financing to all sectors
of the economy. Indeed, the increased demand for
loans from both the household and businesses,
with destabilising effects on the banking system.
Bank Negara Malaysia has in place a surveillance
mechanism to monitor the banking system’s
exposure to the household sector and the debt
servicing capacity of the household sector. The
exposure to the household sector has thus far
remained within prudential levels. With rising
income levels, the household sector in Malaysia has
continued to accumulate net financial savings, as
reflected in higher accumulation of deposits against
debt accumulation. In addition, while the level of
NPLs for the household sector has increased, the
NPL ratio has remained at manageable levels.
Equally important is the ability of the banking
institutions to manage these risks. Since the crisis,
the banking institutions have enhanced their risk
management infrastructure and capabilities to
better cope with the changing risk profile of their
assets. This was further reinforced with the
availability of complete positive and negative credit
information of all borrowers in the banking system
on a real time basis provided by the Central Credit
Reference Information System.
In line with the policy priority of strengthening the
support to SMEs to promote endogenous sources
of growth, particular attention was directed at
providing improved access to financing by SMEs.


113
The Financial Sector
Although the Government, through various
ministries and agencies, have established various
financing schemes, it was evident that the
awareness among SMEs of these schemes was
low. To address this, Bank Negara Malaysia
established the SME Special Unit in May 2003 to
assist SMEs to obtain information on the various
financing schemes available to them and to
provide financial advisory services. In addition, the
SME Special Unit also assists in facilitating SMEs
in their loan application process. As at end-2003,
the Unit has received 1,789 enquiries from SMEs,
of which 82% were enquiries on sources of
financing, whilst the remainder was related to
problems on access to financing and requests for
loan restructuring. While the Unit strives to assist
viable SMEs, SMEs themselves need to ensure
satisfactory financial records are maintained to
facilitate the process.
One of the problems faced by SMEs is the existing
NPLs, which constrained their ability to obtain
new loans despite having on-going and viable
businesses. Bank Negara Malaysia has, therefore,
established a small debt resolution mechanism in
October 2003 to support viable SMEs that are
constrained by NPLs by facilitating loan
restructuring with their banks. A Small Debt
Resolution Committee (SDRC) has been
established to undertake independent
assessments on the viability of the businesses,
and propose the loan restructuring and assess
new financing requirements of the affected SMEs.
This mechanism is open to SMEs with on-going
businesses that have aggregate NPLs of not more
than RM3 million. As the debt restructuring may
involve new financing, Bank Negara Malaysia has
established the Rehabilitation Fund for Small
Businesses with an allocation of RM800 million.
As part of the efforts to enhance access to
financing, the Fund for Small and Medium
Industries 2 (FSMI2) and the New Entrepreneurs
Fund 2 (NEF2) were increased further. In 2003,
Bank Negara Malaysia provided additional
allocations of RM1.35 billion for FSMI2 and
RM650 million for NEF2. Consequently, the total
allocation of these two Funds increased to RM2
billion and RM1.15 billion respectively. Apart from
setting up special funds, Bank Negara Malaysia
also required the banking institutions to set their
lending targets to SMEs. Where the individual
institutions’ targets were deemed insufficient,
appropriate targets were imposed.
In addition, banking institutions have also
undertaken various initiatives to support SMEs in
obtaining financing. These initiatives include the
establishment of dedicated SME units, provision
of financial advisory services and display of client
charters. The display of the client charter by all
banking institutions enhances the efficiency of
loan approval process by disclosing the necessary
documentation for submission to the banking
institution to support the loan applications,
eligibility criteria, definition of project viability,
and duration taken by a banking institution to
process the loan application. Banking institutions
are also required to inform applicants of reasons
for their loans being rejected. Bank Negara
Malaysia monitors the compliance of the client
charter through the on-site inspection process.
The unexpected outbreak of Severe Acute
Respiratory Syndrome (SARS) in early 2003 had
adversely affected the tourism and other related
sectors. Two specific measures were introduced to
provide relief to ease the financial burden of
affected businesses and their employees. A
Special Relief Guarantee Facility of RM1 billion
was established in May 2003 to alleviate the cash
flow problems faced by businesses directly
affected by the SARS outbreak. Under the
scheme, affected businesses could obtain working
capital loans from banking institutions, up to an
aggregate amount of RM2.5 million, at low
interest rates. In addition, this was reinforced by
the guarantee facility of up to 80% of these loans
by the Credit Guarantee Corporation Malaysia
Berhad. Banking institutions also provided
financial relief to borrowers in the SARS-affected
industries by restructuring or rescheduling loans
for all types of borrowings and credit facilities. In
the case of employees whose remuneration were
reduced by their employers, banking institutions
extended similar financial relief on the housing
loans taken by the employees.
A significant initiative undertaken in 2003 was
the strengthening of the existing infrastructure
and institutional arrangements to extend the
outreach of financial services to microenterprises.
In February 2003, Bank Negara Malaysia proposed
to leverage on the extensive branch network of
Bank Simpanan Nasional and Bank Pertanian
Malaysia to provide microfinancing. To equip
these development financial institutions with the
necessary best practices and skills to provide
microfinancing, initiatives were undertaken to


114
develop microfinance products, operating
manuals and systems as well as training
programmes for loan officers and branch
managers. Meanwhile, to promote microcredit,
the Government allocated RM1 billion, channelled
through Bank Pertanian Malaysia (RM500 million),
Bank Simpanan Nasional (RM300 million) and
Amanah Ikhtiar Malaysia (RM200 million). Due to
the encouraging response from microenterprises,
the Government announced in the 2004 Budget
an additional allocation of RM1 billion to Bank
Pertanian Malaysia and Bank Simpanan Nasional
to finance microenterprise activities. Bank Negara
Malaysia is also working with the Ministry of Land
and Cooperative Development and Department of
Cooperative Development to strengthen the
cooperative movement as a potential source of
financing for microenterprises and low-income
groups. Efforts are underway to enhance the
infrastructure and regulatory and supervisory
frameworks to achieve this objective.
Promoting Active Consumerism
A vital aspect in the transition towards greater
market orientation is promoting active
consumerism. Consumers can be an important
force to drive the performance and efficiency of
the banking institutions. Towards this, consumers
need to be well informed of the different
products and services offered, and their rights
and responsibilities. There must also be an
effective avenue for consumers to seek protection
and redress. Efforts during the year continued to
focus on increasing consumer awareness and
further strengthening the consumer protection
infrastructure, including ensuring accessibility to
affordable banking services.
for their decisions. However, this does not absolve
the banking institutions from their responsibilities
to ensure that their products deliver what is
promised and that customers will obtain fair value
for their money.
The Consumer Education Programme, which has
now entered into its second year of
implementation, has received encouraging
response from the public. As at end-2003, the
BankingInfo website has received 6.4 million hits
and 1.2 million booklets have been taken up by
the public. During the year, another six booklets
were published, bringing the total number of
consumer booklets published to 18. Two of the
new booklets aim to provide information to assist
SMEs in preparing loan applications as well as the
different types of financing products available.
The other new booklets provide information on
the role and responsibilities of guarantors, the
Credit Guarantee Corporation Malaysia Berhad,
house financing-i and charge cards.
Bank Negara Malaysia is also finalising the
product transparency and disclosure rules. The
objective of such rules is to provide
comprehensive, clear and fair information about
the risks and liabilities of financial products and
services to consumers to facilitate informed
decisions. The disclosure standards focuses on
four main items deemed most essential for
making informed decisions, namely the form and
timing of disclosure, items to be disclosed and
disclosure requirements in advertisements. To
facilitate and reduce the cost of information
search by consumers, Bank Negara Malaysia is
also developing “Comparative Tables” on the
yield and cost of financial products and services
Efforts continued to focus on increasing consumer awareness and
strengthening the consumer protection infrastructure, including
ensuring accessibility to affordable banking services.
As outlined in the Financial Sector Masterplan, an
effective consumer education and protection
framework is being developed to set the
foundation for an environment where ultimately,
banking consumers will need to take greater
responsibility for their financial decisions. Once
the relevant information and risks have been
appropriately disclosed and explained, consumers
must be actively involved in comparing,
examining and deciding on investments or
purchases to be made, and assume responsibility
offered by the banking institutions. These tables
would serve as a one-stop reference centre for
information on the costs and features of financial
products and services offered. Initially, the focus
will be on developing comparative tables on the
commonly offered deposit and credit products.
As consumers become more discerning,
competition will drive banking institutions to
increasingly offer greater product differentiation
and value added services to gain competitive


115
The Financial Sector
advantage. Banking institutions are increasingly
leveraging on advances in technology to introduce
and market new products, services as well as new
delivery channels. This dynamic environment will
see the introduction of an increasingly broader
array of financial products and services to
consumers. However, as these innovations require
substantial investments, costs of the more
sophisticated products and services will result in
fees and charges. While this development may be
inevitable, attention has been given to ensure that
the public has access to basic banking services at
minimal cost while the more complex and
sophisticated products and services reflect their
appropriate costs. This is to ensure appropriate
pricing of banking services. In achieving this
objective, a balance is made between providing an
operating environment that promotes innovation
while also taking into account consumer interests.
Therefore, while Bank Negara Malaysia is
committed to a market driven approach to pricing,
this will be undertaken under an environment
where the interests of consumers are also
protected.
In this connection, Bank Negara Malaysia has
initiated work on establishing a framework on
basic banking services, which aims to ensure that
the banking public, especially the low-income
group, would have access to affordable basic
banking services. Under this framework, all
banking institutions would be required to offer a
basic bank account that would provide a
prescribed minimum level of services and
transactions to all Malaysians at minimal cost. The
basic banking services framework is being finalised
for implementation in 2004.
Attention has also been directed at enhancing
dispute resolution mechanisms for consumers to
seek redress. Towards this end, Bank Negara
Malaysia has finalised the structure and operating
framework of the new Financial Mediation Bureau
(FMB), which will commence operations in the first
half of 2004. This new entity will function as a
one-stop centre for the resolution of a broad range
of retail consumer issues raised against the
financial institutions that are regulated by Bank
Negara Malaysia. The enlarged scope of FMB will
provide the public with a prompt and more
effective resolution mechanism. In addition,
regional offices of FMB will be set up to enhance
access to its services nationwide. The expanded
scope of operations of the new bureau and the
increased maximum quantum of claim awards are
illustrated in the following table:
Elements
Banking sector
Insurance sector
Limit
Nature of dispute
Losses suffered not exceeding
RM100,000
All retail banking complaints except
those involving policies, credit
decisions, quality of service and cases
that have been or are referred to
court. This would include complaints
on the following:
• Personal Loans
• Housing Loans
• Automatic Teller Machine
• Credit Card
• Hire Purchase
• Savings Account
• Current Account
• Fixed Deposits
• Remittances
Claims not exceeding:
• RM200,000 (motor and fire
insurance);
• RM100,000 (others); and
• RM5,000 (3rd party property
damage)
All disputes between policyholders/
claimants and their own or third party
insurers except those involving pricing
of insurance product and
underwriting issues, fraud cases and
cases that have been or are referred
to court.


116
Maintaining Financial Stability
The increasingly complex and dynamic financial
activities demand continuous enhancements to the
regulatory and supervisory frameworks to maintain
financial stability. The soundness of the banking
system is important to safeguard the interest of
depositors and ensure that the banking system is
strong and well capitalised to support the growth
process through robust lending activities. In this
regard, due attention continues to be given to
enhance prudential regulations, to ensure that the
regulations are relevant in the face of rapid change in
the financial markets. At the same time, Bank Negara
Malaysia is mindful of the need to ensure that new
regulations would not stifle innovation and
competition amongst players in the financial market.
To further strengthen the regulatory framework, the
Central Bank of Malaysia Act 1958, the Banking and
Financial Institutions Act 1989, the Islamic Banking
Act 1983 and the Takaful Act 1984 were amended in
2003. A new Payment Systems Act 2003 was also
enacted during the year to provide for a
comprehensive legal framework to ensure that the
payment systems are protected from disruptions that
may affect financial stability, and that public
confidence in the payment systems and instruments
is preserved.
Among the key amendments under the Central Bank
of Malaysia (Amendment) Act 2003 are:
•
The enhancement of the regulatory and
supervisory framework for the over-the-counter
Ringgit bond market. This enables Bank Negara
Malaysia to carry out its functions in providing
infrastructure for the Ringgit bond market, which
includes the power to issue regulations necessary
for the regulation and operation of the systems
for the debt securities market;
•
The provision for Bank Negara Malaysia to
promote reliable, efficient and smooth operation
of national payment systems and payment
instruments. This is consequential to the
enactment of the Payment Systems Act 2003,
which provide the regulatory powers of Bank
Negara Malaysia over the designated payment
systems and payment instruments; and
•
The enhancement of the Shariah Advisory
Council of Bank Negara Malaysia [Please refer to
Islamic banking section for details].
Corporate governance practices in the banking
institutions were also enhanced during the year.
Good corporate governance reinforces sound
regulation and supervision. In most instances,
corporate governance forms the first line of defence
against any crisis. For corporate governance to work,
good corporate practices need to be instilled and
embedded in all aspects of the operations and at all
levels within the organisation. Sound corporate
governance would lead to greater responsibility and
accountability of the board and senior management
of the banking institutions. Therefore, the banking
institutions need to be headed by an effective board
with sufficient skills and a high degree of
professionalism. To help achieve this, Bank Negara
Malaysia issued in May 2003 the Guidelines on the
Establishment of Board Committees, Minimum
Qualification and Training Requirement for Directors,
and Definition and Responsibilities of Independent
Directors. The Guidelines set the requirements on the
establishment of three board committees, namely the
nominating committee, remuneration committee and
risk management committee, and the terms of
reference of each of the committee.
The nominating committee is responsible to ensure
that only the most competent individuals who can
contribute and discharge their responsibilities are
appointed to the board and key management
position. Among others, the committee is required to
provide a formal and transparent procedure for the
appointment of directors and chief executive officer,
and a mechanism to assess the effectiveness of
individual directors, the board, chief executive officer
and senior management officers. The remuneration
committee oversees the remuneration matters of
directors and senior management officers. The
committee is responsible for recommending the
remuneration framework for directors, chief
executive officer and senior management officers. It
should ensure that the remuneration framework of
the institution is competitive and consistent with the
institution’s culture, objectives and strategy, and
reflects the responsibilities of board members, chief
executive officer and senior management officers.
The risk management committee is responsible for
overseeing senior management’s activities in
managing credit, liquidity, operational, legal and
other risks, and ensuring that the risk management
infrastructure and process is in place and functioning.
Given the increased complexity of banking businesses
and the heavy responsibilities of the board of
directors, directors need to have the necessary
qualifications and experience to effectively discharge
their duties. In this regard, the Guidelines also focus


117
The Financial Sector
on the required skills and experience for this purpose.
In addition, recognising the critical role of
independent directors in spearheading corporate
governance and upholding independence of the
board, the Guidelines also set out the definition of
independent directors, and their expected roles and
responsibilities. As their primary responsibility is to
protect the interest of minority shareholders and the
general public, independent directors are expected to
provide effective oversight and ensure a strong
independent element on the board. To complement
these measures, the Guidelines on the Appointment
of External Auditor by banking institutions was
issued in August 2003 to mitigate potential conflicts
of interest arising from the long-term relationship
with an external auditor.
The increasingly complex group structures involving
financial conglomerates has called for the
development of a comprehensive regulatory and
supervisory framework for financial conglomerates.
The objective of the framework is to ensure that the
financial health of the financial groups can be
adequately assessed and monitored by supervisors.
Regulation is, therefore, to balance between allowing
group synergy and efficiency, and ensuring that the
activities of the financial conglomerates do not
introduce excessive risks to the financial system.
Towards this end, a concept paper on the
Consolidated Supervision of Financial Conglomerates
was issued in December 2003 with the aim of
formalising and strengthening the existing
infrastructure and regulatory framework for financial
conglomerates. Given the diverse risks associated
with the different activities undertaken by the
different entities within the financial conglomerates,
the proposed framework does not prescribe common
prudential requirements for all entities within the
financial conglomerate. Instead, the framework
emphasises on developing prudential guidelines and
principles to ensure that the financial holding
companies are financially strong and able to lend
support to its subsidiaries.
The framework focuses on five main areas, namely
group structures, corporate governance, risk
management, intra-group exposures and reporting
requirements. On group structures, the framework
outlines the main principles that would form the
basis for financial groups to determine their optimum
group structure, both from a commercial as well as
regulatory perspective. While it is recognised that the
financial groups would organise their group
structures according to their strategies and market
niches, sufficient safeguards need to be in place to
ensure that the group structure does not pose
systemic risk to the banking system. In particular,
regulation is required to ensure minimal transmission
of financial distress from unregulated entities to the
regulated entities within the group, which could
destabilise the banking system. In addition, there is a
need to ensure that the obligation of the
Government in assuring the safety of deposits would
not be extended to other non-depository institutions
within the group. The framework also establishes
basic principles of good corporate governance, which
focuses on the processes and structures used to
manage the business and affairs of a financial
holding company (FHC) and its related entities,
placing greater emphasis on the roles and
responsibilities of the board of directors and
management of the FHC.
As the FHC is expected to provide financial support
to all entities within the group, the framework also
sets out the capital adequacy requirements for the
group. In assessing financial strength of the
conglomerate, Bank Negara Malaysia will focus on
the capital adequacy of the individual banking
institutions on an individual and consolidated basis (if
the institution has subsidiaries), as well as on the
capital adequacy at the group and holding company
level. On risk management, the framework requires
the board of the FHC to establish a Group Risk
Management Committee to oversee the overall
management of the group’s risks, review the senior
management’s control and procedures in managing
these risks, as well as ensuring that remedial actions
are taken. To ensure that all potential sources of
contagion risks, other than cross-selling, are
identified and addressed promptly, the framework
also requires that written policies on intra-group
exposures be incorporated into the risk management
at group level. Subsequently, the FHC is required to
submit periodic reports to Bank Negara Malaysia to
facilitate the continuous assessment of the financial
conglomerate.
Bank Negara Malaysia is also reviewing the current
Guidelines on the Credit Limit to a Single Customer
(GP5) to expand the coverage of exposures to a
single customer to include exposures other than
credit facilities. This exposure would include amongst
others, exposures to holdings of shares and debt
securities, and off-balance sheet items. This revision
would also entail the streamlining of several existing
regulations pertaining to exposures to large
customers into a single comprehensive guideline for


118
easy compliance and reference by banking
institutions.
As banking institutions make greater use of
sophisticated financial instruments, they are
increasingly exposed to higher market risk. In this
regard, a concept paper on the Incorporation of
Market Risk into the Risk Weighted Capital Ratio
(RWCR) was issued in mid-2003 to principally assess
the impact of incorporating market risk into the
RWCR. The study indicated that the RWCR of the
banking system would decline marginally by 0.12
percentage points, with all banking institutions
maintaining a RWCR of more than 8%. Among the
banking institutions, merchant banks exhibited the
largest decline in their RWCR primarily due to their
principal activities in the capital market. Following a
series of discussions with the Market Risk Industry
Working Group, the framework was further refined
and the second concept paper was issued in January
2004. Among the significant changes made to the
framework include the definition of trading and
banking books, treatment on holdings of securities
resulting from debt/loan restructuring, and valuation
of illiquid papers. Banking institutions are required to
assess the quantitative impact of the revised
framework by February 2004.
The market surveillance also detected incidences of
unhealthy trading practices in the domestic bond
market. To preserve market integrity, banking
institutions were reminded to tighten their risk
management practices. The lack of transparency and
information gap in the over-the-counter bond market
is one of the factors that contributed to the
occurrence of irregular trading. To address the
information gap and lack of transparency, Bank
Negara Malaysia is working with the Securities
Commission to enhance the infrastructural
development of the bond market. These measures
include electronic trading platform to improve price
discovery mechanism and the automation and
integration of trade-related processes to allow for
further improvements in operational efficiency.
On the international front, work on the New Basel
Capital Accord or Basel II continued to be the focus of
the Bank for International Settlements (BIS). Following
the issuance of the second consultative paper in
January 2001 and after consultation with the global
financial industry, BIS issued the third consultative
paper (CP3) in April 2003. Among the main changes
in CP3 include a lower risk-weight for residential
mortgages, recognition of “past due” loans with
significant levels of provisioning, the introduction of an
alternative “Standardised” approach for operational
risk at supervisory discretion, and fine-tuning some of
the elements of the Internal Ratings Based (IRB)
approach. Before issuing CP3, the BIS conducted the
third quantitative impact study (QIS3) in October 2002
to gauge the impact of Basel II proposals on minimum
capital requirements. The results of QIS3, which was
released in May 2003, showed marginal increase in
credit risk capital requirements relative to the current
Accord for banking institutions adopting the
“Standardised” approach, while for banking
institutions adopting the IRB approaches, substantial
reductions in credit risk capital requirements were
reported. However, the new operational risk capital
requirement more than outweighed the reduction in
credit risk capital requirements, resulting in an overall
increase in capital for banking institutions adopting
the “Standardised” approach. In comparison, the
minimum capital requirements of banking institutions
intending to adopt the more sophisticated IRB
approach were broadly unchanged. The new rules are
expected to be finalised by mid-2004.
Bank Negara Malaysia has conducted a preliminary
impact study in October 2002 to ascertain the
impact of Basel II on the local banking industry
using the “Standardised” approach. The results of
the impact study indicated that, using the
“Standardised” approach, the RWCR of the banking
system would decline marginally, but still well above
the 8% regulatory requirement. The decline in
RWCR was mainly due to the new operational risk
capital requirements, which more than offset the
increase in the RWCR due to credit risk capital
requirements. In addition, the preliminary survey
findings indicated that unrated corporate loans and
past due loans contributed to the increase in risk-
weighted assets.
In tandem with this impact study, a study was also
undertaken to determine the readiness of domestic
banking institutions to adopt the IRB approach,
which requires banks to use internal ratings to
calculate the capital adequacy requirements. The
main challenge in the adoption of the IRB approach
is the availability of clean or usable data, which is
required to meet the minimum historical 5-year data
requirement. The task of data collection, cleansing
and verification is time-consuming. For some banks,
the recently concluded merger and consolidation
programme and the impending merger between
commercial banks and finance companies may
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The Financial Sector
data could only be developed post-merger to reflect
the current risk profile of the institutions. Data
storage will become a major factor under Basel II as
banking institutions will require data warehouses
with sufficient capacity to cater for the data
intensive IRB systems. To facilitate implementation,
banking institutions will also be required to invest in
staff training to gain the technical expertise to assist
with Basel II implementation.
In the case of banking institutions that already have
internal ratings systems, the challenge is that the
systems are relatively new and the results are
SUPERVISORY ACTIVITIES
The supervisory activities throughout the year 2003
were focused on multi-pronged strategies to further
promote the stability of the banking system in tandem
with the evolving financial industry and increasing
complexities of the financial landscape. These activities
involved on-site examination, off-site surveillance,
market assessment through formal and informal
dialogue sessions with industry players, as well as
further strengthening the capacity building and
assessment methodologies of the supervisors. The on-
site examination and off-site surveillance in supervising
The supervisory activities in 2003 were focused on multi-pronged
strategies to further promote the stability of the banking system.
untested. Some of the banking institutions are also
in the process of upgrading their internal rating
systems to be two-dimensional, covering the
borrower risk as well as the facility risk. Other
expected challenges faced by banking institutions
include being able to fully utilise the capital relief
gained through credit risk mitigation and risk
management techniques under Basel II.
To facilitate the implementation of Basel II in
Malaysia, a Basel II Task Force would be formed to
promote greater consistency and understanding
among banking institutions. The task force,
comprising Bank Negara Malaysia officials and
resource persons from the banking sector will
discuss experiences and build on the best practices
and approaches to capital regulation.
Moving Forward
Significant progress has been achieved in financial
sector restructuring and efforts to strengthen the
resilience and capability of the banking system.
Meanwhile, the Malaysian economy continues to
evolve, with new sources of growth emerging. This,
combined with changes in the global financial
environment will demand greater efficiency,
competitiveness and resilience from the domestic
banking sector. Hence, moving forward, the
strategies aimed at improving the efficiency of the
domestic banking sector while preserving financial
stability will continue to be pursued. At the same
time, given the important role of the banking sector
in promoting sustainable and balanced economic
growth, due emphasis will continue to be given to
ensure that the banking sector remains supportive
of meeting the socio-economic agenda of the
country.
banking institutions continued to be premised on the
risk-based supervisory approach. The overall thrust of
this approach is to identify and assess key risks
encountered by banking institutions and their
capacity to manage these risks. Based on this
assessment, a supervisory plan is formulated for each
banking group, so that supervisory resources can be
optimally allocated in supervising the institutions,
with particular focus on areas of high risk.The
financial and operating conditions of all entities
within a banking group and activities undertaken by
these entities are taken into account to ensure that
these do not adversely affect the performance of the
banking group concerned and pose a systemic threat
to the banking system as a whole.
In 2003, Bank Negara Malaysia conducted 93 on-site
examinations on banking institutions, including the
Islamic banks, as well as development financial
institutions. These examinations covered head offices,
local and overseas branches, bank holding companies
and related companies of banking institutions. The
supervisory scope has also included the examination of
Islamic banking operations and anti-money laundering
measures undertaken by banking institutions. In
addition to the enhanced supervisory scope, Bank
Negara Malaysia has, in recent years, accorded greater
supervisory resources in evaluating banking
institutions’ market and operational risk management
practices, besides credit risk.
To complement the on-site examination of banking
institutions, on-going monitoring of the financial
health of these institutions was conducted through
off-site surveillance. Banking institutions were
monitored closely through regular reporting and
rigorous financial analysis accompanied by periodic


120
stress testing for the early detection of emerging
problems. The off-site surveillance function also
included the review and approval of the financial
accounts of banking institutions to ascertain
compliance with accounting standards and Bank
Negara Malaysia regulations, with particular emphasis
on the adequacy of provisions for impairment of
assets, particularly loans and investments. The off-site
surveillance function has been intensified, to include
credit and fraud surveillance through electronic
information database.
The soundness of banking institutions has been
evaluated based on the CAMELS rating framework
which encompasses the review of a banking
institution’s capital adequacy, asset quality,
management capability, earnings performance, liquidity
and sensitivity to market risk. With the inclusion of the
“sensitivity to market risk” component to the CAMELS
framework in 2003, the Bank has developed a more
structured supervisory framework to assess banking
institutions’ market risk management processes and
modeling techniques. During the year, a measurement
tool kit for market risk was developed to enable bank
supervisors to validate the market risk models used in
banking institutions. An essential element of banking
supervision included the supervision of banking groups
on a consolidated basis. In this regard, the Bank
conducted regular examinations of bank holding
companies as well as related non-banking entities
within the banking groups. These examinations enabled
the Bank to identify sources of vulnerability and assess
the strength and ability of the holding company in
providing financial support to the banking institutions
within the group. It also enabled the Bank to evaluate
the potential impact that other non-bank entities within
the group may have on the banking institutions’
solvency.
In engaging the risk-based supervision approach, Bank
Negara Malaysia implemented a structured risk
assessment framework to evaluate the risk profile of
each banking institution and the adequacy of the
institution’s risk management processes. While banking
institutions have mainly focused on implementing credit
and market risk management, they have also been
moving towards a fully integrated risk management
system, which provides the management with a holistic
view of risk management so that interactions amongst
risks can be identified and managed more effectively. In
this regard, banking institutions have also begun
developing a more structured process in managing their
operational risk. Given that banking institutions are still
in different stages of developing their respective
integrated risk management framework, the Bank
continues its developmental role in monitoring and
evaluating the individual banking institution’s progress
and plans in this area.
In promoting sound corporate governance in banking
institutions, bank supervisors conduct assessments of
the corporate governance practices of banking
institutions to ensure that these practices are indeed
instilled and embedded in all aspects of operations
and at every level of the institutions. A major part of
this assessment is focused on evaluating the
effectiveness of the board of directors who are
ultimately responsible for the overall management of
the banking institutions. The assessment also provides
valuable input for the purpose of approving the
appointment and reappointment of directors.
In line with the Financial Sector Masterplan, an
Enforcement Actions Framework has been developed
to provide a comprehensive and incremental approach
towards enforcing actions to be taken following
supervisory exercise on banking institutions. The first
phase of the framework involving the Informal
Enforcement Actions Framework (IEAF), has been
implemented since September 2002. The IEAF has
facilitated Bank Negara Malaysia in taking pre-emptive
measures not only on banking institutions but also on
related companies of banking institutions to address
emerging weaknesses in a timely and effective manner.
The Bank is working on the second phase where a
Formal Enforcement Actions Framework (FEAF) is being
developed as an extension of the existing informal
framework. Actions under the formal framework will
be taken for institutions with problems or where
informal actions have been unsuccessful in achieving
the desired outcome. While the legal framework is
already in place, the FEAF will refine the mechanism to
make the process more transparent. In addition, in
enforcing pre-emptive measures on a problem banking
institution, the FEAF will incorporate prompt corrective
actions, which will be taken once specified thresholds
for supervisory intervention are triggered.
Another important supervisory area that has been
given greater emphasis since the enactment of the
Anti-Money Laundering Act in 2002, was Bank
Negara Malaysia’s assessment of anti-money
laundering measures taken by banking institutions.
The framework that has been put in place focuses on
five broad functional areas of an institution’s
operations, namely quality of board and management
oversight, comprehensiveness of policies and
procedures, effectiveness of internal controls,


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The Financial Sector
adequacy and accuracy of the management
information system, as well as, quality of the human
resource and availability of training.
As part of the Bank’s supervisory activities, regular
consultative dialogues are held with the board of
directors and management of banking institutions, to
provide an effective forum for two-way
communication on supervisory issues. Through these
interactions, the Bank was better positioned to
evaluate the institutions’ capacity and readiness to
meet impending challenges.
The Bank has also long recognised the importance of
maintaining the integrity of Information Technology
(IT) infrastructure deployed by the banking institutions,
which forms the backbone of all banking operations.
In order to promote a safe and sound IT environment
in banking institutions, to maintain public confidence
and minimise service interruptions, supervisory
attention is given to the Information System (IS)
functions of these institutions through both the on-
site examinations and off-site monitoring mechanisms,
that ensure the adoption of best IT practices and
compliance with regulations. In the year 2003, the
Bank had conducted 18 on-site IS examinations on
banking institutions including overseas branches and
subsidiaries of domestic banking institutions. This is to
ensure relevant controls are in place and appropriate
systems are deployed in their operations particularly
for high risk banking products and services such as
Internet Banking, Mobile Banking, Credit Cards and
Automated Teller Machine.
In an effort to improve the IS supervisory function and
promote supervisory transparency, the Bank has
embarked on several strategic measures in line with
international standards to improve the quality and
effectiveness of its on-site IS examinations. Firstly, a
new IS examination methodology has been developed
and will be fully implemented for all on-site IS
examinations beginning in 2004. The new
methodology provides a more balanced appraisal to
enhance the quality and standard of IS examinations.
It also employs a structured and guided tool for risk
assessment and provides a foundation for IT
benchmarking. Secondly, an enhanced version of the
examination report has been implemented. The Bank
is also developing a new guideline that aims to
strengthen the level of IT management in banking
institutions, which will be enforced in 2004.
In 2003, Bank Negara Malaysia embarked on
upgrading its MS ISO 9002:1994 Quality Management
System certification for the planning and monitoring
of the performance of routine on-site examinations on
banking institutions to MS ISO 9001:2000. The scope
of registration for the new standard was expanded to
include Malaysian banking institutions’ branches and
subsidiaries, operating outside Malaysia and the
incorporation of new quality standards. The new
certification reaffirmed Bank Negara Malaysia’s
commitment to maintain the highest level of
professionalism in undertaking its supervision
responsibilities. In addition, the Bank is also in the
process of obtaining the MS ISO 9001:2000
certification for its on-site IS examinations on domestic
banking institutions.
Recognising the increasing challenges of banking
supervision, Bank Negara Malaysia is committed to
ensure that the knowledge and skills of bank
supervisors are continually enhanced to meet the
demands of an increasingly sophisticated financial
environment. Besides structured training for bank
supervisors, bank supervisors are trained in several
specialised key areas of banking supervision such as
risk modeling and Syariah principles, to keep abreast
with market developments; and function as sources of
reference and capacity building for the Bank. These
measures have further enhanced the capacity of the
Bank to perform its supervisory function in a more
effective manner as well as provide value-add
recommendations to the banking institutions.
With the rapid changes in the financial environment,
particularly with the New Basel Capital Accord, the
Bank is faced with increasing supervisory challenges. As
a pre-requisite for effective supervision, supervisors are
provided with continuous training and exposure to
keep pace with the developments taking place globally
to ensure that Malaysia is at par with international best
practices. In meeting the challenges of the New Accord,
bank supervisors are being equipped with the necessary
knowledge and skills, particularly in effectively
evaluating the more sophisticated methodologies to
determine capital requirements. These initiatives range
from participation in regional and international training
programmes, dialogues with other supervisory agencies
and international bodies on implementation issues and
discussions with the banking industry to facilitate
understanding of their level of readiness towards
implementing the requirements of the New Accord.
In 2003, the Bank continued to strengthen its working
relationship with other domestic and foreign
supervisory agencies to facilitate enhanced co-operation
and information exchange. This collaboration process


122
has been very valuable to the Bank in facilitating its
efforts to undertake effective consolidated supervision
of banking institutions. In this context, Bank Negara
Malaysia carried out nine examinations of overseas
branches and subsidiaries of domestic banks. The
assessment of the financial and general conditions of
these entities was discussed with the respective host
supervisory agencies to identify any common issues of
concern and facilitate their resolution. The Bank also
jointly conducted two examinations on offshore
subsidiaries of domestic banks with the Labuan
Offshore Financial Services Authority (LOFSA).
Bank Negara Malaysia is committed in its role in
preserving the safety and soundness of the banking
system through effective bank supervision. In the
Bank’s pursuit towards this objective, efforts will
continue to be directed at strengthening our
supervisory resources and processes. These efforts
include a more intensive training in specialized areas
of expertise, developing specialists in core banking
operations, closer co-operation with other regulatory
and supervisory agencies, and international bodies, as
well as automation of work processes to achieve
greater efficiency.
Banking Measures Introduced in 2003
Measures implemented in 2003 were aimed primarily at enhancing the efficiency, competitiveness and
soundness of the financial sector. Initiatives were also taken to improve access of businesses, in particular
the small and medium enterprises (SMEs), to financing. Institutional arrangements to strengthen
consumer protection and to increase the awareness of consumers were also introduced.
Measures to Enhance Safety and Soundness
Guidelines on the Establishment of Board Committees, Minimum Qualifications and Training
Requirements for Directors and Definition and Responsibilities of Independent Directors
The Guidelines were issued in May 2003 as part of Bank Negara Malaysia’s continuous efforts to enhance
the corporate governance standards among the licensed institutions. The Guidelines outlined the following:
•
The requirement on the establishment of board committees comprising nominating committee,
remuneration committee and risk management committee, and the terms of reference for each of
the committee. The main objectives of the committees are as follows:
Nominating Committee
To provide formal and transparent procedures for the appointment of directors and chief executive
officer and assessment of effectiveness of individual directors and board as a whole and performance
of chief executive officer and key senior management officers.
Remuneration Committee
To provide formal and transparent procedures for developing remuneration policy for directors, chief
executive officer and key senior management officers and ensuring that compensation is competitive
and consistent with the licensed institution’s culture, objectives and strategy.
Risk Management Committee
To oversee senior management’s activities in managing credit, market, liquidity, operational, legal and
other risks and to ensure that the risk management process is in place and functioning effectively.
•
To ensure that only qualified individuals are appointed to serve on the boards of licensed institutions,
the Guidelines set out the minimum qualifications and continuous learning requirements for the
directors.
•
Recognising the critical role played by independent directors in corporate governance, the Guidelines
also set out the definition of independent directors and their expected roles and responsibilities.
Auditor’s Independence and Appointment of External Auditors
A number of corporate scandals overseas, which involved irregularities in accounting practices, issues on
auditors’ independence and the role of auditors, have raised the concerns of various regulators


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The Financial Sector
worldwide. In this regard, Bank Negara Malaysia issued Guidelines on the Appointment of External
Auditor by licensed institutions which cover:
•
The imposition of mandatory rotation of engagement partner after a period of 5 years. The
engagement partner relinquishing the assignment would not be allowed to resume the role of audit
engagement partner for the licensed institution until after a period of 5 years has lapsed;
•
Provision of non-audit services by the same audit firm would require the prior approval of the
respective licensed institution’s Audit Committee; and
•
The approval for the re-appointment of external auditors by Bank Negara Malaysia on an annual basis.
There should not be any compromise on auditor’s independence in the interim period before the 5
years rotation requirement takes effect.
Prudential Standards on Asset-Backed Securitisation
Although significant benefits could be derived from securitisation activities, participation of banking
institutions in securitisation activities could potentially increase the overall risk profile of the institutions. In
this regard, Bank Negara Malaysia has issued the Prudential Standards on Asset-Backed Securitisation
Transactions which outline the general risk management framework as well as specific regulatory
treatment relating to asset-backed securitisation transactions undertaken by banking institutions. The
Prudential Standards were issued on 10 March 2003.
Credit Card Guidelines
The Guidelines were issued in March 2003 to all credit card issuers. The Guidelines were intended to
promote active consumerism and consumers’ understanding of credit card usage and protecting their
interest as card users.
The Guidelines specify the minimum requirements on credit card operations that need to be complied
with by all credit card issuers. Among others, the Guidelines set the following:
•
Minimum eligibility criteria on credit card application.
•
RM250 limit as the cardholders’ liability for unauthorised transactions as a consequence of lost and
stolen credit cards.
•
Barring of credit card usage for unlawful activities.
•
The requirement for credit card issuers to undertake prudent credit assessment and verification of
credit worthiness of the card applicants using the Central Credit Reference Information System
(CCRIS) and other sources of credit information.
Migration to Chip-based Automated Teller Machine (ATM)
In an effort to enhance the security of payment cards, banking institutions were required to migrate to
chip-based payment card technology. The domestic banking institutions were required to fully upgrade
their ATM infrastructure to be fully chip-enabled and convert their customers’ ATM card to chip-based by
end-September 2003, and the locally incorporated foreign banks, by March 2004.
Minimum Security Standards for Cheques
A concept paper on the proposed Guidelines on Minimum Security Standards for Cheques was issued to
the banking industry in November 2003. The proposed Guidelines set the minimum standards for security
features on cheques, cheque fraud detection facility, security management in cheque printing and
consumer advice on best practices.
Accounting Treatment of Handling Fees for Hire Purchase Loans (HPL)
To standardise the accounting treatment of handling fees for HPL across the finance company industry, all
handling fees for HPL approved and disbursed after 1 January 2004 by finance companies have to be
expensed off in the period they are incurred. For HPL approved and disbursed before


124
1 January 2004 where the amortisation method had been adopted, finance companies were allowed to
continue amortising the outstanding handling fees. Accordingly, in the event of prepayment or the HPL
turning non-performing, the balance of the unamortised handling fees would be expensed off.
Recognition of Deferred Tax Assets (DTA) and Treatment of DTA for Risk Weighted Capital Ratio
(RWCR) Purposes
In line with MASB 25 which was issued by the Malaysian Accounting Standards Board (MASB), licensed
institutions had to account for all DTA in their financial reports. For RWCR purposes, however, such deferred tax
income or expense is excluded from the computation of Tier-1 capital and calculation of risk-weighted assets.
Concept Paper on Incorporation of Market Risk into the RWCR Framework
In April 2003, the first concept paper (CP1) on the incorporation of market risk into the RWCR Framework was
issued to the industry for comments. CP1 adopted and customised recommendations issued by the Basel
Committee on Banking Supervision (BCBS) according to the environment of the local banking industry.
Following a series of discussions with the Market Risk Industry Working Group, the second concept paper
(CP2) was issued in January 2004. CP2 incorporated significant changes to CP1, in particular on the
following areas:
•
Classification of securities in the trading and banking book;
•
Holdings of securities resulting from debt/loan restructuring;
•
Hedging policy;
•
Underwriting positions; and
•
Valuation of illiquid papers.
CP2 also aims to gauge the level of readiness for incorporation of the revised market risk framework and
assess the quantitative impact of the latest proposal on the financial institutions.
Concept Paper on Consolidated Supervision of Financial Conglomerates
In line with Recommendation 3.26 of the Financial Sector Masterplan (FSMP), Bank Negara Malaysia has
developed a framework for the Consolidated Supervision of Financial Conglomerates. This is to ensure that the
financial health of financial groups may be adequately assessed and monitored by supervisors on a group-wide
basis so as to minimise risks emanating from the financial group that could destabilise the financial system.
A concept paper was issued to the banking industry in December 2003. The proposed framework
outlines the underlying regulatory principles of consolidated supervision. Specific recommendations were
made in five areas, namely group structures, corporate governance, risk management, intra-group
exposures, and reporting requirements.
Implementation of the Anti-Money Laundering Act 2001 (AMLA) Compliance Programme
To combat money laundering activities, banking institutions were required to put in place a
comprehensive compliance programme to comply with AMLA. The compliance programme includes an
effective transaction monitoring system that is implemented at all operations of banking institutions
including the branches and subsidiaries. There should also be regular on-going employee training and
regular independent audit.
Measures to Enhance Competition and Efficiency of the Banking Industry
Guidelines on New Product Approval Requirements
The Guidelines were issued in March 2003 as part of the measures to promote Bank Negara Malaysia’s
regulatory philosophy of "what is not prohibited is allowed" as stated in the FSMP
. The main essence of


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The Financial Sector
the Guidelines is the replacement of the existing product pre-approval requirements with a simple new
product notification and approval process that is expected to promote greater incentive for banking
institutions to increase their investment in developing more innovative products. The requirements for
greater product transparency and consumers to have access to product information are embodied in the
Guidelines.
Investments Linked to Derivatives
Effective 12 May 2003, banking institutions were allowed to offer additional yield enhancing investment
products linked to derivatives, other than investments linked to Ringgit denominated interest rate
derivatives. Blanket approval was granted to all banking institutions to offer the following additional
investment products linked to derivatives:
•
Investment products linked to interest rate, commodity, equity and fixed income derivatives,
denominated in both Ringgit and foreign currency; and
•
Investment products linked to foreign currency derivatives denominated in foreign currency only.
Nevertheless, banking institutions are required to meet the general conditions when offering investment
products linked to derivatives and comply with all exchange control rules. However, investment products
linked to credit derivatives would still require specific approval from Bank Negara Malaysia.
Amendments to the Central Bank of Malaysia Act 1958 (CBA) and Banking and Financial
Institutions Act 1989 (BAFIA)
Both the CBA and BAFIA were amended to incorporate provisions to support the efforts to develop the
bond market and to enhance competitiveness and efficiency of the banking industry. The amendments
came into force on 1 January 2004 for the CBA and 15 January 2004 for the BAFIA.
The CBA was amended, among others to empower Bank Negara Malaysia to carry out its functions in
providing the infrastructure for the Ringgit bond market, including the power to establish and operate
systems for the bond market and to make the necessary regulations for the operation of the systems.
The BAFIA was amended to provide for the establishment of a banking and finance company, an entity
which will hold two licences, one for banking business and the other for finance company business.
Measures to Improve Access to Financing
Establishment of Bank Negara Malaysia SME Special Unit
As part of the initiatives to enhance access to financing to SMEs, Bank Negara Malaysia established the
SME Special Unit in May 2003 to assist SMEs in the following areas:
•
To provide information on the various sources of financing for SMEs;
•
To facilitate loan application process for SMEs;
•
To deal with problems faced by viable SMEs in accessing financing; and
•
To provide advisory services on other SMEs financial requirements.
The role of the SME Special Unit will be expanded to include:
•
Coordinating, monitoring and evaluating the financing needs of the SMEs;
•
Formulating policies and strategies to enhance access to financing by SMEs;
•
Establishing and maintaining database on SME financing;
•
Enhancing SMEs awareness on various financing sources; and
•
Formulating structured training programmes for SMEs.


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Additional Allocation for Special Funds for SMEs
As part of efforts to ensure availability of adequate funds at reasonable cost to the SMEs, Bank Negara
Malaysia increased the allocation, twice in 2003 for Fund for Small and Medium Industries 2 (FSMI2) and the
New Entrepreneurs Fund 2 (NEF2) by RM1,350 million and RM650 million, respectively. Consequently, the total
funds available for FSMI2 and NEF2 rose to RM2 billion and RM1.15 billion respectively.
Small Debt Resolution Mechanism
To facilitate the restructuring of non-performing loans (NPLs) of SMEs with on-going businesses and to
assist in their financing requirements, Bank Negara Malaysia established a Small Debt Resolution
Mechanism in November 2003.
Under the mechanism, an 11-member Small Debt Resolution Committee (SDRC) was established to
undertake independent assessment on the viability of the businesses, and propose the loan restructuring
and financing requirements of the affected businesses. The SME Special Unit at Bank Negara Malaysia
serves as the Secretariat to the committee.
This mechanism is open to SMEs with on-going businesses which have aggregate NPLs of not more than
RM3 million with the commercial banks, finance companies, Islamic banks, Bank Pembangunan dan
Infrastruktur Malaysia Berhad, and Bank Industri & Teknologi Malaysia Berhad.
As the debt restructuring process may involve the provision of new financing to the businesses, Bank
Negara Malaysia established the Rehabilitation Fund for Small Businesses with an allocation of
RM800 million. In this regard, eligible businesses may obtain new financing up to RM1.5 million at a
financing rate of 5% per annum for a maximum of 5 years.
With the introduction of this new mechanism, the existing restructuring and financing mechanisms under
Tabung Pemulihan dan Pembangunan Usahawan, and Tabung Pemulihan Industri Kecil dan Sederhana
were discontinued.
Access to Financing by Priority Sectors
As in previous years, Bank Negara Malaysia continued to place due emphasis on lending by the
commercial banks and finance companies to the priority sectors, namely the Bumiputra community, SMEs
and purchase of low and medium cost houses. Targets set were based on various factors taking into
consideration the capacity of the respective institutions.
Establishment of a Special Relief Guarantee Facility for Severe Acute Respiratory Syndrome
(SARS) Affected Businesses
As part of the Economic Package announced by the Government in May 2003 to assist businesses
affected by the SARS outbreak, Bank Negara Malaysia established the Special Relief Guarantee Facility
with an allocation of RM1 billion in the form of guarantee fund provided through the Credit Guarantee
Corporation Malaysia Berhad (CGC).
The salient features of the Facility are as follows:
•
The Facility is implemented through all commercial banks, Islamic banks, finance companies, Bank
Pembangunan dan Infrastruktur Malaysia Berhad and Bank Industri & Teknologi Malaysia Berhad;
•
The maximum loan amount allowable under the facility is RM2.5 million for a maximum tenure of 2
years;
•
The financing rate is capped at 3.75% p.a for the first year and not more than the 3-month KLIBOR
rate plus 1 percentage point for the subsequent year; and
•
CGC will guarantee 80% of the loans taken from the implementing institutions.


127
The Financial Sector
Financial Relief Provided by Banking Institutions to Borrowers in SARS-affected Industries
In response to the SARS outbreak, banking institutions were also requested to formulate appropriate
rescheduling or restructuring schemes to reduce the financial burden of borrowers whose businesses and
cash-flows were affected by the SARS. The rescheduling/restructuring programme should be
implemented on a pre-emptive manner.
To facilitate this measure, the requirement stipulated in the Guidelines on Classification of Non-
Performing Loans and Provisions for Sub-Standard, Doubtful and Bad Debts that requires banking
institutions to obtain specific approval from Bank Negara Malaysia to reschedule a performing loan
account more than once within a 2-year period, was waived.
Measures Related to Consumerism
BankingInfo
To promote greater financial literacy among the public and enhance public understanding of the roles
and functions of the different segments in the financial system, Bank Negara Malaysia launched the
Consumer Education Programme (CEP), known as "BankingInfo" in January 2003.
In summary, BankingInfo aims to:
•
Disseminate information on features of banking products and services, including the rights and
responsibilities of consumers and financial institutions in a clear and simple manner;
•
Promote public understanding on the role and functions of the different segments in the financial
system;
•
Alert consumers on illegal transactions and financial scams;
•
Provide information on basic financial management and importance of savings and financial planning; and
•
Provide consumers with information on how they can seek redress in the event that they have
suffered monetary losses.
To date, 18 booklets have been introduced and are available at all branches of banking institutions.
Information on BankingInfo is also available at the Internet website www.bankinginfo.com.my.
Formation of Financial Mediation Bureau (FMB)
In line with Recommendation 3.37 of the FSMP
, a concept paper on the Formation of the Financial
Mediation Bureau (FMB) with the objective of expanding the current role of both the Banking Mediation
and Insurance Mediation Bureaus was issued in April 2003.
The members of FMB will comprise:
•
Commercial banks, finance companies, merchant banks, and Islamic banks;
•
Development financial institutions regulated under the Development Financial Institutions Act 2002;
•
Payment systems operators and issuers of designated payment instrument under the Payment
Systems Act 2003; and
•
Insurance companies, Takaful operators and Malaysian Nasional Reinsurance Berhad.
The formation of the FMB is expected to facilitate the financial institutions in enhancing their customer
service level and would cover a broad range of retail consumer complaints against all financial institutions
regulated by Bank Negara Malaysia.


128
PERFORMANCE OF THE BANKING SYSTEM
Overview
The financial position of the banking system in 2003
was strong. The key financial indicators of the
banking system remained favourable with no signs of
vulnerabilities. The level of capitalisation was high,
non-performing loans (NPLs) declined whilst
profitability improved. Amidst ample liquidity and
continued recovery in business and consumer
sentiments, the banking institutions registered strong
lending activities. The strong performance of the
banking system was characterised by:
•
High level of capitalisation attributable to higher
profit and capital injections;
•
Ample liquidity in the financial system throughout
the year;
•
Strong resumption in lending activities driven
primarily by lending to the small and medium
enterprises, and household sector;
•
Higher profitability due to higher net interest
income, lower provisioning and high recoveries;
•
Narrowing of interest margins as competition
continued to exert downward pressure on
lending rates amidst a more stable return on
deposits;
•
Improvement in NPLs. There was a decline in new
NPLs, whilst recoveries and reclassifications to
performing accounts remained strong; and
•
Exposure to market risks remained within
prudential levels.
Profitability
Against the backdrop of improving economic
conditions, gross operating profits of the banking
system increased by 7% to RM11.8 billion in 2003,
driven primarily by higher net interest income.
Commercial banks and finance companies posted
growth in gross operating profits of 7.7% and 9.7%
respectively, while those of merchant banks declined
by 18.5%, mainly due to lower net interest income
and income generated from fee-based activities.
Total loan loss provisions of the banking system
declined by 4% during the year, attributed mainly
to higher recoveries which grew by 10.1% or
RM384.8 million. The improved economic
conditions and debt restructuring exercises
undertaken over the years had strengthened the
debt servicing capacity of borrowers, thus
contributing to the higher recoveries. The decline in
loan loss provisions, coupled with the higher gross
operating profits, resulted in the preliminary
unaudited pre-tax profits to increase by 10.2% to
RM10.3 billion in 2003. Consequently, the return on
equity of the banking system increased to 17.1%,
whilst the return on assets was 1.4%.
Given the strong competition in the loan market and
greater disintermediation from the capital market,
interest income from loans and financing declined
marginally by 1.1% in 2003. However, this was offset
by higher interest income earned from debt securities
held and lower interest-in-suspense. By type of
institution, the commercial banks and finance
companies recorded increases in net interest income
of 6.4% and 5.9% respectively in 2003. The net
interest income of merchant banks declined by
7.7%, a trend that has been prevalent for a number
of years as merchant banks started to shift their
business focus from traditional fund-based activities
to fee-based activities.
Although fee-based income grew strongly by 9.9%,
as a percentage of total assets, it remained stable at
0.5%. Fee-based income from loan and financing
activities rose by 11.8%, in tandem with the growth
in lending activities. Nevertheless, fee-based income
Table 4.6
Banking System1: Income and Expenditure
For the calendar year
2002
2003p
Annual change
RM million
%
Interest income net of
interest-in-suspense
35,481
37,420
1,940
5.5
(Interest-in-suspense)
5,578
4,752
-826
-14.8
Less: Interest expense       17,763
18,673
910
5.1
Net interest income
17,718
18,748
1,030
5.8
Add: Fee-based income
3,314
3,642
328
9.9
Less: Staff cost
4,698
4,981
284
6.0
Overheads
5,315
5,614
299
5.6
Gross operating profit
11,019
11,795
776
7.0
Less: Loan loss provisions
5,497
5,276
-220
-4.0
Gross operating profit
after provisions
5,523
6,518
996
18.0
Add: Other income
3,805
3,759
-46
-1.2
Pre-tax profit
9,328
10,278
950
10.2
Of which:
Commercial banks
6,357
6,908
550
8.7
Finance companies
2,379
2,678
298
12.5
Merchant banks
591
692
101
17.0
Return on assets (%)
1.3
1.4
Return on equity (%)
16.3
17.1
Cost to income2 (%)
47.6
47.3
1
Excludes Islamic banks.
2
Only taking into account staff cost, overheads, net interest income and
fee-based income.
p Preliminary.
Note: Total may not add-up due to rounding.


The Financial Sector
129
from loans and financing only accounted for 0.2% of
total outstanding loans, far lower than the average
level recorded by foreign banks of around 0.5%. In
the case of merchant banks, their total fee-based
income declined marginally by 3.1% to
RM327.6 million. This was mainly due to lower
income from corporate advisory and underwriting
activities, which declined by 12.4% and 9.6%
respectively, partly due to lower number of debt
restructuring exercises undertaken in 2003.
The rationalisation efforts undertaken consequent to
the merger programme to improve operational
efficiency have begun to yield positive results, with
gross operating profits per employee improving from
RM125,500 in 2002 to RM134,800 in 2003.
Marketing expenses, however, increased by 7.4% as
banking institutions intensified efforts to enhance
market share. Staff cost per employee also increased
marginally from RM53,500 in 2002 to RM56,900 in
2003 given the better remuneration packages
offered by banking institutions to retain and reward
their staff.
Interest Margin
Reflecting the banking system’s role as the main
provider of funds to the economy, interest income
from loans and financing activities constituted 66%
of gross operating income of the banking system in
2003 (2002: 69%).
Gross interest margin narrowed further in 2003 as
intense competition surrounding the bank lending
activities continued to exert downward pressure on
lending rates amidst a more stable return on
deposits. The gross interest margin, defined as
difference between the average lending rate (ALR)
banking institutions charged on loans and advances
and the rate banking institutions paid on deposits
and borrowed funds (average cost of funds or ACF),
declined by 21 basis points to 3.69 percentage points
for the commercial banks (2002: 3.90 percentage
points). Similarly, the gross interest margins for the
finance companies narrowed to 5.70 percentage
points from 6.08 percentage points at end-2002.
The narrowing of the gross interest margin was due
to the larger decline in ALR, offsetting the marginal
decline in the ACF. At end-2003, the ALR of the
commercial banks stood at 6.11% per annum, whilst
that of the finance companies was 9.11% per
annum (2002: 6.51% per annum and 9.75% per
annum, respectively). The decline in ALR reflected the
50 basis points reduction in the Bank Negara
Malaysia intervention rate in May 2003 that led to a
decline in the base lending rate of 40 basis points.
Notwithstanding the 50 basis points reduction in the
policy rate, the ACF declined by a lower margin (20
and 26 basis points for commercial banks and
finance companies, respectively) as bulk of the
commercial banks’ and finance companies’ funds
comprises mainly fixed deposits, the interest rates of
which declined only marginally.
The lending rates (excluding credit cards) on new
loans approved by the commercial banks averaged
5.59% per annum in 2003. Meanwhile, the average
lending rates on new loans approved by the finance
companies declined by 44 basis points to an average
of 6.64% per annum. During the year, the average
lending rates on newly approved business and SME
loans by the commercial banks declined to an
average of 5.97% per annum and 6.40% per
annum, respectively (2002: 6.16% and 6.55% per
annum, respectively).
The ALR, however, overstates the interest income
earned by the banking institutions as it recognises
the accrued but unearned interest on non-
performing loans (NPLs)  (that is interest-in-suspense
or IIS) even though the banking institutions continue
to incur costs on funds that are borrowed, mainly
deposits, to finance these loans. In addition, the
banking institutions also incur administrative costs in
managing and monitoring these loans. Net interest
margin (gross interest margin after adjusting for IIS
and administrative costs) improved marginally for the
commercial banks to 1.31 percentage points (2002:
1.25 percentage points) while the net interest margin
for the finance companies remained at 3.14
percentage points. The improvement was due to
lower IIS and administrative costs. In tandem with
declining NPLs, the amount of IIS declined from
Table 4.7
Weighted Average Lending Rates for New Loans
Approved
Commercial banks Finance companies
Average for the year (% per annum)
2002
2003
2002
2003
Business loans
6.16
5.97
7.46
7.30
of which: SMEs
6.55
6.40
7.40
6.99
Household loans1
4.78
4.81
7.02
6.53
of which:
Purchase of residential
  properties
4.42
4.46
4.49
4.00
Purchase of passenger
  cars
n.a.
n.a
7.16
6.70
1 Excluding credit card loans.
n.a. Not applicable.


130
1.16% to 0.93% of loans for the commercial
banks, and from 1.56% to 1.28% of loans for the
finance companies. In addition, both commercial
banks and finance companies recorded lower
overheads and staff cost of 1.46% of interest-
related assets for the commercial banks and
1.28% for the finance companies in 2003
(2002:1.49% and 1.38% of interest-related assets,
respectively).
With growing competition in the loan market
amongst the banking institutions as well as with
the non-traditional players, the challenge is for the
banking institutions to further improve operational
efficiencies and risk management capabilities. This
is important to sustain their revenue performance
and hence their returns.
Lending Activity
Lending indicators demonstrated increasing trends
during the year despite the outbreak of the as well
Strengthened financial position of banking system enabled
increased financing for private consumption and business
activities.
as the uncertainty regarding the structure of excise
duty on cars. The issuance of new private debt
securities during the year also increased. The
diversification in sources of financing, especially for
the corporate sector, has resulted in a greater
proportion of lending by the banking system being
channelled to the retail customers and small and
medium enterprises, thus supporting the growth in
private consumption and business activity. The pre-
emptive actions by the Government contributed to
mitigate the effects of SARS on the economy. As
consumer and business sentiments recovered,
business activities regained growth momentum
whilst consumer spending increased, thus
stimulating demand for additional financing.
New loan approvals by the banking system
expanded strongly backed by sustained demand. In
2003, the banking system received loan
applications totalling RM220 billion. At the close
of the year, more than 2.2 million applications
amounting to RM151.4 billion were approved by
the banking system, 11.2% higher than the
amount approved in 2002. Averaging at RM12.6
billion a month, this is the highest monthly
average recorded for loan approvals since the
Asian financial crisis, exceeding the level recorded
in 2002. Loan applications rejected amounted to
RM26 billion, or 11.8% of applications received.
Loan disbursements expanded during the year at
an annual rate of 7.2% to amount to RM433.6
billion. With disbursements surpassing repayments,
outstanding loans expanded by 4.8% to RM464.2
billion as at end-2003. The amount of undrawn
loans rose by 3.6% to RM134.3 billion.
Lending to Households
Outstanding loans for the household sector
expanded by 12.5% to RM226.1 billion to account
for 48.7% of outstanding loan portfolio of the
banking system. As in the previous year, the
lending activities were mainly in mortgage
financing, purchase of passenger cars and credit
card loans. Demand for new financing remained
strong, due mainly to the low interest rates, stable
employment conditions and competition among
car manufacturers. This was further boosted with
the various incentives provided by the Government
to house purchasers, including tax relief on interest
payments for first-time house owners who
purchased properties priced between RM100,000
to RM180,000 from developers, a RM600 cash
payment to borrowers in the lower income
category and the stamp duty exemption on loan
Table 4.8
Banking System1: Financing Activities
For the year
2002
2003
Annual
growth
(%)
RM billion
Loan approvals
136.1
151.4
11.2
Loan disbursements
404.3
433.6
7.2
Loan repayments
396.1
422.8
6.8
As at end
2002
2003
Annual
growth
(%)
RM billion
Outstanding loans
 443.0
464.2
4.8
Total banking system financing2
468.9
496.5
5.9
Total financing for the economy3
546.1
600.2
9.7
1
Excludes Islamic banks.
2
Outstanding banking system loans plus private debt securities held by the
banking system.
3
Outstanding banking system loans plus outstanding private debt securities.


The Financial Sector
131
documents for purchases of houses costing not
more than RM180,000. In meeting the demand,
banking institutions offered attractive financial
packages and adopted aggressive promotion
strategies.
Higher applications were received during the year
totalling RM95.8 billion (+19.4%), the bulk of which
were applications to finance the purchase of residential
properties and passenger vehicles as well as credit card
applications. New approvals expanded by 7.4% to
amount to RM71.4 billion at interest rates averaging
between 4.32% and 5.09% per annum for the
commercial banks and between 6.29% and 6.82% per
annum for the finance companies. Approvals for hire
purchase financing and credit cards recorded strong
increases of 15.2% and 14.1%, respectively. Approvals
for house purchases, however, rose only by 2.4% to
RM29.7 billion, mainly for the high-end properties,
which saw a number of new launches during the year.
Similar to the increasing trend in approvals, there was
higher disbursements to the household sector. Totalling
RM113 billion, this was an increase of 8.6% over the
amount disbursed in the preceding year. A notable
trend was the high utilisation of credit card lines during
the year as card-based payments continued to gain
greater acceptance by consumers and retailers.
Utilisation of credit card lines increased by 19.6% to
RM30.4 billion during the year. Despite the high
utilisation, outstanding credit card loans remained a
small proportion of 2.6% of outstanding loans.
Lending to Businesses
Lending to businesses remained encouraging
throughout the year, supporting the stronger
economic activities. The various forms of relief
introduced by the Government to minimise the
effects of SARS had contributed favourably towards
sustaining demand for financing by the private
sector. To complement these measures, the banking
institutions stepped in to reschedule/restructure loans
amounting to RM2.5 billion as well as extended new
facilities for the affected businesses. The
establishment of the RM1 billion Special Relief
Guarantee Facility in May 2003 also enabled
businesses affected by the SARS outbreak to access
new financing at concessionary rates. At end-2003, a
total of RM40.3 million in working capital lines were
extended to 76 borrowers with guarantees totalling
RM32.2 million [Please refer to the Box on Banking
Measures Introduced in 2003 for details].
For the year as a whole, approvals for credit
facilities to businesses increased by 13.5% to
RM76.5 billion, despite a decline of 5.1% in loan
applications. Loan approvals to businesses were
broad-based, with approvals to businesses in the
manufacturing (20.8%), construction (14.5%), and
wholesale and retail (13.3%) sectors accounting for
the bulk of the new credit lines. Notably, approvals
to the wholesale and retail businesses rose by
28.6% to RM10.2 billion, whilst new facilities
granted to hotels and restaurants grew by 83.4%
demonstrating the continued support of the
banking sector for these businesses amidst the SARS
outbreak. Lending rates on new business loans
remained favourable averaging between 5.51% and
6.42% per annum for the commercial banks and
between 6.94% and 7.64% per annum for the
finance companies.
Stronger economic activity led to higher
disbursements to businesses. Disbursements to the
business sectors of RM296.8 billion (+7.6%)
accounted for 68.5% of total loans disbursed by the
banking system. Most of the funds were channelled
to the manufacturing sector (36.3%), and wholesale
and retail trade sectors (22.9%). Disbursements to
these sectors rose by 4.9% and 9.2%, respectively.
While funds utilised by the construction sector were
generally lower during the year, funds utilised by the
general and civil engineering contractors expanded
by 18.1% to RM9.4 billion. At end-2003,
outstanding loans to the business sectors declined
slightly by 2.2% on account of loan conversions into
debt securities and large repayments (+8.4%).
Meanwhile, unutilised business lines declined by
3.6% at end-2003.
Lending to Small and Medium Enterprises (SMEs)
The banking system continued to support the SMEs,
channelling more funds for their activities as
evidenced by the level of new financing extended
during the year. This commitment was further
reinforced by the availability of dedicated SME units
in almost all the commercial banks. For some
institutions, the SME unit undertakes activities
beyond the provision of financing, to include
developmental and support services such as
identifying and structuring financial products and
services to meet the requirements of the SMEs,
conducting training and workshops, and providing
other advisory services such as financial and cash
management.
Disbursements were also exceptionally strong,
constituting 29% (RM86 billion) of total
disbursements to the business sectors. This amount


132
represented an increase of 75.5% over the amount
disbursed in the preceding year. Meanwhile,
outstanding loans to SMEs expanded by 8.8% to
RM80.2 billion, to account for 38.4% of
outstanding business loans at end-2003. During
the year, nearly 75,000 SMEs obtained new credit
facilities totalling RM25.5 billion at favourable
lending rates which averaged between 5.96% and
6.87% per annum for the commercial banks, and
between 6.57% and 7.38% per annum for the
finance companies. This accounted for a third of
total approvals to the business sectors.
In 2003, the allocations for two special funds were
increased twice to meet the increased demand. The
allocation for the Fund for Small and Medium
Industries 2 expanded by RM1.35 billion to
RM2 billion and the New Entrepreneurs Fund 2 by
RM0.65 billion to RM1.15 billion. On aggregate,
Bank Negara Malaysia has allocated a total of
RM5.6 billion for five1 special funds for the SMEs in
the different segments. Of this amount, a total of
RM5.2 billion has been approved as at end-2003.
In tandem with efforts to improve the accessibility
of SMEs to financing, the SME Special Unit was
established in Bank Negara Malaysia in May 2003.
The Unit began its operations focusing on
disseminating information on the various sources
of financing available to SMEs; facilitating loan
application process by SMEs; assisting viable SMEs
facing difficulties in securing financing; and
providing advisory services on their other financial
requirements. In addition, the Unit looks into loan
related problems and complaints from SMEs. As at
end-2003, the Unit has received 1,789 requests for
assistance from the SMEs, of which 82% were
enquiries on information and sources of financing
and on the details relating to the special funds. To
coordinate and further develop access to financing
by the SME sector, the scope of the Unit will be
expanded to be the one-stop centre responsible for
all initiatives on SME financing and financial
services [Please refer to the Box on Banking
Measures Introduced in 2003 for details on the
expanded role of the Unit].
To resolve the NPLs of SMEs, the Small Debt
Resolution Committee (SDRC) was established to
facilitate the restructuring of NPLs of SMEs with
viable on-going businesses. Similar to the
Corporate Debt Restructuring Committee, the
SDRC undertakes an independent assessment on
loan restructuring requests by SMEs.
Complementing the independent assessment by
the SDRC was the setting up of the Rehabilitation
Fund for Small Businesses with an allocation of
RM800 million [Please refer to the Box on Banking
Measures Introduced in 2003 for details].
Loan Profile
The structure of the banking system loan portfolio
has undergone significant changes since the Asian
crisis, in terms of greater proportion of smaller-sized
loans and more diversified customer base as a result
of the greater focus on retail and SME sectors. This
has improved the risk distribution within the
banking system in particular, and the financial
sector in general. The proportion of outstanding
loans below RM100,000 constituted 30.9% of total
outstanding loans as at end-2003. Outstanding
loans of between RM100,000 to RM500,000 grew
by 14% to account for 24.4% of total loans at end-
2003. On aggregate, outstanding loans of below
RM1 million now accounted for 60% of total
banking system loans, as compared to 48% during
the pre-crisis period of 1996.
Banking Institutions and the Bond Market
Net proceeds from new PDS issued by corporations
rose substantially to RM45.8 billion, compared with
RM26.7 billion in the previous year. More than 60%
of the new issues took place in the first half of the
year as the higher bond yields in the second half of
2003 resulted in many corporations deferring their
proposed issuance. At end-2003, outstanding PDS
recorded a strong growth of 30.8% to RM136
billion. Of this amount, 23.7% were held by the
banking system. On aggregate, outstanding
banking system loans and outstanding PDS grew at
9.7% to RM600.2 billion as at end-2003.
Asset Quality
NPLs declined further owing to the favourable
economic conditions. The year saw a decline in
new NPLs, whilst recoveries and reclassifications
to performing accounts were strong. The outbreak
of the SARS impacted the cash flows of some
businesses, particularly those in the tourism-related
industries. The prompt actions from the
Government and the banking institutions,
however, contributed towards averting a
protracted negative impact on the domestic
economy.
1 Fund for Small and Medium Industries 2 (RM2 billion), New Enterpreneurs
Fund 2 (RM1.15 billion), Fund for Food (RM1.3 billion), Bumiputera
Enterpreneurs Project Fund (RM0.3 billion) and Rehabilitation Fund for Small
Businesses (RM0.8 billion)


The Financial Sector
133
Net NPLs based on the 3-month classification
declined by 8.2% to RM38.3 billion as at end-2003.
Consequently, the net NPL ratio improved by 1.4
percentage points to 8.7%. On a 6-month
classification, the decline in net NPLs was more
gradual at 3.1% to RM29.9 billion to account for
6.8% of total net loans at end-2003, compared with
7.4% as at end-2002. The loan loss coverage ratio
also strengthened to 53.9% on the 3-month basis
and 59.1% on the 6-month basis. Including the value
of collateral, the coverage ratio strengthened further
to 157.9% on the 3-month basis and 163.8% on the
6-month basis.
Improvements in the level of NPLs were due to lower
incidence of new NPLs, write-offs of bad loans
coupled with strong recoveries and reclassifications of
NPLs to performing loans. Reflecting the favourable
involving debts totalling RM9.3 billion were
implemented. At end-2003, 14 cases with debts
totalling RM7.3 billion have yet to be implemented.
Total loans in arrears excluding NPLs, remained stable
throughout the year, except for the temporary
increase in June, possibly due to the effects of SARS.
As such, loans in arrears remained almost unchanged
at RM78.1 billion at end-2003. Of this amount,
23.9% were loans in arrears of between 2 and less
than 6 months. During the year, loans in this
category recorded a small decline of RM0.1 billion or
0.6% to RM18.7 billion to account for 4% of gross
loans at end-2003.
Unlike the banking crisis in the late 1980s where the
pace of decline in the NPL ratio was more rapid,
recovery in the NPLs since the Asian crisis has been
more gradual. This was partly due to the more
stringent reclassification rules that were put in place
to prohibit evergreening of loans. In addition, growth
in the outstanding loans post-Asian crisis has been
much slower relative to the periods following the
mid-1980s economic recession primarily due to the
deepening of the bond market.
NPLs for the business sectors declined substantially to
account for 16.2% of total business loans as almost
all sectors recorded improvements. Sectors that
recorded increase in NPLs include the retail trade,
restaurants and hotels (+15.6%), and electricity, gas
0
5
10
15
20
25
30
35
40
45
50
J
F M A M J
J
A S
O N D J
F M A M J
J
A S
O N D
0
2
4
6
8
10
12
14
%
1
  Excludes Islamic banks
Graph 4.5 
Banking System1: Net Non-performing Loans
RM billion
2002
2003
Net NPLs (6-mths)
Net NPLs (3-mths)
Net NPL ratio (6-mths)
Net NPL ratio (3-mths)
Graph 4.6 
Banking System1: Ageing Profile of Loans in 
Arrears 2-<6 months
0
5
10
15
20
25
J
F M A M J
J
A S O N D J
F
M A M J
J
A S O N D
RM billion
1  Excludes Islamic banks
2002
2003
2-<3mths
3-<4mths
4-<5mths
5-<6mths
Enhanced credit assessment infrastructure and practices ensure
banking system exposure to households remain within prudential
level.
economic conditions, the amount of new NPLs for the
year fell by 3.2% to RM24.5 billion. Recoveries and
reclassifications remained strong at
RM22.6 billion in 2003 despite a slight decrease of
3.5%. This was due to high recoveries and
reclassifications of RM23.5 billion recorded in the
preceding year. Lower provisioning requirements
following the declining NPLs, had enabled banking
institutions to write-off RM8 billion of loans in 2003.
During the year, two restructuring schemes under the
Corporate Debt Restructuring Committee (CDRC)


134
and water (+240%). The higher NPLs for these
sectors was due to the effects of SARS and delay in
the implementation of a borrower’s restructuring
scheme respectively. These increases did not pose
any systemic risks as they accounted for only 5%
of banking system NPLs. Gross NPL ratio for both
the manufacturing and construction sectors
declined significantly to 16.5% and 27.8%
respectively following the implementation of the
debt restructuring scheme of a conglomerate.
Nonetheless, outstanding NPLs remained
concentrated in these sectors, constituting 45.5%
of total business NPLs.
NPLs of SMEs also declined by RM0.6 billion to
RM11.7 billion as at end-2003 to account for
14.6% of total loans to SMEs (Jan 2003: 16.4%).
Significant improvement was registered by the
construction sector which experienced a substantial
decline of 55.2% in NPLs since end-January 2003.
About 42.9% of the NPLs of SMEs were loans in
the manufacturing and construction sectors.
Table 4.9
Banking System1: Non-performing Loans and Loan Loss Provisions
As at end
2002
2003
Classification
3-month
6-month
3-month
6-month
RM million
Banking system1
Non-performing loans
69,760.4
57,488.3
63,566.7
53,428.0
General provisions
8,520.1
7,599.8
9,050.7
8,000.3
Interest-in-suspense
9,855.4
9,502.9
9,226.2
8,859.3
Specific provisions
18,149.0
17,150.7
16,014.9
14,696.9
Net NPL ratio (%)2
10.1
7.4
8.7
6.8
Total provisions/NPL (%)
52.4
59.6
53.9
59.1
Commercial banks1
Non-performing loans
47,957.3
40,012.4
44,649.2
37,669.8
General provisions
6,423.7
5,503.0
6,895.7
5,844.6
Interest-in-suspense
6,686.2
6,483.0
6,237.1
6,071.0
Specific provisions
12,970.8
12,392.2
11,737.8
10,845.2
Net NPL ratio (%)2
9.1
6.8
8.1
6.3
Total provisions/NPL (%)
54.4
60.9
55.7
60.4
Finance companies
Non-performing loans
17,345.3
13,487.0
15,713.0
12,939.5
General provisions
1,819.8
1,820.4
1,909.3
1,909.8
Interest-in-suspense
2,621.8
2,485.7
2,536.4
2,346.0
Specific provisions
4,209.6
3,804.2
3,675.4
3,264.6
Net NPL ratio (%)2
11.2
7.6
9.4
7.2
Total provisions/NPL (%)
49.9
60.1
51.7
58.1
Merchant banks
Non-performing loans
4,457.8
3,989.0
3,204.5
2,818.6
General provisions
276.6
276.5
245.7
245.9
Interest-in-suspense
547.4
534.1
452.6
442.3
Specific provisions
968.7
954.4
601.8
587.1
Net NPL ratio (%)2
24.6
20.8
21.5
17.9
Total provisions/NPL (%)
40.2
44.2
40.6
45.2
1
Excludes Islamic banks.
2
Net NPL ratio = {(NPL less IIS less SP) / (Gross loans less IIS less SP)} x 100%.
Note: Total may not add-up due to rounding.
While household sector NPLs increased by
RM0.9 billion, the magnitude remained small. This
largely reflected the higher NPLs for mortgage loans
(+15.6%) and credit cards (+32.1%). However, the
gross NPL ratios for household sector and mortgage
loans improved to 7.9% and 8.6% respectively.
Meanwhile, the gross NPL ratio for credit cards
remained small despite the increase to 4.7%. Higher
NPLs for mortgage loans and credit cards were
however moderated by lower NPLs for the purchase
of transport vehicles which declined by 10.3%. In the
current environment, exposure to the household
sector still remains within prudential levels. In
addition, banking institutions now have real time
access to comprehensive credit information of
borrowers, including retail borrowers, and therefore
the risk of over-indebtedness of the retail customers
is mitigated.
With prospect of stronger economic growth in 2004,
the declining trend in NPLs is expected to continue.
As the growth in outstanding loans is envisaged to


The Financial Sector
135
remain steady and as bulk of the large problem loans
have already been addressed, the magnitude of the
decline in NPL ratio will depend on the strategies
adopted by banking institutions. This is with respect to
the writing-off of legacy NPLs, in particular, where
recovery prospects are limited and with respect to the
recovery efforts by the special loan rehabilitation units
of banking institutions. While risk management
practices have improved, the capacity of the banking
institutions to effectively manage risks, the changes in
the structure of loan portfolio and the nature of risks as
a result of greater focus on retail and SME loans, as well
as the emergence of new growth areas, would
however, necessitate increased resources to monitor the
performance of the smaller-sized loan accounts. Thus, a
more robust and sound risk management framework
would be critical to ensure that the risk management
standards are able to effectively manage these risks at
all times and under all economic conditions.
Liquidity Management
Liquidity in the banking system remained ample
throughout 2003, mainly due to improved export
performance and continued inflow of foreign
direct investments. Bank Negara Malaysia
conducted liquidity operations to absorb the excess
funds through direct borrowings in the interbank
market and issuance of Bank Negara papers. Total
funds absorbed from the banking system rose
Table 4.10
Banking System1: Non-performing Loans by Sector
As at end
As percentage of total
NPL by sector
Change
loans to the sector
2002
2003
2002/2003
2002
2003
RM million
%
Business enterprises
44,598.0
38,806.3
-13.0
18.4
16.2
   of which SME loans
n.a.
11,692.9
n.a.
n.a.
14.6
Households
16,053.4
16,907.3
5.3
8.4
7.9
Others
1,628.6
1,181.2
-27.5
16.8
11.1
Total
62,279.9
56,894.8
-8.6
Agriculture, hunting, forestry and fishing
932.9
749.3
-19.7
8.2
7.3
Mining and quarrying
158.9
143.1
-9.9
16.1
13.2
Manufacturing
12,509.0
9,817.4
-21.5
21.0
16.5
Electricity, gas and water supply
422.5
1,440.7
241.0
6.6
28.7
Wholesale and retail trade, restaurants and hotels
4,316.7
4,577.6
6.0
11.8
11.8
Wholesale trade
1,851.8
1,728.8
-6.6
9.0
8.0
Retail trade
1,202.5
1,407.0
17.0
10.4
11.7
Restaurants and hotels
1,262.4
1,441.8
14.2
27.5
28.9
Broad property sector
26,817.5
25,802.1
-3.8
15.8
14.1
Construction
9,404.6
7,831.4
-16.7
30.5
27.8
Purchase of residential property
8,484.1
9,808.3
15.6
8.7
8.6
Purchase of non-residential property
4,801.3
4,618.0
-3.8
17.9
16.5
Real estate
4,127.6
3,544.5
-14.1
29.9
25.7
Transport, storage and communication
1,406.5
1,139.2
-19.0
14.6
10.8
Finance, insurance and business services
3,105.3
2,328.1
-25.0
10.5
8.0
Consumption credit
2,359.4
2,497.0
5.8
9.5
9.2
Personal use
1,867.6
1,879.0
0.6
13.4
12.9
Credit cards
434.2
573.8
32.1
4.1
4.7
Purchase of consumer durable goods
57.6
44.2
-23.2
15.9
13.3
Purchase of transport vehicles2
3,023.5
2,713.3
-10.3
5.2
4.2
Purchase of securities
4,372.8
3,777.5
-13.6
20.4
19.2
Community, social and personal services
1,226.3
728.3
-40.6
21.6
14.8
1
Excludes Islamic banks.
2
Includes commercial vehicles.
n.a.  Not available.
Note: Total may not add-up due to rounding.
Graph 4.7 
Liquidity in the Banking System in 2003
0
20
40
60
80
100
120
Jan
Feb
Mar Apr
May Jun
Jul
Aug Sep
Oct
Nov Dec
RM billion
2.60
2.65
2.70
2.75
2.80
2.85
% per annum
Bank Negara Malaysia's total intervention
Weighted average overnight money interbank rate (RHS)
Weighted average 1-week interbank rate (RHS)


136
steadily during the course of the first nine months
of 2003, but picked up significantly towards the
last quarter of the year. As at end-2003, the total
outstanding interbank borrowings by Bank Negara
Malaysia and issuance of Bank Negara Bills and
Negotiable Notes amounted to RM95.4 billion as
compared to RM64.7 billion as at end-2002. As a
result of the liquidity operations conducted by
Bank Negara Malaysia, interest rates remained
stable throughout 2003, with the weighted
average overnight interbank rate ranging from
2.71% to 2.81% per annum and weighted
average one week interbank rate ranging from
2.77% to 2.84% per annum.
In terms of liquidity management by the banking
institutions, the banking system as a whole
projected sufficient liquidity to meet any
unexpected withdrawals for a period up to one
month. As at end-2003, the cumulative liquidity
surplus in banking system (excluding the two Islamic
banks) was projected at RM59.7 billion to meet
demands up to one week and RM95.5 billion for
demands up to one month. Commercial banks,
finance companies and merchant banks projected
large surpluses in the 1-month bucket amounting to
21%, 15% and 32% of their total deposit base
respectively.
Interest Rate Risk
A significant portion of the banking system’s assets
and liabilities is interest rate sensitive. To assess the
banking system’s exposure to interest rate risk, the
duration-weighted net position (DWP) approach
was used to estimate the potential impact on
economic value for a 100 basis point shift in interest
rates. The DWP approach generates a larger
potential loss as it attempts to evaluate on a present
value basis all current and future cash flow earnings
of banking institutions’ on- and off-balance sheet
items across each item’s entire life. In 2003, the
banking system’s DWP increased by 9.1% to
Table 4.11
Banking System1: Liquidity Projection as at
31 December 2003
Cumulative
Buffer as
liquidity surplus
% of total
(RM billion)
deposits
1 wk.
1 mth.
1 wk.
1 mth.
Commercial banks
44.4
77.4
12.1
21.0
Finance companies
8.6
12.1
10.4
14.5
Merchant banks
6.7
6.0
35.5
31.5
Banking system1
59.7
95.5
11.4
18.2
1
Excludes Islamic banks.
RM4.6 billion. The increase, however, had minimal
impact on the banking system’s strong capital
position as shown in the table.
For the banking system as a whole, interest rate risk
was concentrated in the more than five years to
maturity bucket, accounting for more than
RM3.1 billion or 68% of total DWP as at end-2003.
However, there was a shift in the interest rate risk
concentration to the shorter term maturity spectrum
in 2003, particularly in the more than one to five
years maturity bucket. There was a significant
increase of RM13.6 billion or 23% in fixed-rate
loans with remaining maturities of one to five years,
while fixed-rate loans with remaining maturities of
more than five years rose moderately by RM3 billion
or 7.2%.
For the commercial banks, the marginal increase of
their DWP of 3.6% to RM2.2 billion as at end-2003
resulted from a higher level of fixed-rate loans in
the more than three years remaining maturity
bucket, which rose by 18.3% in 2003. The higher
level of fixed-rate loans extended by the commercial
banks comprised primarily Islamic housing loans.
Holdings of fixed-rate securities with remaining
maturities greater than two years had also increased
by 23% to RM28.9 billion as at end-2003. Some of
these exposures were offset by increased long-term
funding strategies particularly through the issuance
of long-term notes and the sale of loan assets to
Cagamas.
The finance companies’ higher DWP of
RM200 million in 2003, was mainly attributed to hire
purchase loans. These exposures were partially offset
by long-term fixed-rate funding sourced primarily
from the sale of loan assets to Cagamas. The interest
Table 4.12
Banking System1: Impact of 1% Rise in Interest
Rate on Capital Strength
Duration-weighted net position
As a percentage
Impact on
of Capital base
 Risk Weighted
(%)
Capital Ratio
(percentage point)
As at end
2002
2003
 2002
 2003
2002  2003
Commercial banks
-2,117 -2,194
-4.6
-4.2
-0.9
-0.9
Finance companies
-1,710 -1,911
-16.1
-16.7
-2.2
-2.2
Merchant banks
-392
-499
-8.9
-11.1
-3.2
-3.7
Banking system1
-4,219 -4,604
-6.9
-6.8
-1.3
-1.4
1
Excludes Islamic banks.
Note: Total may not add-up due to rounding.
RM million


The Financial Sector
137
rate exposure arising from fixed-rate hire purchase
loans of the finance companies can be further
mitigated by greater utilisation of Cagamas facilities.
Mergers between commercial banks and finance
companies would also allow such exposures to be
better managed. Simulating the exposures of the
commercial banks and finance companies on the
basis of their impending rationalisation, the impact
on risk-weighted capital ratio (RWCR) was reduced to
1.4 percentage points compared with 2.2 percentage
points if the finance companies operated on a stand
alone basis.
Within the banking system, the merchant banks
registered the highest percentage increase in DWP of
27% in 2003. This was due to the structural
transformation of merchant banking business
towards investment banking activities from the
traditional loan-based institutions. Hence, as the
merchant banking industry runs down its loan books,
the significant increase in its holding of debt
securities with remaining maturities of above one
year contributed to the increase in DWP
. The
merchant banks’ holding of the more than one year
debt securities rose by 25% or RM2.5 billion to
RM12.2 billion as at end-2003. Almost half of the
increase was concentrated in the more than five
years maturity bucket. Although long-term funding
positions to match these exposures remained at
RM3.8 billion, the relatively liquid nature of these
exposures would allow the merchant banks to adjust
the profile of their interest rate exposure accordingly.
In line with the Basel Committee on Banking
Supervision (BCBS)’s recommendation, banking
institutions will be required to incorporate their
market risk into the RWCR framework using the
“Standardised” approach, which include interest
rate and equity risks for trading book positions, and
foreign exchange rate risk for the entire banking
institution’s position. Based on the impact study of
the proposed framework conducted on positions as
at end-2003, the potential loss from exposures to
Graph 4.8
Banking System1: Distribution of Duration-
Weighted Net Position as a Percentage
of Capital Base as at 31 December 2003
No. of banking institutions
Duration Weighted Net Position/Capital Base
1  Excludes Islamic banks
Commercial banks
Finance companies
Merchant banks
>5% - 10%
>10% - 15% >15% - 20%
>20%
0
2
4
6
8
10
12
14
16
18
Up to 5%
Graph 4.9
Banking System1 : Net Interest Rate Position 
Mismatches as at 31 December 2003 
-60.0
-40.0
-20.0
0.0
20.0
40.0
60.0
>1 - 3
mths
>3 - 6
mths
>6 - 12 
mths
>1 - 2 
yrs
>2 - 3 
yrs
>3 - 5 
yrs
>5 - 10
yrs
>10 - 15 
yrs
yrs
Mismatches
(RM billion) 
Tenure range
  Commercial banks
  Finance companies
  Merchant banks
Banking system
1  Excludes Islamic banks
≤1
mth
>15
Table 4.13
Banking System1: Impact of Market Risk Capital Framework on Capital Strength as at 31 December 2003
RM million
of which:
Interest rate
Equities
Foreign
position risk position risk exchange risk
Commercial banks
1,434
972
62
377
-0.3
2.8
Finance companies
71
35
36
n.a.
-0.1
0.6
Merchant banks
828
644
123
14
-2.3
18.4
Banking system1
2,333
1,644
221
392
-0.3
3.4
1
Excludes Islamic banks.
n.a. Not applicable.
Note: Total may not add up due to rounding.
Total market
risk
Impact on Risk
Weighted
Capital Ratio
(percentage
point)
Total market
risk/Capital
base (%)


138
market risk amounted to RM2.3 billion or 3.4% of
capital base, while the impact on the RWCR of the
banking system as a whole was marginal.
Banking institutions’ interest rate risk in their trading
books accounted for over 70.8% or
RM1.7 billion of total market risk, of which 58.9%
and 39% were attributed to the commercial banks’
and merchant banks’ trading activities respectively.
Equities and foreign exchange risks of banking
institutions accounted for approximately 26.3% of
total market risk.
Equity Risk
Exposure of the banking system to equity risk
remained insignificant, with overall outstanding
equity holdings representing only 0.4% of the
banking system’s total assets as at end-2003.
Banking institutions increased their equity
investments by 30.6%, to RM3.5 billion as at
end-2003 from RM2.6 billion as at end-2002. This
was attributed largely to the conversion of loans into
equity as a result of debt restructuring activities.
Investments in quoted shares by the banking
system increased by 19.7% to RM2 billion from
RM1.7 billion during the year while investments in
unquoted shares registered a significantly higher
increase of 50%. These were reflective of the
restructuring activities undertaken by banking
institutions in 2003. As at end-2003, holdings of
unquoted shares accounted for 41.4% of the total
equity investments by the banking system compared
to 36.1% as at end-2002. In addition, banking
institutions’ holdings of quoted shares were
purchased directly from the market, which increased
by RM105 million or 20.3%. Shares held as a result
of underwriting declined by RM80 million or 88.6%,
reflecting the better performance of the stock market
in 2003.
The finance companies registered the highest
increase in the holding of equity investments within
the banking system, that is by RM329 million, of
which 62.7% were unquoted shares. 94.7% of the
increase in the holding of quoted shares by finance
companies was as a result of loans-to-equity
conversion. The same was true for the commercial
banks as a group, where 54.6% of the increase in
equity holdings comprised unquoted shares, and the
25.7% increase in holdings of quoted shares was
almost entirely due to loan conversion and debt
satisfaction.
With respect to the merchant banks, the substantial
decline in equity holdings resulting from
underwriting and loan conversion had offset the
significant increase of 96.7% in quoted shares
Table 4.14
Banking System1: Equity Exposure
Equity2
Equity2 /
Potential
holdings
Capital base
 equity2 loss /
(RM million)
(%)
Capital base
(%)
As at end
2002
2003
 2002
 2003
2002
 2003
Commercial banks
853.8
1,073.3
1.8
2.1
0.1
0.2
Finance companies
429.0
551.7
3.9
4.8
0.3
0.4
Merchant banks
410.7
402.3
9.0
8.9
0.7
0.7
Banking system1
1,693.5
2,027.3
2.7
3.0
0.2
0.2
1
Excludes Islamic banks.
2
Amount of investment in quoted shares.
Graph 4.10 
Banking System1 : Composition of Equity  
Investments
Unquoted 
shares 
36.1%
Unquoted 
shares  
41.4%
Loan 
conversion 
65.0%
Underwriting
0.5%
Debt satisfaction  
3.8%
Market purchase  
30.7%
As at 31 December 2003
As at 31 December 2002
Loan
conversion
61.2%
Debt satisfaction  
2.8%
Market purchase
30.6%
 
Underwriting 
5.4%
Quoted shares 
63.9%
Quoted shares
58.6%
 1
  Excludes Islamic banks


The Financial Sector
139
purchased directly from the market during the year.
Collectively, the merchant banks’ equity holdings
were marginally lower in 2003 than in 2002.
Even as the equity holdings of the merchant banks
remained unchanged, they continued to record the
highest level of equity exposure as their holdings
of quoted shares accounted for 8.9% of capital
base as against 2.1% for the commercial banks
and 4.8% for the finance companies as at end-
2003. Individually, most banking institutions had
less than 2% of their capital base exposed to
equity risk.
As at end-2003, the potential maximum loss for
the banking system as a whole was lower at 7.9%
compared to 8.2% in 2002. This was in terms of
equity value based on a 10-day volatility of the
Kuala Lumpur Stock Exchange Composite Index
(KLSE CI) in 2003. Based on the estimated
potential maximum loss of KLSE CI, therefore,
potential loss to the banking system was estimated
to remain at 0.2% of capital base despite the
Equity as % of Capital Base
No. of banking institutions
Graph 4.11 
Banking System1 : Distribution by Equity as a 
Percentage of Capital Base as at 31 December 2003
Commercial banks 
Finance companies 
Merchant banks 
1  Excludes Islamic banks
0
2
4
6
8
10
12
14
16
18
0-<2
2-<4
4-<8
8-<13
13-<20
≥20
increase in the holdings of quoted shares. The
potential loss for the commercial banks and
finance companies remained insignificant, at 0.2%
and 0.4% of their capital base respectively. The
potential loss for the merchant banks was
maintained at 0.7% of the capital base.
Foreign Exchange Risk
The exposure of the banking system to foreign
exchange risk in 2003 remained within prudential
levels. Throughout the year, the net open foreign
currency position (NOP) of the banking system
moved within a narrow range of RM2.2 billion to
RM2.8 billion. As a percentage of the banking
system’s capital base, the NOP registered a decline
from 5.5% as at end-2002 to 4.7% as at end-2003.
The banking institutions remained net foreign
currency forward purchasers in 2003 as exporters
capitalised on the forward premiums which ranged
between 42 to 52 basis points for the one-month
forward rates. However, as the forward premiums
stabilised in 2003, the increase in the amount of
forward contracts purchased by the banking
institutions during the year was sustained at about
the same level as in 2002. Forward foreign currency
contracts purchased by the banking institutions rose
by RM7.2 billion or 53.2% in 2003 compared with
an increase of RM6.7 billion or 98.3% in 2002.
Demand for forward contracts by exporters remained
strong in 2003.
Table 4.15
Banking System1: Foreign Currency Exposure
NOP
NOP/Capital base
(RM million)
(%)
As at end
2002
2003
2002
2003
Commercial banks
2,786
2,574
 5.8
5.0
Merchant banks
73
50
1.6
1.1
Banking system1
2,859
2,624
5.5
4.7
1
Excludes Islamic banks.
J
F
M
A
M
J
J
A
S
O
N
D
2003
-10.0
-5.0
0.0
5.0
10.0
15.0
RM billion
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
% p.a
Graph 4.12 
Banking System1: Components of Foreign 
Currency Exposure
Net open foreign currency position
Net foreign currency swap purchased 
Net open foreign currency assets (including value spot and tomorrow) 
Net outright forward foreign currency purchased 
US TBill secondary market rate (RHS)
3-month avg KLIBOR (RHS)
1  Excludes Islamic banks


140
To manage their forward purchases and
capitalize on the relatively cheaper USD
borrowings, banking institutions increased their
foreign currency liabilities by RM4.3 billion or
10.1% to RM46.7 billion as at end-2003. Banking
institutions, however, reduced their foreign
currency assets by RM3.3 billion to RM40.4 billion
as at end-2003 on account of diminishing returns.
On a net basis, the banking system had a net
foreign currency liability of RM6.3 billion as at end-
2003 as against a net foreign currency asset
position of RM1.2 billion as at end-2002.
The banking system is expected to maintain a net
foreign currency liability position and remain a net
forward foreign currency purchaser in an
environment in which the interest rate differential
between USD and Ringgit is expected to remain
positive resulting in continued favourable forward
premiums.
Capital Strength
The banking sector remained resilient and well-
capitalised, with RWCR and core capital ratio sustained
consistently above 13% and 10% respectively
throughout the year. The capital base of the banking
system increased by RM4.5 billion, of which audited
profits contributed RM1.2 billion, while capital raising
exercises by a number of banking institutions
contributed another RM3.3 billion. These new capital
injections offset the reduction in capital as a result of a
merger of two large commercial banks during the first
half of 2003. In line with higher financing activities, risk-
weighted assets of the banking system grew by
RM28.3 billion or 5.9% to RM506.6 billion at
end-2003.
Graph 4.13 
Banking System1 : Distribution of Net Open 
Foreign Currency Position as at 
31 December 2003
<-10
-10-<-2
-2-<2
2-<5
5-<10
≥10
NOP/Capital Base (%)
No. of banking institutions
Commercial banks
Merchant banks
1  Excludes Islamic banks
0
2
4
6
8
10
12
14
16
In tandem with the higher profits and new issuance
of shares, total Tier-1 capital increased by 2.8% or
RM1.6 billion, to RM59.3 billion as at end-2003.
Nevertheless, a higher increase in the risk-weighted
assets caused the core capital ratio to decline
marginally to 10.7%. Meanwhile, total Tier-2 capital
recorded a stronger growth of 14.4%, following the
issuance of subordinated debt by four banking
institutions, mainly to strengthen their capital
position. Combined with the reduction in
investment in subsidiaries as a result of the merger
of two large commercial banks, the RWCR of the
banking system strengthened further to 13.4%
(end-2002: 13.3%).
The RWCR of commercial banks increased to 13.6%
due to higher capitalisation and reduction in
investment in subsidiaries, while there was a decline
in capital base for merchant banks due to a
significant increase in the holdings of other banking
institutions’ shares by one merchant bank. This,
combined with an increase in risk-weighted assets
of 2.4%, resulted in the RWCR of the merchant
Table 4.16
Banking System1: Constituents of Capital
As at end
Annual
2002
2003
change
RM million
RM million
(%)
Tier-1 capital
57,662.0
59,282.5
1,620.5
2.8
Tier-2 capital
16,756.7
19,174.4
2,417.7
14.4
Total capital
74,418.7
78,456.9
4,038.2
5.4
Less:
Investment in
subsidiaries and
holdings
of other banking
institutions’
capital
11,016.4
10,591.9
-424.5
-3.9
Capital base
63,402.4
67,864.9
4,462.5
7.0
Risk assets:
0%
139,125.1 170,856.6
31,731.5
22.8
10%
15,544.0
16,849.8
1,305.8
8.4
20%
96,968.9 119,938.6
22,969.7
23.7
50%
102,628.2 117,511.0
14,882.9
14.5
100%
406,009.8 422,137.2
16,127.4
4.0
Total risk-weighted
assets
478,272.1 506,565.5
28,293.5
5.9
Risk-weighted
capital ratio (%)
Banking system1
 13.3
13.4
0.1
Commercial banks
13.2
13.6
0.4
Finance companies
12.0
11.3
-0.7
Merchant banks
19.0
18.4
-0.6
1
Excludes Islamic banks.
Note: Total may not add-up due to rounding.


The Financial Sector
141
FINANCIAL SECTOR MASTERPLAN
The Financial Sector Masterplan (FSMP) which was launched in March 2001 sets out the broad strategies
for the development of the financial sector over a ten year period. The end objective is to evolve the
financial system into one which is competitive, resilient and dynamic. Efforts that were undertaken
during the initial stage of the implementation of the FSMP were predominantly directed towards
enhancing the capacity and capability of domestic financial institutions in order to enhance their level of
effectiveness and competitiveness, strengthening the regulatory and supervisory framework, promoting a
safe and efficient payments system as well as developing the framework on consumer education and
protection.
During the first three years of the implementation of the FSMP, a total of 31 out of the 119
recommendations have been fully implemented, with an additional 24 recommendations are being
implemented on a continuous basis. Details of the recommendations which have been fully implemented
are as listed in the accompanying table.
Completed Recommendations
Banking Sector
R3.4
Liberalise restrictions on salaries and staff mobility in the banking industry to enable the industry
to attract the best talent and reward them accordingly
R3.5
Uplift restriction on employment of expatriates to attract the best international talents to meet
the demand for expertise in specific areas of banking
R3.6
Establishment of board committees, namely Nominating, Compensation and Risk Management
Committees to further enhance corporate governance standards
R3.7
Allow group rationalisation through cross-selling of products and consolidation of back-office
processes as well as facilitate the merger of commercial banks and finance companies to further
enhance efficiency and competitiveness
R3.12
Encourage outsourcing of non-core functions to gain greater strategic focus and efficiency
R3.14
Encourage the development of new delivery channels to increase the range of products and
services to further enhance competitiveness
R3.15.1 Introduction of a simpler product notification process to provide incentive for development of
  and
new and innovative products, and outline clear set of guidelines providing criteria for product
R3.15.2  notification and specific product approval requirements
R3.21
Issuance of examination manuals for implementation of risk-based supervision with supervisory
focus on high risk areas and greater attention on weak institutions
R3.28
Allow market forces to shape developments in the payments system to allow greater competition
and increase innovation in payments system
Insurance Sector
R4.1
Remove restrictions on outsourcing to enable insurers to further develop core competencies and
effective business strategies
R4.2
Allow eligible insurers to use the internet as a distribution channel to enhance competitiveness
and efficiency of the insurance industry
R4.6
Relax the restrictions on employment of expatriates to accelerate the development of skills and
expertise in the industry
R4.16
Increase the statutory minimum paid-up capital of insurers to enhance their financial
resilience and to accelerate the consolidation of the industry in order for domestic insurers to
capture the size and scale needed to compete effectively in a more deregulated and
liberalised market
R4.18
Establish board committees with specific responsibilities and enhance disclosure of compensations to
directors and senior management to ensure they act in a manner that will increase shareholder value


142
R4.19
Raise the entry requirements for the agency force to ensure the recruitment of more qualified
and competent agency force
R4.20
Introduce additional compulsory exams as part of continuing education programmes for agents
to upgrade their knowledge and skills
R4.21
Further strengthen performance-based supervision to maintain stability under more deregulated
and competitive market conditions
R4.26
Introduce ‘best advice’ regulations to enhance consumer protection and professionalism in the
sale of life insurance products by insurance intermediaries
R4.27
Strengthen regulations on unfair trade practices to ensure sound business practices and fair
treatment of consumers
R4.29
Allow financial and non-financial institutions to acquire interests in direct insurers to create
business synergies
Islamic Banking and Takaful
R5.3
Build strong management through the establishment of board committees, benchmarking and
employment of experienced and qualified staff
R5.6
Increase the number of takaful operators to accelerate the expansion of takaful industry
Development Financial Institutions (DFIs)
R6.4
Introduce a systematic framework for sourcing funds to ensure the appropriate and adequate
funding for the operations of DFIs.
R6.7
Establish a legislative framework to provide for the regulation and supervision of DFIs to ensure
that DFIs’ policies and objective are consistent with the national policy objectives
Alternative Modes of Financing
R7.2
Establish a RM500 million Venture Capital Fund to increase the availability of Venture Capital
financing and stimulate new ventures
R7.3
Introduce further tax incentives for the Venture Capital industry to promote the growth of
Venture Capital
R7.4
Liberalise the MESDAQ listing requirements to facilitate the exit of Venture Capital companies
from their investments
Labuan International Offshore Financial Centre
R8.3
Adopt a consultative and market driven approach to create a conducive tax and business
environment to enhance the competitiveness and attractiveness of Labuan
R8.6
Strengthen Islamic banking and finance as well as takaful to develop Labuan with a strategic
focus on Islamic products and services
R8.7
Enhance Labuan International Financial Exchange (LFX) to be a one stop financial exchange for
residents and global companies
The recommendations implemented and the various initiatives undertaken during the first three
years of implementation have contributed towards enhancing capacity and capabilities of domestic
financial institutions, as well as providing a robust infrastructure to ensure overall stability of the
financial sector.
BANKING SECTOR
Initiatives that were undertaken during Phase 1 of the implementation of the FSMP were primarily
focused on building the capacity and capabilities of domestic banking institutions to enhance their
competitiveness and building the infrastructure within which the banking institutions operate to promote
the development of a more robust banking system. Attention was also accorded towards creating the
necessary infrastructure for a more market-based consumer protection framework.


The Financial Sector
143
One of the key milestones for Phase 1 of the FSMP is to drive performance improvement. The industry-
wide benchmarking programme which was initiated in 2002 provided banking institutions with a tool to
enable more effective strategic focus and business planning and provided the relative ranking of each
institution in all areas of performance. The benchmarking exercise also enabled Bank Negara Malaysia to
assess the progress of the industry, particularly the performance improvements recorded by the domestic
financial institutions thereby determining the speed of transition and progress.
The domestic banking institutions have steadily recorded improvements over the past three years yielding
desirable results. The consolidation programme has resulted in larger and better capitalised domestic
banking institutions. The average total assets and shareholders’ funds per domestic commercial banks
have more than doubled from RM18.1 billion as at end-1999 to RM44.9 billion as at end-2003 and from
RM1.4 billion as at end-1999 to RM3.8 billion as at end-2003 respectively. The profitability levels have
increased over the past three years. Return on average assets and return on average equity of the
domestic banks have increased from 0.7% and 8.4% in 2001 to 1.2% and 13.4% in 2003 respectively.
Pre-tax profit per employee had also increased significantly from RM50,196 in 2001 to RM108,728 in
2003. The cost to income ratio also declined from 41.2% in 2001 to 40.1% in 2003. Improved
management of the operating costs had stabilised the operating expenses as a percentage of average
assets at RM1.42 per every RM100 of assets over the same time period.
The banking institutions in Malaysia operate in an open environment. Both the domestic and foreign
controlled banking institutions are governed by the same set of legislations and regulations, with the
only remaining restriction on foreign banks being in the area of branching. Foreign controlled banking
institutions nevertheless have a strong presence in the market, accounting for 26%, 27% and 25% of
the commercial banking assets, loans and deposits markets respectively.
Competition has resulted in the narrowing of gross interest margins of commercial banks from
4.14 percentage points in 2001 to 3.69 percentage points in 2003. In this more competitive
environment, the domestic banking institutions have been able to sustain their market share at 80%.
The foreign banking institutions have expanded their loan market share mainly in housing loans. The
domestic banking institutions continue to be the main provider of financing for businesses, particularly
for the small and medium enterprises, where 83% of the loans to this sector were extended by the
domestic banking institutions. The domestic commercial banks have also expanded their market share in
the credit card business, which was previously the domain of the foreign controlled commercial banks to
47% of the market (2000: 43%).
To enhance the level of operating efficiency and allow greater strategic focus on business operations,
banking institutions can now outsource non-core operations to third party service providers. They are
also permitted to rationalise common internal operations such as treasury function and human resource
management. A number of banking institutions also cross-sell products and services within the same
banking group. Strategic alliances between banks and other banking institutions as well as non-banking
institutions have also taken place to further enhance competition and innovation. One example is in the
area of bancassurance and the sale of unit trusts. In addition, domestic banking institutions have also
introduced new services such as wealth management and structured deposit products.
To enhance the delivery of products and services to customers, banking institutions have embraced
innovative technology-based delivery channels such as internet and mobile banking. This widens the
accessibility of banking services and facilitates seamless connectivity in the delivery of financial products and
services to customers through the operation of one-stop financial centres. Efficiency of the banking sector
has also improved, with the average time taken by commercial banks to process housing loan applications
having declined from 4 days in March 2002 to 3.1 days and from 11 days to 9.5 days for new credit card
applications. With greater emphasis on customer relationship, the percentage of customer complaints that
are resolved within 14 days have improved from 82.1% in March 2002 to 87.6% in December 2003.


144
As a result of the significant progress made by the domestic banking institutions, liberalisation of the
system has been brought forward in several areas. While the domestic banking institutions were allowed
to offer full internet banking services beginning 1 June 2000, the locally-incorporated foreign banks were
permitted to offer such services beginning 1 January 2002, earlier than was announced. The requirement
for a non-resident controlled company to source at least 50% of its financing requirements from
domestic banking institutions was also uplifted with effect from 1 April 2003.
A smooth functioning payments system which is efficient and effective is also important. As the
payments technology and the structure of the financial services industry change rapidly, it is necessary to
have a payments system which responds to this new environment. To encourage greater innovation and
competition, Bank Negara Malaysia has shifted its role from being directly involved in the development
process to a more facilitative role, particularly in the retail payments system. Bank Negara Malaysia will
however, continue to ensure that minimum security standards are applied when any new systems are
introduced. The Payment Systems Act 2003 was enacted to facilitate the development of payments
system and to ensure that it is secure and efficient.
An important aspect of stability in the financial system relates to the ability of the system to undergo the
transition to deregulation and increasing competition with no disruption in the level or reliability of
services to customers. The customers also play an important role to drive performance improvement of
the financial institutions. Crucial to this is active consumerism, which can only be attained with the public
having the necessary information and understanding of financial products and services. Towards this, a
10-year consumer education programme was launched to disseminate information to consumers
including information on consumer rights and responsibilities. In addition, efforts have also been put in
place to encourage consumers to pursue formal administrative and legal redress for their grievances.
Banking institutions are required to set up dedicated complaint units to manage complaints received from
customers.
The banking system remains the largest provider of funds to the private sector, providing support to the
various sectors of the economy. In line with the objective to develop a well-diversified financial system
with well-functioning, deep and liquid markets, Bank Negara Malaysia continued to take an active role in
the development of the bond market to meet the changing needs of the Malaysian economy. As a result,
the bond market experienced a rapid growth since the Asian financial crisis. As at end-2003, the size of
the bond market was equivalent to 87.6% of GDP
, compared with 46.9% in 1996. The private debt
securities (PDS) market has emerged as an important source of financing for the private sector since
1998. PDS outstanding represented 34.3% of GDP at end-2003.
To enhance the liquidity in the secondary bond market, the Guidelines on Securities Borrowing and
Lending (SBL) Programme under the Real Time Electronic Transfer of Funds and Securities System were
issued to support trading strategies for principal dealers and enhance the return on bond portfolio
investment for investors. Through SBL, principal dealers (PDs) can now participate as both borrower and
lender, which allow PDs to quote two-way prices more effectively and at the same time able to meet
commitments of their treasury activities. In addressing the captive bond market issue and to promote the
secondary trading, greater investment flexibility was accorded for insurance companies to invest in
Malaysian Government Securities and PDS.
To increase the availability of risk management tools for market participants, more players were
allowed to undertake repo transactions with the licensed financial institutions. The Prudential
Standards on Asset Backed Securities Transactions by Licensed Institutions issued by Bank Negara
Malaysia in 2003 helped in creating greater awareness and participation in securitisation transactions.
Universal brokers have been allowed to participate in fixed income market and thus engage the
services of money-brokers. A broader investor base is an important factor in contributing to liquidity in
the secondary market.


The Financial Sector
145
Concerted efforts were also made to develop the Islamic financial markets to meet the demands of
institutional investors such as the issuance of Islamic based Government investment issues and the
development of a risk-free benchmark Islamic yield curve to help in the pricing and trading of Islamic
securities. To further develop the Islamic capital market, the Government had provided incentives such as
tax exemption for expenses incurred on the issuance of Islamic PDS. As a result of these efforts, the
Islamic PDS market has grown significantly. Total outstanding of Islamic PDS stood at RM69.1 billion, or
46% of total PDS outstanding as at end-2003.
Measures that have been put in place over the past three years were implemented to ensure that the
banking system will continue to support sustainable economic growth and to prepare the Malaysian
banking sector for a more liberalised and global operating environment. The strategy for the banking
system on the latter has been one of gradualism. A managed and sequenced deregulation and
liberalisation process is adopted to ensure that financial reforms will be effectively implemented without
destabilising implications on the system.
INSURANCE SECTOR
The recommendations implemented in the first phase of the FSMP are aimed at building the capabilities
of domestic insurers to compete more effectively, strengthening the consumer protection framework and
raising corporate governance standards to further enhance the protection of policyholders and
shareholders value.
The capacity-building initiatives and measures implemented under Phase 1 of the FSMP have brought
about positive developments in the industry over the last three years. Significant progress was achieved in
the consolidation of the industry, particularly in the more fragmented general insurance sector, following
the increase in the minimum paid-up capital requirement for insurers from RM50 million to RM100
million in 2001. A total of 15 mergers and acquisitions involving a total of 28 general insurers (including
four composite insurers) have been successfully completed since 1999. As a result, the average
capitalisation of general insurers strengthened by 54.4% from RM92.2 million in 2000 to RM142.3
million in 2003, improving the competitive position, and therefore better able to take advantage of the
opportunities presented in the more open market environment.
Domestic insurers continued to maintain their dominant position in the general insurance sector, while
also achieving productivity and profitability gains. As at end-2003, domestic insurers accounted for
73.3% of gross general insurance premiums, with the top five domestic insurers collectively controlling
31.8% of the total gross premiums in the industry. Employee productivity rose from RM498,857 in 2000
to RM797,923 in 2003. Overall profitability, as measured by gross premiums generated per employee,
also improved, with domestic insurers sustaining a higher return on equity over foreign insurers (24.7%
as against 20.4% by foreign insurers for the year 2003).
In the life insurance sector, significant attention was directed at developing new growth opportunities to
increase the market penetration, and hence economies of scale. In this respect, domestic insurers secured
a dominant position in bancassurance business, accounting for 76.6% of the total new insurance
premiums generated through banking institutions in 2003. The commitment of domestic insurers to
the development of bancassurance was supported by the encouraging sales of non-credit related
products. Domestic insurers accounted for more than 80% of total non-credit related bancassurance
business in 2003.
As at end-2003, a total of 12 life insurers had been given approval to enter into bancassurance
arrangements with banking institutions. Business generated through this alternative distribution channel
has quadrapled since 2000 to reach RM1,859 million in 2003. Two domestic insurers have successfully
leveraged on the banking distribution network to become market leaders in bancassurance, with a
combined market share of 36% of total bancassurance premiums generated in 2003. Bancassurance


146
currently accounts for more than 38% of total new life business premiums in the market and has been a
major factor contributing to the higher penetration of life insurance business in Malaysia which increased
from 31.5% in 2000 to 36.4% in 2003.
Domestic life insurers succeeded in making further inroads in investment-linked business, which has
emerged as a new growth area. The market share of investment-linked business attributed to domestic
insurers has increased progressively from 16% in 2001 to 27.9% in 2003, contributing to a higher overall
new business growth rate of 31.5% achieved by domestic life insurers in 2003, compared with 19.4%
registered by foreign insurers.
The capacity building initiatives under Phase 1 of the FSMP also introduced a more flexible operating
regime aimed at enabling domestic insurers to innovate, develop expertise and enhance efficiency
levels. In this respect, the transfer of expertise to domestic insurers was facilitated by a more flexible
policy on the appointment of expatriates. As at end-2003, a total of 42 expatriates were employed in
the insurance industry to provide technical support in the areas of information technology,
underwriting, actuarial and agency development. In the more flexible operating environment, an
increasing number of insurers also leveraged on effective outsourcing strategies to lower costs while
delivering higher service quality to their customers.
As at end-2003, more than 30 insurers were engaged in outsourcing arrangements, primarily in back-end
support functions related to management information systems, data processing and customer service
support. Consumer access to insurance was also made more convenient with approval given to 18
insurers to provide insurance over the internet, including eight insurers which are now able to offer
motor insurance policies on-line through an interactive website. The process improvements enabled by
these developments resulted in an overall improvement in the efficiency levels of domestic insurers.
Domestic life insurers registered a lower expense rate of 34.2% in 2003 (2000: 36.8%), while the
combined management expense ratio of domestic general insures improved to 24% in 2003 (2000:
24.4%).
Notwithstanding the positive developments in the industry, domestic players with significant overall
market share have yet to emerge in the life insurance sector.  In the transition to the second phase of the
FSMP which envisages a level playing field between domestic and foreign players, the focus of policy will
continue to be directed at developing domestic insurers, in particular life insurers, to consolidate
domestic strengths in the penetration of alternative distribution channels, promote further innovation
and facilitate strategic alliances.
The implementation of specific measures under Phase 1 of the FSMP to promote greater market
discipline and strengthen corporate governance will support further performance improvements by
domestic insurers. Enhanced disclosure requirements and the implementation of a comprehensive
consumer education programme will empower consumers to make informed decisions on their choice of
financial products and services which in turn, will serve as a strong incentive for improved product and
service offerings by insurers. The strengthened corporate governance framework underpinning these
initiatives will also serve to ensure that the board of directors posses the appropriate qualifications and
experience to enable them to provide effective strategic direction to insurers in the more challenging
environment. These measures supplement the changes being made to the regulatory framework and
constitute important elements of a comprehensive approach to develop a robust, stable and dynamic
insurance sector.
ISLAMIC BANKING AND TAKAFUL
The Islamic banking and takaful sector strengthened and expanded significantly during the first phase of
the FSMP. The Islamic banking market share increased to account for 9.7% (2000: 6.9%) of total assets,
10.4% (2000: 7.4%) of total deposits and 10.3% (2000: 5.3%) of total financing of the banking system.


The Financial Sector
147
The takaful sector also expanded rapidly to constitute 5.7% (2000: 3.9%) of total assets and 6.0%
(2000: 3.9%) of total contributions of the insurance industry. Phase 1 also witnessed significant progress
being achieved in the development of the financial infrastructure for Islamic banking and takaful to
function efficiently and effectively in parallel with conventional banking and insurance.
A significant milestone was achieved in the legal infrastructure development with the assignment of a
dedicated High Court in 2003 to adjudicate all Islamic banking and finance cases. This development,
reinforced by the formation of the Law Review Committee to undertake a holistic review of the present
common law-based legislations will serve to establish an effective legal structure to cater for the unique
nature of transactions in Islamic banking and finance. To complement these initiatives, a preliminary
review of the Islamic Banking Act 1983 and Takaful Act 1984 was also undertaken.
The Shariah advisory structure was also strengthened with the amendment of the Central Bank of
Malaysia Act 1958 which conferred a legal stature to the Shariah Advisory Council at Bank Negara
Malaysia as the sole authority to decide on Shariah matters on Islamic banking and finance that fall
under the purview of Bank Negara Malaysia. Guidelines will be issued to strengthen the structure of the
Shariah Committees at the Islamic banking institutions and takaful operators and to define the
composition, roles and responsibilities of these Shariah Committees. With the guidelines in place, the
overall effectiveness of Shariah governance framework will be significantly enhanced.
The regulatory framework has been enhanced to address the characteristics of Islamic banking and
takaful as well as to strengthen institutional capacity and financial resilience of Islamic banking and
takaful players. The introduction of the standard framework for the computation of the rate of return in
Islamic banking operations in 2001 provided greater transparency in the derivation of the rate of return
to ensure a more equitable distribution of income between the bank and its depositors. The framework
enhanced the capability of Islamic banking institutions to manage volatility in the rate of return more
effectively and to remain competitive relative to the conventional banking institutions. The issuance of
the Guidelines on the Specimen Reports and Financial Statements for Licensed Islamic Banks (GP8-i) in
2003 further increased financial disclosure to promote a more effective role of market discipline.
The capital position and financial resilience of the Islamic banking system strengthened significantly as a
result of the regulatory requirement for conventional banking institutions participating in the Islamic
Banking Scheme (IBS banks) to observe the minimum risk-weighted capital ratio for their Islamic banking
portfolios. The minimum capital requirement of takaful operators would be raised from RM35 million to
RM100 million with effect from 31 December 2004 to position takaful operators at par with
conventional insurers.
The benchmarking programme for performance measurement has also been put in place to enhance the
ability of Islamic banking institutions and takaful operators to assess their relative efficiency and
formulate strategies to improve operational efficiency and to be at par with international best practices.
In the area of corporate governance, the issuance of guidelines on the establishment of board
committees, minimum qualifications and training requirements for directors, as well as the roles and
responsibilities of independent directors in 2003 aim to strengthen the management of Islamic banking
institutions and takaful operators as shareholders play a more active role in overseeing the effectiveness
of the board of directors and management.
The issuance of the Guidelines on the Sell and Buy Back Agreement in 2002 enhanced the capacity of
Islamic banking institutions to better meet their liquidity requirements as part of the efforts to develop a
deep Islamic financial market structure. The variable rate financing mechanism introduced in 2003
provided a competitive tool for Islamic banking players in pricing product offerings to sustain their
competitive position in a dual banking environment and concurrently assist Islamic banking institutions to
effectively manage risks in pricing arising from asset and liability mismatches. The detail implementation


148
framework for mudharabah (profit-sharing) and musyarakah (profit and loss sharing) financing is in the
final stage of completion and is expected to further promote greater diversity in the mode of financing as
the Islamic banking system advances into Phase 2 of FSMP
.
The establishment of the Islamic Banking and Finance Institute Malaysia (IBFIM) in 2002 as an industry-
owned training and research institute was another important progress achieved. IBFIM will spearhead the
development of a pool of knowledgeable and competent Islamic bankers and takaful operators to meet
the requirements of the Islamic financial industry. The organisation of the Islamic Banking and Takaful
Week in 2001 and 2003 as well as the launching of the Consumer Education Programme have also
played an important role in enhancing the level of public literacy in Islamic banking and takaful.
Consumers are now more aware of the characteristics of Islamic banking and takaful, its underlying
Shariah principles and concepts as well as the range of products and services offered by Islamic banking
institutions and takaful operators.
Progress has also been achieved in the development of the institutional infrastructure. Two additional
takaful operators have been licensed. In Islamic banking, a review of the existing “window” institutional
structure of the IBS banks is being undertaken to prepare an enabling structure that can assimilate these
developments and thus strengthen the prudential regulatory and supervisory regime.
As the progress of development has exceeded initial expectations in Phase 1, Bank Negara Malaysia has
brought forward the liberalisation for the Islamic banking sector from Phase 3 to Phase 2, three years
earlier than envisaged by the FSMP
. The liberalisation of the Islamic banking sector will further hasten the
pace of development and strengthen global integration to prepare the enabling environment for Malaysia
to evolve as a regional centre for Islamic banking and finance.
DEVELOPMENT FINANCIAL INSTITUTIONS
In tandem with the strategic directions outlined in the FSMP
, efforts undertaken during Phase 1 of the
FSMP were focused on fostering a pool of efficient and effective DFIs to complement banking institutions
in providing financing to identified priority and strategic sectors in the economy.
During Phase 1 of FSMP
, strategies undertaken were centred mainly on strengthening the
regulatory framework and capacity building of the DFIs. These strategies and initiatives include the legal
infrastructure and policy development to support an orderly and sound development of effective DFIs.
A comprehensive regulatory and supervisory framework to facilitate the overall policy development of
DFIs, especially in strengthening the financial and operational soundness of the DFIs was completed with
the enactment of the Development Financial Institutions Act 2002 (the Act) in February 2002. The Act
provides comprehensive mechanisms to ensure DFIs perform their mandated socio-economic functions.
Following the enactment of the Act, six DFIs were subjected to the regulatory and supervisory framework
embedded in the Act.
The major policy framework on building the capacity of DFIs aimed to ensure that as specialised
development institutions, the institutions would have an effective role in supporting developmental
needs of the nation. The DFIs are required to prepare and submit statement of corporate intent which
highlight the planned business activities, implementation strategies and performance target within the
mandated roles and Government’s development objectives to ensure that DFIs remained focused on
their mandated roles.
Prudential measures, namely, the classification of impaired loans and loan loss provisioning requirement
have been introduced to ensure that the impaired loans and potential losses are identified and recognised
in a timely manner, and loan assets and income are fairly and prudently stated. The maintenance of
minimum liquidity has been introduced to enhance the financial soundness of DFIs. The policy on


The Financial Sector
149
minimum capital requirement has been initiated to ensure DFIs have the financial capacity to sustain their
operations. During Phase 1, regular on-site examinations of the six DFIs were conducted to assess the
DFIs’ performance in meeting the mandated roles.
To further equip DFIs as specialised development institutions, measures were undertaken to enhance their
role in providing non-financial services. A joint project with the Japan International Cooperation Agency
and selected DFIs was initiated to enhance the provision of advisory services of these DFIs to SMEs. The
project will  formulate action and implementation plans to enhance the institutional capability, including
human resource skills.
To strengthen corporate governance, guidelines were issued to assist the DFIs and their stakeholders in
instituting effective governance structure and oversight of Board of Directors. The main areas addressed
in the guideline are duties and responsibilities of the board of directors, minimum requirements and rules
governing the appointment of directors and chief executive officers as well as the establishment of board
committees.
Moving forward, measures implemented will continue to be focussed on providing the enabling
environment for the DFIs to operate efficiently and effectively. Strategies in the near term will focus on
institutional development of the DFIs in the areas of risk management and the advisory and consultancy
capability for other targeted customers, besides the SMEs. At the same time, efforts to promote
institutional efficiency of the DFIs through the formulation of performance indicators will also be
intensified to strengthen their financial and operational conditions.
MOVING FORWARD
The measures that have been implemented thus far were aimed towards providing a strong foundation
on which the financial sector will be developed in the future. In addition to the measures that were
implemented in the banking, insurance, Islamic banking and takaful, and development financial
institutions sectors, significant strides have also been recorded in introducing alternative modes of
financing in the domestic financial system. Significant progress has also been made in the development
of Labuan as an international offshore financial centre. On the former, the Government has been in the
forefront in the development of the venture capital (VC) industry, a key step towards transforming
Malaysia into a knowledge-based economy. Initiatives such as the establishment of a one-stop centre for
the VC industry, tax incentives and VC fund will continue to spur development in the industry. With the
rapid recognition and growing demand for Islamic finance, Labuan has strategically promoted itself as an
Islamic financial centre. Supported by the strong onshore Islamic financial sector, Labuan is well
positioned to participate in the growing global Islamic financial market.
As we move forward, further efforts in institutional development will be undertaken, in particular, for the
domestic financial institutions. This will be accompanied by gradual liberalisation, with the balance being
made to ensure that the benefits will be maximised while any destabilising implications minimised. In
addition, a more diversified financial services landscape will emerge with the capital market, insurance
and venture capital having a significant role in the financial sector.


150
The Proposed Deposit Insurance System in Malaysia
In 2003, substantial progress was made towards finalising the features of the proposed deposit insurance
system for Malaysia, thus paving the way for its establishment. The improved strength, competitiveness
and resilience of the banking system following the comprehensive restructuring and capacity building
initiatives support a positive environment for the effective implementation of a deposit insurance system
that will contribute to the stability of the financial system.
As an integral component of the financial safety net, the deposit insurance system will further strengthen
incentives for financial institutions to adopt sound financial and business practices and enhance public
confidence in the financial system by providing explicit protection of deposits. The proposed features
underpinning the Malaysian deposit insurance system fully support these objectives.
In developing the design features, Bank Negara Malaysia has considered various models adopted in other
countries that operate explicit deposit insurance systems, adapting them as appropriate, in order to
achieve a system that will function efficiently, equitably and in a manner that provides the appropriate
economic incentives for all participants within the Malaysian context. Key elements of the proposed
design features include:-
(a) a legislated mandate for the agency responsible for the administration of the deposit insurance
system (hereafter referred to as ‘Agency’). This will ensure clarity of its role and responsibilities within
the financial safety net and provide the basis for the statutory powers to be accorded to the Agency;
The proposed mandate for the Agency is to:-
(i)
administer the deposit insurance system;
(ii)
protect depositors from the loss of their deposits up to the insured limit in the event of a
bank failure;
(iii)
strengthen incentives for sound risk management in the banking industry; and
(iv)
promote or otherwise contribute to the stability of the financial system.
Within its proposed mandate, the Agency will have the role, in certain circumstances, to
undertake the resolution of banking institutions, as may be required based on the assessment of
Bank Negara Malaysia. In this role, the Agency will also be responsible to minimise the costs of
bank resolutions to the financial system, taking into account factors affecting financial system
stability.
(b) compulsory membership for commercial banks (including subsidiaries of foreign banks operating
in Malaysia) and finance companies licensed under the Banking and Financial Institutions Act 1989,
and Islamic banks licensed under the Islamic Banking Act 1983, to accept deposits (hereafter
referred to as ‘member institutions’). This will avoid risks associated with adverse selection whereby
only small and perceived weaker institutions participate in the system. This is important to enhance
the viability of the deposit insurance system;
(c) protection up to the prescribed limit (for eligible deposits) for all depositors of member institutions.
Provisions will be made for the Agency to approve additional financial instruments as being eligible
for deposit insurance to accommodate new types of deposit products that may be introduced in
future. Deposits that are not payable in Malaysia, foreign currency deposits, negotiable instruments of
deposit or other bearer deposits, repurchase agreements and money market placements would not
be insured;


The Financial Sector
151
(d) an adequate basic level of protection provided for every depositor’s deposits in each member
institution. Depositors with deposits in more than one member institution will be insured separately
for their deposits in each institution. Joint and trust deposits will also be separately insured, providing
additional coverage within the system for depositors with such accounts. The deposit insurance limit
will be set at a level that is sufficient to protect the vast majority of depositors in full. At the same
time, the deposit insurance limit will retain sufficient incentives for the larger and institutional
depositors to monitor the financial condition of member institutions. This is important to promote
sound financial and business practices, thereby further enhancing financial stability;
(e) equivalent protection for Islamic and conventional deposits which will be separately insured up
to the deposit insurance limit to avoid any competitive distortions between the Islamic and
conventional banking systems. In this respect, extensive consultations have been held with the
National Shariah Advisory Council on elements of the deposit insurance system relating to Islamic
deposits to ensure consistency and compliance with Shariah principles;
(f) annual premiums to be paid by member institutions to the deposit insurance fund to be based on
the institution’s total insured deposits. The annual premiums will be borne entirely by member
institutions and should not result in the imposition of additional service charges, either explicitly or
implicitly, on consumers. The deposit insurance fund may be used to reimburse the depositors of a
member institution that is unable to meet its obligations to depositors or otherwise provide financial
assistance for the resolution of the institution. The annual premiums may be supplemented by
additional premiums imposed on member institutions to cover any loss resulting from the
implementation of resolution schemes; and
An Islamic deposit insurance fund, funded by premiums collected on insured Islamic deposits,
will be separately maintained to ensure that the coverage accorded to Islamic deposits fully
comply with Shariah principles.
(g) the implementation of a differential premium system to determine the premiums payable by each
member institution. Consistent with the Agency’s mandate to strengthen sound risk management
practices among member institutions, financial consequences (through higher premium rates) will be
attached to practices of member institutions that increase the risk of loss to the deposit insurance
system. In line with the basic structure of proven and tested rating systems employed in other
countries, both qualitative and quantitative criteria will be taken into account to determine the
premium category in which a member institution is classified.
It is envisaged that the deposit insurance system will be administered by a separate statutory body
established under an Act of Parliament to accord greater focus and clarity to the fulfilment of the deposit
insurance mandate. The Agency will be supported by an independent board comprising relevant
representatives from the public and private sectors. As separate components of the financial safety net,
appropriate institutional arrangements will also be put in place to facilitate effective co-operation and co-
ordination of actions between Bank Negara Malaysia and the Agency.
Following a consultation process with the banking industry, the deposit insurance system will be
implemented subsequent to the passing of legislation in Parliament, and the establishment of the
necessary infrastructure.


152
Table 4.17
Discount Houses: Sources and Uses of Funds
Annual change
 As at end-
2002
2003
2003
RM million
Sources:
Approved capital funds
300
153
2,443
Deposits
4,834
3,847
23,751
Interbank borrowings
-1,370
-1,169
3,559
Others
-185
-13
448
Total
3,578
2,818
30,201
Uses:
Investment in securities:
2,876
809
24,055
Government debt securities
112
-571
1,329
MGS held
-364
-262
835
Khazanah bonds
-281
123
497
BNM bills
229
16
365
Private debt securities
-104
3,197
14,730
Bankers acceptances
2,754
-2,752
3,237
Negotiable instruments of
deposit
-125
752
848
Cagamas debt securities
471
610
2,168
Others1
-181
-567
882
Interbank placements
1,031
1,921
5,809
Others
-329
87
337
2001
2002
2003
Number of discount houses
7
7
7
1
Includes Danaharta and Danamodal bonds.
Total may not add up due to rounding.
bank industry to decline to 18.4% (end-2002:
19%). In the case of finance companies, the
continued strong demand for hire purchase
financing during the year led to a higher growth in
risk-weighted assets as compared with the
moderate growth in capital base, resulting in the
RWCR declining to 11.3% (end-2002: 12%).
The higher expansion in loans contributed to the
increase in total risk-weighted assets of the banking
system, which grew by 5.9% to RM506.6 billion.
The increase was noted across all risk categories,
especially at the 0% and 20% category.
The increase in the 0% category by 22.8% to
RM170.9 billion, was mainly due to Bank Negara
Malaysia’s liquidity operations. In line with the
higher lending for the purchase of residential
properties, the assets in the 50% risk-weight
category increased by 14.5% to RM117.5 billion.
Risk-weighted assets in the 100% risk-weight
category grew by 4% or RM16.1 billion,
attributable to other loan financing.
Given its strong level of capitalisation, the banking
system is well placed to efficiently and effectively
support economic activities, which augurs well for
the growth of the economy in 2004.
OTHER FINANCIAL INSTITUTIONS
Discount Houses
Amidst ample liquidity in the financial system, total
resources mobilised by the discount houses increased
further during the year by 10.3% or RM2.8 billion
(2002: 15% or RM3.6 billion).  Deposits (primarily in
the form of short-term fixed deposits) continued to
be the main source of funds, increasing by 19.3%
(2002: 32.1%).  With the stronger growth in
deposits, discount houses were able to further wind
down their interbank borrowings, which declined by
24.7% (2002: -22.5%).
There was a marked shift in the allocation of funds
mobilised by the discount houses.  A significant
decline in holdings of banker’s acceptances (BAs),
together with lower holdings of MGS and Khazanah
bonds, were offset by a large increase in holdings of
PDS.  PDS investments increased by RM3.2 billion or
27.7% in 2003 (2002: -RM0.9 billion or -0.9%) as
discount houses took advantage of the low PDS
prices in the second half of the year when market
sentiment turned more cautious on bonds.  The
increase in deposit funds was also placed in the
interbank market. Interbank placements rose by
RM1.9 billion or 49.4%, partly due to the
temporary placement of funds in the interbank
market at the end of 2003 by a discount house,
whose holdings of Danaharta bonds matured at the
same time.
Discount houses continued to expand their fee-
based activities during the year.  The industry
arranged, lead-managed and co-managed the
issuance of PDS worth RM9.8 billion (2002: RM8
billion), while the total amount underwritten
increased to RM2.6 billion (2002: RM1.9 billion) for
31 PDS issues (38 issuances in 2002).
Provident and Pension Funds
Total resources of the 13 provident and pension
funds (PPF) surveyed by Bank Negara Malaysia
increased by 7.9% to RM266.4 billion in 2003.
Accumulated contributions, which accounted for
90.2% of the total resources of the PPF, grew by
9.2% in 2003 (2002: 8.5%). The increment was due
to increases of 16.2% in net contributions and
15.7% in dividends credited to contributors’
accounts during the year. The latter was made
possible by higher investment income in 2003. The
Employees Provident Fund (EPF) remains the largest
PPF, accounting for 82.6% of the total resources of
the PPF.


The Financial Sector
153
The strong increase in net contributions in 2003 was
the result of both higher gross contributions and
lower withdrawals. Gross contributions increased by
1%, due mainly to the increase of 12.4% in the
number of contributors, which more than offset the
reduction in the employee contribution rate to EPF to
9% from 11% for a year, effective June 2003. The
reduction in the employee contribution rate was one
of the measures under the Economic Package
announced by the Government in May 2003 to
stimulate consumption.
Meanwhile, withdrawals declined by 10.5% during
the year due to the significant decline in withdrawals
by pensionable employees under the EPF’s
Pensionable Employees Withdrawal Scheme, which
was launched in 2000. The bulk of these withdrawals
was made in 2001. Withdrawals for investment and
housing purposes, however, increased by 8.7% and
2.1% respectively.
Investment income of the EPF increased by 3.4%
to RM11.1 billion in 2003 due mainly to the
increase in investment income from fixed income
instruments by 3.4%. Investment in fixed income
instruments contributed 77.4% of the total
investment income of the EPF in 2003. In line
with the strong performance of the equity
markets, investment income from equities
(including income from external equity fund
managers) registered the highest increase
(17.1%) among all asset classes in 2003.
Table 4.18
Provident and Pension Funds:  Selected
Indicators
2002
2003p
RM million
As at end-year
Number of contributors (‘000)
18,436
20,718
of which:
EPF
10,335
10,490
SOCSO
7,912
9,997
Accumulated contributions
220,094
240,238
Assets
246,974
266,438
of which:
Investments in MGS
77,387
91,589
During the year
Gross contributions
24,000
24,233
Withdrawals
13,689
12,249
Net contributions
10,311
11,984
Dividends credited
8,117
9,393
Investment income
10,553
12,200
p Preliminary
Source:
Employees Provident Fund, Pension Trust Fund, Social Security
Organisation, Armed Forces Fund, Malaysian Estates Staff Provident
Fund, Teachers Provident Fund and seven other private provident and
pension funds.
Others
Total Assets (RHS)
Equity 
Private Debt
Securities
MGS 
Loans 
Deposits & 
Money Market
Graph 4.14 
Provident and Pension Funds: 
Major Asset Composition
27.9
30.3
31.9
31.3
34.4
13.6
11.7
10.7
12.2
15.8
11.4
11.5
11.6
24.5
25.4
26.2
24.7
23.1
20.4
18.0
16.0
10.7
8.9
8.8
22.9
0
20
40
60
80
100
1999
2000
2001
2002
2003
RM billion
0
50
100
150
200
250
300
% of total assets
Holdings of all asset classes, except deposits and
money market instruments, increased in 2003. Given
the low interest rate environment, the decline in the
holdings of deposits and money market instruments
of PPF was part of an investment strategy to shift
into assets which offered higher returns. In line with
this strategy, the shares of loans and Malaysian
Government Securities (MGS) in total assets of the
PPF rose in 2003. The increase in the PPFs’ holdings
of MGS was also due to the higher issuance of MGS
in 2003. Investments in equities by PPF increased
marginally by 1.6%, while overseas investment
increased by 14.5%. The share of overseas
investment in total assets of the PPF, however,
remained small at 0.3%.
Venture Capital
In 2003, the venture capital (VC) industry continued
to expand as an alternative source of financing to the
economy. As a result of efforts taken by both the
Government and the private sector, the VC industry
recorded further growth in terms of fund size,
number of investee companies, number of venture
capital fund management companies (VCFMCs) and
venture capital companies/funds (VCCs). Total funds
available for VC investment grew by 10.5% to
RM2.1 billion. As at end-2003, investee companies
that received funding from VC sources, increased to
298 companies, with higher net investment of
RM878.7 million.
The Government remained supportive of the
development of the VC industry through the
provision of financing and incentives, which were


154
announced in the Economic Package and the 2004
Budget. The Cradle Investment Programme (CIP), a
programme initiated under the Economic Package
announced in May, was launched with an allocation
of RM100 million and was administered by the
Malaysia Venture Capital Management Berhad
(MAVCAP). The CIP was established in mid-2003 to
provide pre-seed funding and entrepreneurial
support to generate new ideas and innovations by
individuals, research institutes and institutions of
higher learning. As at mid-March 2004, a total
amount of RM1.2 million had been disbursed to
finance 93 ideas and innovations.
MAVCAP continued to offer and subsidise the
“Ignite the Technopreneur Fire” series of workshops
to interested technopreneurs, which was aimed at
addressing issues of entrepreneurship like
technology assessment, commercialisation and
financing. These workshops helped to address
technopreneurs’ concerns on management, human
resources and operations. Another initiative was the
“Three M” (Monday Meeting of the Month)
meeting, which was initiated and sponsored by
MAVCAP and jointly organised with the Malaysian
Venture Capital Association (MVCA). The monthly
forums were aimed at providing the opportunity for
technopreneurs and financiers to interact and
discuss issues of concern. Venture Accelerate 2003
took on a new approach which aimed at
accelerating the development of promising
entrepreneurs into successful start-ups, via a strong
focus on intensive mentoring and skills-building
over a 6-month period. The main objective was to
produce quality entrepreneurs and, in turn,
generate a more vibrant and sustainable
entrepreneurial environment in Malaysia. The
programme was launched on 17 September 2003
and is expected to end in June 2004.
The Venture Capital Consultative Council (VCCC),
which was established in 2002, contributed effectively
in developing further the VC industry. By providing a
consultative forum for both public and private sectors
involved in the VC industry, the VCCC has addressed
several areas of concern, which affected the
development of the industry. Among others, key areas
of improvement attributable to the VCCC were
addressing tax incentive-related issues, streamlining
data collection, ensuring constant dialogues between
the public and private sector involved in the VC
industry and initiating educational programmes.
A greater level of private sector involvement was
reflected in the increased funding for VC
Table 4.19
Key Statistics of Venture Capital Industry
As at end-year
2002
2003
Venture capital funds (RM million)
1,953.1
2,118.1
Net investment1 (RM million)
862.6
878.7
Local sources (RM million)
n.a.
769.0
Foreign sources (RM million)
n.a.
109.6
No. of venture capital companies/
funds
38
43
No. of venture capital fund
management companies
29
31
No. of investee companies
183
298
During the year
2002
2003
Gross investment (RM million)
191.4
227.2
Local sources (RM million)
n.a.
192.5
Foreign sources (RM million)
n.a.
34.8
No. of investee companies
80
115
1
Gross investment less divestment activities.
n.a. Not available.
Source: Securities Commission
Pension and provident
funds
0.1% 
Other private 
sector entities
20.6%
Private individuals
6.3%
Banks
17.6%
Foreign
1.1%
Source: Securities Commission
Insurance companies
0.11%
Graph 4.15
Sources of Venture Capital 
(% share, as at end-2003)
Government
 54.2%
Table 4.20
Investment by Stages during 2003
No. of Investee Companies
115
Business Stage
RM million
% share
Seed capital
        19.9
8.7
Start-up capital
        47.9
21.1
Early stage
        17.2
7.6
Expansion, Growth
        81.4
35.8
Bridge, Mezzanine, Pre-IPO
        20.3
8.9
Management buy-out
        11.7
5.1
Management buy-in
        16.8
7.4
Cashing-out (Secondary purchase)
 …
…
Other types of investment
        12.1
5.3
Total
      227.2
100.0
Source: Securities Commission


The Financial Sector
155
Graph 4.17
Outstanding Investment by Stages (% share)
As at end-2001
As at end-2002
As at end-2003
Source: Securities Commission
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
Other types of investment
Cashing-out (Secondary purchase)
Turnaround
Management buy-in
Management buy-out
Bridge, Mezzanine, Pre-IPO
Expansion, Growth
Early stage
Start-up capital
Seed capital
investments. Contributions from the private sector
rose by 18.9% to account for 45.8% of total funds
raised during the year (38.5% in 2002). VC funds
from foreign sources were small, amounting to
RM109.6 million as at end-2003. Almost 75% of VC
funds from foreign sources were invested in the ICT
and life sciences sectors.
In 2003, private sector initiatives undertaken to
promote VC investment were substantial, with the
total number of investee companies at the start-up
stage remaining high at 21.1% of total VC
investments in 2003. While remaining small, the
cumulative investment in the seed-capital stage also
increased in 2003, reflecting an increase in the risk
appetite within the VC industry. At the same time,
the Kuala Lumpur Stock Exchange (KLSE) provided an
Total Investment: RM227.2 million
Number of Investee Companies: 115
Information and
communication
technology
45.7%  
Life sciences
26.8%
Others
1.5%
Manufacturing
26.1%
Source: Securities Commission
Graph 4.16
Gross Investment in 2003 (% share of total)
Table 4.21
Investment by Sectors
As at end-2003
RM million
% share
Manufacturing:
304.8
34.7
Of which,
Wood and wood products,
including furniture
39.5
4.5
Transport equipment, automotive
components
10.3
1.2
Advanced manufacturing: electronics,
automation systems, electro-optics,
advanced materials
65.3
7.4
Fabricated metal products, machinery
and equipment
19.9
2.3
Electrical and electronic products
(manufacture, assemble)
19.1
2.2
Others
150.7
17.2
Information and communication technology
326.0
37.1
Life sciences
147.3
16.8
Electricity, power generation, gas and water
15.6
1.8
Wholesale, retail trade, restaurant and hotels
5.0
0.6
Education
4.0
0.5
Construction
0.1
0.0
Transport, storage and communications
1.4
0.2
Financing, insurance, real estate and
business services
9.8
1.1
Others
64.7
7.4
Total
878.7
100.0
Source: Securities Commission
effective exit mechanism for VC investments. This
was evident with the higher number of initial public
offerings (IPOs) in 2003, by small companies with
high-growth potential.
During the year, most of the VC investments were
channelled to the new growth sectors of information
and communication technology (ICT), life sciences


156
Table 4.23
Islamic Unit Trusts
2002
2003
2002
2003
Growth (%)
Number of Unit Trust
Management Companies
27
27
17.4
0.0
Number of Unit Trust Funds*
36
50
28.6
38.9
Units in Circulation (billion)
5.8
8.6
35.1
49.1
Number of Accounts
303,000 346,000
13.5
14.2
Net Asset Value (RM billion)
3.2
4.7
32.6
47.8
Net Sales (RM million)
980.4 1,169.9
Ratio of NAV to KLSE Syariah
Index market capitalisation (%)
1.2
1.3
* Refers to funds already launched.
Source: Securities Commission.
and advanced manufacturing. In value terms, the
software, internet services and e-businesses sub-
sector received the highest amount of funding
(21.1% of total), followed by medical and
biotechnology sub sector (15.5%). As at end-2003,
the bulk of total outstanding investments of VCCs
(61.3%) were concentrated in the new growth
sectors of ICT, life sciences and advanced
manufacturing sectors. Investments in other sectors
amounted to RM340.1 million, with the
manufacturing sector (excluding advanced
manufacturing) accounting for 27.3% of total
outstanding VC investments. While domestic VC
funds were mostly invested in the manufacturing
(38.1%), ICT (36.7%) and life-sciences (14.2%),
foreign VC investments concentrated on ICT (39.9%)
and life-sciences (34.8%) only.
Unit Trust Industry
The unit trust industry continued to expand in 2003,
with a larger number of new funds launched and
continued increase in the number of units in
circulation. In line with the significant improvement
in the performance of the KLSE, the net asset value
(NAV) of the industry expanded by 30.5% in 2003.
As a result of the intensified marketing efforts and
the introduction of a greater variety of products by
the unit trust management companies to cater to the
diverse investor needs and preferences, gross sales of
unit trust funds increased by 37.5% in 2003. The
gross sales level remained consistently high
throughout the year. However, due to high
repurchases made during the second half of the year,
net sales were slightly lower compared with 2002.
This development was the result of portfolio
rebalancing exercises by investors in view of the
better performance of the equity market in the third
quarter. In September and October, net repurchase
positions were recorded. Nevertheless, given the
continued favourable sentiments and expectations of
better performance in equity investments, net sales
were recorded in the fourth quarter.
One segment of the unit trust industry that has
grown significantly in recent years was the Islamic
unit trust. In 2003, 14 new Islamic funds were
launched (8 in 2002), bringing the total number of
Islamic funds to 50. The NAV for Islamic funds grew
substantially by 47.8% in 2003. The share of Islamic
funds of total NAV of the unit trust industry rose to
6.7% from 6% in 2002.
In the development of unit trust activities, Bank
Negara Malaysia has liberalised regulations pertaining
to investment abroad by the unit trust industry,
Table 4.22
Unit Trust Industry (Including Islamic Unit Trust
Funds) - Selected Indicators
2002
2003
2002
2003
Growth (%)
Number of Unit Trust
Management Companies
39
36
5.4
-7.7
Number of Unit Trust Funds*
175
217
17.4
24.0
Number of New Funds Launched
26
42
Units in Circulation (billion)
84.5
97.4
18.4
15.2
Number of Accounts (‘000)
10,175
10,221
1.9
0.5
Net Asset Value (RM billion)
53.7
70.1
13.4
30.5
Average Monthly Gross
Sales (RM billion)
1.9
2.6
Average Monthly
Repurchases (RM billion)
1.3
2.1
Net Sales (RM billion)
7.6
6.9
Ratio of NAV to KLSE market
capitalisation (%)
11.1
10.9
* Refers to funds already launched.
Source: Securities Commission.
Gross Sales
Repurchases
Net Sales
Graph 4.18
Unit Trust Industry - Gross Sales, Repurchases 
and Net Sales 
-1,000
0
1,000
2,000
3,000
4,000
5,000
6,000
J
F M A M J
J
A S O N D J
F M A M J
J
A S O N D
2002
2003
RM million


The Financial Sector
157
which would accord flexibility for unit trust
management companies to diversify their portfolio in
order to improve returns to investors. Effective 1 April
2004, unit trust management companies can freely
invest in foreign assets up to 10% of NAV per fund
for funds subscribed by residents, and up to the full
amount of NAV for funds subscribed by non-
residents. Unit trust funds of different companies
may also be pooled to benefit from economies of
scale when investing abroad.
In addition, the Securities Commission also revised
the Guidelines on Unit Trust Funds on 1 April 2003.
Key improvements introduced included greater
flexibility for the issuance of specialised unit trust
products, faster assessment of applications for the
issuance of unit trust products, faster prospectus
registration, streamlining approval process, and
enhancing disclosure and reporting requirements.
FINANCIAL MARKETS
Overview
Increased activities in the money market reflected
higher trading in both interbank deposits and money
market papers. The volume of transactions in the
interbank market increased more significantly with
103.3% in terms of volume, and by 58.5% in terms
of value. In the bond market, low interest and ample
liquidity situation were significant factors that caused
increased trading in the private debt securities (PDS)
market, particularly in the first half-year.
Higher turnover was also recorded in the derivatives
markets with the Crude Palm Oil (CPO) Futures market
emerging as the best performer. The stronger
performance was due to imbalances in the global
vegetable oil market as production of major oilseeds
increased only marginally, while demand, particularly
from India and People’s Republic of China, increased
significantly. Active trading of KLIBOR Futures was
influenced by expectations on the interest rate outlook.
Two new derivatives products, the 3-year and 10-year
MGS Futures contracts, were introduced in 2003.
Total funds raised in the capital market in 2003
were significantly higher, with gross proceeds
amounting to RM105.1 billion, compared with
RM69 billion in 2002. After accounting for
redemptions, net funds raised in the capital market
were significantly higher, amounting to RM54
billion (2002: RM23 billion). Net funds raised
through the PDS market accounted for a majority
share of 69.6% (2002: 13.4%). The Federal
Strengthening economic fundamentals and improved prospects
for the Malaysian economy led to substantially higher trading
activities across all segments of the financial markets.
the shift in market preference towards shorter-term
money market instruments.
In the Kuala Lumpur interbank foreign exchange
market, the average daily volume of transactions
increased during the year due to greater trade and
investment flows, as well as increased hedging
activities to mitigate the impact from greater volatility
in international foreign exchange markets. While
trading activity continued to be dominated by
transactions in the ringgit against the US dollar, the
share of euro and Japanese yen transactions against
the US dollar increased in line with the higher
transactions and hedging needs by market
participants to manage the volatility of the G3
currencies.
Trading activities were also higher in the equity, bond
and exchange-traded derivatives market. The KLSE
Composite Index (KLSE CI) rose by 22.8% while the
average daily trading activities rose significantly by
0
10
20
30
40
50
60
1999
2000
2001
2002
2003
RM billion
Graph 4.19
Net Funds Raised in the Capital Market by the 
Public and the Private Sectors
Public sector
Private sector
Government continued to tap the domestic market
to finance most of its financing requirements, given
the ample liquidity situation. Gross proceeds of
RM41.3 billion were raised, mainly through 13
issuances of Government Securities. The private
sector raised RM58.7 billion from the PDS and


158
Graph 4.20 
Yields of Money Market Instruments
2.50
2.70
2.90
3.10
3.30
3.50
3.70
3.90
4.10
4.30
4.50
J-02
F-02
M-02
A-02
M-02
J-02
J-02
A-02
S-02
O-02
N-02
D-02
J-03
M-03
A-03
M-03
J-03
J-03
A-03
S-03
O-03
N-03
D-03
 Yield (%) 
F-03
3-month T-bills 
1-year MGS
3-year MGS 
5-year MGS
equity markets (RM49.5 billion in 2002). Companies
with strong credit profiles continued to lock-in low
financing costs through the issuance of PDS. There
was also an increase in issuance of asset-backed
bonds as well as convertible bonds, in light of
improving interest in the equity market. The equity
market remained an important source of financing,
especially for small and high-growth potential
companies. The number of IPOs offered on the KLSE
was 58, the highest since 1998 and RM7.8 billion
were raised from these new issues.
The Government remains strongly committed to the
further development of a broad and liquid capital
market. Several measures and initiatives were taken
in 2003 to improve retail investors’ participation and
protection, enhance market liquidity and efficiency,
ease capital-raising exercise and listing policies and
strengthen intermediation in the Malaysian capital
market. Details are contained in the box “Key
Capital Market Measures in 2003”.
Money Market
Increased activities in the money market in 2003
were reflected mainly in higher trading of interbank
deposits. Trading of money market papers increased
marginally.
Activities in the interbank money market in 2003 were
marked by two periods of changing market
expectations. In the first half, trading in the market was
largely influenced by concerns regarding the adverse
impact of increased geopolitical uncertainties on
economic growth following the war in Iraq. The
outbreak of SARS in the region further aggravated this
uncertain environment. As a result, most of the market
players took a view that the existing accommodative
monetary policy stance will remain for an extended
period. Against the background of a low inflation, the
prevailing uncertainty increased the market’s preference
for fixed-income instruments, especially in the higher-
yielding longer dated papers. From January to July
2003, the average monthly MGS volume traded was
higher at RM27.6 billion compared with RM18.1 billion
in the same period of 2002. Nevertheless, the overall
Table 4.25
Money Market1
2002
2003
Volume
Annual
Volume
Annual
(RM
change
(RM
change
billion)
(%)
billion)
(%)
Total money market
transactions
1465.1
-2.4
1538.4
5.0
Interbank deposits
1011.7
-4.1
1084.7
7.2
Money market papers
453.4
1.8
453.7
0.1
Bankers Acceptances (BAs)
51.3
-15.2
37.3
-27.3
Negotiable Instrument of
Deposits (NIDs)
36.7
7.0
43.1
17.4
Malaysian Government
Securities (MGS)
244.1
11.0
231.4
-5.2
Khazanah bonds
15.5
-13.4
18.8
21.3
Treasury bills
8.4
-37.3
9.9
17.9
Bank Negara Bills
54.4
-1.4
71.5
31.4
Cagamas bonds
 29.2
12.7
25.6
-12.3
Cagamas notes
13.8
-25.0
16.1
16.7
1
All data are sourced from the Bond Information and Dissemination System,
except BAs and NIDs which are sourced from money market brokers.
Table 4.24
Funds Raised in the Capital Market
2002
2003p
RM million
By Public Sector
Government Securities (gross)
16,266
41,262
Less Redemptions
8,900
18,600
Less Government holdings
0
0
Equals Net Federal receipts
7,366
22,662
Khazanah Bonds (net)
0
346
Government Investment Issues (net)
738
1,729
Malaysia Savings Bond (net)
464
-9
Net Funds Raised by Public Sector
8,568
24,728
By Private Sector
Shares
13,291
7,772
Debt securities
Issuance (gross)
36,195
50,975
Less Redemptions
34,137
33,189
Equals Net Issues
2,058
17,786
Net Funds Raised by Private Sector
15,349
25,558
Total Net Funds Raised
23,917
50,286
Short-term papers and notes (net)1
-880
3,753
Total
23,037
54,039
1
Refers to Commercial Papers, Cagamas Notes and Medium Term Notes.
p Preliminary


The Financial Sector
159
Graph 4.21
Volume of Traded MGS 
0
5000
10000
15000
20000
25000
30000
35000
40000
J-02
F-02
M-02
A-02
M-02
J-02
J-02
A-02
S-02
O-02
N-02
D-02
J-03
F-03
M-03
A-03
M-03
J-03
J-03
A-03
S-03
O-03
N-03
D-03
RM million
MGS yields remained stable during this period as the
greater demand for the longer dated papers, was offset
by the steady supply of the MGS to the market. During
the first half of the year, net issuance of MGS
amounted to RM13.3 billion.
Nevertheless, the uncertain outlook proved to be
temporary as business activities picked up steadily in
the second half of the year. This prompted market
players to factor-in an expectation for an earlier
turnaround in the interest rate cycle in the near
future. The improving corporate performance amidst
strengthening financial position of corporations and
the better-than-expected GDP growth in the third
quarter, led to a shift in asset allocation towards
equity. The rising perception of market risk resulted
Overnight
1 week
6 months, 12 months and others
Weekend
1-3 months 
Graph 4.22 
Share of Total Volume Traded: Interbank 
Deposits
67.7
67.5
17.0
18.3
4.7
4.7
1.8
0.9
8.6
8.8
0
20
40
60
80
100
% share
2002
2003
Khazanah 
TB
BAs 
NIDs
MGS
BNB 
Cagamas Instruments
2003
2002
% share
100
80
60
40
20
0
2.2
4.1
9.5
8.2
9.2
15.8
51.0
1.9
3.4
8.1
11.3
9.5
12.0
53.8
Graph 4.23 
Share of Total Volume Traded: Money Market 
Instruments
in lower volumes traded in the money market.
Trading in MGS was also relatively subdued during
the period of August to November. This was caused
by concerns over the direction of interest rates
following the upward adjustment in policy rates by
two central banks (Australia and United Kingdom)
and the brighter prospects for the US economy.
These factors contributed to the upward shift in the
MGS term structure, with the yields on the 3-year
and 5-year MGS increasing by 94 and 129 basis
points respectively.
The volume of transactions in the interbank deposit
market also rose significantly in the second half of
2003. Trading on interbank deposits increased by
21.5% (-3.7% during the same period in 2002) in
the second half of 2003 with a shift in the market’s
preference towards shorter-term money market
instruments.
Foreign Exchange Market
In the Kuala Lumpur interbank foreign exchange
market, the average daily volume of interbank
foreign exchange transactions (spot and swap
transactions) increased by 27% compared to 2002,
arising from higher trade and investment flows. The
higher volume of transactions also reflected higher
spot and swap trades following increased activity by
market participants to manage their exposure due to
greater volatility in international foreign exchange
markets. Trading activity comprised mainly trade-
related transactions, as position-taking activity on the


160
ringgit has been contained through the elimination
of the offshore ringgit market and through guidelines
governing the operating framework of banking
institutions.
By composition, the Kuala Lumpur foreign
exchange market continued to be dominated by
transactions in the US dollar against the ringgit,
with the share of such transactions increasing to
81.7% of total transactions in 2003 from 80.8% in
2002. The dominance of US dollar transactions
against the ringgit reflects the significance of the
US dollar in the Kuala Lumpur foreign exchange
market as well as the high usage of US dollars in
the settlement of trade, services and capital
account transactions. A notable development in
2003 was the significant increase in the share of
euro and yen transactions against the US dollar.
The share of Euro transactions against the US
dollar more than doubled, while the share of yen
transactions also increased markedly by 33%.
These increases can be attributed largely to the
higher transaction and hedging needs of market
participants to manage the significant volatility
among the G3 currencies during the course of
the year.
Equity Market
In 2003, the Kuala Lumpur Stock Exchange
Composite Index (KLSE CI) ended the year on a
stronger note, following stronger economic growth
and improved economic outlook. For the year as a
whole, the KLSE CI registered a strong annual
growth of 22.8%, while average daily trading
activities rose significantly by 103.3% in terms of
volume and by 58.5% in value. The higher turnover
was supported by both higher retail and
institutional participation.
The performance of the KLSE in the first four
months was subdued, with sentiments affected
by uncertainties on the global economic outlook.
Market sentiments turned more positive since
May, driven by improved economic outlook,
stronger corporate earnings and significant
progress achieved in corporate restructuring.
2003 
(RM323.6 billion) 
81.7%
4.2%
2.9%
8.7%
2.6%
US$/EURO
Others
US$/RM
US$/SGD
US$/YEN
Graph 4.25
Transactions in the Kuala Lumpur Foreign  
Exchange Market by Currency
2002 
(RM270.6 billion)
80.8%
6.5%
1.1%
6.1%
5.5%
Graph 4.24 
Volume of Interbank Transactions in the 
Kuala Lumpur Foreign Exchange Market
0
200
400
600
800
1,000
1,200
1,400
0
200
400
600
800
1,000
1,200
1,400
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
RM billion
RM billion
Spot 
Swap
Total
Note: Data from 2002 onwards is based on the new Ringgit Operations 
 
Monitoring System (ROMS), whereas observations for previous years are 
 
based on transactions of the eight Authorised Dealers
KLSE CI registered its strongest performance since 1999. Increased
domestic participation was evident following the standardisation
of board lot sizes to 100 units.
Policy measures introduced by the Government to
promote capital market developments also
created a more conducive environment for
investors.
The Malaysian Exchange of Securities Dealing &
Automated Quotation (MESDAQ) Market
Composite Index (MCI) was the best performing
index in 2003. The MCI posted a substantial gain
of 82.9% (-5.5% as at end-2002). The strong
performance of the index and higher trading
activities were due to increased new listings of
small but high-growth potential companies. The
Second Board Index also posted a significant gain
of 43.2%, reflecting investors’ preference for


The Financial Sector
161
600
31-Dec
7-Jan
14-Jan
21-Jan
28-Jan
4-Feb
11-Feb
18-Feb
25-Feb
4-Mar
11-Mar
18-Mar
25-Mar
1-Apr
8-Apr
15-Apr
22-Apr
29-Apr
6-May
13-May
20-May
27-May
3-Jun
10-Jun
17-Jun
24-Jun
610
620
630
640
650
660
670
680
690
700
Concerns over uncertainties on global economic outlook
due to increased geopolitical tensions, prior to the war in Iraq
21 May
* Government unveiled
   its Economic Package
* BNM reduced the 3-month
   Intervention Rate by 50 bps
   to 4.5%
12 March
WHO issued a global
alert on the SARS
outbreak
20 March
Invasion of Iraq
11 March
10 new measures to
enhance the capital market
was announced
10 January
Announcement of the
establishment of a new
public sector-owned, fund
management company
29 April
WHO issued a
statement that SARS
was over in many parts
of the region
28 May
Announcement of
GDP growth of 4% for
1Q 2003
26 May
The exercise to
standardise board lot
sizes to 100 units was
implemented
Fears over the outbreak of SARS in
the region
26 June
US Federal Reserve
lowered the Fed
Fund rate by 25 bps
to 1%
Graph 4.26: Performance of the KLSE Composite Index (31 December 2002 - 30 June 2003)
1-Jul
8-Jul
15-Jul
22-Jul
29-Jul
5-Aug
12-Aug
19-Aug
26-Aug
2-Sep
9-Sep
16-Sep
23-Sep
30-Sep
7-Oct
14-Oct
21-Oct
28-Oct
4-Nov
11-Nov
18-Nov
25-Nov
2-Dec
9-Dec
16-Dec
23-Dec
30-Dec
600
620
640
660
680
700
720
740
760
780
800
820
840
Graph 4.27: Performance of the KLSE Composite Index (1 July - 31 December 2003)
2 July
KLSE CI breached
the 700-mark to
703.25
5 August
Bomb explosion
in Jakarta
28 August
Announcement of
GDP growth of 4.4%
for 2Q 2003
4 September
Positive comments on
Malaysia by IMF Managing
Director and expectations
of higher GDP growth for
2004, ahead of the 2004
Budget announcement
22 October
KLSE CI breached
the 800-mark to
805.11
31 October
* Highest point reached
   at 817.12
* Smooth transition
   of leadership
29 October
Listing of largest
IPO in 2003
8 October
Standard & Poor's
upgraded Malaysia's
long-term foreign
currency sovereign
credit ratings from 
BBB+ to A-
28 October
SC announced 
a shorter time-to-
market for IPO to 
13 days from  
25 days 
previously
12 September
2004 Budget announcement
Year end
rally


162
at 0.62 in the third quarter of 2003 (average of
0.61 between the third quarter of 1999 and the
third quarter of 2003). The improvements in
profitability, together with stable leverage and
low interest rates, resulted in stronger debt
servicing capacity of the corporate sector. The
interest coverage ratio, which measures the
number of times a company’s earnings before
interest and tax exceeds its interest expense, rose
to 4.7 times in the third quarter of 2003, its
highest level recorded since the third quarter of
1999.
Encouraged by improved market performance and
more favourable investor sentiments in 2003, a
larger number of smaller firms raised funds in the
KLSE Trading Volume 
KLSE CI
Source: Kuala Lumpur Stock Exchange
Second Board Index 
MCI
Graph 4.28 
Kuala Lumpur Stock Exchange Composite Index, 
Second Board Index, MESDAQ Market Composite 
Index and KLSE Trading Volume 
50
70
90
110
130
150
170
190
210
230
Index (Jan 2002=100)
0
2
4
6
8
10
12
14
16
18
20
Volume (billion units)
Jan-02
Feb-02
Mar-02
Apr-02
May-02
Jun-02
Jul-02
Aug-02
Sep-02
Oct-02
Nov-02
Dec-02
Jan-03
Feb-03
Mar-03
Apr-03
May-03
Jun-03
Jul-03
Aug-03
Sep-03
Oct-03
Nov-03
Dec-03
Table 4.27
KLSE: Performance of Sectoral Indices
2002
2003
Annual change (%)
KLSE Composite Index
-7.1
22.8
EMAS
-4.8
24.4
Second Board
-26.8
43.2
MESDAQ Composite Index
-5.5
82.9
Industrial
0.1
31.3
Consumer Products
0.5
28.8
Industrial Products
-2.5
23.4
Construction
-14.9
24.6
Trading/Services
-6.1
18.3
Finance
-4.7
33.2
Properties
-9.8
38.8
Mining
-5.1
74.8
Plantation
14.7
19.3
Syariah
-7.4
23.2
Technology
-17.9
33.9
Source: Kuala Lumpur Stock Exchange
Table 4.26
Kuala Lumpur Stock Exchange: Selected Indicators
2002
2003
Price Indices:
Composite
646.3
793.9
EMAS
157.3
195.6
Second Board
98.2
140.6
MESDAQ
83.3
152.3
Total Turnover:
Volume (billion units)
55.6
112.2
Value (RM billion)
117.0
183.9
Average Daily Turnover:
Volume (million units)
224.3
456.0
Value (RM million)
471.6
747.5
Market Capitalisation (RM billion)
481.6
640.5
Market Capitalisation / GDP (%)
133.5
163.4
Total No. of Listed Companies:
865
906
Main Board
561
598
Second Board
292
276
MESDAQ
12
32
Market Liquidity:
Turnover Value / Average Market
Capitalisation (%)
23.2
33.4
Turnover Volume / Number of
Listed Securities (%)
24.3
43.4
Market Concentration:
 10 Most Highly Capitalised Stocks1 /
Market Capitalisation (%)
34.0
31.6
Average Paid-Up Capital of Stockbroking
Firms (RM million)
164.2
170.9
1
Based on market transactions only.
Source: Kuala Lumpur Stock Exchange
smaller companies with higher potential for
earnings growth. Listed stocks on the Main Board
saw more moderate price performances across all
sectors.
The strong performance of the equity market was
supported by improvements in earnings outlook
and sound financial health of corporates. From a
sample of 300 listed non-financial corporations
(representing almost 75% of total KLSE market
capitalisation), cumulative profits for the first
three quarters were 54% higher in 2003,
compared with the same period in 2002.
Annualised return-on-equity for the sample rose
to 7.3% in the third quarter of 2003, from 5.4%
in the third quarter of 2002. Stronger corporate
earnings were observed in most sectors as the
impact of the SARS outbreak and geopolitical
uncertainties on businesses in the first half of
2003 was only confined to a few tourism-related
companies.
Other indicators of corporate health also showed
positive developments. Corporate indebtedness
remained stable, with aggregate debt-equity ratio


The Financial Sector
163
Bond Market
Equity Market
Graph 4.29 
Funds Raised by the Private Sector in the 
Capital Market
5,000
0
10,000
15,000
20,000
25,000
30,000
35,000
1999
2000
2001
2002
2003
RM million
Graph 4.30
Performance of Selected Stock Market Indices
(% change from end-2002 to end-2003)
Malaysia KLCI
Dow Jones IA
Korea KOSPI
Singapore STI
Taiwan TWSE
Hong Kong HSI
Nasdaq CI
Indonesia JCI
Thailand SET
Source: Kuala Lumpur Stock Exchange
25.3
22.8
29.2
34.9
50.0
62.8
116.6
32.3
31.6
0
20
40
60
80
100
120
140
(%)
equity market. Total funds raised were, however,
lower at RM7.8 billion compared with RM13.3
billion in 2002 due to the small size of the initial
public offerings (IPOs). The new funds were
mainly raised through IPOs (51%) and rights issues
(29.4%). A total of 58 new companies was listed,
the highest number since 1998. Of this total, 16
Recognising the importance of the capital
markets in raising capital to facilitate growth of
the Malaysian economy, the Government and
relevant authorities introduced new measures to
improve retail investors’ participation and
protection, enhance market liquidity and
efficiency, ease the process for capital-raising
In 2003, 58 new companies were listed on the KLSE, the highest
since 1998. Significantly improved market performance
encouraged smaller companies with growth potential to raise
funds in the equity market.
companies were listed on the Main Board, 22 on
the Second Board and 20 on the MESDAQ
Market. Prices of 52 new listings traded at a
sizeable premium over the offer prices at the end
of the first day of trading, influenced mainly by
widespread investor interests and more active
retail trading activities. The total number of
companies listed on the KLSE was 906 as at end-
2003, the second largest number of listed
companies on a stock exchange after Hong Kong
China in the East Asian region, excluding Japan.
The liberalisation of the listing policy to allow the
listing of Malaysian businesses abroad and
foreign-based businesses with Malaysian
operations resulted in the listing of a large
foreign company on the KLSE. The IPO, which
raised RM2.03 billion, was the largest in 2003.
activities and strengthen intermediation in the
Malaysian capital market. Details of these
measures are contained in the box ”Key Capital
Market Measures in 2003”.
As part of the demutualisation plan, the KLSE
completed on 5 January 2004 its conversion into a
public company limited by shares, from a company
limited by guarantee. The demutualisation was in
line with a recommendation in the Capital Market
Masterplan to enhance corporate, organisation
and governance structures. While there was no
significant diversion of the usual business practice,
KLSE’s stock exchange businesses were transferred
to a wholly-owned subsidiary, Malaysia Securities
Exchange Berhad (MSEB). The demutualised KLSE
became the exchange’s holding company with
plans for listing on the exchange.


164
Key Capital Market Measures in 2003
Capital market measures introduced in 2003 were aimed at improving retail investors’ participation and
protection, enhancing market liquidity and efficiency, easing the process for capital-raising and listing, and
strengthening intermediation in the Malaysian capital market. The key measures were as follows:
Enhancing Investor Participation
•
Effective 17 March, the cap on stamp duty for all securities traded on the Kuala Lumpur Stock
Exchange (KLSE) was reduced to RM200 per contract (previously capped at RM1,000 per contract).
•
On 26 May, the exercise to standardise board lot sizes to 100 units from the previous 1000 units
for all securities listed on the KLSE was completed.
Increasing the Efficiency of the Capital-Raising Process
•
In line with the reduction in the processing time for IPOs to less than three months from the present
six to eight months, the time-to-market period (period beginning from the issue of prospectus to the first
day of listing) was also reduced to 13 days (from 25 days previously), effective 1 December 2003.
•
Beginning 12 March, all corporate proposals which required approvals from both the Foreign
Investment Committee (FIC) and the Securities Commission (SC) would be processed by the
SC only. In cases where the SC’s approval was not required, the approval remained with FIC.
•
On 18 November, a set of guidance notes on share splits for public listed companies was
introduced. Among others, liberalisation included abolishing the requirements for the appointment of
a principle adviser to submit proposals and for the approved share split exercise to be implemented
within three months.
Strengthening Investor Protection and Corporate Governance
•
On 3 June, the SC issued the “Guide on Areas of Compliance and Internal Controls for
Management Companies and Trustees” to assist fund management companies and trustees in
establishing effective internal controls within their respective organisations. The Guide identified key
areas of compliance and internal controls.
Enhancing Restructuring of Distressed Companies
•
On 18 June, the SC issued a set of criteria for delisted PN4 companies to seek re-listing on the
KLSE. The criteria, among others, allowed delisted PN4 companies to seek re-listing without the
requirement for a general public offering, provided that the application was submitted within 12
months from the date of delistment.
•
On 19 November, the SC announced a six-month extension of the deadline for under-capitalised
public listed companies to increase their paid-up capital to at least RM60 million for Main Board
companies and RM40 million for Second Board companies. The new deadline is 30 June 2004.
Liberalisation of KLSE Listing Policies
•
Effective 11 March, the moratorium on the shareholding period for promoters (which includes
original owners and stakeholders of the companies) for all new IPOs/ Reverse Takeovers
(RTO) was reduced from four years to one year.


The Financial Sector
165
•
On 11 March, the SC issued a set of new guidelines to ease the listing process for large
companies. The new guidelines exempted large companies (with a minimum market capitalisation of
RM250 million and after-tax profits of at least RM8 million for the latest financial year) from the three
to five profits record requirement.
•
On 19 September, the SC announced further liberalisation of the Guidelines on Issues/Offer of
Securities to widen the breadth of listings in the Malaysian equity market. The revised listing policy
allowed Malaysian businesses abroad and foreign corporations with Malaysian operations
to list on the KLSE. The companies must also obtain the approval of Bank Negara Malaysia, where
applicable, for the use of proceeds from the issue/offering of securities.
•
Amendments to the share buy-back guidelines were made to allow flexibility for companies to
undertake share buy-back activities. With effect from 7 October, a listed company would be allowed
to appoint up to two stockbroking companies for the purpose of purchasing its own shares or reselling
treasury shares on the exchange.
Strengthening the Role of Intermediaries
•
Effective 9 June, the SC implemented the minimum stockbroking commission rates structure. The
minimum commission rates would only apply to retail trades, while the rates applicable to institutional
and inter-broker trades would remain fully negotiable. The minimum commission rates announced
were as follows:
Category of trade
Minimum rate per contract
Inter-broker and Institutional trades
Fully negotiable
Retail trades valued above RM100,000
0.30%
Retail trades valued up to RM100,000
0.60%
E-broking transactions
Up to 30% discount
•
On 20 November, the SC refined the Capital Adequacy Requirement (CAR) framework for
stockbroking companies. The enhancement was aimed at facilitating the re-engineering of business
models in the stockbroking industry and would enable stockbroking companies to utilise their capital
more efficiently.
•
On 10 December, the SC introduced the Guidelines on the Offering of Structured Products. The
aim was to facilitate universal brokers, merchant banks, commercial banks, including Islamic banks,
and performance-guaranteed Special Purpose Vehicles to issue "structured products" to meet the
needs of an increasingly sophisticated Malaysian capital market.
Further Relaxation on the Uses of PDS Proceeds
•
On 1 August, the SC liberalised rules on use of proceeds from private debt securities (PDS) to
allow such funds to be used to finance the development of hypermarkets. Prior to this, the
"construction of hypermarkets" fell under the definition of the "construction of shopping complexes"
which was previously not allowed to be funded through PDS proceeds.
Enhancing Skills and Professionalism
•
On 1 April, the SC launched the Capital Market Graduate Training Scheme which was aimed at
increasing the pool of graduates with skills and knowledge on the capital market.


166
Bond Market
Total funds raised in the ringgit bond market were
significantly higher in 2003. Gross issuance increased
by 74.8% due to higher issuance by both the public
and private sectors. After netting off redemptions
during the year, total net funds raised in the bond
market amounted to RM42.5 billion (RM10.6 billion
in 2002). As a result, outstanding ringgit bonds rose
by 16.7% to RM319.4 billion, equivalent to 81.5%
of GDP. As corporate borrowers stepped up their net
issuances during the year, the outstanding Private
Debt Securities (PDS) increased by 14.4% to
RM170.2 billion or equivalent to 43.4% of GDP
, and
accounted for 53.3% of total bonds outstanding.
The low interest rate environment and ample liquidity
situation were significant factors influencing the
growth of the PDS market in 2003. Corporations,
particularly those with strong credit profiles
capitalised on the low interest rates through the
issuance of long-term debt securities at competitive
costs. The favourable market conditions, particularly
in the first half of 2003 also prompted corporations
to refinance their existing debt through PDS.
Issuance of Malaysian Government Securities (MGS)
was significant as the Government sourced the bulk
of its financing requirements from the domestic
Graph 4.31
Bonds Outstanding
90
103
117
125
149
113
140
158
149
170
0
50
100
150
200
250
300
350
1999
2000
2001
2002
2003
RM billion
Public sector
Private sector
Graph 4.32
Ratio of Bonds Outstanding to GDP
30
30
35
35
38
38
41
47
41
43
68
71
82
76
81
0
10
20
30
40
50
60
70
80
90
1999
2000
2001
2002
2003
Public sector
Total
Private sector
%
Table 4.28
Funds Raised in the Bond Market
2002
2003p
RM million
By Public Sector
Government Securities (gross)
16,266
41,262
Less Redemptions
8,900
18,600
Equals Net Federal Receipts
7,366
22,662
Government Investment Issues (net)
738
1,729
Khazanah Bonds (net)
0
346
Malaysia Savings Bond (net)
464
-9
Net Funds Raised
8,568
24,729
By Private Sector
Private Debt Securities (gross)
36,195
50,975
Straight Bonds
7,763
27,983
Bonds with Warrants
300
0
Convertible Bonds
2,852
3,177
Islamic Bonds
13,829
8,143
Asset Backed Securities
1,916
3,487
Cagamas Bonds
9,535
8,185
Less Redemptions
34,137
33,189
Private Debt Securities
28,770
28,037
Cagamas Bonds
5,367
5,152
Net Funds Raised
2,058
17,786
Net Funds Raised in the Bond Market
10,626
42,515
Private Debt Securities, excluding
Cagamas (gross)
26,660
42,790
Net Funds Raised in the Bond Market,
excluding Cagamas
-2,110
14,753
Net Issues Short Term Securities,
Commercial Papers / Medium Term
Notes1
-880
3,753
Total
9,746
46,268
1
Refers to Cagamas Notes, Commercial Papers, Medium Term Notes.
p Preliminary
Total funds raised in the ringgit bond market were
significantly higher in 2003. The low interest rate
environment and the ample liquidity situation were the main
factors influencing the growth of the private debt securities
market in 2003.


The Financial Sector
167
market. The ample liquidity situation enabled the
Federal Government to do so without crowding out
the private sector. The Federal Government made
twelve Malaysian Government Securities (MGS)
issuances, with gross proceeds totalling RM41.3
billion. In addition, the size of the Government
Investment Issues (GII) was gradually enlarged to
meet the increasing market demand for such Islamic
instruments. Including net issuances of Khazanah
bonds, the total outstanding public sector bonds rose
to RM149.3 billion, or equivalent to 38.1% of GDP
.
The bond market in 2003 could be dichotomised
into two distinct periods of market developments.
Commencing the year on a strong note, the
underlying market conditions were favourable to
both issuers and investors during the first half-year.
Bond yields trended downwards, influenced largely
by concerns regarding the adverse impact of
increased geopolitical uncertainties on the global
economic outlook. The SARS outbreak further
fuelled market expectations that interest rates
would remain low for an extended period. Demand
for long-dated and higher yielding bonds was high
which resulted in a decline of 10-year MGS yields by
53 basis points and in turn caused the narrowing of
the PDS credit spreads. With the declining yields
and strong demand for debt securities, corporations
increased bond issuances during this period. As a
result, the bulk of the corporate bonds (65.8%)
were issued in the first half-year, with a large
portion of the proceeds being utilised for
refinancing purposes.
Bond yields, however, reversed direction and trended
upwards in the second half-year. Concerns over
geopolitical risks and SARS outbreak proved to be
short-lived. As signs of strengthening economic
growth became evident with market expectations
that interest rate might rise, investors reduced bond
holdings. The rising yields of the US Treasury
securities also influenced the domestic bond yields.
Asset allocation shifted to the equity market
following improved market sentiments in the equity
market. As a result, bond trading activities turned
subdued with a 47.2% reduction in the trading
volume, compared with the first half of the year.
Consequent from the sharp increase in the bond
yields, fund-raising activities through the PDS market
weakened in the third quarter of 2003, as some
impending corporate issues were deferred.
Nevertheless, the weak demand for bonds and the
fall in issuance were temporary. Bond yields stabilised
Jan-03
Feb-03
Mar-03
Apr-03
May-03
Jun-03
Jul-03
Aug-03
Sep-03
Oct-03
Nov-03
Dec-03
2.5
3.0
3.5
4.0
4.5
5.0
%
Jan 03: 
3-year: 3.003 
5-year: 3.101 
10-year: 3.775 
Jun 03: 
3-year: 3.008 
5-year: 3.093 
10-year: 3.532 
4.850
4.278
3.755
 
2.94
Graph 4.33 
Trends in MGS Yields
MGS 3-year
MGS 10-year
MGS 5-year
3-month interbank rates
Graph 4.34
Yield Differentials for 3-year PDS vis-a-vis the 
3-year MGS
Jan-03
Feb-03
Mar-03
Apr-03
May-03
Jun-03
Jul-03
Aug-03
Sep-03
Oct-03
Nov-03
Dec-03
A
0
1
2
3
4
5
6
7
%
BBB
AA
AAA
Graph 4.35 
Utilisation of Proceeds 
2002
2003
54.3
23.5
8.2
44.3
22.7
13.3
13.1
6.6
14.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
Refinancing
Restructuring
Merger and
acquisition
Others
New activities
% of total


168
in December following portfolio rebalancing activities
and strong buying interests of quality papers. The
rebound in issuances in December was partly due to
the corporate issues which were postponed earlier.
The low interest rate environment was the dominant
factor influencing financing decisions of the
corporate sector during the year, as reflected in the
higher bonds issued for refinancing purposes (44.3%
of total bonds issued). The issuers were companies
from the transport, infrastructure, utilities and
construction sectors. The bulk of funds raised for
restructuring purposes was raised by a conglomerate
in the manufacturing sector. During the year, total
funds raised for merger and acquisition purposes
accounted for 13.3% of the total, and were mainly
raised by companies in the utilities and
telecommunication sectors. Meanwhile, funds raised
for new activities were lower and were mainly
channelled to utilities-related infrastructure projects,
the construction sector and, to a smaller extent, the
manufacturing sector. The construction and real-
estate property companies utilised the proceeds
mainly for land acquisition, refinancing and working
capital purposes.
During the year, the bulk of the new issues (52% of
total value) were for tenures between five to ten years,
in response to investors’ preference for short to
medium-end PDS. On average, the issue size for PDS
increased to RM602.5 million per issuer in 2003 from
RM494.7 million per issuer in 2002. Nevertheless, the
maturity profile of the domestic market lengthened
further, with the longest tenure issued reaching 28
years, compared with 26 years recorded in 2002.
In terms of types of instruments, straight bonds were
the most preferred form of debt securities,
accounting for 50.4% of total bonds issued.
Meanwhile, the improved sentiment in the equity
market led to higher issuance of convertible bonds.
In recent years, commercial papers/medium-term
notes gained more prominence, especially for the
purposes of financing working capital requirement.
Table 4.29
New Issues of Private Debt Securities by Sector
Sector
2002
2003p
RM million
% share
RM million
% share
Agriculture, hunting, forestry and fishing
971.9
3.6
993.1
2.3
Mining and quarrying
0.0
0.0
0.0
0.0
Manufacturing
1,776.8
6.7
9,072.4
21.2
Construction
2,174.1
8.2
6,049.7
14.1
Electricity, gas and water supply
1,349.0
5.1
3,410.5
8.0
Transport, storage and communication
9,099.5
34.1
8,603.8
20.1
Financing, insurance, real estate and business services
5,513.8
20.7
8,372.8
19.6
Government and others
4,644.5
17.4
6,288.1
14.7
Wholesale and retail trade, restaurants and hotels
1,130.8
4.2
0.0
0.0
Total
26,660.3
100.0
42,790.4
100.0
p Preliminary
2002
2003
Graph 4.36 
PDS Issues by Tenure
0
10
20
30
40
50
60
1 - 5
5.1 - 10
10.1 - 15
15.1 - 20
20.1 - 28
Years
% of total value
2002
2003
Graph 4.37 
PDS Issues by Type of Instrument
7.8
0.3
2.9
13.8
1.9
9.5
1.8
28.0
0.0
3.2
8.1
3.5
8.2
4.6
0
5
10
15
20
25
30
Straight
Bonds
Bonds
with 
Warrants
Convertible 
Bonds
Islamic 
Bonds
Asset 
Backed
Securities
Cagamas
Bonds
Medium
Term 
Notes
RM billion


The Financial Sector
169
These instruments allowed more flexibility for issuers
to take advantage of the low interest rates in the
shorter term by issuing commercial papers, while
waiting for opportunities to lock-in favourable rates
in the medium-term as and when the yields began to
trend upwards.
A wide range of Asset Backed Securities (ABS) were
issued during the year, which included those backed
by hire-purchase receivables, loans and innovative
issuance of Islamic principle ABS backed by mortgage
assets. In total, there were ten ABS (including one
commercial paper ABS) amounting to RM7 billion,
since the first issuance of ABS in 2001. The ABS
market is expected to develop further, given the tax
incentives announced in 2004 Budget.
Despite a challenging operating environment with
ample liquidity in the banking system, Cagamas
Berhad maintained its position as an active issuer.
In 2003, Cagamas issued 33 issues of debt
securities at a total value of RM17.9 billion
(including 15 short-term Cagamas notes of RM9.7
billion). Most of the Cagamas bond and notes
were issued during the second half of 2003, due
to the rising bond yields which had prompted the
financial institutions to be more active in hedging
their portfolios through the sale of loans and debts
to Cagamas. Taking into consideration the less
favourable market sentiments during the second
half-year, Cagamas spaced out the issuances in
order to ensure an orderly market performance.
Investors’ demand for Cagamas bonds throughout
the year was firm, as evidenced by the weighted
average over-subscription rate of 1.83 times and
2.38 times for Cagamas notes and Cagamas bonds
respectively.
Total trading activities in the ringgit bond market
increased by 11.6% to RM436.8 billion, with
higher activities in the first half of the year. In the
second half-year, trading activities were
concentrated in shorter-end papers, given the
higher risk premium and price volatility of long-
dated papers. The most actively traded papers
were MGS, accounting for 53% of total trading
activities and a liquidity ratio of 1.89 times its
outstanding amount. Demand for corporate bonds
increased, and accounted for 22.6% of the total
trading activities, compared with 14% in the
previous year. Nevertheless, the corporate bond
market remained less liquid, with a liquidity ratio
of only 0.81 times, and trading activities were
centred on bonds with high ratings and good
credit quality.
Graph 4.38 
ABS: Types of Underlying Assets (2001-2003)
Private debt 
securities
9.1%
Loans 
32.7%
Property and 
mortgage 
receivables 
27.2%
Hire purchase 
receivables 
7.3%
Other
receivables 
23.7%
Graph 4.39
Monthly Trading Volume
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
RM million
Jan-03 
Feb-03
Mar-03
Apr-03 
May-03 
Jun-03
Jul-03
Aug-03
Sep-03
Oct-03
Nov-03
Dec-03
Graph 4.40
Turnover of Selected Debt Securities (Jan-Dec 2003)
 Total: RM436.8 billion
Khazanah bonds
4.3%
Government  
Investment Issues 
7.9%
Other unlisted bonds 
20.3%
Danaharta 
2.1%
Danamodal 
4.2%
ABS 
2.0%
Cagamas bonds 
5.9%
Malaysian
Government 
Securities 
53.0%
Listed PDS 
0.2%


170
Rating profiles of long-term debt securities remained
healthy. Both the Rating Agency Malaysia (RAM) and
the Malaysian Rating Corporation Berhad (MARC)
undertook 116 new ratings, with total gross value of
RM41.9 billion. In terms of rating profiles, the issues
were mainly distributed throughout the AAA, AA
and A categories, with the heaviest concentration in
the single A category. During the year, RAM and
MARC conducted 204 rating reviews on the existing
long-term debt securities, of which 161 issues were
affirmations/reaffirmations, 10 issues were upgrades
and 18 issues were downgrades. The higher number
of downgrades were partly due to companies in the
tourism-related sector, whose financial positions were
adversely affected by the outbreak of SARS.
On the international front, market sentiments for the
Malaysia’s foreign currency sovereign bonds and
corporate bonds remained positive due to
expectations of an upgrade in sovereign ratings as
economic fundamentals strengthened. Spreads for
Malaysian sovereign bonds narrowed significantly
during the year. The first Malaysian sovereign Sukuk
bond issue which was listed in Luxembourg Stock
Graph 4.41
Rating Distribution of Outstanding PDS
(As at end-December 2003)
0
5
10
15
20
25
30
35
40
45
AAA
AA 
A 
BBB
BB
B
C
D
% 
Source: RAM and MARC
% of total value
% of total value
% of total issues
Table 4.30
Sovereign Spread Over US Treasury Benchmark
Dec-02
Mar-03
Jun-03
Sep-03
Dec-03
MALAYSIA 09
183
180
123
101
85
MALAYSIA 11
145
150
83
70
36
CHINA 11
61
65
29
28
29
INDONESIA 06
348
288
284
173
185
KOREA 08
110
162
84
69
45
PHILIPPINES 10
478
500
382
343
353
THAILAND 07
108
90
53
18
5
PETRONAS 06
204
198
145
126
117
Source: Bloomberg
Exchange and Labuan International Financial Exchange
in July 2002 was also listed on the Bahrain Stock
Exchange on 24 September 2003. The listing helped
to raise the profile of Malaysia to West Asian investors.
In line with enhancing the development of the bond
market, efforts were taken in 2003 to accord greater
investment flexibility to insurance companies in
investing in debt securities, as well as to provide more
risk management products. In November, Bank Negara
Malaysia increased the insurers’ limits on investment in
secured and unsecured credit facilities which includes
PDS. In addition, the Malaysian Derivatives Exchange
introduced two new products, the 3-year and 10-year
MGS futures, which added more hedging instruments
in the domestic financial markets.
Exchange-traded Derivatives Market
In 2003, higher turnover was recorded for all
exchange-traded derivative products on the
Malaysian Derivatives Exchange (MDEX), except for
trading in the Kuala Lumpur Stock Exchange (KLSE)
Options. Total turnover increased significantly by
55.3% to reach more than two million contracts.
Following the launch of two new products, the 3-
year and 10-year MGS Futures Contracts, which
enhanced risk management opportunities for
investors, the MDEX now offers seven derivative
products.
As in the previous year, the Crude Palm Oil (CPO)
Futures market emerged as the best performer on
the MDEX in 2003. During the year, the price range
for the benchmark 3-month CPO Futures contract
widened to RM622 (2002: RM587), with the highest
daily traded price at RM1,865 per tonne on 9
December.
Graph 4.42 
MDEX: Total Monthly Volume and Month-end  
Open Interest
J
F M A M J J A S O N D J F M A M J J A S O N D
2002
2003
Contracts
Contracts
Total monthly volume
Open interest (RHS)
Source: Malaysian Derivatives Exchange
0
50,000
100,000
150,000
200,000
250,000
300,000
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000


The Financial Sector
171
CPO futures prices began the year on a strong
note, with the monthly prices averaging around
RM1,600 – RM1,635 per tonne before
consolidating in the following months to average
around RM1,300 - RM1,480 per tonne. In the final
Table 4.31
Performance of MDEX Products
Products
Turnover
Factors affecting
performances
2002
2003
2002
2003
Number
Annual
Average
Number
Annual
Average
of lots
change
daily
of lots
change
daily
(%)
volume
(%)
volume
CPO Futures
909,073
89.5
3,666
1,429,959
57.3
5,813
70.6
71.5
KLSE CI Futures
233,863
-18.7
943
331,218
41.6
1,346
18.2
16.6
Open interest position
(as at end-year)
1,346
8,993
KLSE CI Options
1
-99.8
…
0
…
0
…
…
3-month KLIBOR
Futures
64,307
17.1
259
119,659
86.1
486
5.0
6.0
Open interest position
(as at end-year)
21,114
18,977
3-year MGS Futures
n.a
n.a
n.a
781
-
3
n.a
…
5-year MGS Futures
80,419
n.a
324
118,635
32.2
482
6.2
5.9
Open interest position
(as at end-year)
4,860
127
10-year MGS Futures
n.a
n.a
n.a
11
-
…
n.a
…
n.a. Not available.
Source: Malaysian Derivatives Exchange
Share of total
MDEX volume
(%)
• Strong CPO Futures prices.
• Better trading platform
with switch to electronic-
based system in 2002.
• Higher trading with
implementation of cost-
cutting measures.
• Lack of liquidity and
knowledge by participants.
• Higher turnover mainly in
the second half of 2003,
reflected the shift in market
preference from bond
market to short-term
money and interbank
markets instruments.
• Introduced in September
2003.
• Physical bond and bond
futures markets experienced
a correction in July 2003
following expectations over
the direction of global
interest rates.
• Introduced in September
2003.
Graph 4.43 
Crude Palm Oil Futures
J
F M A M J
J A S O N D J
F M A M J
J A S O N D
2002
2003
Lots ('000)
Price 
(RM/tonne)
Lots
Open interest
3-month average futures prices (RHS)
0
30
60
90
120
150
180
0
300
600
900
1,200
1,500
1,800
quarter of the year, CPO prices regained its
strength to record the highest level in four years,
to average around RM1,660 - RM1,790 per tonne.
The strong price performance in 2003 was a
reflection of the imbalances in the global vegetable
oils and fats markets, as the production of major
oilseeds, especially soybean, rapeseed and
sunflower increased marginally, whilst demand
from the major consumers of edible oils had
increased substantially during the year.
Trading activities in the KLSE Composite Index
(KLSE CI) Futures rose significantly in 2003. The
Derivatives Liquidity Ratio (DLR), which represents
the ratio between the turnover value of futures
against the turnover value of underlying KLSE CI
component stocks, increased significantly by
40.3% in 2003. The modification of the contract
size from RM100 to RM50 and the increase in the
tick sizes for the prices of the products effectively
reduced the margin requirements and the cost of
trade and thus encouraged more participation in


172
the market. Trading activities by both domestic and
foreign institutional players accounted for 76% of
total trades.
Total volume of the 3-month KLIBOR Futures
improved significantly following the sharp fall in
bond prices and expectations that interest rates may
increase. The higher turnover, mainly in the second
half-year, reflected the shift in market preference
from the bond market to short-term money market
and the interbank market instruments. Meanwhile,
the total turnover of 5-year MGS Futures registered
an increase of 32.2% amidst expectations on the
direction of global interest rates. Market sentiment
turned cautious in the second half of 2003. Domestic
institutions continued to be the major players in the
MGS and 3-month KLIBOR futures markets.
DEVELOPMENTS IN PAYMENT AND SETTLEMENT
SYSTEMS
Developments in 2003
In November 2003, the Payment Systems Act was
enacted by Parliament and is a landmark
achievement for the Bank as it sets out a
comprehensive regulatory oversight framework,
which is essential in governing the changing
payment landscape. The primary objective of the
Bank is to ensure the security, safety and efficiency of
The primary objective of the Bank is to ensure the security, safety
and efficiency of the payment systems in the country, and that
there is continued public confidence in the use of payment
instruments.
the important payment systems in the country, and
that there is continued public confidence in the use
of payment instruments. Of significance also is the
migration towards the use of advanced technology
such as chip cards to provide safer payment modes.
During the year, domestic banking institutions had
replaced their magnetic stripe ATM cards with the
chip based Bankcard, and with effect from 1
October 2003, all ATM transactions are carried out
using the Bankcard. The Bankcard has three
standard applications, that is, an ATM function, an
e-debit function and the MEPS Cash e-purse. The
locally incorporated foreign banks are expected to
replace their ATM cards with chip based cards by
March 2004. Presently, there has been no report of
any ATM fraud through the use of cloned chip
ATM cards.
In implementing a long-term measure to prevent the
fraudulent skimming of credit cards, the banking
industry is currently conducting an industry wide
Europay-Mastercard-Visa (EMV) chip migration of
their magnetic stripe credit cards. The magnetic
stripe cards are going to be replaced by end-2004,
and upgraded card acceptance devices will be
deployed to accept EMV chip cards by end-2005. As
at end-2003, there were about 243,000 EMV chip
credit cards issued and about 18,000 card
acceptance devices have been deployed to accept
these EMV cards.
In addition to the enhancement of security features
in the payment systems and instruments, technology
also facilitates the development of more efficient
payment modes, compared to paper-based payment
instruments such as cheques. Electronic funds
transfer systems (EFT) are more efficient and faster
than cheque processing systems, as well as, being
more secure and capable of effecting finality of
payment with greater certainty. The Malaysian
Electronic Payment System (1997) Sdn Bhd, has
developed several electronic payment systems, one of
which is the Financial Process Exchange (FPX) which
is targeted to be completed in early 2004. The FPX
will enable users to make online payments to
facilitate electronic commerce transactions using a
multi-bank payment platform.
Due to its many benefits, the promotion of the
migration from paper-based payment instruments to
electronic payments is being accelerated. In
December 2003, this was discussed at the National
Payment Advisory Council, followed by a consultation
exercise with financial institutions. Three broad areas
were proposed for the industry to consider on the
measures that would promote the migration to
electronic payments.
(i)
Financial institutions should offer efficient and
cost effective electronic payments that are accessible
and convenient for their customers to use.
(ii) Strategic incentives including pricing should be in
place to facilitate the investment and
development of the e-payment infrastructure,
and make e-payments widely acceptable.


The Financial Sector
173
Payment Systems Act 2003
Introduction
The Payment Systems Act 2003 (the Act) was gazetted on 7 August 2003 and came into effect on 1
November 2003. The introduction of the Act is in line with the recommendation in the Financial Sector
Masterplan for the adoption of a flexible, proactive and effective regulatory framework for the oversight
of payments system and to increase efficiency in the payment system. The introduction of the Act reflects
the significance of payments system to the country’s economic activities and recognizes Bank Negara
Malaysia as the sole authority responsible for its oversight. An efficient and well functioning payments
system would support the creation of social and economic efficiency and is crucial for the smooth
functioning of the financial markets and in maintaining financial stability. In addition, the smooth
operation of the payments system is also essential for Bank Negara Malaysia to effectively conduct
monetary policy.
The objective of the Act is to ensure the safety and efficiency of the payment related infrastructure, and to
safeguard public interest. The Act provides the legal framework to ensure that the financial system, and
the public’s confidence in the payment systems is well protected. The Act provides the specific legislative
authority for a more comprehensive and effective oversight of the payment system. Banking institutions as
well as non-bank players offering payment systems and instruments would be governed by the Act.
New oversight framework on payment system
The Act was drafted to provide a balanced regulatory framework for the oversight of the payment system
in line with Bank Negara Malaysia’s objective and to promote market innovation. The Act outlines two
different oversight regimes for two types of players namely, the operator of payment systems and the
issuer of designated payment instruments.
Oversight on the operator of payment systems
The Act defines a payment system as "any system or arrangement for the transfer, clearing or settlement
of funds or securities". Several arrangements including the clearing house recognised under the Securities
Industry Act 1983 or clearing house licensed under the Futures Industry Act 1993 are excluded from the
definition of payment system. An operator of the payments system is required to submit documents and
obtain notification from Bank Negara Malaysia. These documents and information are important for the
establishment of a surveillance mechanism that is capable of monitoring developments in the payment
system for the formulation of appropriate policies as and when required. Bank Negara Malaysia is also
empowered to prohibit the operation of any payment system in the event that it is necessary in the
interest of the public, or the operation of such system is detrimental to the reliable, safe, efficient and
smooth operation of the country’s payment systems.
The Act empowers Bank Negara Malaysia to designate a payment system as a designated payment system
(DPS) if such a system poses systemic risks, or if the designation is necessary to protect the interest of the
public. Only fit and proper persons can accept appointment as a director or chief executive officer of an
operator of a DPS. The operation of a DPS would be subjected to closer oversight by Bank Negara
Malaysia, including the requirement to establish good corporate governance. In addition, an operator of a
DPS is required to ensure that adequate operational arrangements are in place to ensure the smooth
functioning of these payment systems. This includes the establishment of rules and procedures setting out
the rights and liabilities of the relevant parties including the financial risks that the parties might incur, as
well as procedures for the management of credit risk and liquidity risk and measures to ensure the safety,
security and operational reliability of the DPS.
To ensure that a DPS can work effectively, it is necessary for all payment and settlement instructions that
are sent through the DPS be considered as final and irrevocable. The Act, therefore, provides that a
payment or settlement instruction sent through a DPS shall be final and shall not be revoked or reversed


174
from the time such an instruction is entered into the DPS. The operator of a DPS is required to establish
rules that determine the point of time that a payment or settlement instructions is deemed as final.
In acknowledging that a DPS may also adopt netting arrangements in order to reduce settlement risks, the
Act gives legislative recognition to any netting arrangements that are entered into, in relation to the DPS,
to avoid any uncertainty with regards to such netting arrangements. The Act provides that netting
arrangements adopted by participants of a DPS as well as finality of payment and settlement instructions
in a DPS prevail over insolvency laws.
Oversight on the issuance of designated payment instruments
The Act empowers Bank Negara Malaysia to designate a payment instrument as a designated payment
instrument (DPI). These are instruments that are widely used or that should be regulated by Bank Negara
Malaysia in the interest of the public. Issuance of a DPI requires the prior approval of Bank Negara
Malaysia. Three payment instruments have been designated as a designated payment instrument, namely,
electronic money, credit and charge instruments.
Similar to DPS, issuers of DPIs are required to implement adequate corporate governance and operational
arrangements to ensure the safety and reliability of these payment instruments. This includes the
requirement to establish measures to ensure prudent management of funds collected from the users of
the designated payment instruments and to ensure that such funds are available for repayment to the
users.
Powers of Bank Negara Malaysia under the Act
Bank Negara Malaysia is empowered under the Act to require an operator of a payment system or issuer
of a payment instrument to be an incorporated company. This requirement may be imposed where the
corporate structure is necessary to provide more permanence, credibility and stature to the entity that will
be required to comply with the Companies Act 1965 as well. To ensure effective supervision and
monitoring of the payment systems in the country, Bank Negara Malaysia may require the operator of a
payment system or the issuer of a payment instrument to submit information on the payment system
operated or the payment instrument issued by them. Other powers conferred by the Act to Bank Negara
Malaysia include: -
i.
Powers of examination
The Act empowers an examiner authorised by Bank Negara Malaysia to examine the premises and
offices, apparatus or documents, of an operator of a payment system or an issuer of a payment
instrument or any other person falling within the purview of the Act.
ii.
Control over DPS
The Act imposes a duty on an operator of a DPS who is insolvent to immediately inform Bank Negara
Malaysia. Bank Negara Malaysia, by order published in the Gazette, may assume control of, or to carry
on, the whole or part of a DPS’s property, business and affairs, as the case may be. Bank Negara
Malaysia may appoint a person to carry out such powers on its behalf by making an application to the
High Court to appoint a receiver or a manager to manage the company.
iii. Investigation, search and seizure
The Act empowers Bank Negara Malaysia to appoint its employee or any person as its investigating
officer for offences under the Act. The investigation officer has the powers of entry into any premise,
search and seize property, apparatus, or documents and search of persons. The Act also empowers
Bank Negara Malaysia to investigate, with the concurrence of the Securities Commission, clearing
houses recognised under the Securities Industry Act 1983 or those licensed under the Futures Industry
Act 1993.


The Financial Sector
175
iv. Offences and enforcement
In order to ensure an effective regulatory regime, the Act includes a schedule of offences that provides
for penalties in the event that identified provisions of the Act are contravened. Offences under the Act
are assigned penalties in accordance with the severity of their potential effects, including systemic and
other risks.
Conclusion
The enactment of the Act serves to strengthen Bank Negara Malaysia’s oversight over payment systems
and instruments. The Act enables Bank Negara Malaysia to identify and monitor systemically important
payment systems and important payment instruments, which will be closely regulated under the Act,
while giving regulatory flexibility to operators of payment systems and issuers of payment instruments to
encourage innovation.
(iii) The financial industry should promote awareness
of the electronic payment options and encourage
consumers to use electronic payments and
instruments by enhancing their confidence in
using these means of payments.
General Payment Profile in Malaysia
In the financial system, Malaysian consumers are
notably heavy users of cheques compared to other
payment instruments. The breakdown by percentage
for the value and volume of non-cash payment
transactions in 2003 is as shown in Table 4.32.
Whilst the banking industry continues to invest
significantly in e-payment infrastructures, cheques
remained a significant payment instrument. In 2003,
cheques accounted for 96.7% of the total non-cash
payment value. Although the value of e-purse
transactions is negligible in terms of total non-cash
payments, its volume accounted for 36.4% of total
non-cash payments in 2003. E-purse transactions in
Malaysia constituted mainly toll payments, where the
Touch ‘n Go contactless card was used. Settlement of
retail related payments were made through the
financial institutions, whereby interbank fund
transfers are mainly undertaken through the real-
time gross settlement system (RENTAS).
Table 4.32
Non-Cash Payments in Malaysia
Value (%)
Volume (%)
Cheques
96.67
34.04
Credit cards
2.48
27.68
Credit transfers (Giro)
0.63
0.24
Charge cards
0.16
1.42
E-purse - Toll payments
0.05
36.40
- Retail
0.00
0.00
Debit cards
0.01
0.22
IFTS Value
IFTS Volume
Volume (million)
Value (RM trillion)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
1999
2000
2001
2002
2003
0
2
4
6
8
10
12
14
Graph 4.44
RENTAS – IFTS Turnover
SSTS Value
SSTS Volume
0
20
40
60
80
100
120
140
1999
2000
2001
2002
2003
0.0
0.2
0.4
0.6
0.8
1.0
1.2
Volume ('000)
Value (RM trillion)
Graph 4.45
RENTAS – SSTS Turnover


176
135
140
145
150
155
160
165
170
175
180
185
1999
2000
2001
2002
2003
0.60
0.70
0.80
0.90
1.00
1.10
1.20
Value (RM trillion)
Volume (million)
Graph 4.46
Volume and Value of Cheques Cleared by 
SPICK Centres 
Value
Volume
In 2003, in terms of value and volume, Interbank
Funds Transfer System (IFTS) saw an increase of
10.9% and 9.1% respectively, while Scripless
Securities Trading System (SSTS) transactions saw a
significant increase of 28.6% and 18.3%
respectively, when compared with 2002.
Efficiency Improvements
Bank Negara Malaysia had introduced several
enhancements to improve RENTAS in 2003. These
include the following:
(i) RENTAS-STP
The ‘Straight Through Processing’ (STP) module
which is linked to the RENTAS system was
introduced to enable all processes in a payment
cycle beginning from payment initiation by
customers to interbank settlement is integrated
electronically. Members are advised to implement
RENTAS-STP to improve the efficiency of their
banking operations. The RENTAS-STP will reduce
human intervention, enabling operational cost
savings and resulting in improved customer
service. Presently, four members have
implemented RENTAS-STP
.
(ii) Intra-day credit enhancement
In August 2003, the RENTAS system was enhanced
to allow intra-day collateral securities to be valued
on the net price basis after taking into account
market price movements, credit rating changes
and margin requirement. This method replaced the
earlier method of calculating the ‘haircut’ which
was based on the nominal value and did not
reflect the fair value of the security. The intra-day
credit enhancement has improved risk
management, as the collaterals are now valued
based on its fair value derived from the current
market prices.
(iii) Enhancement of RENTAS i-LINK
In September 2003, Bank Negara Malaysia
completed Phase 2 of the RENTAS i-LINK
implementation. This system provides a timely
and accurate real-time settlement information,
allows monitoring, enquiring and analysing
information pertaining to management of
liquidity, cash and security positions. With the
implementation of these modules, the RENTAS
members are better able to monitor incoming
and outgoing cash/securities flows, to extend
vital RENTAS data to the front office for value-
added analysis and to prepare management
reports and updating the RENTAS members’
directory online. This has allowed active
management of information by members.
(iv) Universal Brokers (UBs) membership
As a measure to support the development of the
capital market, the UBs were allowed access to
the SSTS modules of the RENTAS system, which
enables them to deal directly in the unlisted debt
securities together with the other members of
the RENTAS system. Since October 2003, two
UBs have been admitted as members.
Payment Instruments and Channels
Cheques
The volume of cheques processed through the three
Sistem Penjelasan Imej Cek Kebangsaan (SPICK)
cheque clearing centres operated by Bank Negara
Malaysia increased marginally by 2.0% from 176.4
million cheques in 2002 to 179.9 million cheques in
2003. The value of cheques cleared, however,
remained at about RM1.1 trillion in both years.
In May 2003, the SPICK-KL (the largest of the
SPICK centres, the others being in Pulau Pinang
and Johor Bahru) was awarded the ISO 9001:2000
certification for another three years, reflecting the
commitment of the Bank towards providing quality
service. During the year, efforts were continued to
further improve the efficiency of SPICK operations,
such as the replacement of the Compact Disc
Production subsystem and upgrading the operating
system to Windows 2000. After the
enhancements, the overall SPICK operation for the


The Financial Sector
177
three centres showed an improvement in
performance with the reduction of clearing time by
an average of 1.5 to 2 hours.
As part of the Bank’s on-going effort to curb cheque
fraud, the Bank had in October 2003 issued a
consultative paper on “Guideline on Minimum
Security Standards for Cheques” to the banking
institutions with the objective of enhancing the
security features on cheques, cheque fraud detection
facilities, security management in cheque printing
and the necessary advise to consumers on best
practices. The Guideline also covers the related
governance processes. Banking institutions will be
required to make the necessary changes to their
work processes and upgrade their systems. The
Guideline will be enforced later in 2004.
In 2003, the number of blacklisted offenders in Biro
Maklumat Cek (BMC) remained constant. As at end-
2003, the number of offenders stood at 49,389,
including 32,408 individuals compared with 48,814
offenders including 32,351 individuals at end-2002.
Account holders, therefore, need to monitor their
account balances carefully and ensure that sufficient
funds are available before issuing cheques, as the
consequences of being blacklisted in the BMC can be
damaging.
Giro
Besides cheques, consumers can also use the Giro
credit transfer to make payments. Giro transactions in
2003 are less significant compared to the cheque
volume and value. Nevertheless, the volume and value
of Giro transactions as at end-2003 had increased
markedly by 114.8% and 57.8% when compared to
end-2002. Details on the credit transfer transactions
via the Giro system are shown in Graph 4.47.
Credit, Charge and Debit cards
The number of credit cards issued by the financial
institutions had increased in the recent three years,
from 2.8 million cards at end-2000 to 5.1 million
cards at end-2003. From 2002 to 2003, the total
value of credit card transactions rose by 16% and
credit card remains as a preferred payment card. The
usage of charge and debit cards was insignificant
compared to credit cards as shown in Table 4.33.
As part of the Bank’s effort to ensure an adequate
level of prudential measure, consumer protection
and consumer education, the Bank had issued a
“Credit Card Guideline” in March 2003. The
requirements in the Guideline among others,
stipulates a RM250 limit for consumers’ liability for
unauthorised transactions, bars credit card usage
for unlawful activities such as illegal online betting,
requires banks to provide an advisory to their
cardholders on the consequences of paying only the
minimum repayment amount and requires the
banking institutions to utilise the Central Credit
Reference Information System (CCRIS) in their credit
evaluation for processing applications.
Electronic Purse - MEPS Cash
Marketing programmes and awareness campaigns
have been undertaken during the year to promote
the use of electronic purse and electronic payment
channels in the country. During 2003, the banking
institutions progressively upgraded their existing card
0
200
400
600
800
1,000
1,200
1,400
2000
2001
2002
2003
Volume ('000) 
Value (RM billion) 
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Graph 4.47
Interbank Giro Transactions
Value
Volume
Table 4.33
Payment Cards
2002
2003
No. of cards
Volume
Value
No. of cards
Volume
Value
(million)
(million)
(RM million)
(million)
(million)
(RM million)
Credit cards
4.4
126.9
25,304.7
5.1
146.3
29,359.9
Charge cards
0.3
7.8
1,860.6
0.3
7.5
1,895.7
Debit cards
n.a.
1.0
74.2
2.8
1.2
87.4
n.a. Not available.


178
acceptance devices on a nationwide basis for
merchants to accept MEPS Cash electronic purse.
More than 12,000 terminals have been deployed at
various merchants by the financial institutions and
third party acquirers. As the MEPS Cash scheme has
only recently been deployed on a widespread basis,
the volume of transactions has yet to reach a
significant level.
Internet Banking
The Internet is becoming an increasingly important
channel for banks to provide banking services to both
individual consumers and businesses. During the year,
an Islamic bank and a locally incorporated foreign
bank began offering Internet banking services, making
the number of banks offering transactional Internet
banking services to 13 as at end-2003. Consumers
and businesses continued to show a growing interest
in using the Internet as a bill payment medium and for
conducting interbank fund transfers.
Accordingly, in their efforts to increase the adoption of
this self-direct channel, the banks have increased the
range of services offered via Internet banking including
free online bill payment services and the ability to transfer
funds to accounts in other banks. With more households
and businesses realising the convenience of Internet
banking, the number of Internet banking subscribers
grew from 1 million as at end-2002 to 1.7 million as at
end-2003. The total value of transactions conducted
through Internet banking by individual consumers had
increased significantly from RM0.9 billion for the quarter
ended 31 December 2002 to RM3.5 billion for the
quarter ended 31 December 2003.
Business Continuity Management
Business Continuity Management is the act of
anticipating incidents that will affect critical functions
and processes in the organisation and ensuring that
it is able to respond to any incident in a planned and
prepared manner. The Business Continuity Plan is the
processes and procedures an organisation put in
place to ensure that essential functions can continue
after and during a crisis. As part of the Business
Continuity Plan, the RENTAS, SPICK-KL and SWIFT
operations has a prescribed plan to ensure that these
services, if disrupted, can be re-established swiftly
and smoothly.
In 2003, monthly testing and several extended live
runs have been carried out to ensure that all
operation staff is familiar with the procedures at the
alternate site. During the testing periods, the Bank
worked closely with member banking institutions to
ensure that operations run smoothly, despite a change
in location. This encourages close co-operation among
the members to ensure that these systems operated
by Bank Negara Malaysia are well supported.
MALAYSIA’S ANTI-MONEY LAUNDERING AND
COUNTER FINANCING OF TERRORISM (AML/CFT)
PROGRAMME
Overview
The global community continues to intensify efforts
to enhance measures to detect and deter money
laundering and terrorism financing. There has been
greater co-operation among national agencies to put
in place the appropriate statutes and continue to
build capacity of personnel involved in implementing
the AML/CFT initiatives.
In Malaysia, Bank Negara Malaysia (the Bank) leads
various law enforcement agencies in combating
money laundering and terrorism financing. The Bank
is the secretariat to the National Co-ordination
Committee to Counter Money Laundering (NCC),
which was established in 2000 to formulate AML/CFT
measures, co-ordinate the implementation of these
measures and to ensure that the national efforts are
aligned with regional and international initiatives.
Representatives of member agencies in the NCC
meet several times a year to co-ordinate their
concerted efforts in fighting money laundering and
in countering terrorism financing. Each NCC member
is responsible to study and report on pertinent AML/
CFT issues to the NCC as well as implement, and
report on the development of, any NCC decision.
UN International Convention for the
Suppression of the Financing of Terrorism
Malaysia is committed to criminalise the financing of
terrorism as called for under the UN International
Convention for the Suppression of the Financing of
Terrorism. Malaysia proposes to accede to the UN
Convention by making appropriate amendments to,
and provide new legislative provisions in, five pieces
of legislation, namely the Penal Code, Criminal
Procedure Code, Subordinate Courts Act 1948,
Courts of Judicature Act 1964 and the Anti-Money
Laundering Act 2001 (AMLA).
Anti-Money Laundering (Amendment) Act 2003
In November 2003, the Parliament passed the Anti-
Money Laundering (Amendment) Act 2003, which
was gazetted as law on 25 December 2003. When
this legislation is brought into force by a Ministerial
order, the short title of the AMLA would be changed


The Financial Sector
179
to “Anti-Money Laundering and Anti-Terrorism
Financing Act 2001”. The amending legislation
extends the Bank’s money laundering reporting
mechanism to include the reporting of suspected
terrorism financing, provides for measures to be taken
for the detection and prevention of terrorism financing
as well as provides for the freeze, seizure and forfeiture
of terrorist property.
Implementation of the Anti-Money Laundering
Act 2001
The money laundering reporting mechanism under the
AMLA covers financial institutions and certain
categories of non-financial institutions, which are
considered to be of higher risk to money laundering or
terrorist financing activities. Our implementation
approach of extending the reach of the law
incrementally ensures that the reporting institutions are
well prepared and able to effectively comply with their
obligations under the AMLA.
Recent AML/CFT Measures under the AMLA
Extending the List of Reporting Institutions
Since the AMLA came into force on 15 January
2002, the requirement to report suspicious
transactions was invoked on banking and Islamic
banking institutions, insurance companies and
takaful operators, money changers and offshore
entities. In 2003, several other categories of
businesses have been included as reporting
institutions. To date, the reporting institutions under
the AMLA are as follows.
Other non-financial institutions that are vulnerable to
money laundering and terrorism financing will be
brought under the AMLA in stages.
Increase Reporting Obligations
The full-fledge reporting obligations under the
AMLA, such as record-keeping, retention of record,
compliance programme and customer identification
requirements have been invoked on the following
institutions:
•
Commercial banks, finance companies, merchant
banks and Islamic banks with effect from 15
January 2003;
•
Discount houses, offshore banks, offshore trust
companies, offshore insurers, reinsurers, insurers,
insurance brokers and takaful operators with
effect from 15 April 2003; and
•
Money changers with effect from 1 October
2003.
The Bank continues to work in collaboration with
these reporting institutions through regular dialogue
sessions to ensure effective implementation of the
AMLA compliance programme. The banking industry
has set up a Compliance Officers Networking Group
(CONG), which meets regularly to discuss AML/CFT
compliance issues at the premises of the Institute of
Bankers Malaysia. Officers of the Financial
Intelligence Unit (FIU) in the Bank attend CONG
meetings by invitation only.
Increase Predicate Offences
In 2003, the number of money laundering predicate
offences has increased from 122 to 150 serious
crimes from 23 pieces of legislation.
Suspicious Transaction Reports (STRs)
As the competent authority mandated by the
Minister of Finance, the Bank receives STRs pursuant
to section 14(b) of the AMLA. Section 14(b) requires
the reporting of suspicious transactions to the FIU in
the Bank. The STRs are analysed and, where
applicable, shared with the relevant enforcement
agencies, which conduct their own surveillance and
investigations into these cases based on the Bank’s
financial intelligence.
Capacity Building
Awareness Programme
The Bank continues to promote awareness among
relevant stakeholders to ensure effective
implementation of the AML/CFT measures. A
nationwide awareness programme for the banks,
including Bank Kerjasama Rakyat Malaysia Berhad,
Table 4.34
Reporting Institutions under the AMLA
Invocation date
Type of Reporting Institution
Number of
Institutions
(as at 31
December 2003)
15-Jan-02
Commercial banks
23
Finance companies
11
Merchant banks
10
Islamic banks
2
15-Apr-02
Discount houses
7
Offshore banks
54
Offshore insurance companies
101
Offshore trust companies
18
Insurance companies
44
Reinsurance companies
10
Insurance brokers
35
Takaful operators
4
1-Jun-02
Money-changers
649
15-Jan-03
Bank Kerjasama Rakyat
Malaysia
1
Bank Simpanan Nasional
1
Lembaga Tabung Haji
1
Pos Malaysia Berhad
1
Genting Casino
1
 Total reporting institutions
973


180
Bank Simpanan Nasional and Lembaga Tabung Haji
were conducted in August-October 2003. Dialogue
sessions with reporting institutions were also
conducted regularly to update and clarify any issues
relating to the development of the AML/CFT
measures.
Training Initiatives
The Bank hosted several workshops to enhance the
knowledge and skills of both domestic and regional
stakeholders in the AML/CFT initiatives. Financial
sector experts from the United States, Australia, the
United Kingdom and international and regional bodies
such as the IMF, the World Bank and the Asia/Pacific
Group on Money Laundering (APG) were invited to
share their experiences and expertise at these
workshops. The international training programmes
organised and hosted by the Bank were:
(i)
The ASEAN Anti-Money Laundering Workshop
2003, held from 28–30 July 2003. The workshop
formulated strategies for the creation of a
comprehensive anti-money laundering regime in
each ASEAN country, which included defining the
core functions of a financial intelligence unit,
identification of the agencies and the role of
enforcement agencies in the AML/CFT framework.
(ii) The Basic Analysis and Suspicious Transaction
Reporting Workshop 2003, held on 25-29
August 2003. The workshop was co-hosted by
the South East Asia Regional Centre to Counter-
Terrorism and the Bank. It focused on techniques
in basic analytical skills on collection, analysis and
sharing of information on suspected money
laundering and terrorism financing submitted by
reporting institutions.
(iii) The APG Typologies Workshop, held from 8–9
December 2003. The workshop was attended by
participants from 34 member and observer
jurisdictions of the APG. The workshop focussed
on the sharing of trends and cases relating to
money laundering and terrorist financing. In
addition, various working groups to conduct in-
depth study on cash couriers, terrorism financing
and corruption related issues were established.
(iv) The APG AML/CFT Assessment Training
Workshop, held on 10–12 December 2003. This
workshop trained the financial sector experts
from the APG member jurisdictions to conduct
assessment based on the IMF/ World Bank
Methodology for Assessing Compliance with
AML/CFT Standards.
Challenges Ahead
The Financial Action Task Force reviewed its 40
Recommendations in June 2003. The revision
extended the reporting entities to designated non-
financial business and professions (DNFBP). The
DNFBP includes real estate agents, dealers in
precious metals, dealers in precious stones, lawyers,
notaries, other independent legal professionals,
accountants and trust and company service
providers. The Bank will invoke the AMLA reporting
obligations on DNFBP in stages taking into
consideration the readiness of these entities. The
Bank recognises that the consultative process with
the DNFBP and the relevant regulatory and
supervisory authorities of the DNFBP as significant
to the successful implementation of the AMLA
reporting obligations.
The amendments to the Penal Code to criminalise
terrorism financing and the amendments to the
AMLA require the development of appropriate
counter-financing of terrorism mechanisms and
procedures to ensure effective implementation of the
UN International Convention for the Suppression of
the Financing of Terrorism. The Bank will work in
collaboration with the NCC members to effectively
implement the new legislative provisions.
Money laundering trends constantly evolve and
hence, necessitate continuous training of law
enforcement personnel to upgrade their knowledge
and skills. The Bank will continue its leadership role in
the fight against money laundering activities.


182-186
Growing Significance of the Islamic Financial System
186-196
Policy Thrust in 2003 
187-189
White Box: Introduction of Islamic Variable Rate Mechanism
190-193
White Box: The Framework of the Rate of Return
193-194
White Box: Guidelines on the Specimen Reports and 
Financial Statements for Licensed Islamic Banks (GP8-i)
196-201
Performance of the Islamic Banking System
The Islamic Financial System


182
GROWING SIGNIFICANCE OF THE ISLAMIC
FINANCIAL SYSTEM
The Islamic financial system has evolved into a viable
and vibrant component of the overall financial
system, complementing the conventional financial
system. The Financial Sector Masterplan (FSMP)
provides clear strategic focus to develop and
promote the expansion of the Islamic banking
system. Against the backdrop of a stronger economy
and strong macroeconomic fundamentals, Islamic
banking activity experienced rapid growth to account
for 9.7% of the total assets of the banking system in
2003 from 6.9% in 2000. The market share of
deposits and financing also increased markedly to
account for 10.4% (2000: 7.4%) and 10.3%
(2000: 5.3%) of the total banking system
important role in mobilising deposits and
providing financing to facilitate growth. The
Islamic banking system is currently represented by
33 Islamic banking institutions, comprising two
Islamic banks and 31 conventional banking
institutions (nine commercial banks, four foreign
banks, seven finance companies, four merchant
banks and seven discount houses) offering Islamic
banking products and services under the Islamic
Banking Scheme. These Islamic banking
institutions offer a comprehensive and broad
range of Islamic financial products and services
ranging from savings, current and investment
deposit products to financing products such as
property financing, working capital financing,
project financing, plant and machinery financing,
hire purchase, education financing and other
The rapid progress of the domestic Islamic banking system,
accentuated by significant expansion and developments in Islamic
banking and finance has become increasingly more important in
meeting the changing requirements of the new economy.
respectively. The rapid progress of the domestic
Islamic banking system, accentuated by significant
expansion and developments in Islamic banking and
finance has become increasingly more important in
meeting the changing requirements of the new
economy.
In Malaysia’s dual banking environment, the Islamic
financial system operates in parallel with the
conventional financial system. The Islamic financial
system encompasses the Islamic banking system,
Islamic money market, Islamic insurance or takaful,
Islamic capital market and the specialised financial
institutions which provide alternative sources of
financing. The intra-dependency of these key
structural components creates a comprehensive
enabling environment for the Islamic financial system
to effectively play its role as an efficient conduit to
mobilise resources and provide financing for
productive economic activity. This structure also
enhances the resilience and robustness of the Islamic
financial system to withstand financial shocks and
contributes to the overall stability of the Islamic
financial system.
•
The Islamic banking system which forms the
backbone of the Islamic financial system plays an
The Islamic Financial System
financing products including trade finance
products. The ability of the Islamic banking
institutions to arrange and offer products with
attractive and innovative features at prices that
are competitive with conventional banking
products, has appealed to both Muslim and non-
Muslim customers, reflecting the capacity of the
Islamic banking system as an effective means of
financial intermediation. The extensive
distribution network of Islamic banking
institutions, comprising 152 full-fledged Islamic
banking branches and 2,065 Islamic banking
counters (offering Islamic banking products), that
is also well supported by an efficient, secure and
effective payment system, has enhanced access
to banking services for the various sectors of
the economy.
•
The existence of an active Islamic interbank
money market is another important component
in the Islamic financial system. Under the
mudharabah (profit-sharing) interbank
investment (MII) mechanism, Islamic banking
institutions are able to raise funds to meet their
short-term funding requirement based on profit-
sharing arrangement. Since its inception in
1994, the volume of MII increased from only


183
The Islamic Financial System
RM0.5 billion in 1994 to RM283.8 billion in
2003. The availability of a broad spectrum of
short and long-term Islamic financial instruments
such as Government Investment Issues (GII),
Bank Negara Negotiable Notes (BNNN) and
Islamic private debt securities as well as the
active trading of these instruments allow Islamic
banking institutions to meet their investment
and liquidity needs. The GII and BNNN are also
among the instruments used by Bank Negara
Malaysia to manage liquidity in the Islamic
banking system. The efficiency of the Islamic
money market is enhanced by the Real-Time
Gross Settlement System (RENTAS) and the Fully
Automated System for Tendering (FAST). RENTAS
facilitates larger value interbank funds transfers
and scripless securities while FAST facilitates the
tendering process for Islamic securities including
government securities, commercial papers and
private debt securities.
•
In the Islamic capital market, funds are raised to
finance long-term infrastructure and
development projects through the issuance of
Islamic private debt securities. The Islamic capital
market reduces over-dependence on the Islamic
banking system for long-term financing and
allows Islamic banking institutions to diversify
part of the risks emanating from asset and
liability mismatches. The existence of the Islamic
capital market plays an important role in
reducing potential source of financial
vulnerabilities and contributes to enhance the
robustness and resilience of the Islamic financial
system, leading to greater financial stability. The
issuance of diverse Islamic financial instruments
ranging from short-term Commercial Papers and
Medium Term Notes to long-term Islamic bonds
facilitates Islamic banking institutions in meeting
their investment and liquidity needs. The
different financial structures of the Islamic
instruments also provide flexibility to issuers in
managing their distinct financing requirements.
Moreover, the Islamic financial instruments
attract a wider investor base, encompassing
both Islamic and conventional institutional
investors, and thereby the funds raised can be
tapped at competitive cost. In addition, the
active participation of Islamic banking
institutions in deal origination, underwriting and
corporate advisory services expands the breadth
and depth of the Islamic capital market,
contributing to increased effectiveness and
efficiency of the Islamic financial system.
The availability of credit ratings by the external
credit rating agencies such as the Rating Agency
Malaysia (RAM) and Malaysian Rating
Corporation Berhad (MARC) enhance price
discovery and efficiency of the market and
facilitate efficient investment and financing
decisions. The efficiency of the Islamic debt
securities market is further augmented by
settlement and tendering systems such as
RENTAS and FAST as well as the Bonds
Information Dissemination System that provides
comprehensive market information on domestic
debt securities.
Table 5.1
Islamic Banking System: Key Data
As at end
Annual
change (%)
2002
2003p
2003p
Number of financial
institutions
35
33
-5.7
Commercial banks
14
13
-7.1
Finance companies
9
7
-22.2
Merchant banks
 3
4
33.3
Islamic banks
2
2
0.0
Discount houses
7
7
0.0
Total assets (RM million)
68,070
82,196
20.8
Commercial banks
29,109
36,824
26.5
Finance companies
12,623
17,875
41.6
Merchant banks
1,430
1,716
20.0
Islamic banks
20,160
20,955
3.9
Discount houses
4,748
4,826
1.6
Total deposits (RM million)
53,306
60,212
13.0
Commercial banks
23,476
26,519
13.0
Finance companies
9,094
10,965
20.6
Merchant banks
684
852
24.6
Islamic banks
16,421
17,584
7.1
Discount houses
3,631
4,292
18.2
Total financing (RM million)
36,718
48,615
32.4
Commercial banks
16,706
22,324
33.6
Finance companies
10,050
15,746
56.7
Merchant banks
804
781
-2.9
Islamic banks
9,158
9,764
6.6
Discount houses
n.a.
n.a.
n.a.
Financing-deposits ratio (%)
68.9
80.7
11.8
Commercial banks
71.2
84.2
13.0
Finance companies
110.5
143.6
33.1
Merchant banks
117.5
91.7
-25.8
Islamic banks
55.8
55.5
-0.3
Discount houses
n.a.
n.a.
n.a.
Number of branches
138
152
10.1
Commercial banks
8
13
62.5
Finance companies
2
7
250.0
Islamic banks
128
132
3.1
Number of counters
2,065
2,065
0.0
Commercial banks
1,335
1,410
5.6
Finance companies
730
646
-11.5
Merchant banks
–
9
–
n.a. Not applicable.
p  Preliminary


184
•
In the Islamic equity market, Islamic institutional
investors participate in capital raising exercise to
finance business expansion of corporations. The
Islamic unit trusts provide investors access to
professional management of funds to maximise
returns on different risk profiles. The
comprehensiveness of the Islamic financial
system creates significant investment
opportunities for both Islamic and conventional
investors in managing their portfolios to meet
financial needs.
•
The takaful industry adds significant synergies to
the overall Islamic financial system. Takaful
operators, particularly in general takaful business,
contribute to mitigate part of the risks of the
banking system emanating from financing
transactions and hence strengthen the resilience
of the Islamic financial system. In the family
takaful business, takaful operators assume an
Shariah framework. The Islamic banks are regulated
and supervised by Bank Negara Malaysia under the
Islamic Banking Act 1983 (IBA), while the conventional
banks participating in the Islamic Banking Scheme (IBS
banks) are regulated under the Banking and Financial
Institutions Act 1989 (BAFIA). Islamic banking
institutions operate under a robust regulatory and
supervisory framework based on international
standards and best practices, at par with conventional
banking institutions. For the IBS banks, the robustness
of the regulatory and supervisory framework includes
the establishment of effective firewalls to ensure that
there is complete segregation between Islamic
banking and conventional banking portfolios in line
with the dictates of the Shariah. This is to preserve the
integrity and confidence in the Islamic banking system.
•
Islamic banks observe the Basel Capital Accord in
maintaining a minimum risk-weighted capital
ratio (RWCR) of 8% and a minimum core capital
The comprehensiveness of the Islamic financial system creates
significant investment opportunities for both Islamic and
conventional investors in managing their portfolios to meet
financial needs.
important role as economic agents that mobilise
long-term savings for long-term investments and
economic growth. The role of takaful operators
as institutional investors has contributed to
stimulate the development of Islamic financial
instruments and consequently adds depth to the
Islamic financial markets.
•
Specialised non-bank institutions offering Islamic
financial products and services such as the
development financial institutions (DFIs) and
Pilgrims Fund Board complement the Islamic
banking system in expanding its reach to specific
strategic economic sectors thereby enhancing the
capacity of the Islamic financial system in its overall
contribution to economic growth and development.
Meanwhile, the existence of ancillary institutions
such as the National Mortgage Corporation
(Cagamas Berhad) contributes to enhance resilience
of the Islamic financial system through securitisation
of the Islamic house financing and Islamic hire
purchase receivables in the portfolios of Islamic
banking institutions.
Ensuring Financial Soundness and Stability
The Islamic financial system operates under a robust
and comprehensive legal, regulatory, supervisory and
ratio of 4%. The IBS banks observe the
compliance to the RWCR framework for the
Islamic banking portfolio in addition to the
compliance on a consolidated basis (for
both Islamic banking and conventional
banking portfolios).
•
To ensure Islamic banks maintain sufficient
liquidity at all times, Islamic banks are required to
observe the liquidity framework. Under this
framework, Islamic banks are required to manage
their liquidity positions in a dynamic manner
through the matching of short-term liquidity
requirements arising from maturing obligations
with maturing assets. In addition, Islamic banks
are required to maintain adequate liquidity
surpluses to be able to sustain unexpected heavy
withdrawals for at least one month. In the case
of the IBS banks, this liquidity framework is
observed on a consolidated basis.
•
Prudent management of the Islamic banking
portfolio is pertinent to protect the interest of
depositors in view of the profit and loss sharing
nature of Islamic banking operations. To inculcate
prudent financing practices, Islamic banking
institutions are required to provide adequate


185
The Islamic Financial System
provisioning for potential deterioration in asset
quality and observe the credit limit to a single
customer and its related corporations.
•
Islamic banking institutions observe the Central
Bank’s guidelines on best practices in credit risk
management and prohibition of financing to
directors, staff and their interested corporations
to prevent abuses, conflicts of interests and
irregular practices.
•
Strong corporate governance is essential to
ensure that Islamic banking institutions are
managed by competent management who are
able to provide the strategic direction for the
institution as well as manage the operations of
Islamic banking institutions in an effective and
prudent manner. Islamic banks adhere to the
Central Bank’s guidelines on corporate
governance pertaining to the appointment of
directors, the structure of the board, limitation
on the number of directorships of directors and
chief executive officers, code of conduct for
directors and employees of banking institutions
as well as guidelines on minimum audit
standards. To further strengthen the corporate
governance structure of Islamic banks,
additional measures were introduced in 2003
requiring Islamic banks to establish a nominating
committee, remuneration committee and risk
management committee to ensure that the
shareholders play a more active role in
overseeing the effectiveness of the board of
directors and management. The guidelines
highlighted the roles and responsibilities of
independent directors, which include inter alia,
to provide effective oversight and enhance the
independence of the board. The guidelines also
specified the minimum qualifications and
training requirements for directors.
•
In the preparation of financial statements,
Islamic banks are required to observe the
Guidelines on the Specimen Reports and
Financial Statements for Licensed Islamic Banks
(GP8-i). The IBS banks disclose their Islamic
banking operations in the Notes to the Accounts
of the principal financial statements as part of
GP8 of the conventional banks. To further
enhance transparency in the derivation of the
rate of return in Islamic banking business,
Islamic banking institutions are required to
observe a standard framework for the
calculation of the rate of return.
•
Another important dimension in Islamic banking
operations is Shariah compliance. Under the IBA,
Islamic banks need to establish Shariah advisory
bodies. Central to these bodies is the Shariah
Advisory Council (SAC) at Bank Negara Malaysia
as the sole authority to decide on Shariah
matters on Islamic banking and financial
business that fall under the purview of the
Central Bank. The SAC at Bank Negara Malaysia
also serves as the ultimate reference for Shariah
ruling in court proceedings on Islamic banking
and finance cases.
•
The Anti-Money Laundering Act 2001 (AMLA)
and guidelines on money laundering and “know
your customer policy” protect the Islamic
banking system from money laundering
activities. AMLA provides comprehensive laws
for the prevention, detection and prosecution of
money laundering, the forfeiture of property
derived from, or involvement in money
laundering and the requirements for record
keeping and reporting of suspicious transactions
by Islamic banking institutions.
•
To reinforce the regulatory framework that has
been established to preserve financial stability,
Islamic banking institutions are subject to a
rigorous supervisory framework. Supervisory
activities emphasise the vigilant monitoring of the
financial condition and soundness of Islamic
banking institutions, the adoption of pre-emptive
strategies to address any adverse trend or
weakness identified and the instilling of best
practices to enhance corporate governance
structures as well as risk management systems.
The supervisory process is premised on a forward-
looking proactive risk-based model encompassing
both dynamic off-site surveillance and on-site
examinations. The off-site surveillance process
includes the review and approval of financial
statements to ascertain compliance with Bank
Negara Malaysia’s guidelines as well as close
monitoring of Islamic banking institutions
through regular reporting and rigorous financial
and non-financial analysis for early detection of
any emerging problems. In 2003, on-site
examinations were conducted on the Islamic
banks, comprising the head offices, local and
offshore branches, based on the CAMELS rating
framework. In addition, stress testing remains an
on-going exercise where the Islamic banking
institution’s current financial condition is
subjected to simulated stress under alternative


186
adverse scenarios in order to detect potential
areas of vulnerability. The results of this stress test
form the basis for the implementation of pre-
emptive actions.
Global Integration of Islamic Financial System
The significant progress achieved by the domestic
Islamic financial system has set the stage for its
integration with the global market place. The
initiatives on the global front to position the Islamic
financial system as a credible component of the
global financial system will contribute to further
strengthen the development of the domestic Islamic
financial system.
•
The establishment of the Islamic Financial Services
Board (IFSB) in Kuala Lumpur to develop
international prudential regulatory standards in
accordance with the distinct features and risks of
Islamic financial institutions will contribute towards
ensuring the soundness and stability of the Islamic
financial system. Since its establishment in 2002,
the IFSB has attracted wide participation. As at
end-2003, the number of IFSB members has
and facilitate efficient liquidity management by
Islamic financial institutions. Malaysia
spearheaded the issuance of the first sovereign
global Islamic sukuk to give impetus to the
development of the IIFM. The global Islamic
bond served as a benchmark and catalyst that
spurred the issuance of subsequent global
Islamic bonds. The development of Islamic
finance as an important niche activity in
Malaysia’s International Offshore Financial
Centre in Labuan complements the development
of the IIFM in the issuance, listing and trading of
foreign currency-denominated Islamic financial
instruments as well as in forging linkages with
other Islamic financial centres to further expand
the global reach of Islamic banking and finance.
POLICY THRUST IN 2003
In tandem with the overall objective of the FSMP to
create an efficient, progressive and comprehensive
Islamic financial system that can contribute
significantly to the effectiveness and efficiency of the
Malaysian financial sector, the Islamic financial policy
The Islamic financial policy thrust in 2003 continued to be directed
at further strengthening the fundamental underpinning
foundations of the Islamic banking system to support the sound
and progressive development of the Islamic banking industry.
increased to 13 full members, three associate
members and 20 observer members. The IFSB has
made progress in developing prudential standards
on capital adequacy and risk management and will
commence preparation of an additional standard
on corporate governance. The participation of the
International Monetary Fund, the World Bank, the
Asian Development Bank and the Bank for
International Settlements in the IFSB will enhance
co-operation towards achieving the common goal
of international monetary and financial stability.
•
The establishment of the International Islamic
Financial Market (IIFM) in 2002 constitutes part
of the overall efforts to strengthen the efficacy
of the Islamic financial system as a component
of the global financial system in achieving
balanced growth and development. The IIFM
provides the infrastructure to facilitate the
mobilisation of foreign capital according to
Shariah principles, stimulate the creation and
trading of Islamic financial instruments, enhance
investment opportunities for global investors
thrust in 2003 continued to be directed at further
strengthening the fundamental underpinning
foundations of the Islamic banking system to support
the development of a sound and progressive Islamic
banking industry. The focus was on strengthening the
institutional financial infrastructure, enhancing the
regulatory framework, strengthening the Shariah and
legal infrastructure as well as enhancing intellectual
capital development and consumer education.
Strengthening Institutional Financial
Infrastructure
Institutional Development
A comprehensive and well-developed financial
infrastructure is key to enhancing the capacity and
effectiveness of the Islamic banking system
premised on its own principles, uniqueness and
characteristics.
•
One feature of a well-developed financial
infrastructure is the diversity of the players,
including the participation of foreign players in
the Islamic financial landscape. Cognisant of this,


187
The Islamic Financial System
Bank Negara Malaysia has brought forward the
liberalisation of the Islamic banking sector. The
presence of full-fledged foreign Islamic banks in
Malaysia will generate spill over effects that will
enhance product diversity, spur financial
innovation and support the overall development
of the Islamic financial system. It will also act as a
bridge between Malaysia and other global Islamic
financial markets, thus providing the enabling
environment for Malaysia to become a regional
hub for Islamic banking and finance.
•
As the domestic Islamic banking industry
progresses into a more advanced stage of
development, significant developments are
shaping the industry’s financial regulatory
infrastructure, both on the domestic and
international fronts.
•
On the domestic front, these included the
emergence of a different set of accounting
standards for Islamic financial business to be
issued by the Malaysian Accounting
Standards Board (MASB) and the introduction
of the Deposit Insurance Scheme.
•
On the international front, the Islamic
Financial Services Board (IFSB) will be issuing
a specific set of prudential regulatory and
supervisory standards to govern Islamic
banking operations globally.
•
Against this backdrop, Bank Negara Malaysia has
conducted a review of the existing “window”
institutional structure of the IBS banks to prepare
an enabling structure that can assimilate these
developments and thus strengthen the prudential
regulatory and supervisory regime.
Risk Management
The enhancement of risk management capabilities of
the Islamic banking institutions is another important
aspect in developing the institutional financial
infrastructure.
•
A variable rate financing product under the concept
of bai’ bithaman ajil (deferred payment sale) was
introduced in 2003 as an instrument to diversify the
financing portfolio of the Islamic financial
institutions from over-reliance on fixed-rate
financing as well as to mitigate the risk associated
with funding mismatch.
•
Moving forward, to complement the bai’
bithaman ajil (BBA) floating rate financing
Introduction of Islamic Variable Rate Mechanism
A significant achievement was made in 2003 in the area of risk management when the first variable
rate financing product was developed for the Islamic banking industry under the concept of bai’
bithaman ajil (deferred payment sale), or in short, BBA. This Shariah-compliant product was structured
by a working group comprising representatives from Bank Negara Malaysia and the industry to enable
the Islamic financial institutions which operate in a dual banking environment to constantly match the
current market financing rate in order to provide matching returns to their depositors, thereby
alleviating any mismatch risk. By doing this, the Islamic financial institutions are able to receive varying
income streams from their financing activities, which will be distributed to the depositors at a more
competitive rate.
The new instrument is an alternative to the existing mode of financing portfolio which is predominantly
fixed-rate in nature. In recent developments, the high leverage on fixed-rate financing became a topical
issue in Islamic banking as there has been an inadequate hedging mechanism through which Islamic
financial assets could grow and be protected from exposure to fluctuations in the financing rate. As at
end-December 2003, total fixed-rate financing accounted for 87.8% of total Islamic financing and a
large proportion of this financing, namely, house and other property financing-i and term financing-i,
were predominantly on a longer term tenure, constituting 58.8% of total Islamic financing, as shown in
Graph 1. (The current method of variable rate financing offered by a few Islamic financial institutions is
impractical as it involves multiple sub-agreements to reflect a change in the rate).
This fixed-rate regime has resulted in a funding mismatch to the Islamic financial institutions because
their long-term financing was funded by short-term bank deposits which can give variable returns. As


188
the banks had locked in their profit rates for the financing over a long period, any upward movement in the
market rates, therefore, may result in the Islamic banking institutions finding it difficult to give a satisfactory
return to their depositors. This is because the constant income stream from the financing is tied to a fixed
profit rate which is relatively lower when compared to a conventional floating rate loan whose rate has risen.
Inevitably, this situation would cause a switching of Islamic funds to conventional funds.
The variable rate financing is designed to mitigate the mismatch risk currently faced by the Islamic
financial institutions by allowing them to vary the profit rate for the financing in order to raise the
deposit rates. As a result, the depositors will obtain satisfactory returns vis-à-vis that in the conventional
banking market, and hence, would not switch their deposits which otherwise could adversely affect the
Islamic banking operation. This new option reduces the vulnerabilities of the Islamic financial institutions
to exposure in market risk in a banking environment where the Islamic banking system and
conventional banking system operate side-by-side.
The variable rate financing is an innovation to the existing BBA financing concept which is fixed-rate in
nature. Under the BBA, the selling price of the asset sold to the customer on deferred terms would be
fixed at a profit rate known as the ceiling profit rate which is higher than the profit rate under the fixed-
rate BBA financing where, in principle, the contractual selling price and instalments would be higher.
However, rebate known as ibra’ (a waiver of right to claim unearned profit) is required to be granted at
every instalment, for example on a monthly basis, in order to reduce the monthly instalments to match
that of the current market level.
As illustrated in Graph 2, the financing is created upon the bank purchasing the asset from the customer for
cash which will be immediately sold back on deferred terms. Computed at a ceiling rate of 12% per annum
as in the example, the selling price (which is higher than under BBA fixed financing) will be agreed upon and
the contractual repayment is to be made in equal monthly instalments of RM2,000 over the agreed period. If
the base lending rate (BLR) plus margin used as benchmark in the pricing calculation is 10% per annum for
the first month, the bank would give a monthly rebate of RM500, which represents the difference between
the ceiling profit rate of 12% per annum and effective profit rate of 10% per annum. If in the fourth month,
the market rate rises to 11% per annum, the bank would then only grant a monthly rebate of RM300.
Graph 1 
Total Financing by Mode of Financing as at end-2003
Other fixed-rate 
financing 
32.6%
Fixed-rate hire 
purchase 
29.0%
Fixed-rate house 
financing 
26.2%
Floating rate 
financing 
12.2%


189
The Islamic Financial System
In practice, the rebate would be varied so that the effective profit rate (ceiling profit rate less rebate)
reflects the fluctuating market financing rate. Accordingly, the bank would be able to raise the
financing rate when there is a rise in market rate, hence, it can give better returns to its depositors. As
such, this justifies the setting of a high ceiling profit rate to buffer any rise in the market rate. However,
if the market rate rises beyond 12% per annum, the effective profit rate would remain at the ceiling
rate. The ceiling rate would provide some comfort to the customer that the effective profit rate would
be capped at that rate.
To govern this mode of financing, such rates are subject to a ceiling profit rate of four percentage point
above the market’s BLR unless supported by findings that the market rate is forecasted to be volatile
and escalating. In setting the effective profit rate, the banks are required to observe the maximum profit
spread of 2.5 percentage point above the BLR. However, as a matter of policy, the effective profit rate
cannot transgress the ceiling profit rate even if the market rate rises above the latter, while any change
to the effective profit rate would need to be communicated to the customer prior to the change.
At maturity, any difference in the amount between the selling price and the total repayments plus the
monthly rebates granted, would be rebated. In addition to the rebates on instalments and at maturity
which have been made mandatory to be included in the financing agreement, rebates must also be
granted in the event of early settlement or redemption, or termination of contract. Bank Negara
Malaysia has allowed rescheduling of the financing (where the period of financing can be extended) if
the bank wishes to grant the option that the effective monthly instalment need not be increased if the
effective profit rate rises, on the condition that the financing agreement contains a rescheduling clause
and the total repayments are not in excess of the original selling price. The computation of capital
adequacy for the BBA variable rate financing will be accorded the same risk-weight as under the BBA
fixed-rate financing.
Currently, this new mode of financing is applicable to house, property and term financing only and
would be extended to other types of financing in due course. Undoubtedly, this new product is
expected to grow significantly as it is a natural hedging product, particularly in view of the risk exposure
issues prevalent in Islamic banking today.
Unearned
profit
Bank’s
purchase
cost
Graph 2
BBA Variable Rate Financing
Financing tenure (e.g. months)
Monthly 
rebates 
granted
Actual 
total
repayments 
= 
purchase 
cost 
+ 
earned 
profit
Profit
rate
(%)
12
11
10
End of tenure
Contractual 
agreement
Ceiling rate
2,000
1,700
1,500
Selling price 
under BBA 
fixed financing
Unearned 
profit
RM
Higher 
selling 
price 
under 
BBA 
variable 
rate
Bank’s 
purchase 
cost
1             2            3             4             5  . . . . .
Monthly rebate given at each instalment 
Effective monthly instalments


190
mechanism, another variable rate financing
product based on the concept of ijarah muntahia
bittamleek (leasing ending with ownership) is
being explored.
Enhancing Regulatory Framework
The growing significance of the Islamic banking industry
requires the development of an effective regulatory
framework to provide the enabling environment to
support the development of the industry.
•
In 2003, Bank Negara Malaysia conducted a
review on the Framework of the Rate of Return.
The purpose was to further strengthen the
methodology for deriving the rate of return to
depositors, whereby the revised framework is to
provide a greater degree of flexibility in the
implementation of the framework.
•
The Guidelines on the Specimen Reports and
Financial Statements for Licensed Islamic Banks
(GP8-i) was issued in August 2003. The objective
was to promote consistency and standardisation
amongst the Islamic banks in complying with the
provisions of the IBA and approved accounting
standards, specifically MASB i-1 and the Shariah
requirements. The Guidelines prescribed the
minimum requirements of the financial statements
that the Islamic banks need to disclose.
•
In the development of accounting standards for
Islamic financial business, the Malaysian Accounting
Standards Board has embarked on the preparation
of standards on leasing (ijarah), deferred payment
sale (BBA) and cost-plus (murabahah) in relation to
the recognition, measurement and disclosure of
these Islamic financial transactions.
The Framework of the Rate of Return
Towards standardising the methodology on the calculation of distributable profits and the derivation of
the rates of return to depositors in Islamic banks, Bank Negara Malaysia introduced the “Framework of
the Rate of Return”. Among others, the objectives of the framework are to: -
(i)
Set the minimum standard in calculating the rates of return;
(ii) Level the playing field and provide the terms of reference for the Islamic banking institutions (IBIs) in
deriving the rates of return; and
(iii) Provide Bank Negara Malaysia with an effective yardstick to assess the level of efficiency of
the IBIs.
Prior to the introduction of the framework, the IBIs adopted various methods in deriving the rates of
return. Such practice has led to large variations in the results and implications. For example, some IBIs
include all types of income in their computation while some exclude certain type of incomes. These
variations have led to the following impediments in terms of: -
(i)
Assessment of the rates of return by Bank Negara Malaysia specifically to ascertain whether the
rates genuinely reflect the true performance of the IBIs or otherwise;
(ii) Regulation and supervision by Bank Negara Malaysia, particularly in assessing the prudence and
fairness in the distribution of profits to the depositors; and
(iii) Assessment by the IBIs of their funding cost, which in turn led to the distortion of rates of return in
the retail and inter-bank markets.
The standardisation of the rates of return was also aimed at addressing the information asymmetry
between the IBIs and the depositors by enhancing the level of transparency and ensuring that
depositors would receive fair returns on their investment. The framework would detail the items, for
example, the income and expense items that need to be reported and incorporated for the purpose of
the calculation. In particular, the calculation table lists the expense items that need to be shared by the
depositors and the bank; and items that are to be solely borne by the bank.
The introduction of the framework is also to effectively support the application of mudharabah (profit-
sharing) contract in Islamic banking deposit-taking activities. Unlike conventional banking, which is


191
The Islamic Financial System
based on a lender-borrower relationship, the mudharabah contract is based on an investor-
entrepreneur relationship. In this system, the depositor assumes the role of capital provider while
the bank assumes the role of the entrepreneur. The depositors’ funds are utilised for financing and
investment activities, and the profits generated from these activities are shared between the
depositor and the bank based on the pre-agreed profit sharing ratio. In the event of a loss, it will
be borne by the depositors. As the bulk of the deposits in Islamic banking are in the form of
mudharabah deposits, it places a higher degree of fiduciary risk on the management of the IBIs to
ensure that the funds are utilised in the most efficient manner, as profits generated from the
financing and investments are distributed to the depositors in the most equitable manner. Towards
this end, the framework was introduced, not only to standardise the methodology for the
calculation of returns, but also to ascertain the actual and fair distribution of income to the
depositors.
The Framework
The Framework of the Rate of Return comprises two main components, that is, the calculation and
distribution tables. The calculation table prescribes the income and expense items that need to be
reported and sets out the standard calculation in deriving the net distributable income. Among the
important items in the calculation table is the provisions. Prior to the issuance of the framework,
the provisions of the banking institutions participating in the Islamic Banking Scheme (IBS banks)
were provided by the conventional banking operations. Under conventional banking operations, the
provisions are solely borne by the bank. However, under the framework, the IBS banks are required
to distinguish their general and specific provisions, in accordance with the mudharabah contract,
whereby the provisions in Islamic banking operations are shared by both the depositors and the
bank.
The calculation table also introduced a new item known as Profit Equalisation Reserve (PER).
The PER is an item that acts as a mechanism to mitigate the fluctuation of rates of return arising
from the flux in income, provisioning and total deposits. This would ensure that the rates of return
of the IBIs remained competitive and stable. The PER is appropriated out of the total gross income
and is shared by both the depositors and the bank.
The second component of the framework is the distribution table. The table sets out the
distribution of the net distributable income, derived from the calculation table among demand,
savings and general investment deposits according to their structures (mudharabah or non-
Table 1
Calculation Table
RM million
Income generated from asset items
(+) Net trading income
(+) Other income
Total gross income
(-) Provisions and income-in-suspense
(-) Profit equalisation reserve
(-) Direct expenses
Net gross income
(-) Income attributable to:
Specific investment account
IBCF/SHF1
Net income
(-) Income attributable to:
Amount due to designated FIs
Islamic negotiable instruments
Net distributable income
1
Islamic banking capital funds/ shareholders' funds.


192
mudharabah), maturities and the pre-agreed profit sharing ratios between the bank and depositors.
Under the framework, Bank Negara Malaysia allowed the IBIs to adopt either the weightage or
without the weightage method, primarily to accord the system capacity of the IBIs.
The IBIs are required to calculate their rates of return on a monthly basis and to declare their monthly
rates of return on a specified date. The following month would be the effective period of the
declared rates of return.
The introduction of the framework has provided the IBIs with a standard approach in deriving the
rates of return and has enhanced the level of transparency. The framework has also improved the
efficiency level of the IBIs given that the rates of return are now reflective of the business acumen of
the IBIs rather than the methodology of deriving the rates of return. The introduction of the PER has
also reduced the volatility of the rates of return of the Islamic banking industry and enabled the IBIs
to manage their portfolio more efficiently. In tandem with the introduction of the framework, the
scope of the statistical submission has been broadened further to provide Bank Negara Malaysia with
an effective measurement tool to assess the efficiency of the IBIs in terms of profitability, prudent
management and fairness.
Bank Negara Malaysia has also undertaken a review of the framework in 2003 to promote capacity
enhancement and efficiency among the IBIs in managing their business operations. While the
foundation of the framework remained unchanged, the revised framework will provide, among
others, flexibility in determining the weightage assigned to each group of deposits, the profit sharing
ratio of investment deposits, the provisioning of PER and the segregation of income from the funds
that are managed under a consolidated fund or managed separately between shareholders’ and
depositors’ funds. The reviewed framework will provide greater flexibility to the IBIs in managing their
portfolios and remain competitive in the market place.
Table 2
Distribution Table
Distributable profits
Depositors’ portion
Type of deposit
ADA1
Weightage
WADA2
RM
%
PSR3
RM
%
Current account
Savings account
GIA4
1-month
3-month
6-month
9-month
12-month
Above 12-month
NDI5
1 Average daily amount of each type of deposit.
2 Weighted average daily amount.
3 Profit sharing ratio agreed by the bank and depositors.
4 General investment account.
5 Net distributable income transferred from Calculation Table.


193
The Islamic Financial System
Guidelines on the Specimen Reports and Financial Statements
for Licensed Islamic Banks (GP8-i)
The Guidelines on the Specimen Reports and Financial Statements for Licensed Islamic Banks or GP8-i was
issued to the Islamic banks (IBs) in August 2003. It sets out the minimum requirements for the presentation
and disclosure of reports and financial statements of IBs. The GP8-i is to be adopted by the IBs for annual
accounts commencing 2004.
The objective of the GP8-i is to provide the basis for presentation and disclosure of reports and financial
statements of the IBs. GP8-i is also aimed at ensuring consistency and comparability of the reports and
financial statements amongst the IBs in complying with the provisions of the Islamic Banking Act 1983,
Companies Act 1965, Shariah requirements and other Bank Negara Malaysia guidelines. As a comprehensive
guideline, GP8-i also incorporated the new requirements of MASB standards, specifically the MASB i-1:
Presentation of Financial Statements of Islamic Financial Institutions. The standard, which came into effect in
2003, was issued to streamline the disclosure and presentation of financial statements of the IBs and the
conventional banks that participate in the Islamic Banking Scheme (IBS banks).
Prior to the issuance of the GP8-i, the IBs observed the various provisions of the Companies Act 1965, the
applicable accounting standards and the Guidelines on the Specimen Financial Statement for the Banking
Industry (GP8) which was formulated to facilitate the conventional banking operations. Some of the
requirements have been modified for the IBs, particularly those under the GP8, to reflect the Islamic banking
operations such as the disclosure on the various Shariah concepts applied in financing.
Salient Features of GP8-i
The salient features of the GP8-i, amongst others, are as follows:
a)
Performance Overview and Statement of Corporate Governance
In promoting good corporate governance, IBs are required to report their performance overview and
corporate governance practices. The performance overview requires the IBs to disclose their review on
performance, measures, business plans and strategies, whilst the statement of corporate governance requires
IBs, among others, to disclose the composition and responsibilities of the Board, internal audit and control
activities and risk management strategies and policies. These report requirements are important in providing
additional information to users in evaluating the performance and conduct of an IB.
b)
Disclosure of Shariah Advisory Board/ Committee and Zakat Obligations
The Shariah Advisory Board or Committee plays an important role in monitoring the compliance of
Islamic banking activities with the Shariah requirements. Given its importance, the IBs are required to
disclose the functions and duties of their Shariah Advisory Board or Committee in monitoring the
activities pertaining to Shariah matters under the Directors’ Report. With respect to the zakat
obligations disclosure, IBs are required to disclose the responsibility towards payment of zakat either on
the business or shareholders or on behalf of depositors.
c)
Report of the Shariah Advisory Board/ Committee
The IBs are required to report the conformity of the IB’s operations with the Shariah principles under the
Report of the Shariah Advisory Board/Committee. The Report, which is akin to the Auditors’ Report, will
enhance the credibility of the IB’s operation in complying with the Shariah principles.
d)
Profit Equalisation Reserves (PER)
PER is a mechanism introduced in the Framework of the Rate of Return to stabilise the rate of return to
depositors. Disclosure of PER would reflect the capability of the IBs in managing the level of profit
distribution to the mudharabah depositors. The IBs are required to disclose their policy on PER as well as
its movement (provision and write-back) during the financial year.


194
Product Approval
•
In tandem with the gradual progression towards
a market-driven regulatory environment, Bank
Negara Malaysia issued the Guidelines on New
Product Approval Requirements for Islamic
Banking Institutions (the Guidelines). These
replace the existing product pre-approval
requirements and came into effect on 2 January
2004. The Guidelines outline the notification and
specific approval process for new products
submitted by Islamic banking institutions.
In formulating the Guidelines, Bank Negara
Malaysia adopted the approach that “what is not
prohibited is allowed” on new Islamic banking
products. This was to provide greater clarity,
transparency and speedy product approval. For a
new product to qualify for automatic approval
(under notification process), the submission to
Bank Negara Malaysia must be made at least 21
days before its launch date. The definition of a
new product has also been widened to include an
existing approved product or service that is
applying a different or a new combination of
Shariah concepts. In addition, the Islamic banking
institutions are required to submit a detailed
explanation on the Shariah concepts used in the
product as endorsed by their Shariah committee.
This is to ensure that a thorough research on the
product has been carried out by the Islamic
banking institutions and thus, would not lead to
any detrimental effect on the customers and on
the stability of the financial system. A new product
that does not qualify for automatic approval
would require specific approval from Bank Negara
Malaysia and may require, among others, the
deliberation of the Shariah Advisory Council of
Bank Negara Malaysia. The Guidelines place
significant emphasis on self-regulation, where the
e)
Classification of Deposits from Customers and Placements from Banks and Other Financial
Institutions
The IBs are required to disclose their deposits into two categories i.e. mudharabah and non-
mudharabah deposits. As the manager of public funds, the disclosure would provide additional
information on the risk profile of the IBs’ deposits portfolio to the public.
f)
Presentation of the Income Statement
Presentation of the Income Statement of the IBs is structured to reflect the nature of the Islamic
banking operation, mainly on the application of mudharabah concept in the deposit-taking activities.
The statement discloses the incomes and expenses that are either shared by the bank and depositors or
solely belonged to the bank.
Islamic banking institutions are required to ensure
consistency of the products introduced with the
Guidelines.
•
In line with efforts to streamline the regulatory
framework of the credit card industry, Bank
Negara Malaysia issued the Credit Card-i
Guideline (the Guideline) in January 2004. This
was an extension to the Credit Card Guideline
issued to the conventional banks in March 2003.
Under the Guideline, the credit card-i can apply
either bai’ inah (sell and buy back arrangement)
or BBA (deferred payment sale) Shariah concept.
Under the bai’ inah concept, the fund for the
cardholder’s spending limit is created upon the
bank buying back the asset from the cardholder
for cash which it previously sold to the cardholder
on deferred terms. Under the BBA concept, the
fund is created upon the bank purchasing the
asset from the cardholder for cash which will be
sold back to the cardholder on deferred basis.
The Guideline also prescribes the treatment on
penalty and fee structure according to the
Shariah principles. In terms of late payment
charges, issuers of credit card-i are allowed to
impose a compensation fee on the defaulters
subject to specific terms and conditions imposed
by Bank Negara Malaysia. The terms and
conditions, among others, prohibit the Islamic
banking institutions from compounding the
compensation fee for late payment and monthly
charges. This provision was intended to protect
the customers as well as to streamline the penalty
structure of credit card-i.
Strengthening Shariah and Legal Infrastructure
One of the pre-requisites for a strong and stable
Islamic banking system is the existence of a


195
The Islamic Financial System
comprehensive Shariah and legal infrastructure. A
strong Shariah framework combined with a sound
legal structure would accelerate the pace of
development and innovation of the Islamic
banking industry.
•
As part of the efforts to strengthen the Shariah
framework for the Islamic financial industry, Bank
Negara Malaysia amended the Central Bank of
Malaysia Act 1958 (CBA) in 2003 to position the
Shariah Advisory Council (SAC) of Bank Negara
Malaysia as the sole authority on Shariah matters
pertaining to Islamic banking and finance that fall
under the purview of Bank Negara Malaysia.
With that stature, the SAC will serve as the
reference point for the court or arbitrator in
dispute resolution that involves Shariah issues on
Islamic banking and finance cases.
•
Consequent to this development, the role of the
Shariah advisory bodies and Shariah consultants at
the Islamic banks, the IBS banks and takaful
companies will be rationalised accordingly. Bank
Negara Malaysia is preparing a comprehensive
guideline on the new structure, roles and functions
of the Shariah committees of the Islamic banks, the
IBS banks and the takaful operators. The guideline
would specify among others, the requirements for
the appointment of the Shariah committee
members. In this regard, the Islamic financial
institutions are required to seek Bank Negara
Malaysia’s approval prior to the appointment of the
Shariah committee members. The duties and
responsibilities of the Islamic financial institutions
would also be outlined in order to assist the Shariah
committee in carrying out its roles and functions
effectively. The guideline is expected to be issued in
the first quarter of 2004.
•
A significant development in respect of legal
infrastructure was the establishment of a
dedicated High Court to adjudicate all muamalat
cases in the Commercial Division of High Court
Kuala Lumpur. In this regard, a directive (Practice
Direction No. 1 of 2003) was issued by the Chief
Judge Malaya to all legal practitioners in the
country to register Islamic banking and finance
cases at both the High Courts and the lower
courts using a special code number. The
establishment of the dedicated High Court for
Islamic banking and finance will expedite the
hearing of Islamic banking and finance cases and
further increase public confidence in Islamic
banking and finance.
•
To complement the court system, Bank Negara
Malaysia has identified arbitration as an
alternative dispute resolution mechanism for
Islamic banking and finance. Arbitration has been
acknowledged as an appropriate dispute
resolution mechanism especially for high-scale
financing facilities to reduce the court process
which can be time consuming. Towards this end,
Bank Negara Malaysia is finalising an
arrangement with an existing institutional
arbitration centre to administer Islamic banking
and finance arbitration.
•
The Financial Mediation Bureau (FMB) has been
established as a single mediation centre for both
banking and insurance, including Islamic banking
and takaful. This Bureau replaces existing bureaus
for the banking and insurance industry. The FMB
is expected to provide speedy and cost-effective
mediation for consumers to redress complaints
on products and services offered by the financial
institutions.
•
In addition to the dispute resolution mechanism,
there is also a need to create a conducive legal
environment to cater for the unique nature of
transactions in Islamic banking and finance. Bank
Negara Malaysia has formed the Law Review
Committee in June 2003, comprising
representatives from the Attorney General’s
Chambers, Ministry of Finance, Malaysian Bar
Council, industry players and legal practitioners.
The Committee will review the existing laws and
make recommendations to the relevant
authorities to enable smooth execution of Islamic
banking and financial contracts. The review
covers tax and stamp duty laws, company laws,
land laws and procedural laws.
Enhancing Intellectual Capital Development and
Consumer Education
The creation of a large pool of talented bankers is
critical for the development of a dynamic and
competitive Islamic banking industry.
•
To achieve this objective, Islamic Banking and
Finance Institute Malaysia (IBFIM) has been
earmarked to spearhead efforts to create the
pool of bankers who are both knowledgeable
and competent in Islamic banking and finance. In
this respect, IBFIM will focus on enhancing its
capacity in three key areas encompassing
education and training, consultancy and advisory
as well as research and publications.


196
•
As part of the objective to elevate consumer
education and awareness in Islamic banking and
finance, the Association of Islamic Banking
Institutions Malaysia, under the auspices of Bank
Negara Malaysia, organised the Islamic Banking
and Takaful Week (IBTW 2003) from 26
September to 2 October 2003. Activities
organised during the week included a three-day
exposition on Islamic banking and finance.
•
In conjunction with the IBTW 2003, Bank Negara
Malaysia, together with participating Islamic
financial institutions, jointly hosted the
production of a television documentary
programme on Islamic banking and finance,
entitled “Kewangan Islam” (Islamic Finance). The
11-episode documentary programme, produced
by a local broadcasting station, portrayed the
development of the Islamic financial system in
Malaysia as well as products and services offered
by the Islamic financial institutions.
To further increase public literacy in Islamic
banking and finance, information booklets were
published on “What is Islamic Banking?” and
“House Financing-i” as part of the Consumer
Education Programme through “BankingInfo”.
The booklets provide consumers with basic
knowledge and understanding on Islamic
banking, the underlying Shariah principles and
concepts, the range of Islamic banking products
and services as well as information on the
mechanics of house financing based on Shariah
principles.
PERFORMANCE OF THE ISLAMIC BANKING
SYSTEM
The Islamic banking industry continued to register
strong expansion during the year with increasing
market share in terms of assets, financing and
deposits of the total banking system. The improved
performance was characterised by strong
capitalisation levels attributable to increases in capital
and profits as well as higher financing activities with
significant growth in financing for the purchase of
transport vehicles and residential property. In
addition, asset quality recorded further improvement
with a declining trend in net non-performing
financing ratio and high financing loss provisions.
Capital Strength
The total capital base of the Islamic banking
institutions increased from RM5.1 billion as at end-
2002 to RM6.8 billion as at end-2003. New capital
injections contributed RM1 billion to the increase in
capital base in 2003 whilst the audited profits
contributed another RM414.6 million. The new
capital injections were due to the participation of a
merchant bank in the IBS and the maintenance of
adequate capital by IBS banking institutions.
In tandem with the new capital injection, total tier-1
capital increased by RM1.4 billion or 31.1% to
RM5.9 billion, while total tier-2 capital recorded an
increase of RM215.9 million following an increase in
general provision for bad and doubtful financing. As
at end-2003, the Islamic banking system recorded a
strong risk-weighted capital ratio (RWCR) of 13.1%
and core capital ratio of 11.4%.
%
RM billion
Graph 5.1
Islamic Banking System: 
Capital Adequacy in 2003
Core capital ratio (%)
Month
Risk weighted 
capital ratio (%)
Capital base
0
2
4
6
8
10
12
14
16
J
F
M
A
M
J
J
A
S
O
N
D
0
1
2
3
4
5
6
7
8
Table 5.2
Islamic Banking System: Sources and Uses of
Funds
Annual change
 As at end
2002
2003p
2003p
RM million
Sources
Capital and reserves
1,269
2,081           6,784
Deposits
6,200
6,906         60,212
Funds from other financial
institutions
271
2,541           6,985
Other liabilities
1,401
2,598           8,215
Total
9,141
14,126         82,196
Uses
Cash
39
15              255
Reserve with
Bank Negara Malaysia
318
321           1,517
Deposits with other financial
institutions
-3,767
1,247           8,982
Financing
8,517
11,897         48,615
Securities
4,014
3,277         22,554
Other assets
20
-2,631
273
p Preliminary


197
The Islamic Financial System
The RWCR of Islamic banks and IBS commercial
banks stood at 11.8% and 14.3% respectively. The
RWCR of the IBS merchant banks as a group
increased from 10.9% to 13.5% due to the increase
in the Islamic banking fund by two merchant banks
amounting to RM80 million as well as the
participation of an additional merchant bank in the
Islamic Banking Scheme. As for the IBS finance
companies, the capital base increased by 33.2% or
RM479 million to RM1.9 billion during 2003.
Meanwhile, the risk-weighted assets expanded by
47.9% or RM4.9 billion to RM15.1 billion, mainly
from hire purchase financing, which resulted in a
marginal decline in the RWCR by 1.4 percentage
point to 12.7%.
Total risk-weighted assets of the Islamic banking
system grew by 24.4% or RM10.1 billion to RM51.5
billion as at end-2003. The increase was seen across
the risk categories except for the 10% category
where there was reduction in interbank placements
with discount houses and Cagamas mudharabah
bonds held. A large increase was recorded in the
100% and 50% risk categories (RM8.3 billion and
RM2.9 billion respectively) due to other financing and
end-financing of residential properties.
Reflective of the strong capital position of the Islamic
banking system in 2003, the RWCR and core capital
ratio of the system remained consistently above 11%
and 9% respectively throughout the year.
Assets
As at end-2003, the total assets of the Islamic
banking sector increased by RM14.1 billion or 20.8%
to RM82.2 billion. A significant portion of the
increase in total assets was attributable to the
growth in total financing of IBS commercial banks
(33.6%) and IBS finance companies (56.7%),
constituting 78.3% of total financing. As in previous
years, a notable trend observed during the year was
the shift of funds from interbank deposits to
investment in securities to secure a higher rate of
return. Investment in securities of RM22.6 billion
accounted for 27.4% of total assets and marked an
increase by RM3.3 billion or 17% during the year. In
terms of market share, the largest portion of Islamic
banking assets remained with the IBS commercial
banks with a share of 44.8%, followed by Islamic
banks (25.5%) and the IBS finance companies
(21.8%). In terms of the growth in assets, IBS finance
companies recorded the highest growth of 41.6%,
followed by IBS commercial banks (26.5%) and
merchant banks (20%).
Financing Activities
Total financing extended by the Islamic banking
system expanded by 32.4% or RM11.9 billion (2002:
30.2% or RM8.5 billion). The growth in financing was
largely attributable to the significant growth in the
financing for the purchase of passenger vehicles and
residential property of 60.8% and 33.3% respectively.
The higher consumer demand was further expanded
by the attractive and competitive financing packages
offered by the Islamic banking institutions. Financing
based on bai’ bithaman ajil (deferred payment sale)
concept remained dominant, constituting 47.7% of
total financing while ijarah thumma al-bai’ (hire
purchase) constituted 27.6%.
Against the backdrop of strong demand from
consumer spending and corporate financing, the
value of financing applications received by the Islamic
banking institutions in 2003 increased by 8.8% to
RM26.3 billion. Responding to the strong demand
for new financing, RM16.7 billion of new financing
was approved during the year, whilst disbursements
posted a growth of 49.5%. Meanwhile, financing
Table 5.3
Islamic Banking System: Direction of Financing
 
Annual change
As at end
2003p
2002
2003p
RM million
Agriculture, hunting,
forestry and fishing
-45.6
267.6       1,861.6
Mining and quarrying
10.5
-11.0            63.5
Manufacturing
807.8
505.6       4,386.8
Electricity, gas and water
-9.9
-284.8          248.9
Community, social and
personal services
-139.2
89.4          303.3
Broad property sector
4,953.2
4,747.0
20,482.7
Real estate
103.5
142.6          811.9
Construction
579.9
 655.3       2,933.5
Purchase of residential
property
3,916.9
3,581.4     14,344.2
Purchase of
non-residential property
353.0
367.7       2,393.1
Wholesale and retail trade,
restaurants and hotels
251.2
410.6       1,797.0
Transport, storage and
communication
61.8
199.5       1,024.3
Finance, insurance
and business services
42.2
661.6       1,933.3
Purchase of securities
62.4
-14.1          920.9
Consumption credit
2,474.5
5,584.9
14,872.1
Credit cards
57.5
95.7          156.2
Personal uses
374.7
575.5      1,637.1
Purchase of consumer
durables
8.1
-9.2
54.1
Purchase of transport
vehicles
2,034.1
4,922.9
13,024.7
Others
47.5
-258.7
720.9
Total
8,516.4
11,897.6     48,615.3
p Preliminary


198
repayments increased by 26.3% during the year. On
average, RM3 billion of financing were disbursed
monthly in 2003, compared with RM2 billion in
2002. Given the favourable economic outlook,
strong capital position and ample liquidity in the
as at end-2003. Islamic financing contributed 7.5%
of the total financing extended by the banking
system to the SMEs as at end-2003 as compared to
4.7% as at end-2002.
Asset Quality
The asset quality of the Islamic banking industry
continued to improve during the year. As at end-
December 2003, the gross and net NPF ratios stood
at 8.6% (2002: 8.9%) and 5.5% (2002: 5.7%)
respectively based on a 6-month classification. The
net NPF ratio of the Islamic banking institutions was
sustained within the range of 5.3% to 5.6%
throughout the year. Financing loss coverage
remained high at 53.7% of total NPF as at end-
December 2003. In terms of absolute amount,
financing loss coverage increased to RM2.4 billion
from RM2 billion in 2002. The income-in-suspense,
general provision and specific provision set aside by
Islamic banking institutions increased by 43.7%,
33.7% and 3.9% respectively during the year.
Overall, the average general provision for Islamic
banking industry stood at 1.9% of total net financing
reflecting the prudent stance of a number of Islamic
Other Islamic 
concepts 
16.0%  
Musyarakah 
0.5%
Murabahah 
6.2%
Istisna' 
0.6%
Ijarah 
1.4%
Bai' Bithaman Ajil 
47.7%
Ijarah Thumma 
Al-Bai' 
27.6%
Graph 5.2
Islamic Banking System: 
Financing Concepts as at end-2003
Given the favourable economic outlook, strong capital position
and ample liquidity in the Islamic banking system, the Islamic
banking institutions are well positioned to sustain the growth
momentum in financing activities in 2004.
banking institutions in setting aside higher provisions
for financing. This was further reinforced through the
separate apportionment of general provision for the
Islamic banking financing portfolio of IBS banks
following the introduction of the standard
framework for the calculation of the rate of return.
Islamic banking system, the Islamic banking
institutions are well positioned to sustain the growth
momentum in financing activities in 2004.
The Islamic banking sector also focused on providing
financing to small and medium-sized enterprises
(SMEs). The total financing provided by the Islamic
banking institutions to the SMEs increased by 77.1%
from RM3.5 billion as at end-2002 to RM6.2 billion
0
2
4
6
8
10
12
14
16
18
%
2000
2001
2002
2003
1 Based on actual classification
Graph 5.3
Islamic Banking System: 
Net Non-performing Financing Ratio1
Islamic banking system
Commercial banks
Merchant banks
Islamic banks
Finance companies
Table 5.4
Islamic Banking System: Financing Activities
For the year
Annual change
2002
2003p
(%)
RM million
Financing approvals
       12,310      16,739
        36.0
Financing disbursements
       24,187      36,162
        49.5
Financing repayments
       20,776      26,241
        26.3
As at end
Annual change
2002
2003p
(%)
RM million
Outstanding financing
       36,718      48,615
        32.4
p Preliminary


199
The Islamic Financial System
The broad property sector continued to account for
the largest share, at 62.3% of the total NPF (2002:
59.7%). The high NPF in the broad property sector
reflected the increase of NPF in the residential
property and construction sectors of RM451 million
and RM174.5 million respectively. In addition, there
was also an increase in NPF in transport, storage and
communication sector of RM108.2 million.
Rates of Return
The rates of return on investment deposits were
influenced by the asset yield, asset quality and the level
of total deposits of the Islamic banking institutions.
During the year, in tandem with favourable financing
growth and asset quality, the rates of return to the
investment account depositors recorded stable
2.00
2.50
3.00
3.50
4.00
J
F
M
A
M
J
J
A
S
O
N
D
Month
(%)
Graph 5.4
Islamic Banking System:
Trend of Rate of Return to Depositors
1-month
3-month
6-month
12-month
Table 5.5
Islamic Banking System: Non-performing Financing and Financing Loss Provisions
As at end
2002
2003p
Classification
Classification
3-month
6-month
3-month
6-month
RM million
Islamic banks
General provisions
209.1
       209.1
       209.1
       170.5
       170.5
       170.5
Income-in-suspense
133.2
       142.2
       133.2
       178.2
       186.9
       178.2
Specific provisions
 395.4
       436.4
       395.4
       406.7
       434.9
       406.7
Non-performing financing
1,396.4
    1,933.0
    1,396.4
    1,575.5
    2,002.2
    1,575.5
Net NPF ratio (%)3
10.1
         15.8
         10.1
         10.8
         15.1
         10.8
Total provisions/ NPF (%)
52.8
         40.8
         52.8
         47.9
         39.6
         47.9
Commercial banks2
General provisions
250.0
       226.5
       247.9
       400.9
       379.7
       300.8
Income-in-suspense
113.0
         78.1
       111.4
       213.3
       130.1
       207.1
Specific provisions
222.4
       222.4
       222.3
       280.3
       284.4
       309.3
Non-performing financing
 1,300.0
    1,604.2
    1,085.0
    1,991.7
    2,274.4
    1,653.7
Net NPF ratio (%)3
 5.9
           7.9
           4.6
           6.9
           8.5
           5.2
Total provisions/ NPF (%)
45.0
         32.9
         53.6
         44.9
         34.9
         49.4
Finance companies2
General provisions
202.2
       202.2
       202.2
       316.7
       316.6
       318.7
Income-in-suspense
129.8
       158.7
       126.3
       150.8
       155.8
       149.8
Specific provisions
279.4
       748.9
       238.3
       274.9
       296.7
       274.5
Non-performing financing
751.5
       919.0
       671.1
       832.3
    1,058.7
       805.1
Net NPF ratio (%)3
3.6
           0.1
           3.2
           2.7
           4.0
           2.5
Total provisions/ NPF (%)
81.4
       120.8
         84.5
         89.2
         72.6
         92.3
Merchant banks2
General provisions
12.2
         12.2
         12.2
         12.1
         12.1
         12.1
Income-in-suspense
15.6
         15.6
         15.6
         20.6
         20.7
         20.6
Specific provisions
33.6
         33.6
         33.6
           5.4
           5.4
           5.4
Non-performing financing
127.7
       127.7
       127.7
       125.6
       128.3
       125.6
Net NPF ratio (%)3
10.4
         10.4
         10.4
         13.2
         13.5
         13.2
Total provisions/ NPF (%)
48.1
         48.1
         48.1
         30.3
         29.8
         30.3
Islamic banking system
General provisions
673.5
       649.9
       671.3
       900.2
       879.0
       802.0
Income-in-suspense
 391.7
       394.6
       386.6
       562.9
       493.5
       555.6
Specific provisions
930.7
    1,441.3
       889.6
       967.2
    1,021.4
       995.8
Non-performing financing
3,575.5
    4,583.9
    3,280.2
    4,525.1
    5,463.6
    4,159.9
Net NPF ratio (%)3
6.4
           7.9
           5.7
           6.4
           8.4
           5.5
Total provisions/ NPF (%)
55.8
         54.2
         59.4
         53.7
         43.8
         56.6
1
Financing classified as NPF based on individual banking institution’s NPF classification policy i.e. 3-month or 6-month classification.
2
Refers to Islamic banking portfolio of conventional banking institutions participating in Islamic Banking Scheme and represents a subset of the figures reported under
the total banking system for commercial banks, merchant banks and finance companies.
3
Net NPF ratio = (NPF less IIS less SP) / (Gross financing less IIS less SP) x 100%.
p Preliminary
Actual1
Actual1


200
movement across the different tenures. The rates for 1-
month and 3-month ranged between 2.56% to 2.72%
and 2.63% to 2.85% respectively. The stable
movement was also influenced by the changes made to
the profit sharing ratio of each deposit tenure and the
existence of the Profit Equalisation Reserve that enabled
Islamic banking institutions to manage the volatility of
the rates.
Profitability
In line with the moderate growth in total financing, the
Islamic banking sector recorded an increase in net
finance income of RM555 million at the operating level.
Notably, the non-finance income of the Islamic banking
sector registered an increase of RM232 million or
46.9%. The Islamic banking sector posted higher profit
before provision that amounted to RM2.3 billion (2002:
RM1.7 billion). After allocating financing loss provisions,
the Islamic banking sector recorded profit before tax for
the calendar year 2003 that amounted to RM977.2
million (2002: RM947.8 million). Despite the increase in
provisions that amounted to RM1.3 billion, a higher
profit before tax was recorded as the increase in finance
and non-finance income more than offset the increase
in provisions. The higher financing loss provisions
charged by the Islamic banking institutions were partly
due to the increase in NPF and Profit Equalisation
Reserve.
Liquidity
There was ample liquidity in the Islamic banking
system throughout 2003. Total deposits recorded a
moderate growth of 13% or RM6.9 billion to reach
RM60.2 billion as at end-2003. The IBS commercial
banks and the Islamic banks accounted for the major
share (73.2%) of total deposits in the Islamic banking
sector (2002: 74.8%). The IBS merchant banks
recorded the highest growth rate in deposits (24.6%)
followed by the IBS finance companies (20.6%).
Investment deposits (general and special) continued
to capture a major portion of the deposits,
accounting for 58.5% of the total. During the year,
savings and demand deposits grew by 26.6% and
19.6% respectively mainly due to the increase in the
retail customer base. In terms of the maturity profile
of general investment deposits, 52.6% of the general
investment deposits continued to be concentrated at
the shorter end of the spectrum, mainly in the one-
to three-month tenure as the incremental return
between the shorter and longer placement tenures
remained small. The average deposit rates remained
stable in year 2003.
In terms of liquidity position, the two Islamic banks
had sufficient liquidity to meet any unexpected
withdrawals for a period of up to one month. This
represented surplus liquidity above the minimum
requirement of 3% and 5% for the up-to one-week
and one-week to one-month time buckets
respectively. The financing-to-deposits (FD) ratio of
Table 5.7
Islamic Banking System:
Deposits by Type and Institution
 
Annual change
As at
end
2003p
2002
2003p
RM
%
RM
%
RM
million
million
million
Demand deposits
2,727
42.2
1,796
19.6  10,980
Islamic banks
834
31.9
693
20.1
4,143
Commercial banks
1,893
49.3
1,103
19.2
 6,837
Savings deposits
1,275
30.7
1,442
26.6   6,866
Islamic banks
308
21.2
190
10.8
 1,952
Commercial banks
897
42.1
1,145
37.8
 4,175
Finance companies
70
12.5
107
16.9
 739
Investment deposits
2,463
7.4
-741
-2.1  35,227
Islamic banks
909
8.9
93
0.8 11,183
Commercial banks
-1,032
-7.6 -2,351
-18.7  10,227
Finance companies
1,419
20.3
614
7.3
 9,019
Merchant banks
7
1.9
213
56.5
 590
Discount houses
1,160
49.2
690
19.6
 4,208
Other deposits
-266
-8.9
4,410
161.6
 7,139
Islamic banks
-5
-4.0
187
157.1
 306
Commercial banks
-314
-12.8
3,148
147.6
5,281
Finance companies
-59
-50.9
1,150 2,017.5
 1,207
Merchant banks
4
1.3
-46
-15.0
 261
Discount houses
108
2,160.0
-29
-25.7
84
p Preliminary
Table 5.6
Islamic Banking System: Income and Expenditure
For the
calendar year
2002 2003p
2003p
RM
RM
%
million
million
Finance income net of
income-in-suspense
3,196
3,870
674
21.1
(Income-in-suspense)
373
306
-67
-18.0
Less:
Finance expense
1,569
1,688
119
7.6
Net finance income
1,627  2,182
555
34.1
Add:
Non-finance income
495
727
232
46.9
Less:
Staff cost
199
229
30
15.1
Overheads
269
384
115
42.8
Profit before provisions
1,654
2,296
642
38.8
Less:
Financing loss & other
provisions
706
1,319
613
86.8
Pre-tax profit
948
977
29
3.1
Return on assets (%)
1.4
1.2
Return on equity (%)
20.2
14.4
p Preliminary
Annual change


201
The Islamic Financial System
the Islamic banking institutions has shown a
favourable trend. The FD ratio increased from 68.9%
as at 31 December 2002 to 80.7% as at end-2003
due to the more rapid increase in the total financing
base compared with deposits during the period.
Islamic Interbank Money Market (IMM)
During the year, liquidity in the IMM was ample. The
excess liquidity, however, was maintained at an
appropriate level following a series of liquidity
operations undertaken by Bank Negara Malaysia.
Apart from using wadiah interbank deposits to
absorb liquidity, the RM2 billion worth of
Government Investment Issues (GIIs) and RM1 billion
in Bank Negara Negotiable Notes (BNNNs) were
issued, which helped stabilise liquidity conditions.
The active management of the surplus liquidity
position through the issuance of government and
Bank Negara Islamic papers has correspondingly
reduced the amount of funds absorbed by Bank
Negara Malaysia through direct acceptance of
wadiah interbank deposits. The average daily amount
outstanding absorbed through wadiah interbank
deposits declined by 61.3% from RM6.2 billion in
2002 to RM2.4 billion in 2003.
The increase in the supply of GII and BNNN
contributed significantly to higher trading in these
instruments. Trading in GIIs recorded an increase of
511.9% (RM30.2 billion) and in BNNNs recorded an
increase of 300% (RM6.6 billion). The increase in the
supply of Government papers has promoted active
secondary market trading in the IMM. In addition,
Bank Negara Malaysia also introduced a new
measure whereby principal dealers are required to
perform the role of market makers for GIIs and
BNNNs. This measure has put in place the price
discovery process to facilitate trading in the primary
and secondary market.
Trading in interbank deposits and other instruments
such as trade bills in the IMM also registered
positive growth. During the year, the mudharabah
interbank investments recorded a moderate increase
of 14.9% totalling to RM283.8 billion (2002:
RM247 billion). Trading of Negotiable Islamic Debt
Certificates (NIDCs) also registered a positive
growth. Islamic banking institutions have intensified
the issuance of Islamic negotiable instruments of
deposit to mobilise longer-term deposits (a maturity
tenure of more than 6 months) by issuing NIDCs.
This initiative spurred active trading of NIDC in the
IMM, which recorded a triple-digit growth of 425%.
However, in absolute terms, the trading of NIDC
remained relatively small. The trading of short-term
trade bills also showed an encouraging growth of
40.3%, from RM24.8 billion in 2002 to RM34.8
billion in 2003, emanating from the increase in
trade financing activities.
0
1
2
3
4
5
6
7
8
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
RM billion
Graph 5.5 
GII - Trading Volume
Trading volume
Month
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Jan Feb Mar Apr May Jun
Month
Jul Aug Sep Oct Nov Dec
Yield %
Average rates 
5-year - 
 3.618 
4-year - 
 3.450 
3-year - 
 3.264 
2-year - 
 3.090 
1-year - 
 2.886
Graph 5.6 
GII - Average Yield to Maturity
Table 5.8
Islamic Interbank Money Market
2002
2003p
Annual change
RM billion
RM billion
%
Islamic Funds
Mudharabah Interbank
Investments*
247.0
283.8
36.8
14.9
Islamic Papers
Government Investment
Issues
5.9
36.1
30.2
511.9
Bank Negara Negotiable
Notes*
2.2
8.8
6.6
300.0
Short-term Trade Bills*
24.8
34.8
10.0
40.3
Negotiable Islamic Debt
Certificates*
0.8
4.2
3.4
425.0
Total
280.7
367.7
87.0
31.0
* Volume transacted through brokers.
p Preliminary
During 2003, the trading of Islamic private debt
securities (IPDS) increased by 59.7% to RM60.7 billion
from RM38 billion in 2002. This higher increase
emanated from new issues of IPDS amounting to
RM8.1 billion, and strong trading sentiments in the first
half of the year. The year 2003 also witnessed the issue
of the first asset-backed securities that were structured
on Islamic principles amounting to RM986 million.




Development
Financial Institutions
204
Introduction
204-208
Policies and Measures
208-220
Performance of Development Financial Institutions


204
INTRODUCTION
Guided by the main strategic directions and road
map for development financial institutions (DFIs) in
the Financial Sector Masterplan (FSMP), continued
efforts were made to further develop the DFIs under
the Bank’s purview in 2003. Policy strategies
undertaken during the year remained focused on
areas related to enhancing the regulatory framework
and capacity building of the DFIs. Several initiatives
formulated in 2002 to further strengthen the
financial soundness and operational structure of the
DFIs were implemented during the year.
Adopting the phased and prioritised approach, a
number of prudential measures were put in place to
enhance the financial and operational soundness of
the DFIs, to ensure efficient and effective
implementation of their mandated roles in the
POLICIES AND MEASURES
Building capacity and capability of DFIs
•
Enhancing advisory capacity of DFIs to SMEs
As specialised institutions mandated to
promote certain identified economic sectors,
DFIs need to complement financing facilities
with non-financing facilities, in particular
advisory and consultancy services to their
targeted customers. To build capacity of the
DFIs in providing advisory services, the Bank
initiated a joint project with the assistance of
the Japan International Cooperation Agency
and selected DFIs to enhance the capacity of
the institution to provide advisory services to
SMEs. The project aims to provide action and
implementation plans to improve the advisory
services provided by DFIs to the SMEs.
Several prudential measures and initiatives were undertaken in
2003 to enhance the financial and operational soundness of DFIs
and to ensure effective implementation of their mandated roles.
economy. These include Guidelines on Liquidity
Requirements, Corporate Governance Standards on
Directorship, Credit Card Operations, and
Classification of Impaired Loans and Provisioning for
Bad and Doubtful Debts. In addition, as part of the
initiatives to further enhance the monitoring of
activities and financial performance of the DFIs, a
computerised reporting system would be
implemented in early 2004.
To further equip the DFIs for their role as
specialised institutions, initiatives on enhancing
advisory capability of DFIs to small and medium
enterprises (SMEs) were commenced in 2003. At
the same time, policy on minimum capital
requirement was initiated to ensure DFIs have the
financial capacity to sustain their operations.
Recognising the wide outreach of selected DFIs, a
programme to enhance access to financing for
micro enterprises was also launched and
implemented by these DFIs. The objective of this
programme is to unlock the potential of the large
number of small businesses in promoting domestic
sources of economic growth.
Monitoring of DFIs’ Activities and Performance
•
Development Financial Institutions Statistical
System
To enhance the ability to measure the
performance of DFIs, accurate information in a
timely manner is important. Towards this end,
the Bank had, in mid-2003, embarked on a
project to develop a computerised reporting
system to capture and generate statistical data
on DFIs. The system known as the Development
Financial Institutions Statistical System or DFISS,
will collect relevant information from DFIs via
online. To address the uniqueness of each DFI,
the DFISS will capture both generic and specific
information relating to their businesses.
•
Supervisory Activities
The Bank adopts a two-pronged risk-based
supervisory approach encompassing regular on-
site examinations and off-site surveillance. With
the risk-based approach, supervisory attention
and resources were directed to areas that pose
higher degree of risks. Supervisory efforts were
Development Financial Institutions


Development Financial Institutions
205
primarily concentrated on ensuring that the
DFIs were operationally and financially sound.
The on-site examinations by the Bank on the DFIs
in 2003, inclusive of their subsidiaries, have
enabled the Bank to assess the operating
conditions and financial positions of the DFIs. As
a result of these examinations, measures have
been taken to promote the efficiency and
effectiveness of individual DFIs. Capital adequacy
was also assessed to ensure sustainability of the
DFIs in performing their mandated roles.
The on-site examinations had in addition, focused
on building institutional capacity and placing
sound infrastructures in the DFIs. In this regard,
emphasis was placed on instilling best practices in
corporate governance structures and risk
management systems. The importance of
corporate governance cannot be over-
emphasised for the overall health of the DFIs, as
it would ensure accountability and provide
incentives for the Board and management to put
in place effective risk management systems. As
part of establishing the effectiveness of the
Board, an essential ingredient in corporate
governance, interviews were conducted with the
directors of DFIs to promote understanding of the
roles and responsibilities as well as the
commitment of the directors to the development
of the institutions. As most DFIs were involved in
lending activities, DFIs were also required to give
attention to discipline in risk management,
especially in credit risk management. The DFIs
were strongly encouraged to have in place a
comprehensive risk management system with
appropriate management oversight to identify,
measure, control and monitor risks with emphasis
on the uniqueness of the targeted sectors. Data
integrity and information technology capacity
were also assessed to ensure safe and sound
information technology operations in supporting
the DFI’s business activities.
To complement the on-site examinations, on-
going off-site surveillance was undertaken to
regularly monitor the financial health of the DFIs
for early detection of any problems arising in
these institutions. This included rigorous analysis
of financial data, ratios and trends concerning
the important areas of capital adequacy, asset
quality, management, earnings performance and
liquidity position. For a more effective and
consultative supervisory process, arising from the
examination of the DFIs, the Bank also conducted
and engaged in dialogues and meetings with the
Board of Directors and management of the DFIs
to discuss issues following the supervisory
findings.
Achievement of the DFIs’ mandated roles was
also assessed particularly as these DFIs were
established as specialised development financial
institutions to achieve national socio-economic
and developmental goals. The DFIs needed to be
more dynamic and proactive in enhancing the
range of facilities offered through product and
service innovation as well as broaden their
activities by providing value-added advisory/
consultancy services and technical assistance to
their customers. The DFIs were also encouraged
to proactively develop key productivity indicators
and other financial analysis for self-assessment on
their achievement of mandated roles.
A rating framework was used in the supervisory
process to assess the DFIs, both in terms of
performance of their mandated objectives as well
as the overall financial condition. A structured
rating framework for the DFIs was developed
taking cognisance of the mandated core business
activities and the underlying impact on the
management and financial elements of the
institutions.
Strong corporate governance and risk
management practices would enable DFIs to be
more dynamic in the performance of the
identified mandated roles. In supervising the DFIs,
attention is given to the need to balance the high
risk inherent in the portfolios with effective risk
management, the fulfilling of the mandated roles
and at the same time remaining financially viable.
Strengthening Financial Conditions and
Operational Structure
During the year, the Bank also issued the following
prudential policies and measures to enhance the
soundness of the financial conditions of the DFIs:
•
Guideline on Liquidity Requirements
In 2003, minimum liquidity requirements were
imposed on two DFIs, namely Bank Simpanan
Nasional (BSN) and Bank Kerjasama Rakyat
Malaysia Berhad (Bank Rakyat), given both


206
institutions mobilise substantial funds through
their deposit-taking activities from the public.
These DFIs were required to maintain a minimum
level of liquid assets as part of the measures to
mitigate liquidity risks. The Bank has formulated
two types of liquidity frameworks to be used in
determining the minimum level of liquid assets to
be maintained by Bank Rakyat and BSN.
Under the Liquid Assets Ratio Framework, BSN is
required to maintain at all times a minimum
liquidity ratio of at least 10% of designated
assets in proportion to its total eligible liabilities.
For Bank Rakyat, the New Liquidity Framework
(NLF) which is similar to that imposed on
banking institutions, is used to determine the
level of liquid assets to be maintained. Under
this framework, the liquidity needs of Bank
Rakyat are assessed based on its ability to
match its short-term liquidity requirement
arising from maturing obligations against
maturing assets. The NLF is designed to assess
liquidity at three levels. The first level assesses
the sufficiency of liquidity in the normal course
of business over the next one week to 12
months. The second level assesses whether a
financial institution has sufficient liquidity
surplus and reserves to meet sudden liquidity
withdrawal shocks. The third level assesses a
financial institution’s general funding structure,
in particular, assesses the degree of
dependency on particular markets. To ensure
that there is sufficient liquidity to meet its
liability obligations in the near term, Bank
Rakyat is required to maintain adequate
liquidity surplus not only to meet expected
obligations but also to sustain unexpected
heavy withdrawals for at least one month.
The minimum liquidity requirement for the other
DFIs will be imposed in stages.
•
Guideline on Corporate Governance
Standards on Directorship
As part of the on-going efforts to promote strong
corporate governance structures and practices in
DFIs, the Guideline on Corporate Governance
Standards on Directorship for DFIs was issued on
23 September 2003. This guideline aims to assist
the DFIs and their stakeholders in instituting
effective governance structure and oversight of
board of directors. The guideline outlines the
duties and responsibilities of the board of
directors, minimum requirements and rules
governing the appointment of directors and chief
executive officer (CEO) and the establishment of
board committees.
Duties and responsibilities of the Board
The guideline specifies the main duties and
responsibilities of the Board. The Board is
responsible for supervising the affairs of the
DFIs and to be fully informed of the institution’s
condition and management policies in ensuring
that the institution is soundly managed. In this
regard, the Board is responsible for the
selection and appointment of qualified and
competent senior executives to administer the
affairs of the institution. Specific for DFIs, the
Board is responsible in steering the institution
in achieving its mandated roles to provide
financial services and facilities for which the
institution was established for. Other main
duties and responsibilities of the board of
directors include ensuring that DFI’s strategic
focus are clearly defined, establishing and
ensuring the effective functioning of Board
committees, and setting up effective internal
control system and internal audit functions to
improve accountability.
Minimum qualification standard and training
requirements for directors
This minimum qualification standard and training
requirements for directors aim to ensure that
board of directors of DFIs possess the necessary
qualifications, skills and experience to effectively
discharge their governance responsibilities.
Directors of DFIs are expected to have an
understanding of the nature of business and the
current issues and the regulatory changes in their
identified targeted sectors.
Appointment of CEO and directors
This guideline emphasises the need to appoint
appropriate candidates as CEO or directors to
ensure the sound operation of a DFI. Candidates
must be suitably qualified with appropriate
experience, calibre and impeccable integrity, in
addition to being familiar with the operations,
state of the internal controls, requirements of
regulations and current policies affecting the DFI
to ensure smooth running of the day-to-day
operations of the institution. The guideline also
clarifies the ‘fit and proper’ criteria as set out in
the Development Financial Institutions Act 2002
(DFIA).


Development Financial Institutions
207
On the policy with regard to appointing
practising lawyers and accountants as directors of
a DFI, the guideline indicates that such
appointments can be made provided that they
are not employed by or are not partners in a legal
firm or accounting firm, which are on the panel
of lawyers or engaged to conduct audit of or
consultancy work for that particular DFI.
Directorship in other corporations
The CEO is not permitted to hold any executive
position in another corporation to ensure focus on
the management of the institution. Directorships in
subsidiaries and associate companies of the DFI
should not exceed five at any one time. The Board
should set policies on the maximum number of
directorships that can be held by other staff of the
DFI. To ensure that the non-executive director
participates and is actively involved in the
management and affairs of the DFI, attendance
must be at least 75% of the Board meetings.
Size and composition of the Board
The guideline prescribes that DFIs are required to
have at least seven directors on its board to
ensure adequate number of directors to represent
the interest of various stakeholders. In addition,
there must be sufficient number of independent
directors to provide a balanced view and opinion
in the Board. The guideline also restricts the
maximum number of executive directors on the
Board to two.
Board committees
To assist the Board in discharging its
responsibilities effectively, the Board is required to
set up four board committees with specific
functions and responsibilities. The setting up of
these committees at the board level facilitates
active involvement of the Board in various policy
formulation and to provide oversight and
direction on critical aspects of the organisation.
The four committees are: Audit and Examination
Committee, Nomination Committee,
Remuneration Committee, and Risk Management
Committee. The guideline provides the terms of
reference, composition, minimum qualification
where necessary and conducts of the respective
committees.
•
Guideline on Credit Card Operations for
Bank Simpanan Nasional
As part of the process to further increase the
awareness with regard to the products and
banking services and to implement the measures
on consumer protection, a Guideline on Credit
Card Operations which was issued to the banking
institutions was also extended to BSN being one
of the credit card issuers. The guideline was
effective from 28 July 2003.
Under the guideline, BSN is required to comply
with the requirements on the minimum age and
income requirements, placement of fixed deposit,
prudent lending, minimum monthly payment,
fees and charges, and classification of impaired
loans/financing and provisioning for bad and
doubtful debts with immediate effect. The
compliance with the requirements pertaining to
terms and conditions, statement on minimum
monthly payment, minimum disclosure on fees
and charges, supplementary cardholder’s liability,
liability for lost or stolen credit card, and
consumer awareness and education program
were effective from 28 January 2004.
•
Guideline on Classification of Impaired Loans
and Provisioning for Bad and Doubtful Debts
This guideline was issued pursuant to Section 41
of DFIA to all DFIs under the Bank’s purview
excluding the Malaysia Export Credit Insurance
Berhad (MECIB) on 13 March 2003. The guideline
sets out the minimum standards on classification
of impaired loans and advances and provisioning
requirements for such assets of DFIs. The
guideline aims to ensure that impaired assets and
potential losses are identified and recognised in a
timely manner, and loan assets and income are
fairly and prudently stated.
The guideline stipulates minimum categories of
classification for impaired loans, amount of
specific provision to be set aside for different
categories of impaired assets, treatment of
interest income of impaired assets, and general
provision to be set aside for the loan portfolio.
The impaired assets are categorised according to
the degree of recoverability of the loans. Loans
with no probability of recovery are accorded with
‘bad’ classification, ‘doubtful’ when the chances
of recovery are improbable and with high risk of
ultimate default, and ‘substandard’ when there is
more than the normal risk of loss.
The guideline requires DFIs to suspend all interest
accrued when the loan/financing is classified. On
minimum provisioning requirements, the
guideline requires the DFIs to maintain loan loss


208
provision at a level that is adequate to absorb
potential loan/financing losses. The provisions
required are in the form of specific provision and
general provision. While specific provision refers
to provision for loan losses of specific loan
accounts, general provision refers to provision for
loan losses of the overall loan portfolio. For the
specific provision, the DFIs are required to
gradually build up the provision for potential loan
losses according to the degree or category of
classified assets. DFIs are required to provide 10%
of the uncovered exposure for loans classified
substandard, 50% for doubtful classification, and
eventually full provision for loans classified bad.
The DFIs are also required to set aside provisions
for off-balance sheet items where the DFIs face
credit risk from failure of counter-parties to fulfill
their contractual obligations.
The guideline requires the DFIs to review the
adequacy of both specific and general provision
regularly at least every 6 months. This is to
ensure that the provisions set aside are
consistent with current information on the
collectibility of the loans. In addition, the DFIs’
assessment of the adequacy of the provisions
need to be performed in a systematic and
consistent manner, in conformity with the
objective criteria and be supported by adequate
documentation.
The guideline also emphasises active involvement
of the Board of Directors and management in
ensuring that approval and formulation of policy
on classification of impaired loans and
provisioning policy of the DFIs is consistent with
the minimum standards that have been set.
•
Circular on Use of Generic Names and “i”
Indicator for Islamic Banking Products
To increase awareness in Islamic products and
services offered by banking institutions and to
streamline and standardise the generic names
for Islamic banking products, the Bank issued a
guide on the use of standardised generic
names to financial institutions offering Islamic
banking products. The Bank requires all
banking institutions including DFIs that provide
Islamic banking products and services to use
standardised generic names as set out in the
list and to use “i” indicator for marketing and
advertising of Islamic banking products in all
media, brochure and product pamphlet, and
other printed forms or promotion events.
•
Circular on Permission for New Products and
Services
On 26 April 2003, a Circular on  Permission for
New Products and Services was issued with the
objectives to ensure that DFIs remained focus on
their mandated activities and at the same time
avoid undertaking unnecessary risks in
performing their mandated role. In addition, it
aimed to ensure that the products meet the
customers’ requirements.
PERFORMANCE OF DEVELOPMENT FINANCIAL
INSTITUTIONS
The financing activities of the DFIs improved in 2003,
in tandem with the overall growth of the economy.
Table 6.1
Development Financial Institutions1 : Sources and
Uses of Funds
Annual Change
As at end
 2002
2003
2003
RM million
Sources:
Shareholders’ funds
999
1,592
9,498
Paid-up capital
596
1,180
7,193
Reserves
321
-122
1,395
Retained earnings
82
534
910
Deposits accepted
492
2,585
42,383
Borrowings
1,111
2,100
16,076
Government
2,250
2,481
11,356
Multilateral /
  International agencies
113
-399
3,036
Others
-1,252
18
1,684
Others
1,779
369
11,135
Total
4,381
6,646
79,092
Uses:
Deposits placed
3,456
1,393
17,113
Investments
-2,700
1,874
21,142
of which:
Government securities
-219
66
3,562
Shares
1,328
-629
5,799
Quoted
847
-3
5,323
Unquoted
481
-626
476
Loans and advances
4,956
3,106
32,548
Fixed assets
595
99
3,706
Others
-1,926
174
4,583
Total
4,381
6,646
79,092
Contingencies:
Guarantee
-182
493
3,653
Export credit insurance
3
-26
125
Total
-179
467
3,778
1 Refers to Bank Pembangunan dan Infrastruktur Malaysia Berhad, Bank Industri &
Teknologi Malaysia Berhad, Bank Kerjasama Rakyat Malaysia Berhad, Bank
Simpanan Nasional, Export-Import Bank of Malaysia Berhad, Malaysia Export
Credit Insurance Berhad, Malaysian Industrial Development Finance Berhad,
Sabah Development Bank Berhad, Borneo Development Corporation (Sabah)
Sendirian Berhad, Borneo Development Corporation (Sarawak) Sendirian Berhad,
Bank Pertanian Malaysia, Credit Guarantee Corporation Malaysia Berhad, Sabah
Credit Corporation and Lembaga Tabung Haji.


Development Financial Institutions
209
The DFIs provided financing to strategic sectors and
sub-sectors of the economy. These included
agriculture, capital-intensive and high technology
industries, shipping, infrastructure, manufacturing,
export, Bumiputera entrepreneurs, co-operatives as
well as home ownership and property development
at the state level, namely in Sabah and Sarawak. In
2003, two DFIs, namely BSN and Bank Pertanian
Malaysia (BPM), were appointed by the Government
to implement the micro credit scheme, which was
part of the Government's Economic Package
announced in May 2003.
Financing Activity
Total loans outstanding of the DFIs increased at an
annual rate of 10.5% or RM3.1 billion (2002: 20.2%
or RM5 billion) to RM32.5 billion as at end-2003, led
by lending to the infrastructure sector by Bank
Pembangunan dan Infrastruktur Malaysia Berhad
(Bank Pembangunan) and retail financing by Bank
Rakyat.
In terms of overall sectoral distribution, consumption
credit rose strongly by 20.1% representing 24.8% of
total loans outstanding of the DFIs. Loans
outstanding to the construction, and transport,
storage and communication sectors as a group
increased by 3.8%, representing 26% of total loans.
Growth was also recorded in the agriculture and
manufacturing sectors, at 10.2% and 8.9%
respectively, contributing 21.3% to total loans
outstanding of the DFIs. In regard to credit insurance
and credit guarantee, total outstanding insurance
and guarantee coverage provided by the relevant
DFIs increased by 14.1% to RM3.8 billion as at the
end of the year, contributed by significantly higher
guarantee coverage provided by the Credit
Guarantee Corporation Malaysia Berhad (CGC).
Lending by six DFIs that are under the purview of
DFIA increased during the year. Bank Pembangunan's
financing of the infrastructure sector and Bumiputera
SMEs increased by 11% and 4.6% respectively. In
addition, the bank provided advisory services and
training to the SMEs. Retail financing provided by
Bank Rakyat to its members rose strongly by 20.8%
while BSN registered a strong increase of 15.8% in
its lending activities due to loans extended under the
micro credit scheme. Meanwhile, the Export-Import
Bank of Malaysia Berhad (EXIM Bank) recorded
growth of 2.1% in its lending activities. Declines in
lending/underwriting activities were, however,
recorded by Bank Industri & Teknologi Malaysia
Berhad (Bank Industri) and MECIB by 7.6% and
9.9% respectively, due primarily to capital
constraints. For the deposit-taking DFIs, savings
mobilised by BSN increased by 0.1% whilst that by
Table 6.2
Development Financial Institutions1 : Direction of
Lending
Annual Change
As at end
 2002
2003
2003
RM million
Agriculture, forestry
and fishery
214
302
3,266
Mining and quarrying
44
6
96
Manufacturing
209
298
3,654
Electricity, gas and water
supply
119
170
624
Import and export,
wholesale and retail trade,
restaurants and hotels
-378
166
406
Broad property sector
2,140
567
8,408
Construction
1,444
228
4,019
Purchase of residential
property
191
162
2,948
Purchase of non-
residential property
124
50
443
Real estate
381
127
998
Transport, storage and
communication
1,502
80
4,443
Finance, insurance and
business services
480
96
1,876
Consumption credit
1,312
1,351
8,067
Others
-686
70
1,708
Total
4,956
3,106
32,548
1 Refers to Bank Pembangunan dan Infrastruktur Malaysia Berhad, Bank Industri &
Teknologi Malaysia Berhad, Bank Kerjasama  Rakyat Malaysia Berhad, Bank
Simpanan Nasional, Export-Import Bank of Malaysia Berhad, Malaysian Industrial
Development Finance Berhad, Sabah Development Bank Berhad, Borneo
Development Corporation (Sabah) Sendirian Berhad, Borneo Development
Corporation (Sarawak) Sendirian Berhad, Bank Pertanian Malaysia, Credit
Guarantee Corporation Malaysia Berhad, Sabah Credit Corporation and
Lembaga Tabung Haji.
Table 6.3
Development Financial Institutions1 : Non-
performing Loans and Loan Loss Provisions
As at end
 2002
2003
RM million
General provisions
614
667
Interest-in-suspense
1,152
1,224
Specific provisions
2,163
2,135
Non-performing loans
5,028
4,934
Percent (%)
Gross NPL ratio2
17.7
15.7
Net NPL ratio3
6.8
5.6
Total provisions/NPL
78.1
81.6
1 Refers to Bank Pembangunan dan Infrastruktur Malaysia Berhad, Bank Industri &
Teknologi Malaysia Berhad, Bank Kerjasama Rakyat Malaysia Berhad, Bank
Simpanan Nasional, Export-Import Bank of Malaysia Berhad, Malaysian Industrial
Development Finance Berhad, Sabah Development Bank Berhad, Borneo
Development Corporation (Sabah) Sendirian Berhad, Borneo Development
Corporation (Sarawak) Sendirian Berhad, Bank Pertanian Malaysia, Credit
Guarantee Corporation Malaysia Berhad and Sabah Credit Corporation.
2 Gross NPL ratio = (NPL / Gross loans*) x 100%.
* Excluding loans under ECR scheme.
3 Net NPL ratio = (NPL less IIS less SP) / (Gross loans* less IIS less SP) x 100%.
* Excluding loans under ECR scheme.


210
Bank Rakyat increased strongly by 16.8% partly due
to attractive returns offered by the bank.
Gross NPLs of the DFIs declined by RM94.1 million to
RM4.9 billion as at the end of the year, resulting in
an improvement in the gross NPL ratio to 15.7%
compared with 17.7% a year ago. Nevertheless, the
gross NPL levels of most DFIs remained high, ranging
from 9% to 46.1% of total loans outstanding. All
DFIs under the purview of DFIA classified a loan or
financing account in default for six months or more
as non-performing.
As a group, the DFIs have made provisions
amounting to RM4 billion to cover potential loan
losses. The net NPL amount and ratio of the DFIs
stood at RM1.6 billion or 5.6% respectively as at
end-2003 (2002: RM1.7 billion or 6.8%).
Sources of Funding
Total deposits mobilised by the deposit-taking DFIs
increased by 6.5% to RM42.4 billion as at end-2003.
Deposits from individuals recorded a growth of 5.4%
(RM1.1 billion), accounting for the largest share of
total deposits mobilised (51.2%). Lembaga Tabung
Haji and BSN remained dominant in mobilising
savings from individuals, with the former recording
an increase of 9.9%, while the latter registering a
decline of 5.8% in 2003. Deposit placements by
business enterprises, and the Government and
Government agencies accounted for 33.9% and
12.1% respectively of total deposits.
Borrowings from the Government, which amounted
to RM11.4 billion as at end-2003 (2002: RM8.9
billion), represented 14.4% of total resources.
Borrowings from the Government were used
primarily to enhance access to financing. The
operations of the DFIs were also funded by
shareholders’ funds totalling RM9.5 billion or 12% of
total resources.
In 2003, four DFIs recorded pre-tax/zakat losses
totalling RM34.8 million, mainly due to poor asset
quality. The remaining 10 DFIs recorded pre-tax/zakat
profits totalling RM715.7 million.
Bank Pembangunan dan Infrastruktur Malaysia
Berhad
Bank Pembangunan dan Infrastruktur Malaysia
Berhad’s (Bank Pembangunan) primary roles are
promoting the participation of the Bumiputera
community in business and industry, and providing
financing for infrastructure projects, in particular
Government-identified projects. Bank Pembangunan
registered an increase in its lending activities in 2003.
Bank Pembangunan also provides advisory services,
entrepreneurial training and project consultancy
services to enhance the business capabilities of
Bumiputera SMEs. As part of the efforts to promote
the development of a viable and resilient Bumiputera
Commercial and Industrial Community, Bank
Pembangunan introduced two new packages known
as "Premis SMI" or "SMI Premises" and "Groombig"
in 2003. Under the "SMI Premises" package, apart
from low rental rates for its factory complexes, Bank
Pembangunan also provides loans, advisory services
(which include financial, corporate and technical
advice), training and matching grants (whereby Bank
Pembangunan provides grants amounting to 70% of
total project cost). As at end-2003, Bank
Pembangunan rented 229 of the 368 factory units to
SMEs. In the case of the "Groombig" package,
which is aimed at enhancing the performance of the
larger sized SMEs, the entrepreneurs were provided
with loans, advisory services and training. In 2003, a
total of 29 companies were identified to participate
in this programme.
Total loans outstanding to Bumiputera SMEs
increased by 4.6% (2002: -5.6%) to RM1.3 billion as
at end-year. Overall, including lending to non-
Bumiputera SMEs, total loans outstanding to SMEs
stood at RM1.6 billion, an increase of 5.9% over the
level at end-2002.
Graph 6.1
Bank Pembangunan dan Infrastruktur 
Malaysia Berhad: 
Direction of Lending as at 31 December 2003 
Others 
10.2%
Manufacturing
8.7%
Utilities
6.0%
Construction 
33.2%
Transport &  
communication 
41.9%


Development Financial Institutions
211
Loans to finance infrastructure projects recorded a
slower growth of 11% in 2003 compared with
56.5% in 2002. The outstanding loans for
infrastructure projects totalled RM8.6 billion as at
end-2003, accounting for 84.5% of total loans
outstanding. These were mainly to finance
Government-identified infrastructure projects. The
loan increase was attributed largely to loans
extended to the transport and communication
(RM80.8 million), construction (RM331.2 million) and
utilities (RM163.3 million) sectors. Overall, the loan
portfolio of Bank Pembangunan increased by 10.2%
to RM10.2 billion as at end-2003, representing
68.5% of Bank Pembangunan’s total assets.
As at end-2003, Bank Pembangunan managed 26
Government funds. Loan approvals and loan
disbursements under these funds increased by
203.8% (+RM334.6 million) and 63.4% (+RM82
million) respectively. The Tourism Infrastructure Fund
and Special Tourism Fund 2 were the main
beneficiaries with approvals of RM132.5 million and
RM187.2 million respectively.
Gross NPLs increased to RM912.6 million
representing 9% of total loans as at end-2003 (2002:
RM769.8 million or 8.3%), attributed largely to
higher NPLs for infrastructure loans. The gross NPL
ratio of infrastructure loans rose to 4.2% (2002:
2.6%), while the level of NPLs for SME loans declined
to 35% (2002: 38.2%). The net NPL ratio of Bank
Pembangunan showed a marginal decline from
3.2% to 3.1%.
During the year, the investment portfolio decreased
by 36.6% (RM574.4 million) following the disposal
of private debt securities (PDS) and Government debt
securities. Investments in PDS of RM757.5 million
formed the largest component of Bank
Pembangunan’s investment which stood at RM995.4
million as at end-2003. Deposits placed with financial
institutions increased to RM2.6 billion (2002: RM1.5
billion) to account for 17.5% of total assets.
The main sources of funding were borrowings from
the Government (RM4.2 billion), deposits from
Government agencies and public enterprises (RM3.8
billion), borrowings from multilateral and
international agencies (RM1.4 billion), debt securities
issued (RM1 billion) and Government grants and
subsidies (RM644.7 million), accounting for 74.3% of
Bank Pembangunan’s total resources. During the
year, Bank Pembangunan’s shareholders’ funds
increased by RM234 million to RM2.5 billion. Bank
Pembangunan’s paid-up capital rose to RM1.6 billion
following additional capital injection of RM400
million by the Government.
Bank Industri & Teknologi Malaysia Berhad
The lending activities of Bank Industri & Teknologi
Malaysia Berhad (Bank Industri) declined in 2003, by
7.6% (2002:-9.3%) to RM837.3 million as at end-
year. The maritime sector (comprising shipping,
shipyard and marine-related industries) was the main
recipient of the loans, representing 56.6% of total
loans outstanding, while the manufacturing sector
accounted for the remaining loans. As at end-2003,
total loans outstanding accounted for 19.8% of Bank
Industri’s total assets of RM4.2 billion.
Loan approvals declined by 4.7% (2002: +17.7%),
given that in 2003, the utilisation of the New Ship
Financing Facility was restricted to financing of
merchant vessels only. The approvals for the
manufacturing sector meanwhile continued to record
positive growth. During the year, lending activities of
Bank Industri were also constrained by the level of its
shareholders’ funds.
Bank Industri managed 13 Government funds during
2003, representing 34.9% of the total loans of Bank
Industri. Loan approvals and loan disbursements
under the funds continued to fall markedly, by
31.3% and 28% respectively, as most of the funds
have been fully utilised.
Gross NPLs decreased by RM1.4 million to RM323.6
million as at end-2003. However, due to a significant
Graph 6.2
Bank Industri & Teknologi Malaysia Berhad: 
Direction of Lending as at 31 December 2003 
Shipyard 
14.4%
Manufacturing 
43.4%
Shipping
36.7%
Marine-related 
industries 
5.5% 


212
contraction in the loan base, the gross NPL ratio
increased to 38.6% (2002: 35.8%). Loans to the
maritime sector accounted for 56.6% of total NPLs
while the manufacturing sector accounted for the
balance. The net NPL ratio fell marginally to 18.4%
from 18.9% a year ago.
Investment in subsidiaries (RM1 billion) and loans and
advances to subsidiaries (RM840.7 million) formed
the largest component (44.2%) of the bank’s assets
as at end-2003. The investment and advances were
mainly in four subsidiaries, namely MECIB, EXIM
Bank, Global Maritime Ventures Berhad and BI Credit
and Leasing Berhad.
Borrowings formed the largest source of funding for
Bank Industri, amounting to RM2.3 billion (54% of
total resources) as at end-2003, of which 52.7%
from the Government and 47.3% from multilateral
and international agencies. Another major source of
funding was deposits placed by Government and
Government agencies, totalling RM678.3 million. The
shareholders’ funds of Bank Industri rose to RM280.2
million as at end-2003 (2002: RM164.3 million)
mainly from the capital injection of RM80 million by
the Government in June 2003 as part of the
Government’s Economic Package.
Export-Import Bank of Malaysia Berhad
Financing activities of Export-Import Bank of Malaysia
Berhad (EXIM Bank) to promote the export of
Malaysia's goods and services recorded an increase of
2.1% to RM2.1 billion in 2003. New loans approved,
however, recorded a marked increase of 24.5% or
RM92.8 million, reflecting the significant growth of
Malaysian exports during the year. The two major
activities were financing provided under the Export
Credit Refinancing (ECR) scheme (54.2% of total
loans) and financing of overseas projects (41.6%),
while export financing constituted 4.2%. The bank
also provided export guarantee of RM172.3 million,
a decline of 2.1% from the previous year.
During the year, financing of overseas projects fell
further to RM866.2 million, constrained by the small
size of the bank's shareholders' funds. Nearly half of
the total was channelled to projects undertaken in
countries in the African continent and another
36.9% in South-East Asia. Meanwhile, the sole
guarantee issued was for a project undertaken in
South-East Asia. Consistent with its mandated role
to promote the diversification of Malaysia’s export
markets, loans to non-traditional markets accounted
for 60.4% of the total principal loans outstanding
as at end-2003. For project financing, 63.7% was
channelled to non-traditional markets, while 32.4%
of the export financing was channelled to the same
markets.
EXIM Bank is the designated agency to manage the
ECR scheme which is funded by the Government as
part of the efforts to promote exports. Competitive
rates are offered to banks participating in the
scheme for on-lending to exporters. EXIM Bank
disbursed a total of RM6.6 billion to exporters under
the ECR scheme, an increase of 7.5% from the level
in 2002,in line with the growth in Malaysia's exports
and the increase in the customer base by 7% to
1,760 exporters. The major users of the facility were
exporters in the palm oil products, rubber products,
chemical products and textiles industries.
Loans outstanding formed the largest asset of EXIM
Bank amounting to a share of 60.3% whilst deposit
placements accounted for 37.5% of EXIM Bank’s
total assets.
Gross NPLs improved during the year, to RM439.9
million (2002: RM450.9 million), representing
46.1% of total loans outstanding, excluding loans
provided under the ECR scheme (2002: 46.7%).
Project financing accounted for the largest
component of NPLs at 92.6%. The net NPL ratio
declined to 2.3% after significant provisioning of
RM436.3 million.
The bank sourced its funds through borrowings from
the Government, international agencies and its
parent company, apart from its shareholders' funds
of RM238.2 million. As at end-2003, borrowings
from the Government amounted to RM2 billion,
Graph 6.3
Export-Import Bank of Malaysia Berhad:
Credit Facilities as at 31 December 2003
Export
financing
4.2%
Project
financing
41.6%
ECR scheme
54.2%


Development Financial Institutions
213
international agencies RM298.2 million and, its
parent company RM369.7 million. These borrowings
accounted for 78% of the bank’s total resources.
Borrowings from the Government were utilised solely
for the ECR scheme.
Following the signing of Multilateral Letter of Credit
Confirmation Facility Agreements with seven Asian
export-import financing institutions in 2002 in order
to promote trade within the region, EXIM Bank
signed Bilateral Letter of Credit Confirmation Facility
Agreements with Korea EXIM Bank and India EXIM
Bank, to further enhance Malaysia's bilateral trade
with the respective countries.
Malaysia Export Credit Insurance Berhad
The activities of the Malaysia Export Credit
Insurance Berhad (MECIB), which provides insurance
cover and guarantee facilities to facilitate exports
and overseas investment, continued to decline in
2003. Total insurance coverage and guarantees
issued amounted to RM496.6 million as at end-
2003, a decline of 9.9% (2002: -13.3%), although
coverage under short-term credit insurance facilities
increased by 12.9% in tandem with Malaysia’s export
growth. Of the total coverage, 74.7% was
guarantees issued and the remaining were export
credit insurance covers. The guarantee coverage
were largely medium- and long-term exposures
while the export credit insurance cover was mainly
short-term in nature. MECIB faced capital
constraints to engage in large medium- and long-
term business.
Non-traditional markets accounted for 40.8% of the
total guarantee and insurance coverage, reflecting
MECIB’s role in supporting Malaysia’s export market
diversification efforts. Exposure to countries in East
Asia accounted for 46.9% of the total exposure,
followed by Africa 12.7% and South Asia 12%.
MECIB funded its activities solely from its
shareholders' funds, which improved slightly to
RM76.6 million as at end-2003 (2002: RM45.6
million). The loss percentage, indicating the ratio
of claims paid to premiums received, improved to
29.3% as at the end of 2003, compared with the
level of 55.3% recorded at the end of 2002.
The main assets of MECIB were investments in
securities and deposits placed with financial
institutions, accounting for 45.1% and 40.3% of
total assets respectively.
Bank Kerjasama Rakyat Malaysia Berhad
Bank Kerjasama Rakyat Malaysia Berhad (Bank
Rakyat) or People’s Cooperative Bank of Malaysia
registered strong growth both in financing and
deposit mobilisation activities. Bank Rakyat’s assets
increased significantly by 17.7% to RM17.1 billion
as at the end of the year. Financing formed the
major portion (58.2%) of total assets, followed by
deposit placements (24.5%) and investment in
securities (14.2%).
Financing activities grew strongly by 16.9% to
RM10 billion, with borrowings by members, which
accounted for 77.7% of total financing
outstanding, increasing by 20.8%. Demand for
consumption credit continued to register a
significant growth of 18.6% to RM6.9 billion as at
end-year. Financing extended to the property sector
grew by 15.8% to RM1.9 billion, reflecting primarily
Graph 6.4
Malaysia Export Credit Insurance Berhad:
Contingent Liabilities as at 31 December 2003
Short-term
guarantee
1.8%
Medium-and
long-term
guarantee
72.9%
Medium-and
long-term
insurance
0.4%
Short-term
insurance
24.9%
Graph 6.5
Bank Kerjasama Rakyat Malaysia Berhad:
Direction of Financing as at 31 December 2003
Others 
1.8%
Agriculture 
0.6%
Property 
19.1%
General 
commerce 
4.7%
Share financing 
1.1%
Purchase of 
motor vehicles 
2.8%
Consumption
credit 
68.9%
Manufacturing 
1%


214
strong demand for residential properties. Financing
of motor vehicles also registered strong growth of
136% although its share remained small at only
2.8%. In terms of sectoral distribution, consumption
credit accounted for 68.9% of the financing
outstanding whilst 19% and 4.7% were extended to
the property sector and general commerce
respectively. New financing approved and disbursed
remained relatively unchanged at RM3.6 billion and
RM3.7 billion respectively (2002: RM3.6 billion and
RM3.5 billion respectively).
The gross non-performing financing (NPF) ratio fell
marginally to 10.7% from 11.4% while the
outstanding gross NPF increased slightly to RM1.1
billion from RM974.2 million. The property sector
and consumption credit contributed 39.8% and
35.4% respectively, to total gross NPF. In terms of net
NPF, the ratio was 5.2%.
Bank Rakyat’s financing operations were largely
funded by deposits, totalling RM13.1 billion and
representing 76.6% of the bank’s total resources.
Deposits placed by business enterprises accounted for
a major share (66.7%), of which two-thirds was from
private enterprises while the remaining from public
enterprises. Deposits mobilised from individuals saw a
significant growth of 39.3% (RM454.9 million), raising
its share of total deposits to 12.3% (2002:10.3%),
attracted by the high rate of return offered by Bank
Rakyat. Similarly, deposits of cooperatives rose strongly
by 54.1% in 2003 although its share was only 2.6%
at RM339 million. Overall, deposits mobilised by Bank
Rakyat continued to register a strong growth of
16.8% (RM1.9 billion) due primarily to the favourable
returns offered by the bank.
Bank Rakyat’s shareholders’ funds rose from RM1.8
billion to RM2.5 billion as at end-2003. This was
attributed to higher members’ shares and
subscription funds, which increased to RM1.3 billion
(2002: RM0.9 billion). Bank Rakyat’s improved
profitability in 2003 further enlarged the bank’s
shareholders’ funds. During the year, the individual
membership of Bank Rakyat increased by 86,770 to
629,907 while cooperative membership increased by
84 to 1,067. The high dividend rate of 15% declared
by Bank Rakyat in 2002 and the privilege loan rate
offered to members attracted additional
membership.
Bank Simpanan Nasional
Savings mobilised from small savers by Bank
Simpanan Nasional (BSN) or National Savings Bank
declined while deposits from business enterprises
rose sharply by 54.9%. Retail loans to small
borrowers increased in 2003, consistent with the
role of the savings bank to meet the financing
needs of small borrowers. In June 2003, BSN was
appointed by the Government to implement the
micro credit scheme. As at the end of 2003, BSN
operated through 398 branches covering both the
urban and rural areas, and supported by 591
ATMs.
Total deposits outstanding increased marginally by
0.1% or RM4.9 million during the year to RM9.4
billion. Savings from individuals continued to
account for the largest component (71.3%) of the
deposit base although such savings declined by
5.8% or RM411.4 million to RM6.7 billion,
compared with growth of 4.1% or RM284.1
million in 2002. The increase of deposits from
business enterprises was in part due to the
requirement for micro credit borrowers to open an
account with BSN. In terms of type, more than
one-half of the deposits was in the form of savings
deposits, 36.3% fixed deposits and the remaining
in the form of general investment deposits.
The deposits were mainly invested in securities,
which amounted to RM5.5 billion (49.8% of total
assets) as at end-2003, of which RM2.8 billion
were investments in Government securities. The
balance was utilised to finance lending operations.
Total loans outstanding registered strong increase of
15.8% (2002: -7.4%) to RM2.4 billion, reflecting the
loans provided under the micro credit scheme which
Graph 6.6 
Bank Simpanan Nasional: 
Total Deposits Accepted as at 31 December 2003 
Individuals 
 71.3%
Government 
agencies 
10.9% 
Private-controlled 
business 
enterprises 
10.3%
Government-
controlled 
business 
enterprises 
6.0%  
Financial 
institutions 
1.5%


Development Financial Institutions
215
was launched in June 2003 as part of the
Government’s Economic Package. As at end-2003, a
total of RM415.6 million had been extended under
the micro credit scheme, accounting for 17% of total
loans outstanding. BSN received 102,432 loan
applications under the scheme, of which 60,364
applications amounting to RM541.8 million and
RM430.8 million were approved and disbursed
respectively. The micro credit borrowers were
involved mainly in food stall business, retail trading
and business services. Meanwhile, more than 90% of
the loans outstanding, excluding micro credit, was
extended to individuals mainly in the form of
consumer loans and for purchase of residential
property.
Gross NPLs decreased marginally by RM21.9 million
to RM297.4 million as at the end of 2003, attributed
to a decline in NPLs of credit card loans. NPLs of Giro
Housing Loans increased marginally by 1% to
RM158.6 million while NPLs of motor vehicle loans
fell slightly by 1.2% to RM112.5 million. The gross
NPL ratio improved to 12.2% as at end-2003 (2002:
15.1%) largely due to an expansion in the loan base.
Net NPLs decreased to 6.6% amounting to RM154.6
million.
In 2003, BSN’s reserves strengthened following the
capital injection of RM100 million by the
Government under the Economic Package.
Bank Pertanian Malaysia
Financing activities of Bank Pertanian Malaysia (BPM)
or Agriculture Bank of Malaysia increased
significantly in 2003. Under the Eighth Malaysia Plan
(8MP), BPM had been mandated to manage various
agricultural financing schemes with the objective to
enhance the performance of the agriculture sector in
the economy. In 2003, BPM received an allocation of
RM44.5 million for three financing schemes namely,
Food Production Credit, Bumiputera Commercial and
Industrial Community Scheme and Agricultural
Mechanisation and Automation Scheme. In addition,
as part of the Government’s Economic Package, BPM
was appointed to implement the micro credit
scheme.
Total loans outstanding increased strongly by 16.2%
to RM2.7 billion as at end-2003 following the
launching of the micro credit scheme. Since its
launch in June 2003, BPM received a total of 30,004
applications under the scheme and approved 17,237
applications with a value of RM199.3 million as at
end-2003. A total of RM194 million had been
disbursed to borrowers, mainly involved in agrobased
projects, agriculture marketing, crop cultivation and
livestock rearing.
Of the loans outstanding, a major part (60.5% or
RM1.7 billion) was extended to the oil palm, food
crop and livestock industries. Meanwhile, small
farmers accounted for 43.8% (RM1.2 billion) of loans
outstanding. As at end-2003, loans outstanding
represented 45.6% of BPM's total assets of RM6
billion.
BPM approved 27,735 loan accounts, and disbursed a
total of RM709.2 million during the year. Small farmers
continued to be the main target group with 98.4% of
the total loan applications approved. Although the
number of applications approved increased during the
year, in terms of value, the amount approved showed a
decline of 7.9% to RM709.2 million, as most of the
loans were small in size.
Gross NPLs amount and ratio on a 12-month
classification basis improved further to RM889.2
million and 32.4% respectively (2002: RM894.3
million and 37.8% respectively). Net NPLs stood at
RM326.4 million or 15% of total net loans.
Investments formed the second largest component of
the total assets of BPM at 31.9% or RM2 billion
mainly in PDS (37.2% of total investment), unit trusts
(29.6%) and promissory notes/commercial papers
(25.3%).
The major source of funds for BPM was deposits of
RM3.8 billion mobilised through its network of 119
branch offices and 4,907 mobile units nationwide.
Graph 6.7
Bank Pertanian Malaysia:  
Direction of Lending as at 31 December 2003
Others
21.4%
Rubber
1.5%
Tobacco
2.6%
Forestry
3.3%
Livestock
15.1%
Fishery
10.7%
Food crops
20.1%
Oil palm
25.3%


216
This represented 62.5% of BPM's total resources.
Borrowings from the Government totalled RM1.1
billion, accounting for 18.7% of total resources.
These were mainly to fund the various financing
schemes introduced by the Government. As at end-
2003, BPM managed 11 funds with loans
outstanding amounting to RM206.4 million or
10.8% of the total loans of BPM.
In 2003, BPM's shareholders' funds strengthened
following the capital injection of RM200 million by
the Government under the Economic Package and
the profit recorded in the financial year 2003.
Malaysian Industrial Development Finance
Berhad
Financing activities of Malaysian Industrial
Development Finance Berhad (MIDF) recorded a
marginal increase in 2003. During the year, MIDF was
appointed as the implementing agency for the new
Soft Loan Scheme for Factory Relocation
administered by the Small and Medium Industries
Development Corporation (SMIDEC). Consistent with
the growing demand for Islamic financing products,
MIDF introduced Islamic financing in October 2003,
offering a wide range of Shariah compliant schemes.
Loans outstanding grew by 6.4% to RM1.1 billion as at
end-2003. Loan disbursements increased significantly to
RM312.3 million (2002: RM240.6 million). The loans
outstanding were mainly for the manufacturing sector
(82.4%), with the major beneficiaries being the
fabricated metal products and machinery industry
(17.2%), basic iron and steel and non-ferrous products
industry (16%), and wood products industry (15.4%).
Meanwhile, loans outstanding to SMEs accounted for
50.1% of total loans.
During the year, loan approvals increased to RM493.7
million (2002: RM409.6 million), of which 85.3% was
for manufacturing establishments and 19.1% was for
Bumiputera projects.
Asset quality of MIDF improved significantly. Based
on 3-month classification, the gross NPL amount and
ratio improved to RM337.9 million (2002: RM524.9
million) and 29.8% (2002: 49.2%) respectively, due
to resolution of some NPL cases totalling RM195.4
million.
MIDF managed a total of ten Government and
Government agencies funds with total loans
outstanding of RM328.6 million, an increase of
34.3%. Loans approved under the special loan
schemes decreased to RM151.4 million (2002:
RM190.2 million) while loans disbursed increased to
RM134.8 million (2002: RM116.6 million).
The main sources of funds were shareholders’ funds
and borrowings. As at end-2003, total shareholders’
funds increased by 26.8% to RM1.3 billion (2002:
RM1 billion) following the issue of new shares,
accounting for 46.1% of total resources. Meanwhile,
borrowings accounted for another 40.2% of total
resources. This included RM641.6 million sourced
directly or indirectly from the Government to be on-
lent for socio-economic purposes. MIDF also raised
funds from the capital market amounting to
RM528.8 million as at end-2003 for its other
corporate lending activities.
Graph 6.8
Malaysian Industrial Development Finance Berhad:
Direction of Lending as at 31 December 2003
Non-manufacturing
17.6%
Manufacturing
82.4%
Plastic products
7.1%
Wood products
15.4%
Non-metallic
mineral products
10.1%
Basic iron & steel and
non-ferrous products
16.0%
Fabricated metal
products
& machinery
17.2%
Electrical & electronic
products
8.1%
Others
18.9%
Food, beverages
& tobacco
7.2%


Development Financial Institutions
217
Credit Guarantee Corporation Malaysia Berhad
The principal objective of the Credit Guarantee
Corporation Malaysia Berhad (CGC) is to assist SMEs
enhance their access to credit facilities. There was a
significant increase in guarantees issued in 2003,
contributing to facilitating financing to SMEs by
banking institutions.
In 2003, CGC launched the revised and liberalised
New Principal Guarantee Scheme and Islamic
Banking Guarantee Scheme to facilitate SMEs
obtain higher financing. CGC also introduced the
Special Relief Guarantee Scheme to provide
coverage for working capital provided by banking
institutions for businesses affected by the Severe
Acute Respiratory Syndrome, especially those
involved in the tourism industry. In addition, CGC
has engaged consultants under its Business Advisory
Service Entity plan to assist SMEs, particularly in
preparing business plans and financial documents.
Meanwhile, an online posting of Direct Access
Guarantee Scheme (DAGS) loans for bidding by the
banking institutions was launched to facilitate
financing to SMEs.
Total guarantees outstanding recorded a strong
growth of 18.3% (2002: –3.9%) to RM3 billion as at
end-2003. This was mainly attributed to the strong
performance of DAGS and the Flexi Guarantee
Scheme (Flexi Guarantee). Since the introduction of
DAGS in 2000, guarantees outstanding of this
scheme continued to rise markedly, by 120.4% in
2003 to RM718.3 million, as the revised programme
enabled more SMEs to gain access to the scheme.
Guarantees outstanding for the Flexi Guarantee also
expanded significantly, by 108.5% or RM262.6
million to RM547.6 million as at end-2003. This was
a turnaround from a decline of 25.4% or RM89.2
million experienced in 2002. The high growth of
Flexi Guarantee reflected mainly the higher demand
for loans extended under the Fund for Small and
Medium Industries 2 (FSMI 2) and New
Entrepreneurs Fund 2 (NEF 2).
Borrowers with loan size of below RM250,000
continued to be the main beneficiary, accounting
for 41.2% of total guarantees outstanding. They
were followed by borrowers with loans of between
RM250,000 and RM500,000 (25.5%) and those
with loan size of between RM500,000 to RM1
million (24.7%). Guarantees for loans of above RM1
million formed 8.6% of guarantees outstanding.
The general business sector remained the largest
group that benefited from guarantee coverage,
accounting for three quarters of total loans
guaranteed, followed by the manufacturing
(23.3%) and agriculture (1.3%) sectors.
Total provisions for claims increased by 38.1% or
RM119.5 million to RM433.5 million as at end-2003,
resulting from higher loans guaranteed turning non-
performing which increased by 28.4%. Meanwhile,
claims payable by CGC decreased by 16% to RM96.3
million (2002: RM114.6 million).
In addition to providing guarantee coverage, the
CGC also implemented a number of loan schemes
created by the Government for the SMEs. These
loans were extended by CGC to banking
institutions for on-lending to the SMEs. As at end-
2003, loans outstanding under the schemes
declined to RM915.8 million (2002: RM988.7
million). Of this, four major special loan schemes
namely, FSMI 2, Fund for Small Entrepreneurs,
NEF 2, and Islamic NEF 2 as a group amounted to
RM908.7 million or 99.2% of loans outstanding.
Of the total loans outstanding under these
schemes, 73.2% or RM670.1 million were
channelled to SMEs in the business services sector,
while 22.4% or RM205 million was for SMEs in the
manufacturing sector.
Gross NPL amount and ratio for the loans extended
by the banking institutions under the schemes
declined to RM86.8 million (2002: RM139.6 million)
and 9.5% (2002: 14.1%) respectively. The major
Graph 6.9 
Credit Guarantee Corporation Malaysia Berhad: 
Guarantee by Sector as at 31 December 2003
General business 
75.4%
Manufacturing
23.3%
Agriculture 
1.3% 


218
component of the gross NPLs was contributed by
loans to the business services sector, accounting for
66.3%.
The shareholders’ funds remain unchanged at RM2.1
billion as at end-2003, with paid-up capital of RM1.6
billion.
Lembaga Tabung Haji
The deposit mobilisation activities of Lembaga
Tabung Haji (LTH) or Pilgrims Fund Board increased
significantly in 2003, in tandem with the improved
performance of the economy. To further improve
services to its depositors, LTH has recently teamed up
with four major banks to provide Internet banking
facilities to its customers, enabling depositors with
these banks to transfer funds into their savings
accounts with LTH. LTH signed a Memorandum of
Understanding with an estate agent company to
provide accommodation for the pilgrims during Haj
pilgrimage through a long-term tenure arrangement.
This was part of continuous efforts by LTH to
enhance the quality of its services.
Total deposits mobilised by LTH increased by 9.9% to
RM11.3 billion while the number of its depositors
increased by 4.1% to 4.7 million. For the year 2003,
LTH had announced a bonus payout of 4% to its
depositors (2002: 3.5%).
Meanwhile, total investments made up RM8.1 billion
or 66.2% of total assets. Investment in shares,
amounting to RM3.8 billion, formed the largest
component in investment portfolio, followed by
deposit placements with financial institutions of
RM1.5 billion, investments in subsidiaries and
associate companies and investment in PDS of RM1.3
billion each. LTH also provided financing to its
subsidiaries involved in agriculture and construction
activities, and other companies totalling RM1.7 billion,
an increase of 24.2%.
Sabah Development Bank Berhad
After a year of strong expansion, the lending
operations of the Sabah Development Bank Berhad
(SDB) slowed down by 5.6% to RM1.2 billion as at
end-2003 (2002: RM1.3 billion). The decline in loans
outstanding was mainly attributed to the decline in
loans extended to Government-controlled business
enterprises. Significant declines were registered in
loans extended to the business services,
manufacturing and agriculture sectors.
While the number of loan approvals remained
relatively unchanged, the total value of loans
approved was substantially lower at RM250.6 million
(2002: RM794.3 million), as credit facilities were
extended mainly for small development projects.
Total loans disbursed also declined to RM184.3
million (2002: RM271.3 million). Meanwhile, loan
repayments increased to RM316.3 million (2002:
RM223.7 million), contributing to the decline in loans
outstanding.
A total of 43.3% of the loans outstanding was
extended to the real estate sector, while 10.6% was
channelled to the construction sector and 9.6% to
the business services sector. Loans remained the
Graph 6.10
Lembaga Tabung Haji:
Investments as at 31 December 2003
Private
debt securities
15.8%
Investment in
subsidiaries and
associates
16.0%  
Shares
47.3%
Deposits
placed
18.7%
Other
investment
2.2%
Graph 6.11 
Sabah Development Bank Berhad: 
Direction of Lending as at 31 December 2003 
Others 
22.8%
Business services 
9.6%
Construction 
10.6%
Real estate 
43.3%
Manufacturing 
5.6%
Agriculture, 
forestry & fishery 
8.1%  


Development Financial Institutions
219
largest asset component of SDB, accounting for
75.3% of total assets of RM1.6 billion.
Gross NPL amount and ratio improved to RM492
million and 39.7%, respectively (2002: RM542.2
million or 41.3%). A major share (69%) of the NPLs
comprised loans extended to the real estate and
business services sectors. The net NPL ratio was lower
at 4.6% (2002: 5.8%).
The main source of funds were deposits from the
Government and Government-controlled business
enterprises (RM354 million) and borrowings from
financial institutions (RM536.6 million). These
amounted to RM890.6 million or 54.1% of total
resources. The bank’s shareholders’ funds increased
to RM251.5 million (2002: RM233.2 million).
Sabah Credit Corporation
The lending activities of the Sabah Credit
Corporation (SCC) picked up strongly in 2003. Loans
outstanding increased by 18.9% (2002: -1.8%) to
RM632.8 million. Total loans approved and disbursed
increased significantly to RM236.5 million (2002:
RM80.1 million) and RM223.8 million (2002: RM84.8
million) respectively.
The strong expansion of 70.9% or RM253.6 million
in the lending operations was mainly on account of a
strong demand for consumption credit, of which
about two-thirds were executive loans and the
remaining was channelled for hire purchase facilities.
Housing loans, which declined marginally by 1.2% to
RM289.6 million, remained the largest loan
Graph 6.12
Sabah Credit Corporation: 
Direction of Lending as at 31 December 2003
Industrial 
development 
11.1% 
Others 
1.8%
Agriculture 
1.3%
Housing 
45.8%
Hire purchase 
13.2%
Executive 
loans 
26.8%
component. Loans outstanding accounted for 94.5%
of total assets (RM658.8 million) as at end-2003.
Gross NPL ratio, based on a 4-month classification,
improved to 13.6% (2002: 16.1%). A substantial share
of the NPLs (61.1%) was attributed to loans extended
to low cost housing. On a net basis, the NPL ratio was
slightly higher at 4.6% (2002: 4.1%).
Borrowings from the State Government (RM328.8
million) and banking institutions (RM156.2 million),
accounted for a combined share of 73.3% of total
resources.
Borneo Development Corporation (Sabah)
Sendirian Berhad
Property development activities in Sabah undertaken by
the Borneo Development Corporation (Sabah) Sendirian
Berhad (BDC Sabah) slowed down in 2003. This was
reflected in the decline of 2.1% in property
development expenditure and progress billings to
RM98.2 million.
As experienced in the previous two years, no new loan
applications were received by BDC Sabah due to
competitive lending rates offered by banking
institutions. Loans outstanding declined to RM9.5
million, following repayments of RM1.9 million in 2003
(2002: RM1.7 million). Of the amount outstanding,
75.2% was accounted for by loans to individuals, while
business enterprises accounted for the balance.
Gross NPLs, which stood at RM2.4 million or 25.4% of
loans outstanding, increased from the previous year
(2002: RM2.1 million or 20.1%). Loans for the
purchase of non-residential property constituted 94.7%
of total NPLs.
BDC Sabah sourced its funding mainly through
borrowings from financial institutions, which
amounted to RM75.7 million or 77.1% of total
resources. The shareholders’ funds declined to RM5.2
million.
Borneo Development Corporation (Sarawak)
Sendirian Berhad
Property development and construction activities
undertaken by the Borneo Development Corporation
(Sarawak) Sendirian Berhad (BDC Sarawak) for the
State Government, recorded a significant increase in
2003. The amount of stocks and work-in-progress
increased sharply by 49.9% (2002: -18.1%) to
RM50.3 million as at end-2003, representing the
largest (58.2%) asset component of BDC Sarawak.


220
The end-financing activities declined further as
borrowers continued to redeem their loans due to
competitive lending rates offered by banking
institutions. As a result, loans outstanding declined
to RM1 million as at end-2003 (2002: RM1.4 million).
Meanwhile, the investment portfolio, which
accounted for 12.4% of total assets of RM86.4
million, increased by 6.4% (2002: -38.8%) to
RM10.7 million.
Shareholders’ funds (RM38.7 million) and borrowings
from financial institutions (RM20.3 million) remained
the major source of funds to BDC Sarawak, with a
combined share of 68.3% of total resources.


External Relations
222
Economic Surveillance
222-223
International Financial Architecture
223
External Relations with the IMF
223-224
Islamic Banking
224
Combating Money Laundering and Terrorist Financing
224-229
Financial Sector Liberalisation
229-232
Regional Co-operation
231
White Box: Asian Bond Market Initiative
232
Bilateral Co-operation
232
Technical Assistance and Information Exchange


222
External Relations
Discussions at regional and international fora during
2003 focussed on promoting growth, enhancing
macroeconomic surveillance, strengthening
capacities, and deepening regional financial
collaboration. To take these agenda forward, Bank
Negara Malaysia continued to participate actively in
all key international and regional fora.
Economic Surveillance
The surveillance initiatives undertaken by the regional
groupings, including the ASEAN+3, South-East Asian
Central Banks (SEACEN), and Executives Meeting of
East-Asia and Pacific (EMEAP), were aimed at
complementing surveillance activities of the
international financial institutions. The meetings
focussed on macroeconomic policy management,
monetary and financial stability issues as well as
exchange of experiences in financial sector reforms.
In addition to the regional fora, surveillance issues
were also discussed at meetings of the Bank for
International Settlements (BIS).
Bank Negara Malaysia hosted the Sixth Meeting of
the Working Party on Monetary Policy in Asia in
Kuala Lumpur on 5-7 November 2003. The Meeting,
chaired by the BIS, was attended by senior officers
from 20 central banks and monetary authorities from
the Asian and G10 economies. The Working Party, a
group initiated by the BIS, meets annually to review
recent global and regional economic developments
and outlook, and its implications for monetary and
financial policies.
Malaysia participated in several initiatives by the
multilateral financial institutions to strengthen the
financial sector, in particular, in the work to
strengthen risk management in financial institutions.
At the International Monetary Fund (IMF), Malaysia
led the South-East Asia (SEA) Voting Group Office in
the meeting of experts on the guide for compiling
financial soundness indicators. The compilation
would provide guidance to member countries on the
concepts, definitions, data sources and techniques
Economic surveillance discussions covered macroeconomic policy
management, monetary and financial stability issues and
strengthening banking systems. Further progress was seen in the
area of developing codes and standards to strengthen financial
systems.
for the compilation and dissemination of the core
and encouraged sets of financial soundness
indicators. The set of data that member countries are
encouraged to compile and disseminate include 27
indicators on deposit taking institutions, other
financial corporations, non-financial corporate sector,
households, market liquidity and real estate markets.
At the BIS, Malaysia was part of the regional initiative
to enter into a consultative process in relation to the
Basel Accord to take account of the special
characteristics of banking operations in emerging
market economies, particularly those from the
region. Bank Negara Malaysia, as Chairman of the
EMEAP Working Group on banking supervision,
compiled and conveyed the views of member
countries of the EMEAP group to the Basel Committee
on Banking Supervision (BCBS). In August 2003, Bank
Negara Malaysia organised dialogue sessions between
the BCBS and regulators from EMEAP member
countries and India, as well as between the banking
industry of these countries and the BCBS. The Bank
also facilitated the participation of the domestic
banking sector in the Quantitative Impact Survey that
was conducted by the BIS during the year.
International Financial Architecture
The work on reform of the International Financial
Architecture (IFA) during 2003 focussed mainly on
crisis prevention measures, particularly through
developing a voluntary code of conduct for crisis
resolution. While there was continued opposition to
the IMF proposal of sovereign debt restructuring,
efforts to develop a Code of Good Conduct for parties
involved in sovereign debt restructuring made some
progress on including collective action clauses (CACs)
in international sovereign bonds.  While there was no
general acceptance to the inclusion of the CACs,
members were willing to accept such inclusions
provided the Code could accommodate country-
specific circumstances, by providing a degree of
flexibility in its application. Malaysia had, since 2000,
issued bonds that included CACs.


External Relations
223
A set-back in the IFA reform process was in the area of
up-front IMF liquidity support. After the 1997 Asian
Financial Crisis, the IMF introduced the Contingent
Credit Line (CCL) facility. The objective was to provide
front-loaded financial support. Access, however, was
confined only to member countries with strong
economic policies, which face short-term balance of
payments problems arising from unexpected external
developments. The facility has not been used by
member countries since it was introduced in 1999.
The IMF finally conceded to discontinue the CCL from
end-November 2003 when all efforts to improve the
design, access and implementation procedures had
not resulted in a scheme that would be practical in
assisting member countries.
Another area lacking progress in the IFA reform
efforts was in redressing the governance of the IMF.
Lack of consensus on according higher
representation in IMF decision making process to
non-G10 countries resulted in the 12th General
Review of Quotas being concluded in January 2003,
without any adjustment to the IMF quotas.
Developing and emerging economies continued to
view adjustment of the IMF’s quota structure as
critical since the current IMF quotas did not reflect
the increased significance and importance of the
emerging market economies in the world economy.
This issue would be pursued during the 13th General
Review of Quotas, which covers the period from
February 2003 to January 2008. Developing and
emerging economies are expected to maintain their
position on the realignment of the IMF quotas to
promote a more balanced voting structure at the IMF,
in line with the principle that relative voting strength
of members must reflect their relative economic
position in the global economy.
Notwithstanding the failure of developing countries
to secure higher quotas in the IMF, the SEA Voting
Group in the IMF and the World Bank set up two
focus groups to improve the effectiveness and
efficiency of the Voting Group Offices in
representing members’ interests and in participating
in policy discussions at the IMF and the World Bank
Executive Boards.  Bank Negara Malaysia was tasked
to lead in the area of improving the work process at
the IMF SEA Group Office. The final report of the
The IMF’s Article IV report on Malaysia concluded that the country
was well placed in the near term to benefit from the projected
global upturn, with the outlook biased on the upside.
Focus Group was endorsed by the Governors of the
SEA Group at the IMF/World Bank meeting in Dubai
in September 2003. A new rotation scheme,
commencing from November 2004 to October
2016, was also approved with Malaysia securing
greater representation at senior positions. Under
this rotation framework, Malaysia will assume the
post of Executive Director and lead the SEA Group
Office for a period of two years from November
2004 to October 2006.
External Relations with the IMF
Malaysia continued to engage the IMF during the
annual Article IV consultations on Malaysia’s
macroeconomic performance and policy issues for
2003 and expectations for 2004. The IMF’s
assessment of the management of the economy for
2003 was published as a public information notice
following the conclusion of the IMF Executive Board’s
discussions on Malaysia. The Managing Director of
the IMF visited Malaysia in September.
He noted the progress of reforms had enabled
Malaysia to sustain economic growth in spite of
weaknesses in the external environment.
Malaysia continues to maintain its net creditor status
in the IMF. Since September 2002, in line with
Malaysia’s strong balance of payments and
international reserves position, Malaysia has been
included in the IMF’s operational budget’s Financial
Transaction Plan (FTP).  Under the FTP
, selected IMF
members with strong balance of payments and
international reserve positions may be called upon to
provide foreign exchange resources to support the
IMF’s financial operations.  Under the FTP
, Malaysia
was called upon to transfer SDR45 million for the
period March to May 2003.
Islamic Banking
In the area of Islamic banking and finance, Bank
Negara Malaysia played an active role in the Islamic
Financial Services Board (IFSB), particularly through
the IFSB Council and Technical Committee meetings.
During the year, the IFSB finalised the guidelines for
the preparation of prudential standards for Islamic
financial institutions, and initiated the process of
preparing two standards, namely the standard on risk
management and standard on capital adequacy. In


224
this connection, the IFSB conducted two workshops
on risk identification in October 2003 in order to
improve the understanding of the risks faced by
Islamic financial institutions. These workshops were
attended by participants from Islamic banking
institutions in Bahrain, Iran, Jordan, Kuwait, Malaysia,
Pakistan, Qatar, Saudi Arabia and Sudan.
In 2003, the Central Bank of Egypt, Central Bank of
Jordan, Qatar Central Bank and Ministry of Finance,
Brunei Darussalam, became full members of the IFSB.
Three international organisations, namely, the Bank
for International Settlements, International Monetary
Fund and the World Bank, became associate
members of the IFSB, while the Asian Development
Bank became an observer. At end February 2004, the
IFSB had 36 members, comprising 13 full members, 3
associate members and 20 observers.
Combating Money Laundering and Terrorist
Financing
Malaysia continued to be at the forefront of global
efforts to combat money laundering activities and
the financing of terrorism. During the year, the
Malaysian Parliament passed the Anti-Money
Laundering (Amendment) Act 2003 to extend the
scope of the Anti-Money Laundering Act 2001
(AMLA) to include measures to be taken to prevent
terrorism financing offences and provisions to freeze,
seize and forfeit terrorist properties.
In July 2003, Bank Negara Malaysia was admitted as
a member of the Egmont Group of Financial
Intelligence Units. The Egmont Group provides a
forum to expand and exchange information on
financial intelligence, improve expertise and
capabilities of personnel, and foster better
communication among financial intelligence units.
Within the Asia/Pacific Group on Money Laundering
(APG), Malaysia became a member of the APG
Steering Group for a period of one year, up to June
2004. The Steering Group plays an advisory role in
the areas of key governance issues in the APG,
which include the revision of the Financial Action
Task Force (FATF) standards and modalities to meet
the increased international pressure for countries to
comply with the revised standards.
In line with the liberalisation path charted under the Financial
Sector Masterplan, Malaysia implemented further unilateral
liberalisation in the banking and insurance sectors in 2003.
Malaysia participated in the training and technical
assistance needs analysis that was conducted by
consultants commissioned under the Asia-Europe
Meeting (ASEM) Anti-Money Laundering Project.
The report on Malaysia was finalised in February
2003, with the ASEM consultants’ conclusion being
that Malaysia’s anti-money laundering system was
well developed, integrated and supported by
capable and professional staff across a number of
agencies. The ASEM consultants had acknowledged
Malaysia’s efforts in constructing an effective system
as well as the development of sound legislation,
effective institutions and well-trained staff.
Financial Sector Liberalisation
World Trade Organisation
In 2003, negotiations to further liberalise the services
sector, including financial services, at the World Trade
Organisation (WTO) continued to focus on the
“request and offer” phase, which began on 28
March 2001. The negotiations were generally based
on requests for market opening submitted by
member countries to a trading partner and offers
submitted by the trading partner. These were
conducted through bilateral discussions between
0
5
10
15
20
25
30
35
40
1999
2000
2001
2002
2003
Year
No. of commercial banks
0
5
10
15
20
25
30
35
Percent (%)
Graph 7.1
Foreign Participation in the Malaysian 
Commercial Banking Sector
Total no. of commercial banks (including the two Islamic banks)
No. of fully foreign-owned banks
No. of domestically-owned banks with foreign interest
Average foreign share (%) of equity across domestically-owned 
banks with foreign interest
Foreign share (%) of total commercial bank assets 
(comprising share of fully foreign-owned banks and other 
foreigners via equity participation in domestically-owned banks)


External Relations
225
Graph 7.2
Foreign Participation in the Malaysian Insurance 
Industry
Total no. of insurers
No. of foreign-owned insurers
Aggregate foreign market share (%) of 
general insurance premiums
Aggregate foreign market share (%) of 
life insurance premiums
0
10
20
30
40
50
60
70
1999
2000
2001
2002
2003
Year
No. of insurers
0
10
20
30
40
50
60
70
80
90
Percent (%)
members. The deadline for completion of
negotiations is 1 January 2005.
Table 1:
Financial Services Liberalisation Measures Since 2000
Year
Banking Sector
2000
•
The maximum total credit facilities that could be obtained by non-resident controlled
companies (NRCCs) from foreign-owned banking institutions in Malaysia was increased from
40% to 50% in December 2000.
•
Licensed Offshore Banks in the Labuan International Offshore Financial Centre (Labuan
Offshore Banks) would be allowed to invest in ringgit assets/instruments in Malaysia for their
own accounts, though not on behalf of their clients.
•
Licensed commercial banks, including the foreign-owned banks, and Bank Islam Malaysia
Berhad in Malaysia (licensed banks) were allowed to extend in aggregate an intra-day
overdraft facility of not exceeding RM200 million and an overnight facility of not exceeding
RM10 million to non-resident stockbroking companies and non-resident global custodian
banks to finance funding gaps due to inadvertent delay in relation to settlement for trade on
the KLSE. In addition, they can also enter into short-term currency swap and/or outright
forward contracts to cover for purchase of shares on the KLSE.
Non-banking financial sector (excluding insurance)
•
The maximum foreign equity limits in a stockbroking company and a financial leasing
company were increased to 49% from 30% effective 1 July 2000.
Banking Sector
2001
•
Foreign-owned banking institutions were allowed to set up communicative websites from
1 January 2001.
The Fifth Ministerial Conference (5th MC) to
undertake a mid-term review of the progress of
multilateral trade negotiations under the Doha
Development Agenda (DDA), including for
negotiations on trade in financial services, ended
without consensus. There were wide differences in
the positions of developed and developing country
members on the new issues of trade and investment,
trade and competition policy, transparency in
government procurement and trade facilitation.
Notwithstanding this outcome, the 5th MC agreed on
the need for member countries to continue working
on outstanding issues of the DDA. These
negotiations are ongoing among trade negotiators
in Geneva.
Malaysia has maintained an undertaking of
progressive liberalisation of financial services as part
of the overall measures to further develop the
domestic financial sector.  In line with the
liberalisation path charted under the Financial Sector
Masterplan, Malaysia has taken several steps to
unilaterally liberalise the banking and insurance
sectors in 2003 (see Table 1).


226
•
Banking institutions (including the foreign-owned banks) in Malaysia were allowed to extend
credit facilities in ringgit to finance the purchase and/or construction of one immovable
property for non-residents who participate in the Silver Hair Programme implemented by the
Immigration Department of Malaysia.
•
Financial institutions (including the foreign-owned banks) were allowed to extend up to three
credit facilities in ringgit to non-residents to finance the purchase or construction of any
property in Malaysia (excluding for the purchase of land), subject to their own internal credit
assessment guidelines.
•
Banking institutions (including the foreign-owned banks) in Malaysia were allowed to effect
transfers involving External Accounts and another External Account and/or Resident Account
of different account holders by way of:
(a) Automated Teller Machine transfer up to RM5,000 per person/company, per day, per bank
for any purpose;
(b) Internet-bank transfers up to RM5,000 per person/company, per day, per bank for any
purpose; and/or
(c) Cheques up to RM5,000 per cheque for any purpose.
Insurance sector
•
All insurers with the requisite minimum risk management and security systems in place were
allowed to offer the full range of life and general insurance products through the internet
with effect from April 2001.
Banking Sector
2002
•
Foreign-owned banking institutions were allowed to offer transactional internet banking from
1 January 2002.
•
Internal credit lines used solely to facilitate drawing against uncleared cheques, granted by
licensed banks (including the foreign-owned banks) to NRCCs, were excluded from the
computation of the NRCC’s total domestic credit facilities. Licensed banks were also permitted
to allow NRCCs to overdraw their current accounts for amounts of up to RM500,000 per
account for a period not exceeding 2 working days.
•
Banking institutions (including the foreign-owned banks) in Malaysia were allowed to extend
additional ringgit credit facilities to any non-resident up to an aggregate of RM5 million per
non-resident to finance projects undertaken in Malaysia. Prior to this, credit facilities in ringgit
to a non-resident, for purposes other than purchases of three immovable properties or a
vehicle, were limited to RM200,000.
Insurance sector
•
The areas in which insurers may employ expatriates were expanded to include, in addition to
the fields of specialised underwriting, actuarial and information technology previously
provided for, other areas involving product research and development, risk management and
investment.
Banking Sector
2003
•
Licensed banks (including the foreign-owned banks) in Malaysia were allowed to extend
overdraft facilities in ringgit not exceeding RM500,000 in aggregate to a non-resident
customer, provided such overdraft facilities are covered by fixed deposits placed by the non-
resident customer with the licensed banks in Malaysia. These overdraft facilities were in
addition to all ringgit credit facilities allowed to be extended freely by banking institutions
since 21 November 2002.


External Relations
227
•
The 50% limit on the maximum total credit facilities that could be obtained by NRCCs from
foreign-owned banking institutions in Malaysia was removed on 1 April 2003.
•
The overnight limit for foreign currency account (FCA) to retain receipts arising from export of
goods (export receipts) for Approved Operational Headquarters (OHQ) was increased to
USD70 million from USD10 million. The maximum overnight limit on export FCA of other
resident exporters was also raised to USD70 million.
•
Residents may invest in investment products that are linked to foreign currency denominated
derivatives that are offered by licensed banks (including the foreign-owned banks) in Malaysia.
The foreign currency funds used for the investment that are utilised from the residents’ FCA
will be earmarked and computed as part of the aggregate overnight balances of the FCA of
the residents.
•
Allow up to three new Islamic banking licences to qualified foreign players.
Insurance sector
•
Effective 17 April 2003, foreign-owned insurers with foreign shareholding not exceeding 51%
were allowed to open not more than two branch offices in one year.
Banking Sector
2004
•
To enhance cash flow management for supporting value chain expansion in Malaysia, licensed
banks (including foreign-owned banks) can retain higher amount of foreign currency funds
for residents in FCA:
-
Up to a maximum of USD100 million (previously USD70 million) of export receipts.
-
Any amount of non-export receipts for residents with domestic borrowing (previously
need approval).
-
Up to USD150,000 for education/employment purpose (previously USD100,000).
•
Labuan Offshore Banks are allowed to maintain FCA for residents:
-
Up to USD0.5 million of non-export receipts for residents without domestic borrowing
(previously need approval).
-
Up to USD150,000 for education/employment purpose (previously USD100,000).
-
Any amount overseas foreign currency funds for resident individuals.
•
To enhance access to ringgit funds for business requirements in Malaysia, the various limits for
banking institutions lending to non-residents in ringgit have been consolidated to one single
aggregate limit of RM10 million for use in Malaysia for any purpose (excluding stockbroking
company, custodian bank and correspondent bank).
•
The extension of property loans in ringgit by residents, including licensed banks, to non-
residents now includes the purchase of land (previously not allowed).
•
Licensed banks are allowed to extend an aggregate overnight overdraft facility of RM200
million (increased from RM10 million) to a non-resident stockbroking company or a non-
resident custodian bank to facilitate settlement for purchase of shares listed on the KLSE.
•
Resident individuals employed or staying abroad with foreign currency funds sourced from
abroad are allowed to invest in any foreign currency assets, including those offered by
licensed banks, approved licensed merchant banks and Labuan Offshore Banks.
•
Multilateral Development Bank and foreign multinational corporation issuers of ringgit-
denominated bonds in Malaysia may enter into forward foreign exchange contracts with
onshore licensed banks to hedge their currency risks arising from the issuance of the ringgit
denominated bonds. Non-resident investors subscribing to these issues can also hedge their
foreign exchange risks.


228
China
Singapore
Thailand
Date Agreement came into effect
Negotiations concluded
Agreements under negotiations
Proposed (negotiations not started)
Chile, New Zealand and Singapore
European Free Trade Association (EFTA) comprises Switzerland, Iceland, Liechtenstein and Norway
1
2
USA
Bilateral Free Trade Arrangements (FTA)s
for Selected Regional Countries since 2001
July 2003 
November 2002 
January 2003 
January 2004 
January 2004 
January 2001 
Sri Lanka
Peru
Pacific Three1
New Zealand
Mexico
Korea
Jordan
Japan
India
Hong Kong
EFTA2
Canada
Bahrain
Australia
ASEAN
Source: Various publications
Increased foreign presence is also through strategic
alliances between foreign players and local
entities. These included bancassurance and
outsourcing arrangements undertaken by
domestic-owned financial institutions with foreign
partners.
ASEAN Framework Agreement on Services and
Proposed Free Trade Arrangements
Liberalisation of financial services among the
ASEAN countries is also being effected under the
ASEAN Framework Agreement on Services (AFAS).
A third round of negotiations on financial services
under the AFAS which began in 2002 is expected
to be concluded by 2004. Under this round,
ASEAN member countries will make further
General Agreement for Trade in Services (GATS)-
plus commitments on financial services, that is,
undertake liberalisation measures beyond those
made under the GATS.
Apart from the AFAS, financial services
liberalisation would be covered within the scope of
trade arrangements currently pursued by Malaysia
with partner countries to promote freer trade and
investment regimes. Malaysia has commenced
negotiations on establishing free trade
arrangements (FTA)s with the People’s Republic of
China (under the proposed ASEAN-China free
trade area) and Japan. The proposed FTAs would
complement  existing trade liberalisation initiatives
under the WTO and other regional economic
integration arrangements, namely, the ASEAN Free
Trade Area for goods, the AFAS for services and
the ASEAN Investment Area for investment
liberalisation.


External Relations
229
Japan
China
2003
YEAR
2002
2004
2
November 2002
ASEAN-China
Framework Agreement
signed
1 
3
4
November 2002
ASEAN-Japan Joint
Declaration  signed
October 2003
ASEAN-Japan Framework
for Comprehensive
Economic Partnership
signed
December 2003
Agreed to start
bilateral
negotiations in
2004
January 2004
Bilateral
negotiations
started
June 2004
To conclude negotiations
on trade in goods
2003
Negotations on FTA
ongoing
1 Malaysia participates with other ASEAN countries in negotiations on the proposed ASEAN-China Free Trade Area.
2 The ASEAN-China Framework Agreement on Comprehensive Economic Co-operation was signed on 4 November 2002 to serve as a basis 
for the countries to start negotiations on establishing a free trade area between ASEAN and China.
3 The ASEAN-Japan Joint Declaration on Comprehensive Economic Partnership (CEP) was signed on 5 November 2002 to develop a 
concrete framework to realise such a partnership between ASEAN and Japan.  While considering a framework for the realisation of 
the CEP between ASEAN and Japan as a whole, the Joint Declaration does not preclude bilateral economic partnerships between Japan 
and individual ASEAN countries.  
4 The Framework was signed on 8 October 2003 and provides for consultations among ASEAN and Japan to start from early 2004 on areas 
of facilitation, co-operation, and trade and investment liberalisation, among others.
     
Progress of Malaysia's Negotiations on Proposed Free Trade Arrangements (FTA)s with China and Japan
Regional Co-operation
The momentum of collaborative efforts to strengthen
and deepen regional co-operation picked up in 2003,
with much of the focus being on developing regional
financial markets and enhancing regional financial
stability. These efforts include the strengthening of
Further strengthening of regional co-operation with the
expansion of bilateral swap arrangements under the Chiang Mai
Initiative (CMI); enhanced regional surveillance; and new
initiatives to deepen and broaden Asian bond markets.
Miyazawa Initiative, provide Malaysia with access to
a total of US$6 billion in financing.
An effective surveillance mechanism is essential to
the effectiveness of the CMI arrangement. To
improve regional surveillance, the ASEAN+3 finance
short-term financial support, particularly through the
bilateral swap arrangement; regional surveillance
under the ASEAN+3 forum; and initiatives to meet
the region’s long-term funding requirements through
the development of bond markets.
Further progress was made among the ASEAN+3
countries in the expansion of the bilateral swap
arrangement network under the Chiang Mai Initiative
(CMI). To date, 16 bilateral swap arrangements with
a combined value of US$35.5 billion have been
concluded, and would be available to ASEAN+3
member countries. Of the 16 bilateral swap
arrangements, Malaysia had signed three
agreements. The three, together with Malaysia’s
US$2.5 billion agreement with Japan under the New
forum adopted new mechanisms to enhance the
surveillance processes undertaken under the CMI
arrangement. In this connection, the exchange of
economic reviews and policy dialogues among the
ASEAN+3 countries were further deepened and
broadened with an in-depth analysis of topical
regional issues that would strengthen the region’s
peer review process. Meanwhile, regional
surveillance of capital flows in the Asian region was
further strengthened in 2003 and in early 2004
through data exchange and assessments of
developments among members of the SEACEN
Expert Group on Capital Flows.
The year 2003 witnessed two significant events
towards the development of bond markets in Asia


230
ABMI under 
ASEAN + 3
To identify issues & 
impediments to regional 
bond market development
                                     Asian Bond Fund
                                     under EMEAP
US$1 billion Fund
– invest in US$ denominated
bonds issued by Asian
sovereign & quasi-issuers in
EMEAP economies (except
Japan, Australia and
New Zealand)
SUPPLY
DEMAND
Objective
Broadening & deepening bond markets in the region
with the launch of the US$1 billion Asian Bond
Fund (ABF) and the Asian Bond Market Initiative
(ABMI). The development of deeper and more liquid
bond markets will assist in channelling the large
pool of savings in Asia to fund productive
investment in the region. Together, these initiatives
signal strong official support to expand  regional
bond markets. Under the ABMI, six working groups
have been tasked to identify the necessary
infrastructure and impediments that need to be
removed in order to encourage  the growth of
regional bond markets.
While the voluntary working groups under the
ABMI aim to address supply-side measures deemed
necessary for active participation of both bond
issuers and investors, the ABF complements the
ABMI on the demand-side by taking the first step
towards facilitating the channelling of a portion of
official reserves held by the Asian economies back
into the region. The ABF concept is being studied to
include bonds denominated in regional currencies.
Together, the ABMI and the ABF reflect
strengthened efforts by the public sector to broaden
and deepen the regional bond markets.
Korea
Japan
People’s
Republic
of China
Malaysia
Indonesia
Philippines
People's Republic
of China
Korea
5 October 2001
(US$1 billion)
1
26 July 2002
(US$1 billion)
2
9 October 2002
(US$1.5 billion)
1 
17 February 2003
(US$3 billion)
1
27 August 2001
(US$3 billion)
1 
9 August 2002
(US$1 billion)
29 August 2003
(US$1 billion)
2
1
30 July 2001
(US$3 billion)
1 
11 June 2002
(US$1 billion)
2
6 December 2001
(US$2 billion)
1 
28 March 2002
(US$3 billion)
2
24 June 2002
(US$2 billion)
2
4 July 2001
(US$2 billion)
1 
24 December 2003
(US$1 billion)
30 December 2003
(US$1 billion)
10 November 2003
(US$1 billion)
1 
1 
1 
Singapore
Thailand
Bilateral Swap Arrangement Agreements under the Chiang Mai Initiative
Dates indicate when the agreements were signed. The maximum drawing amount for each agreement is indicated in parentheses. The combined 
total size of the 16 bilateral swap arrangement (BSA) agreements is US$35.5 billion (based on the overall availibility under the BSAs, where the maximum 
drawing amount under two-way swap arrangements is counted twice to reflect the swap amount available to both parties under the agreement). 
1 A one-way swap arrangement where the requesting country under the agreement can request the swap-providing country to enter into a swap transaction. 
2 A two-way swap arrangement where either party could request the other party to enter into a swap transaction under the agreement. 
  
Agreements signed between the Plus Three countries (People's Republic of China, Japan and Korea) and ASEAN countries 
  
Agreements signed among the Plus Three countries 


External Relations
231
Asian Bond Market Initiative
Significance of the ABMI
The Asian Bond Market Initiative (ABMI), launched under the ASEAN+3 Finance Ministers’ forum, is a
comprehensive approach to develop a regional bond market in East Asia. Its aim of creating a deep, broad
and liquid bond market in Asia would further enhance the efficiency of channelling Asian savings into
long-term investments in the region. A deeper Asian bond market will also improve the management of
maturity mismatches present in financing economic activities, facilitate management of currency and
interest rate risks, and improve the overall efficient allocation of capital.
Following the Chiang Mai Initiative, the ABMI is the most significant ASEAN+3 regional financial co-
operation project. Essentially, it reflects the collective effort of the ASEAN+3 finance, central bank and
monetary authorities to improve the financial infrastructure and initiate appropriate policies in supporting
regional bond market development.  Implementation of the ABMI is through a structured approach. Six
voluntary working groups have been set up to identify issues and impediments to bond market
development in a range of areas through regular meetings (see chart). Studies are also being undertaken
by these working groups to recommend modalities for regulatory and legal frameworks that will facilitate
cross-border issuance and investment within the region. The working groups also consult regularly with
key private sector stakeholders, such as multilateral development banks, financial intermediaries and
market participants.
Malaysia’s commitment
Malaysia is fully committed to the successful development of the ABMI and Bank Negara Malaysia is an
active member in all the working groups. Malaysia chairs the Working Group on Foreign Exchange
Transactions and Settlement Issues (Bank Negara Malaysia), and co-chairs the Working Group on Technical
Assistance Co-ordination with Indonesia and the Philippines (Securities Commission). In leading the
Working Group on Foreign Exchange Transactions and Settlement Issues, it has been acknowledged that
the creation of a deep and liquid bond market in Asia needs to be complemented with a sound and
efficient bond settlement system mechanism. Efforts are, therefore, being directed towards establishing a
conducive and enabling environment to facilitate foreign exchange transactions and to address issues
related to timely and cost-effective settlement of cross-border transactions.
As part of the work programme, the Working Group organised a Symposium on Foreign Exchange
Transactions and Settlement Issues in Kuala Lumpur on 20 October 2003 to deliberate on issues pertaining
to foreign exchange transactions and settlement issues in cross-border bond transactions.
Singapore
and Japan
Asian Bond Market Initiative (ABMI)
ASEAN+3 Finance Ministers
Ministers
endorsed the
ABMI on 7
August 2003
Chair country
Comprising
ASEAN+3
Ministry of
Finance,
Central Bank
and Securities
Commission
officials
Creating New
Securitised
Debt
Instruments
Thailand
Korea
Malaysia
China
Indonesia, the
Philippines
and Malaysia
ASEAN+3 Finance and Central Bank Deputies
Voluntary Working Groups
Credit
Guarantee
Mechanisms
Foreign
Exchange
Transactions
and Settlement
Issues
Local and
Regional
Rating
Agencies and
Dissemination
of Information
on Bond
Market
Technical
Assistance
Coordination
Issuance of Bonds
Denominated in Local
Currency by Multilateral
Development Banks,
Foreign Government
Agencies and Asian
Multinational
Companies


232
Increased focus of bilateral co-operation was in the area of
trade and financing, including the use of gold in financing
bilateral trade.
Malaysia accords a high priority to regional co-
operation in training to strengthen domestic
capacities in the financial sector and macroeconomic
management. In this regard, Bank Negara Malaysia
has supported the activities of the SEACEN Research
and Training Centre, which undertakes intensive
central banking training, especially in bank
supervision, macroeconomic policy formulation,
financial stability assessment, and financial reforms.
In 2003, the SEACEN Centre extended its training to
16 non-members while continuing to provide
training to its members, which expanded to 12, with
the admission of the Ministry of Finance, Brunei
Darussalam1. The SEACEN Centre also extended its
collaboration with Japan, and regional groupings and
international institutions such as the Asia-Pacific
Economic Co-operation (APEC), BIS, IMF and the
World Bank. The closer collaboration with a wider
group of countries and institutions has facilitated the
Centre’s work in ensuring broad-based training of
central bankers given the rapid changes in the global
financial markets.
Bilateral Co-operation
In enhancing bilateral co-operation in trade and
financing, progress was made on Malaysia’s proposal
for the Gold-based Trade Payments Arrangement
(GTPA). The GTPA enables a debtor country to settle
its bilateral trade balance using gold.
Promotion of the GTPA was also undertaken through
collaboration with the Islamic Development Bank
(IDB). As a result of this collaboration, member
countries of the IDB unanimously endorsed the GTPA
and agreed to enter into bilateral negotiations in
order to operationalise the scheme. Subsequently,
the GTPA was adopted by the Organisation of the
Islamic Conference (OIC) countries’ Heads of State/
Government at the 10th OIC Summit in October
2003, as contained in the Putrajaya Declaration. On-
going discussions with bilateral trading partners on
GTPA commenced in 2003.
Technical Assistance and Information Exchange
Bank Negara Malaysia continued to encourage
capacity building through technical assistance and
information exchange among central banks and
monetary authorities. In 2003, Bank Negara Malaysia
received 14 foreign participants from 13 central
banks, under the sponsorship of the Malaysian
Technical Co-operation Programme (MTCP), to
attend Bank Negara Malaysia’s central banking and
banking supervision courses.
Bank Negara Malaysia also participated in
collaborative capacity-building efforts under various
regional fora in areas such as banking supervision,
alternative remittance systems, domestic bond
market development, and Islamic banking and
insurance. The development of takaful and
retakaful in Islamic countries was actively promoted
by Bank Negara Malaysia, particularly through the
organisation of international seminars and
workshops, provision of training and consultancy
services as well as sharing of technical expertise
by the Malaysian takaful operators. These
initiatives had contributed to the establishment of
takaful operators in several Developing-8 (D-8)
member countries, namely Bangladesh, Indonesia
and Nigeria.
1 Effective 1 April 2004, SEACEN’s membership will increase to 13 members,
with the admission of the Reserve Bank of Fiji. The other SEACEN members
are the Ministry of Finance, Brunei Darussalam; Bank Indonesia; The Bank of
Korea; Bank Negara Malaysia; The Bank of Mongolia; Central Bank of
Myanmar; Nepal Rastra Bank; Bangko Sentral ng Pilipinas; Monetary
Authority of Singapore; Central Bank of Sri Lanka; Central Bank of China,
Taipei; and Bank of Thailand.


Organisation and 
Human Resource
234-238
Organisation Development – Overview
238-240
Risk Management in Bank Negara Malaysia
241
Organisation Structure


234
ORGANISATION DEVELOPMENT - OVERVIEW
2003 marked the third year of the Bank’s 5-year
Knowledge-Based Organisation (KBO) strategic
development initiative. The initiative was launched in
2000 to enable the Bank to leverage on the
application of knowledge as a critical resource to
enhance productivity and organizational
performance. The Bank’s KBO development efforts
incorporate human resource management, training
and learning management, knowledge management,
information and communication technology
management, corporate governance, information
security management and office space management.
New initiatives implemented in 2003 focused on
content management, improvements to the facilities
and systems available for learning and training,
integration of key and critical information and
communication technology systems as well as the
conceptualization of the organisation performance
measurement system.
The Bank also conducted an independent
organisation climate survey to assess the progress
achieved over the previous three years. The results
indicated that the Bank’s organisation development
initiatives had created a more effective organisation
in terms of leadership, operational efficiency,
knowledge management, communications, career
development, compensation and work-life balance.
Human Resource Management
The Bank continued to enhance the existing human
resource policies and practices, in particular, placed
sharper focus on performance measurement and
rewards management. With the increase in the
Bank’s responsibilities over the recent three years, the
staff strength has also increased. Also, arising from
the changing composition of the workforce in terms
of background, experience and age structure, the
human resource policies have been realigned to the
changing requirements to be relevant.
Cognizance of the changing challenges, there has
been a gradual shift to greater emphasis on
performance-based rewards, opportunities for
learning and development and improved amenities to
enhance the quality of working life. Greater flexibility
and wider choice of reward options were developed
to better position the institution to retain top talent,
Organisation and Human Resource
improve staff productivity, and at the same time be
flexible enough to meet changing staff aspirations at
different stages in their career paths. The
introduction and implementation of flexi benefits
plan, mentoring programmes and active recognition
programmes aim to accommodate these objectives.
In 2003, the Bank introduced new awards for
Cultural and Professional Development while a
Career Management Unit was established to
structure and assist long-term career planning by
staff. The list of approved professional qualifications
for sponsorship by the Bank was also expanded.
Together with the other organisation development
initiatives, such as competency and knowledge
management, more personalized training and wider
availability of learning resources, the human resource
management approach has constantly evolved to
meet the varied priorities of a dynamic workforce.
Consequently, a performance-based culture has
increasingly been embedded in the Bank.
In terms of capacity, the total staff strength of the
Bank increased by 3.5% to 2,295 as at end of 2003.
Staff turnover rate remained low at less than 2%.
In terms of occupational safety and health, the Bank
recognizes that while work and career fulfillment can
have an effect on employee productivity and
commitment, health and safety also contributes to
enhancing the effectiveness of an organisation. During
2003, the Bank embarked on and completed more
structured safety audit programmes. Apart from
ensuring high standards of safety in the office
environment, the Bank provided more avenues for staff
to improve their health and fitness.  The Bank
conducted health talks to enhance awareness on issues
related to stress management, SARS, diabetes and
osteoporosis. A long-term programme covering the
environment, personal resources and health practices is
also being initiated. This five-year programme will be
implemented in stages, beginning from 2004.
Training and Learning Management
The Bank’s drive to promote organisational learning
to facilitate a performance-based culture is reflected
through a number of initiatives implemented in
2003. A programme is now in place that ensures that
the workforce in the organisation has a responsibility
to learn and develop. The learning experience and
training is integrated with performance planning and
evaluation to ensure that the returns on expenditure


Organisation and Human Resource
235
on staff development is maximised. Technology has
been, and will be used more extensively in improving
the delivery of content for learning throughout the
Bank. A Learning Management System has been put
in place to provide tools for staff to gauge their
learning requirements, explore the type of content
available, design a personal learning agenda and
conduct learning more effectively. The anticipated
outcome is the development of a culture more
inclined to online learning, and the capacity to
integrate individual learning with individual staff
performance management.
The Bank’s investment in staff training amounted to
RM8 million during the year 2003, an increase of
45% compared to 2002.  On average, this amounted
to RM3,500 per employee, an increase of 40% from
2002.  An average of 12 training man-days per staff
was achieved for year 2003 (2002 - 11 training man-
days).  Bank-wide training programmes organised by
the Human Resource Development Centre (HRDC)
accounted for 46% of total investment in staff
training with the programmes oriented towards the
building of core functional and management skills
and ICT and leadership skills.
Information and Communication Technology
Management
The use of Information and Communication
Technology (ICT) solutions was expanded and
enhanced to facilitate the development of a
performance driven Knowledge Based
Organisation (KBO). The Bank has embarked on a
technology blueprint for central ICT-Knowledge
Management (KM) services. This framework is to
provide focus for action to address ICT and KM
infrastructure needs and include information and
technology integration. The emphasis is not only in
automating the organisation, but more
importantly, connecting people to people, and
more rapid access to well-organised information
across all relevant spectrum for sound analysis and
decision-making. The ultimate aim is to create an
organisation with highly knowledgeable and
collaborative people where ICT is leveraged
extensively to serve stakeholders.
The Virtual Discussion Room (VDR), Departmental
Homepages (DHP) and other collaboration and
communication services introduced in 2002 continue
to mature with steady growth in usage and content.
In 2003, a new channel – the Corporate Portal
(Kijang.Net) – was introduced to provide a single
window that facilitates awareness and
communication through access to on-line electronic
information services and application systems in the
Bank, as well as polls and surveys.
The Bank will continue to strengthen the security,
reliability and resilience of the ICT infrastructure.
Towards this end, a new state-of-the-art Data Centre
offsite from the Bank’s Head Office is being planned.
Remote access facilities were also implemented to
provide greater flexibility for work and improved
lifestyles among staff as part of the Bank’s Work-Life
Balance initiative.
Information Security Management
In 2003, a revised Information Security Policy was
introduced to optimize the use of the Bank’s
intellectual capital and to facilitate easy access to
information and widespread knowledge sharing to
add value to the Bank without compromising on
controls governing use of sensitive data.
The Information Security policy was benchmarked
against the British Standard 7799 and other
international best practice. The broad framework
encompasses three decision drivers, namely
Technology, Strategy and Usage; Business Initiatives
and Processes; and Risk Management.  The three
drivers define the Information Security framework
used in safeguarding the Bank’s information assets.
The framework will guide security standards within
the information and communication technology
environment, and in the adoption of appropriate
business rules, procedures and staff education
programmes to raise awareness about information
disclosure practices.
The Information Security Management Unit was
established in 2003 to implement the Information
Security policy through appropriate enforcement,
monitoring and recovery processes. The Unit
collaborates closely with the Corporate Governance
Unit as well as the Information Technology Services
Department, which is responsible for data and
communications network management. The
Information Security Policy is expected to promote
greater knowledge sharing within the Bank by
defining the rules of disclosure for restricted
information.
Knowledge Management
The Bank’s knowledge management practices
achieved another milestone in 2003 with the
implementation of a Knowledge Management
Measurement Framework.  The framework will be


236
used to guide future efforts in designing the Bank’s
KM practices by measuring the Bank’s progress
against four criteria – Continuity & Stability,
Competency and Productivity, Innovation &
Responsiveness.  The framework reinforces the
Bank’s existing processes for promoting the
identification, acquisition, application and retention
of knowledge in the organisation.
During 2003, the Bank initiated a series of
knowledge audits to assess knowledge gaps within
the Bank. The knowledge audits, as well as various
other indicators are fed into the KM measurement
framework to enable more effective monitoring of
the progress of KM initiatives. The Bank’s Library
Unit leads the knowledge audits, as well as review
and implement programmes to improve content
management. This includes the Corporate
Taxonomy project which is now under way to map
The successful implementation of new ICT tools,
changes to HR practices, development of a
‘knowledge centric’ library and re-engineering of
training and learning methodologies marks the
Bank’s transition into Phase 3 of the KM Roadmap.
Changes to behavior and culture oriented towards
the proactive use of personal and organisation
knowledge to deliver concrete results in a prompt
manner are expected to yield the desired results
over the next few years.
Office Space Management
The Bank has begun to implement a new office
space design and layout that incorporates elements
of flexibility, efficiency, comfort and ergonomics that
will improve the working conditions for the staff, as
well as provide enabling and broader range of
facilities to assist a knowledge worker.
An open plan office concept was adopted to
and structure the ‘information domain’ of the Bank.
The ‘information domain’ refers to all the types of
information relevant to the Bank, in terms of
subject, media (document or digital database),
confidentiality (public, confidential or secret) and
relationship with other information within the Bank.
The corporate taxonomy will enable effective and
efficient searching, storing and communication of
information within the Bank. Given the exponential
growth in information today, this project will be a
major milestone in enabling the ease of access and
productive use of the knowledge-bank within
the Bank.
enhance flexibility, effective use of space and
harmonisation as part of space management. The
restrictions to individual and acoustical privacy were
managed through low partitions and creation of
additional spaces for small group discussions.
Facilities for teamwork and collaboration were
made widely available by having dedicated
projectors and network devices in all meeting
spaces. Variable lighting, ergonomically structured
chairs and workstations with ample storage space
contributed to workplace safety and staff
convenience.
• KM Strategy
• KM Infrastructure
• Knowledge Processes
• Repositories
• Knowledge Policy
• Knowledge
 
Sharing
 
Culture
• Knowledge
 
Culture
• Learning
 
Organisation
• Knowledge Permeating
• Intellectual
 
Capital
 
Measurement
Phase 1
Initial
Phase 2
Awareness
Phase 3
Reuse and Leverage
Phase 4
Institutionalise
ORGANISATION
OPERATIONAL
EFFICIENCY AND
EFFECTIVENESS
...enhance our
reputation as a
professional,
credible and
responsive
knowledge-
based Central
Bank
ACHIEVING SUSTAINABLE SUPERIOR PERFORMANCE BY
LEVERAGING ON KNOWLEDGE
KM ROADMAP 2001 - 2005


Organisation and Human Resource
237
The Bank’s approach in dealing with office space
management as an issue integral to organisation
development has led to solutions that not only
address space requirements, but also ensure that
the physical space within the Bank reflects the
values espoused by the Bank as a knowledge-based
organisation.
Corporate Governance
In performing its functions as decreed by the
Central Bank of Malaysia Act 1958, the Bank is
guided by its overall mission, aspiration and shared
values. In addition to the Central Banking Act, other
legislations have also extended the objects and
powers of the Bank as well as the specific manner
in which the functions are undertaken. Collectively,
the legislative framework shapes the Bank’s
governance and functional structure that enables
the institution to undertake its roles and
responsibilities.
In compliance with the Act, 12 Board Meetings
were held during the year. In addition, the following
senior management meetings were held - 4 Board
Audit Committee Meetings, 54 Management
Committee Meetings, 4 Reserve Management
Committee Meetings, 4 Risk Management
Committee Meetings, 8 Monetary Policy Committee
Meetings, 17 Financial Stability Committee
Meetings and 6 Payment System Meetings. During
the year, 2 Board Briefings to the Prime Minister and
Minister of Finance were conducted to present the
Bank’s assessment of the banking system, the
financial sector and outlook for the economy. The
Bank also provided an assessment of the
developments and challenges facing the banking
system, the financial sector and the overall
economy, and proposed recommendations to
address these challenges.
Awards
The Board congratulates the Governor, Tan Sri Dato’
Sri Dr. Zeti Akhtar Aziz for the award as ‘The Asia’s
Best Central Bank Governor’ for 2003 by
Euromoney Institutional Investor plc, a UK-based
financial publication house and ‘Global Central
Bank Governor’ for the year 2004 by The Banker,
a monthly magazine published by the Financial
Times Business Limited.
The Board extends its congratulations to Dato’ Ooi
Sang Kuang on being conferred the Darjah Yang
Mulia Pangkuan Negeri (D.M.P
.N.) on the
occasion of the birthday of His Excellency, the Yang
Terutama Yang di-Pertua Negeri Pulau Pinang on 12
July 2003.
The Board also congratulates Encik Yahaya bin Haji
Besah on being conferred the Darjah Johan Negeri
(D.J.N.), Puan Woo Seok Hooi and Puan Khairani
binti Rejab on being conferred the Pingat Jasa
Kebaktian (P
.J.K.) on the occasion of the birthday of
His Excellency, the Yang Terutama Yang di-Pertua
Negeri Pulau Pinang on 12 July 2003, Encik Mohd
Yunos bin Haji Salih, Encik Abdullah bin Lebai
Ahmad, Puan Helen Jeniffer Buma and Encik Loh
Kam Fatt on being conferred the Pingat Mahkota
Perlis (P
.M.P
.) on the occasion of the birthday of His
Royal Highness, the Tuanku Raja of Perlis on 17 May
2003, Encik Abdul Rajap bin Abidin on being
conferred the Pingat Jasa Kebaktian (P
.J.K.) on the
occasion of the birthday of His Excellency, the Yang
di-Pertuan Negeri Melaka on 11 October 2003, Encik
Yap Bee Fatt, Encik Saari bin Rajap dan Encik
Nasaruddin bin Zakaria on being conferred the
Pingat Jasa Kebaktian (P
.J.K.) on the occasion of
the birthday of His Royal Highness, the Sultan of
Pahang Darul Makmur on 24 October 2003 and
Encik Kunchi Raman a/l C V Kluva Chary on being
conferred the Pingat Jasa Kebaktian (P
.J.K.) on
the occasion of the birthday of His Royal Highness
the Sultan of Kedah Darul Aman on 19 January
2003.
As in previous years, the Bank continued to reward
deserving staff with its formal Recognition Awards.
During the Bank’s annual dinner held on 13
September 2003, a total of eight awards were
issued for Academic Achievement, Excellent
Performance, Excellent Team Performance,
Leadership, Innovation, Quality Service, Sport and
Cultural.
Retirement
The Board wishes to place on record its appreciation
and gratitude to the 24 retirees who have rendered
loyal and dedicated service to the Bank. The staff
who retired from the services of the Bank in 2003
are listed in Table 8.1.
The Board of Directors would also like to extend its
gratitude to all Bank staff for their dedication and
commitment in the year 2003. The Board looks
forward to the continued commitment and
professionalism of all staff in the year ahead in
striving for performance excellence in this
challenging and fast changing economic and
business environment.


238
Table 8.1
List of Retirees
No
Name
Department/Branch
1
Puan Rafiah binti Salim
Governor’s Office
2
Encik Che Sab bin Ahmad
Special Investigation
3
Encik Low Koon Seng
Governor’s Office
4
Cik Tan Sook Peng
International
5
Encik Wong Yew Sen
Insurance Supervision
6
Puan Gan Choon @ Gan Soo Mei
Statistical Services
7
Puan Ti Thiow Chen @ Ti Teow Kim
Foreign Exchange Administration
8
Encik Mukhtar bin Yusof
Malaysian Electronic Payment System
9
Encik Che Norudin bin Che Alli
Security
10
Puan Fahimah binti Haji Yaacob
Foreign Exchange Administration
11
Encik Ismail @ Awang Sulong bin Abu Bakar
Human Resource Management
12
Encik John Teo
Foreign Exchange Administration
13
Encik Sidek bin Sabli
Insurance Regulation
14
Encik Tan Ewe Lee
Payment Systems
15
Puan Maznah binti Haji Ali
Bank Regulation
16
Encik Md Hanafiah bin Mohd Zin
Bank Regulation
17
Encik Abdul Rajap bin Abidin
Security
18
Encik Aladdin bin Ibrahim
Security
19
Cik Loo Yuk Ng @ Loh Yee Ee
Statistical Services
20
Puan Siti Norzini binti Abdullah @ Joyce Koh
IT Services
21
Encik Thyagarajah a/l Gurusamy
PPPM Shah Alam
22
Encik Yap Bee Fatt
Foreign Exchange Administration
23
Encik Doraimuthu a/l Changlimuthu
BNM Pulau Pinang
24
Puan Fatimah binti Moin
Finance
25
Encik Sol Ong @ Mohamad Sol bin Sebli
BNM Kuching
26
Encik Sulaiman bin Abu Kassim
Human Resource Development Centre
RISK MANAGEMENT IN BANK NEGARA
MALAYSIA
The Bank’s risk management framework provides
for independent oversight at the supervisory and
operational levels; establishes policies and
processes for good practices; promotes
organisation wide communication; and emphasises
continuous improvement.
Risk Management Structure
With the formation of the Risk Management
Committee (RMC) in 2002, the risk management
structure had evolved further. In 2003, the role of
the departments in operationalising the risk
management framework was brought into greater
focus. At the same time, the relationship of the
Risk Management Unit (RMU) with the
departments and its support functions for the
RMC were sharpened. The other key components
of the risk management structure are the Middle
Office and the Internal Audit Department. During
2003, the RMU assumed the function of a
centralised business continuity management of
the Bank.
Risk Management Practices
In providing supervisory risk management
oversight, the RMC sets the standards and imposes
requirements that ensure that appropriate risk
management practices are embedded into
strategic initiatives, policy formulation and
operations of the Bank. In 2003, the RMC
continued the assessments of departmental reports
on the areas of potential risk and controls, risk
issues, risk events that occurred and their
management. The RMC also engaged in discussion
with the Department Heads on policy and strategic
focus and the approaches to managing existing
and potential risks.


Organisation and Human Resource
239
At the functional level, the Department Heads have
direct responsibility for ensuring that risk
management practices are integral to daily
operations. The departments are required to make an
annual declaration to Management on their review
of the risk profiles of their operations to form an
assessment of the adequacy of departments’ risk
management.
During the year, the RMU provided technical support
and performed its coordination and oversight role.
Specifically, the RMU assisted the departments in
their management reporting by providing guidance
on the approach and reporting requirements. It also
continued to monitor and report on the status of the
annual declaration. Regular audit by the Internal
Audit Department ensured that policies and
procedures were being adopted. The aim is to
provide Management with timely and relevant
information, to ensure that the key risks are
identified and addressed and that decisions are
implemented to achieve their objectives.
Policy Risk
Policy risk is managed through a structured
framework and process for policymaking and
implementation. Major components of the
framework are the internal committees and working
groups for cross-functional consultation and
deliberation. The high-level committees include the
Monetary Policy Committee, Financial Stability
Committee and Management Committee which are
chaired by the Governor. The working groups, whose
membership comprises Assistant Governors and
Department Heads, ensure that all information and
expertise are tapped in the design and formulation of
policy. In certain cases, the consultation process
includes external stakeholders. A policymaking
checklist is also in place to ensure that all implications
have been taken into account in the deliberation of
the policy content and that the procedural
requirements have been met.
The  policymaking mechanism is designed to increase
the prospect of achieving balanced and well-
considered policies. It has provided a formal channel
for the alternative perspectives to be taken into
account at all stages of the policy formulation from
the conceptualisation through to the development
and the issuance of a policy. Since 2002, the
communication aspects of policy implementation
have been centralised in the Corporate
Communication Department and have continued
efforts to strengthen and extend the external
communication to become an integral part of the
work to enhance the effectiveness of policy.
Financial Risk
The main risks in managing the external reserves,
including market, credit and operational risk, are
monitored independently by the Middle Office, a unit
separate from the dealing function. The Middle
Office assesses the risks by monitoring economic and
financial developments affecting major asset classes
and sizable market developments that could have
implications on the Bank’s external reserves portfolio.
The Middle Office also monitors compliance with the
investment guidelines, credit policies and operational
procedures. This is carried out through periodic
review and evaluation of reserve management
activities, taking into account market developments
and dynamics. Reserve management activities are
also subjected to independent checks by the Back
Office, and compliance checks of the internal and the
external auditors.
Enterprise Operational Risk
The operational risk management approach of the
Bank requires ownership of risks, self-assessment,
continual review, escalation of key risk issues and
accountability for control improvement and issue
resolution.
Management fosters the risk management culture
and its risk tolerance levels for the operational
control environment. The RMU establishes and
maintains the overall operational risk management
framework. The Department Heads have the primary
responsibility for managing the risks arising from
their operations and ensuring that an effective
operational control environment is in place in their
business areas. Management considers the periodic
department reports derived from self-assessment and
drawn up from a line perspective, against the overall
Bank perspective and goals. The resulting
comprehensive coverage of operational risk and
event database is a valuable source of information
for in-depth risk analysis and control effectiveness
evaluation.
During the year, the risk management methodology
and toolkit for risk identification, assessment and
reporting were reviewed. Several proposals for
revision were made to incorporate current best
practices. The changes were to enhance the
robustness of the self-assessment methodology and
improve the reporting process as well as the
monitoring of risks and action plans to control risks.


240
Knowledge management initiatives continued to be
pursued, leveraging on information technology, to
harness implicit and explicit information and to allow
for greater accessibility to the users. More extensive
use was made of the Bank’s and the departments’
websites to disseminate information. At the same
time, the Information Security Policy and Standards
was enforced to enhance maintenance of
information integrity and confidentiality.
Business Continuity Management
The Bank has established procedures for business
continuity across all critical departments. The threat
of disruption to monetary and financial system
stability resulting from unexpected events is
managed through the running of a remote recovery
centre and the maintenance of a dedicated
Command Centre at the Head Office. During crisis,
essential personnel are divided into two teams. One
team operates from the Head Office, while the
other team operates at the Bank’s Recovery Centre.
The back up facilities of key systems undergo
regular live-run exercises to provide continuous
assessment of the Bank’s state of readiness to
respond to unforeseen situations. The facilities and
procedures, together with the crisis management
machinery are in place to deal with unexpected
disruptions and challenges. This aspect of risk
management is given priority recognising the
growing need to expect the unexpected. As part of
the strengthening of the Bank’s business continuity
management the Business Continuity Unit (BCU) is
now placed under the RMU. The BCU would have
full-time staff with the necessary expertise to
supervise, coordinate and maintain the Bank’s
contingency arrangements, plans and programmes.


Organisation and Human Resource
241
Secretary to the Board
Mohd Nor bin Mashor
Governor's Office
Ng Chow Soon
Corporate Communications
Abu Hassan Alshari bin Yahaya
Internal Audit
Yahaya bin Haji Besah
Bank Regulation
Nor Shamsiah binti Mohd Yunus
Insurance Regulation
Donald Joshua Jaganathan
Islamic Banking and Takaful
Bakarudin bin Ishak
DFI Regulation
Che Zakiah binti Che Din
Risk Management
Teo Kee Tian
ASSISTANT GOVERNOR
Dato' Mohd Razif bin Abd. Kadir
REGULATION
DEPUTY GOVERNOR
Dato' Mohd Salleh bin Haji Harun
Bank Supervision I
Azizan bin Haji Abd Rahman
Bank Supervision II
Chung Chee Leong
Insurance Supervision
Sani bin Ab. Hamid
Information Systems Supervision
Ramli bin Saad
Payment Systems
Ahmad Hizzad bin Baharuddin
Ahmad Hizzad bin Baharuddin
Property and Services
Zulkifli bin Abd Rahman
Special Investigation
Kamari Zaman bin Juhari
Financial Intelligence
Koid Swee Lian
ASSISTANT GOVERNOR
Datuk Zamani bin Abdul Ghani
SUPERVISION
BOARD OF DIRECTORS
GOVERNOR
Dr. Zeti Akhtar Aziz
IT Services
Hong Yang Sing
Human Resource Management
Mainor bin Awang
Human Resource Development Centre
Lim Lai Hong
Strategic Planning
Mior Mohd Zain bin Mior Mohd Tahir
Corporate Services
Mohd Nor bin Mashor
Security
Ahmad bin Mansur
Currency Management and Operation
Hor Weng Keng
Branches (6)
London Rep. Office
New York Rep. Office
ASSISTANT GOVERNOR
Dato' Mohamad Daud bin Hj. Dol Moin
ORGANISATIONAL DEVELOPMENT
DEPUTY GOVERNOR
Dato' Ooi Sang Kuang
ASSISTANT GOVERNOR
Vacant
INVESTMENT AND OPERATIONS
Investment Operations and Financial Market
Muhammad bin Ibrahim
Finance
Abdul Aziz bin Abdul Manaf
ASSISTANT GOVERNOR
Datuk Latifah Merican Cheong
ECONOMICS
Monetary Assessment and Strategy
V. Vijayaledchumy
Legal
Gopala Krishnan Sundaram
Economics
Dr. Phang Hooi Eng
International
Wan Hanisah binti Wan Ibrahim
Foreign Exchange Administration
Mahdi bin Mohd. Ariffin 
Statistical Services
Chan Yan Kit
BANK NEGARA MALAYSIA
BANK NEGARA MALAYSIA
Organisation Structure




Balance Sheets as at 31 December 2003
Annual Accounts


245
245
CERTIFICATE OF THE AUDITOR GENERAL
ON THE FINANCIAL STATEMENTS OF BANK NEGARA MALAYSIA
FOR THE YEAR ENDED 31 DECEMBER 2003
I have audited the financial statements of Bank Negara Malaysia for the year ended 31 December 2003. These
financial statements are the responsibility of the management. My responsibility is to express an opinion on these
financial statements based on my audit.
2.
The audit has been conducted in accordance with the Audit Act 1957 and in accordance with approved
auditing standards. Those standards require the audit be planned and performed to obtain reasonable assurance
whether the financial statements are free of material misstatement. This audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. Evaluation is also made on
the accounting principles used and the overall financial statements presentation.
3.
In my opinion, the financial statements give a true and fair view of the financial position of Bank Negara
Malaysia as at 31 December 2003 and of the results of its operations for the year then ended in accordance with
approved accounting standards.
(DATUK DR. HADENAN BIN ABDUL JALIL)
AUDITOR GENERAL
PUTRAJAYA
10 MARCH 2004


246
STATEMENT BY CHAIRMAN
AND ONE OF THE DIRECTORS
We, Zeti Akhtar Aziz and Oh Siew Nam being the Chairman and one of the Directors of Bank Negara Malaysia,
do hereby state that in the opinion of the Board, the financial statements are drawn up so as to give a true and
fair view of the state of affairs of Bank Negara Malaysia as at 31 December 2003 and of the results of operations
for the year ended on that date.
On behalf of the Board,
On behalf of the Board,
ZETI AKHTAR AZIZ
 OH SIEW NAM
CHAIRMAN
DIRECTOR
5 MARCH 2004
5 MARCH 2004
KUALA LUMPUR
KUALA LUMPUR


247
247
DECLARATION BY THE OFFICER PRIMARILY RESPONSIBLE
FOR THE FINANCIAL MANAGEMENT OF BANK NEGARA MALAYSIA
I, Abdul Aziz Abdul Manaf being the officer primarily responsible for the financial management of Bank Negara
Malaysia, do solemnly and sincerely declare that the financial statements, are to the best of my knowledge and
belief, correct and I make this solemn declaration conscientiously believing the same to be true and by virtue of
the provisions of the Statutory Declarations Act, 1960.
Subscribed and solemnly declared
)
by the abovenamed at Kuala Lumpur
)
this 5 March 2004.
)
Before me,


248
Bank Negara Malaysia
Balance Sheet as at 31 December 2003
2003
2002
RM
RM
LIABILITIES
Note
Authorised Capital
RM200,000,000
Paid-up Capital
3
100,000,000
100,000,000
General Reserve Fund
4
5,864,876,290
5,398,963,841
Other Reserves
5
36,442,290,538
24,744,032,881
Currency in Circulation
29,445,445,674
27,137,417,900
Deposits:
Commercial Banks, Finance Companies
and Merchant Banks
98,498,572,386
69,864,345,027
Federal Government
4,905,179,432
13,827,163,949
Others
6
6,312,202,946
5,613,870,679
Bank Negara Papers
13,385,045,306
12,280,763,725
Allocation of Special Drawing Rights
7
785,160,395
718,346,440
Other Liabilities
 5,093,884,077
 2,512,656,290
200,832,657,044
162,197,560,732
Profit and Loss Appropriation Account for the Year Ended 31 December 2003
2003
2002
RM
RM
Transfer to General Reserve Fund
465,912,449
331,941,108
Amount Payable to Federal Government
1,000,000,000
500,000,000
1,465,912,449
831,941,108
Notes on the following pages form part of these financial statements.


249
249
2003
2002
RM
RM
ASSETS
Note
Gold and Foreign Exchange
8
166,139,324,237
127,515,059,930
International Monetary Fund Reserve Position
3,652,006,672
3,315,547,927
Holdings of Special Drawing Rights
684,961,188
585,019,336
Malaysian Government Papers
9
98,521,225
29,384,948
Deposits with Financial Institutions
2,893,714,989
2,902,228,350
Loans and Advances
8,946,108,379
8,015,270,790
Deferred Expenditure
10
-
570,720,918
Other Assets
11
18,418,020,354
19,264,328,533
200,832,657,044
162,197,560,732
2003
2002
RM
RM
Net Profit
1,465,912,449
831,941,108
1,465,912,449
831,941,108
Annual Accounts


250
Notes To The Financial Statements - 31 December 2003
1. Principal Activities of the Bank
The Bank’s principal roles and responsibilities are as follows:
(a) achieving monetary stability;
(b) promoting a stable financial system;
(c) ensuring an efficient payment system;
(d) issuing currency in Malaysia; and
(e) acting as a banker and a financial adviser to the Federal Government.
2. Accounting Policies
(a) Gold, Securities and Investments
Gold, securities and investments are stated at cost and provisions have been made for diminution in
value as at 31 December 2003.
(b) Foreign Currency Translation
Assets and liabilities in foreign currencies have been revalued into ringgit at rates of exchange ruling on
the balance sheet date. Transactions in foreign currencies during the year have been translated into
ringgit at rates of exchange ruling on value dates.
The International Reserves comprising Gold and Foreign Exchange, International Monetary Fund Reserve
Position and Holdings of Special Drawing Rights at 31 December 2003 was RM170,476.3 million
equivalent to US$44,862.2 million.
3. Paid-up Capital
The entire issued and paid-up capital of RM100 million is owned by the Government of Malaysia.
4. General Reserve Fund
2003
2002
RM
RM
As at 1 January
5,398,963,841
5,067,022,733
Transfer from Net Profit
465,912,449
331,941,108
As at 31 December
5,864,876,290
5,398,963,841
5. Other Reserves
Other reserves comprise the Exchange Rate Fluctuation Reserve and the Contingency Reserve.
6. Deposits - Others
A substantial part of these deposits comprises deposits from Federal Statutory Authorities.
7. Allocation of Special Drawing Rights
International Monetary Fund (IMF) member countries are allocated Special Drawing Rights (SDR) in
proportion to their subscriptions to the IMF. The allocation represents a dormant liability of the Bank
to the IMF, against which assets are received in SDR from the IMF. The net cumulative of the allocation
was RM785,160,395 equivalent to SDR139,048,000.


251
251
8. Gold and Foreign Exchange
2003
2002
RM
RM
Foreign Securities
131,488,613,346
100,151,230,400
Foreign Deposits
20,113,541,612
14,195,692,918
Balances with Other Central Banks, Bank for
International Settlements (BIS) and IMF
2,510,527,105
2,696,527,431
Others
12,026,642,174
10,471,609,181
166,139,324,237
127,515,059,930
9. Malaysian Government Papers
2003
2002
RM
RM
Malaysian Government Securities
98,521,225
29,384,948
10. Deferred Expenditure
This represents the net deficiency arising from foreign exchange transactions in 1993. The Government has
undertaken to make good this deficiency as and when required to do so by the Bank. As at 31 December
2003, the amount has been fully amortised over a period of 10 years beginning from 1994.
11. Other Assets
Other assets include investments in shares and bonds of RM18,306,865,784 acquired under section 30(1)(j)
and section 30(1)(oo)(i) of the Central Bank of Malaysia Act 1958 (Revised - 1994).
12. Contingent Liabilities
Total contingent liabilities as at 31 December 2003 amounted to RM5,128,030,073. These comprise:
(a) an amount of RM5,045,320,650 which represents the obligation of the Bank to pay in full, in SDR or
other convertible currencies, the amount of Malaysia’s quota in the IMF under the Articles of
Agreement; and
(b) an amount of RM82,709,423 which represents the uncalled portion of the 3,000 units of shares held by
the Bank in BIS. The amount is based on the nominal value (in gold francs) of the uncalled portion and
gold price as at the balance sheet date.
13.
Income Tax
The Bank is exempted from payment of income tax and supplementary income tax as set out in the Income
Tax (Exemption) (No. 7) Order 1989.
Annual Accounts




Annex


Contents
1.
Foreign Exchange Administration Policies
P1
2.
Funds and Guarantee Facility Administered/Funded by Bank Negara Malaysia: Fund Utilisation
P9
3.
Licensed Banking Institutions (as at 31 December 2003)
P10
4.
Financial Institutions Offering Islamic Banking Services  (as at 31 December 2003)
P12
5.
National Shariah Advisory Council Members for Islamic Banking and Takaful
– Session 2001-2003
P14
Key Economic and Financial Statistics
Chapter 1: The Malaysian Economy in 2003
A.1
Gross Domestic Product by Kind of Economic Activity in Constant 1987 Prices
P17
A.2
Growth in Manufacturing Production (1993=100)
P18
A.3
Production of Primary Commodities
P19
A.4
GNP by Demand Aggregates
P20
A.5
Savings-Investment Gap
P21
A.6
Balance of Payments
P22
A.7
Principal Markets for Manufactured Exports
P24
A.8
Principal Export Markets for Electronics
P25
A.9
Principal Export Markets for Electrical Products
P25
A.10
Principal Export Markets for Chemicals and Chemical Products
P26
A.11
Principal Export Markets for Manufactures of Metal
P26
A.12
Principal Export Markets for Optical and Scientific Equipment
P27
A.13
Principal Export Markets for Petroleum Products
P27
A.14
Export Prices of Major Commodities
P27
A.15
Principal Export Markets for Palm Oil
P28
A.16
Principal Export Markets for Rubber
P28
A.17
Principal Export Markets for Saw Logs
P29
A.18
Principal Export Markets for Sawn Timber
P29
A.19
Principal Export Markets for Crude Oil
P30
A.20
Principal Export Markets for LNG
P30
A.21
External Debt and Debt Servicing
P31
A.22
Gross Overseas Investment by Country
P32
A.23
Consumer Price Index (2000=100) Sub-groups of Food
P33
A.24
Producer Price Index (1989=100)
P33
A.25
Supply of Office Space, Retail Space, Condominiums and Apartments in the Klang Valley
P34
A.26
Average Monthly Rentals for Prime Office and Retail Space in the Klang Valley
P34
Chapter 2: Monetary and Fiscal Developments
A.27
Broad Money (M3)
P35
A.28
Money Supply: Annual Change and Growth Rates
P35
A.29
Interest Rates (%)
P36
A.30
Consolidated Public Sector Finance
P37
Chapter 3: Outlook and Policy
A.31
Major Industrial Countries: Key Economic Indicators
P38
A.32
East Asia: Key Economic Indicators
P39


Annex
Chapter 4: The Financial Sector
A.33
Sources and Uses of Funds of the Financial System
P40
A.34
Commercial Banks: Commitments and Contingencies
P41
A.35
Finance Companies: Commitments and Contingencies
P42
A.36
Merchant Banks: Commitments and Contingencies
P43
A.37
Commercial Banks: Income and Expenditure
P44
A.38
Finance Companies: Income and Expenditure
P44
A.39
Merchant Banks: Income and Expenditure
P45
A.40
Commercial Banks: Lending Guidelines to the Priority Sectors
P45
A.41
Finance Companies: Lending Guidelines to the Priority Sectors
P46
A.42
Commercial Banks: Direction of Lending
P47
A.43
Finance Companies: Direction of Lending
P48
A.44
Merchant Banks: Direction of Lending
P49
A.45
Commercial Banks: Non-performing Loans by Sector
P50
A.46
Finance Companies: Non-performing Loans by Sector
P51
A.47
Merchant Banks: Non-performing Loans by Sector
P52
A.48
Islamic Banking System: Sources and Uses of Funds
P53
A.49
Islamic Banking System: Commitments and Contingencies
P53
A.50
Islamic Banking System: Income and Expenditure
P54
A.51
Islamic Banking System: Financing Activities
P55
A.52
Islamic Banking System: Financing to Small and Medium-Sized Enterprises
P55
A.53
Islamic Banking System: Direction of Financing
P56
A.54
Islamic Banking System: Non-performing Financing by Sector
P57
A.55
Banking System: Selected Indicators
P58
A.56
Banking System: Key Data
P59
A.57
Housing Credit Institutions
P60
A.58
Outstanding Housing Loans
P61
A.59
Approved Housing Loans
P61
A.60
Leasing Companies: Sources and Uses of Funds
P62
A.61
Leasing Companies: Income and Expenditure
P62
A.62
Leasing Companies: Financing by Sector
P63
A.63
Factoring Companies: Sources and Uses of Funds
P63
A.64
Factoring Companies: Income and Expenditure
P64
A.65
Factoring Companies: Financing by Sector
P64
A.66
Capital Market Debt Securities: Amount Outstanding
P65
A.67
Urban Credit Co-operative Societies
P66
Chapter 5: Development Financial Institutions
A.68
Development Financial Institutions: Sources and Uses of Funds
P67
A.69
Development Financial Institutions under DFIA: Sources and Uses of Funds
P68
A.70
Development Financial Institutions: Direction of Lending
P69
A.71
Development Financial Institutions under DFIA: Direction of Lending
P70
A.72
Bank Industri & Teknologi Malaysia Berhad
P70
A.73
Export-Import Bank of Malaysia Berhad
P71
A.74
Malaysia Export Credit Insurance Berhad
P71
A.75
Bank Simpanan Nasional
P72
A.76
Bank Kerjasama Rakyat Malaysia Berhad
P72
A.77
Bank Pembangunan dan Infrastruktur Malaysia Berhad
P73
A.78
Other Development Financial Institutions: Core Activities
P73
A.79
Development Financial Institutions: Selected  Data
P74
A.80
Development Financial Institutions: Government Special Funds
P75
A.81
Development Financial Institutions: Bank Negara Malaysia Funds
P76
A.82
Development Financial Institutions: Funds from Multilateral and International Agencies
P77


Annex
P1
Foreign Exchange Administration Policies
Foreign exchange administration rules were further liberalised and simplified in April 2004 (refer to the White
Box: ”Liberalisation and Simplification of Foreign Exchange Administration Rules” in Chapter 3). All regulations
continue to be applied uniformly to transactions with all countries, except Israel, Serbia and Montenegro for
which special restrictions apply. Foreign exchange administration regulations are also applied where appropriate
to prevent recourse to the Malaysian banking system for money laundering and terrorist financing. With the
latest changes, the following are the rules affecting foreign exchange transactions:
I
Current Account Transactions
(a)
Payments for Import of Goods and Services
• There is no restriction on payments to non-residents for import of goods and services. Such payments
must be made in foreign currency except currencies of Israel, Serbia and Montenegro.
• There is no restriction for residents to enter into a forward foreign exchange contract with onshore
licensed banks or approved merchant banks to buy foreign currency against ringgit to make payment
for import from a non-resident.
(b)
Proceeds Arising from Export of Goods (Export Proceeds)
• All export proceeds are required to be repatriated back to Malaysia in accordance with the payment
schedule as specified in the sales contract, which should not exceed six months from the date of
export.
• Export proceeds must be received in foreign currency and must be sold for ringgit or retained in export
foreign currency account (FCA) with onshore licensed banks. The aggregate overnight limits range
between USD30 million and USD100 million, depending on the average monthly export receipts.
Higher limits may be allowed on a case-by-case basis.
• Residents may enter into a forward foreign exchange contract with an onshore licensed bank to sell
foreign currency export proceeds for ringgit or another foreign currency, provided the maturity of the
forward contract is not later than six months after the intended date of export.
• Only resident exporters with annual gross exports exceeding RM50 million equivalent are required to
submit quarterly reports to the Controller of Foreign Exchange (the Controller).
(c)
Import and Export of Currency by Travellers
• Import and export of ringgit up to RM1,000, including demonetised RM1,000 and RM500 notes, and
export of foreign currency up to an equivalent of RM10,000 by residents are allowed. Resident
travellers are required to obtain permission from the Controller and declare in the Traveller’s Declaration
Form (TDF) when they –
- Carry into or out of Malaysia, ringgit notes exceeding RM1,000.
- Carry out foreign currency notes including traveller’s cheques, exceeding the equivalent of RM10,000.
Permission is given within one day of application.
• There is no restriction for non-residents to bring in any amount of foreign currency and/or traveller’s
cheques. Declaration in the Arrival/Departure Card (IMM.26) issued by the Immigration Department is
only required for amounts in excess of the equivalent of USD2,500.


P2
• Non-residents would need to seek permission from the Controller if the amount of foreign currency to
be carried abroad exceeds the amount brought into Malaysia, provided the amount to be taken out is
more than the equivalent of USD2,500.
• Non-residents must obtain permission from the Controller and declare ringgit exceeding RM1,000
being brought into or out of Malaysia.
II
Capital Account Transactions
(a)
Foreign Direct Investment
• There is no restriction on repatriation of capital, profits, dividends, interest and rental income by foreign
direct investors.
(b)
Investment Abroad by Residents
• Onshore licensed banks and approved merchant banks may invest abroad as long as they comply with
the Banking and Financial Institution Act 1989 or Islamic Banking Act 1983 and their approved foreign
currency net open position limit. Remittances for investment abroad must be made in foreign currency.
• Residents, other than onshore licensed banks and approved merchant banks, are required to seek prior
permission from the Controller to remit funds in excess of RM10,000 equivalent in foreign currency for
overseas investment purposes. Permission is based on a set of transparent criteria.
• However, resident individuals may invest any amount in foreign currency in securities under the
Employee Share Option/Purchase Scheme offered by their employers’ overseas parent or related
companies.
• Resident individuals employed or staying abroad with own foreign currency funds sourced from abroad
may invest in any foreign currency assets, including those offered by onshore licensed banks and
licensed offshore banks in Labuan.
• Resident unit trust management companies may invest abroad up to the full amount of the Net Asset
Value (NAV) subscribed by non-residents and up to 10% of the NAV per fund subscribed by residents.
Different funds of a unit trust management company or funds of different companies may be pooled
to benefit from economies of scale when investing abroad. Such investments are required to be in line
with the Securities Commission’s prudential guidelines.
• Resident insurance companies and takaful operators may invest abroad up to 5% of their margin of
solvency (MOS) and up to 5% of their total assets respectively.
• Resident insurance companies and takaful operators may also invest abroad up to 10% of the NAV of
the investment-linked funds that they market. These investments are required to comply with prudential
insurance and takaful regulations issued by Bank Negara Malaysia.
• Resident fund/asset managers may invest abroad up to the full amount of investments by their
non-resident clients and up to 10% of investments by resident clients. These funds by different
companies may be pooled to benefit from economies of scale when investing abroad. Such
investments should be based on the mandate of their clients and in compliance with the Securities
Commission’s prudential guidelines.
(c)
Foreign Currency Credit Facilities Obtained by Residents
• Residents may obtain credit facilities in foreign currency up to the equivalent of RM5 million in
aggregate from onshore licensed banks, licensed merchant banks and non-residents.  Any amount
exceeding the permitted limit would require the prior permission of the Controller. Where the aggregate
amount exceeds the equivalent of RM1 million, the resident is required to provide the Controller with
information on the credit facilities.


Annex
P3
• Residents may also obtain trade financing of any amount in foreign currency from onshore licensed
banks and licensed merchant banks provided the tenure of the credit does not exceed 12 months.
• There is no restriction for repayment of credit facilities obtained as long as such credit facilities have
been obtained in accordance with the relevant foreign exchange administration rules.
(d)
Extension of Credit Facilities to Non-Residents
Foreign Currency Credit Facilities
• Onshore licensed banks may extend credit facilities in foreign currency to non-residents for any purpose.
However, credit facilities extended for the purchase or construction of immovable property in Malaysia
would be subject to similar requirements as for ringgit credit facilities outlined below.
Ringgit Credit Facilities
• Non-bank residents may extend credit facilities in ringgit to a non-resident not exceeding an aggregate
of RM10,000.
• Resident stockbroking companies may extend margin financing facilities to non-resident clients for the
purchase of shares listed on Malaysia Securities Exchange Berhad (MSEB), provided they comply with
all the relevant regulations imposed by MSEB.
• Onshore licensed banks may extend ringgit overnight overdraft facilities in aggregate not exceeding
RM200 million to a non-resident stockbroking company or a non-resident custodian bank. The facilities
are strictly for financing funding timing gaps due to unforeseen or inadvertent/technical administration
errors or time zone delays in relation to settlement of trades on MSEB.
• Residents, bank or non-bank, may extend up to a maximum of three property loans in ringgit to a
non-resident to finance/refinance the purchase or construction of any immovable property in Malaysia,
excluding for the purchase of land only, subject to their own internal credit assessment guideline. All
purchases of immovable properties are subject to the guidelines issued by the Foreign Investment
Committee (FIC). Details of the guidelines can be found at http://www.epu.jpm.my/.
• In addition, banking institutions may extend credit facilities in ringgit up to the aggregate limit of
RM10 million to a non-resident (excluding a non-resident stockbroking company, custodian bank and
correspondent bank) for any purpose for use in Malaysia, other than to finance the purchase or
construction of immovable property.
Prior permission of the Controller is required for the extension of credit facilities exceeding the
aggregate limit.
Swap/Forward
• Onshore licensed banks are allowed to enter into –
(i)
Short-term currency swap arrangements with non-resident stockbrokers and non-resident
custodian banks to cover payment for their share purchases on MSEB; and
(ii) Outright ringgit forward sales contract with non-residents for the same purpose.
The permission is subject to the condition that such contracts are based on firm commitment and
not on anticipated purchases, and for maturity period of up to three working days with no rollover
option.
• Onshore licensed banks and approved merchant banks may enter into forward foreign exchange
contracts with residents to purchase any foreign currency receivables against ringgit from the residents
up to the tenure of the underlying transaction, provided the transaction is supported by firm
underlying commitment to receive such currency.


P4
• Onshore licensed banks and approved merchant banks may also enter into forward foreign exchange
contracts with residents to purchase any foreign currency yet to be received by the resident for another
currency up to the tenure of the underlying transaction, provided the transaction is supported
by firm underlying commitment.
• For forward purchase of export proceeds, the maturity date of the forward foreign exchange contract
should not be later than six months after the intended date of export.
• For forward foreign exchange contract involving two foreign currencies, the use or retention of the
foreign currency being purchased must comply with the current foreign exchange administration rules.
• Onshore licensed banks, approved merchant banks and licensed offshore banks in Labuan may enter
into interest rate swaps with residents, provided the transaction is supported by firm underlying
commitment.
• A resident company which has sold forward foreign currency receivables for ringgit, may temporarily
retain up to the amount of foreign currency receipts received earlier than the maturity date of the
forward foreign exchange contract in its FCA with onshore licensed banks, pending maturity of the
forward foreign exchange contract.
• Multilateral Development Banks (MDBs), where Malaysia is a member, and foreign multinational
corporations (MNCs) wishing to enter into forward foreign exchange contracts with onshore licensed
banks to hedge the currency risks of the MDB and MNC issuers arising from the issuance of ringgit-
denominated bonds would be considered based on the merits of each case.
• Onshore licensed banks may enter into forward foreign exchange contracts with non-residents who
invest in ringgit-denominated bonds issued by MDBs and MNCs to hedge their currency risk arising
from the investment in the ringgit-denominated bonds.
(e)
Portfolio Investments
• There is no restriction for non-resident portfolio investors to repatriate their principal sum and profits
out of the country at any time.
III
Ringgit Credit Facilities to Non-Resident Controlled Companies
• There is no restriction for residents, including foreign-owned banking institutions in Malaysia, to extend
credit facilities in ringgit to a Non-Resident Controlled Company (NRCC) operating in Malaysia up to an
aggregate limit of RM50 million per corporate group or on single entity basis and any amount of short-
term trade financing where the tenure does not exceed 12 months. Residents are required to obtain
prior permission from the Controller to extend ringgit credit facilities exceeding RM50 million in
aggregate to a NRCC. The NRCC has to comply with the 3:1 gearing ratio requirement between its
domestic debt and eligible capital funds only for amounts that exceed RM50 million. Higher gearing
will be allowed on a case-by-case basis.
IV
Issuance of Ringgit Private Debt Securities
• Residents may raise domestic credit facility through the issuance of ringgit Private Debt Securities
regardless of amount, provided the proceeds are not used for financing of investment abroad and/or
for refinancing of offshore borrowing. The issuance of Private Debt Securities must also be in accordance
with the Exchange Control Guideline on Private Debt Securities. The amount issued by the NRCC would
be included as part of the NRCC’s total domestic credit facilities and the rule on the 3:1 gearing ratio
would apply.
• Applications for issuance of ringgit bonds in Malaysia by MDBs, where Malaysia is a member, and
MNCs would be considered based on the merits of each case.


Annex
P5
V
Foreign Currency Accounts of Residents
• Resident exporters may open foreign currency accounts (FCA) with onshore licensed banks to retain
between USD30 million and USD100 million foreign currency export proceeds depending on their
average monthly export receipts.
• The permissible aggregate overnight limits are as follows –
Average Monthly Export Receipts
Aggregate Overnight Limit
(USD million)
Exceeding RM100 million
100
Exceeding RM50 million up to RM100 million
60
Up to RM50 million or for new exporters
30
• In addition, resident exporters are given the option to merge their export and non-export FCA in
accordance with overnight limits imposed on export FCA.
• Resident companies with or without domestic credit facilities may open FCA with onshore licensed
banks to retain foreign currency receivables, other than export proceeds, with no overnight limit.
• Resident companies with or without domestic credit facilities may open FCA to retain foreign currency
receivables, other than export proceeds, up to an aggregate overnight limit of USD500,000 with
licensed offshore banks in Labuan.
• Resident companies may also temporarily retain in their onshore FCA, proceeds that have been sold
forward for ringgit and received earlier than maturity date of the said forward contract.
• Resident individuals may open FCA solely to facilitate education and employment overseas up to an
aggregate overnight limit of –
(i)
USD150,000 with onshore licensed banks;
(ii) USD150,000 with licensed offshore banks in Labuan; and
(iii) USD50,000 with overseas banks.
• Resident individuals with foreign currency funds overseas may maintain FCA, onshore or offshore,
without limit imposed on the overnight balance of the accounts.
• Resident individuals in Malaysia who have foreign currency funds are free to invest in any foreign
currency products offered by onshore licensed banks.
VI
Foreign Currency Accounts of Non-Residents
• Onshore licensed banks and licensed merchant banks may open FCA for non-residents.
• There are no limits on the FCA of non-residents and no restrictions on the inflow and outflow of funds
through the FCA of non-residents.
VII
External Accounts of Non-Residents
• Financial institutions may open accounts in ringgit known as External Accounts for non-residents.
There is no overnight limit on External Accounts. A non-resident may make ringgit cash withdrawal of
any amount from the External Account.
• Non-residents may use ringgit funds in the External Account for the following purposes –
- Purchase of foreign currency excluding the currencies of Israel, Serbia and Montenegro;
- Purchase of ringgit assets in Malaysia;


P6
- Payment for goods and services for own use in Malaysia;
- Payment of administrative and statutory expenses incurred in Malaysia;
- Payment under a non-financial guarantee (where the External Account holder is making payment
upon the guarantee being called upon);
- Extension of ringgit credit facilities to staff in Malaysia in accordance with the terms and conditions
of employment;
- Repayment of ringgit credit facilities permitted by the Controller or in accordance with terms and
conditions of employment; and
- Payments to resident beneficiary for any purpose other than the following –
: Payment for the import of goods and services;
: Extension of ringgit credit facilities to residents other than as permitted by the Controller;
: Settlement under financial guarantees; and
: Payment on behalf of a third party.
• The sources of funds in the ringgit External Accounts may be from –
- Sale of foreign currency excluding the currencies of Israel, Serbia and Montenegro;
- Sale of ringgit assets;
- All income derived in Malaysia including salaries, wages, royalties, commissions, fees, rental,
interest, profits or dividends;
- Proceeds from ringgit credit facilities permitted by the Controller or in accordance with the terms and
conditions of employment;
- Proceeds from repayment of ringgit credit facilities permitted by the Controller or in accordance with
the terms and conditions of employment;
- Transfers from -
: another External Account of the same account holder of any amount;
: another External Account and/or Resident Account of different account holders by way of –
o
Automated Teller Machine transfer up to RM5,000 per person/company, per day, per bank for
any purpose;
o
Internet-bank transfers up to RM5,000 per person/company, per day, per bank for any
purpose.
- Deposit of ringgit notes of an aggregate not exceeding RM10,000 per day; and
- Deposit of cheques up to RM5,000 per cheque for any purpose.
• Ringgit funds in the External Accounts may be converted into foreign currency and repatriated or used
in Malaysia for permitted purposes.
• There is no restriction on the operation of the External Accounts of non-residents working or studying
in Malaysia (including their spouse, children and/or parents who are currently residing in Malaysia),
Central Banks, Embassies, Consulates, High Commissions, Supranational or International organisations
recognised by the Malaysian Government. Such persons or organisations can use funds in the External
Accounts for all purposes, including the permissible purposes referred above.


Annex
P7
VIII
Special Status Granted to Selected Companies
(a)
Offshore Entities in the Labuan International Offshore Financial Centre
• Entities incorporated or registered under the Offshore Companies Act 1990 in the Labuan International
Offshore Financial Centre are declared as non-residents for foreign exchange administration purposes.
• Offshore entities in Labuan may deal in foreign currency other than the currencies of Israel, Serbia and
Montenegro with non-residents.
• All offshore entities may maintain External Accounts with resident banks to facilitate the defrayment
of statutory and administrative expenses in Malaysia.
Offshore insurance entities in Labuan may also use their External Accounts to facilitate the receipt of
insurance premiums and for payment of claims arising from insurance and reinsurance of domestic
insurance business.
• Licensed offshore banks in Labuan may receive payments in ringgit from residents arising from fees,
commissions, dividends or interest from deposit of funds.
• Licensed offshore banks in Labuan may invest in assets/instruments in Malaysia for their own account
provided investments are transacted directly with resident banking institutions or resident brokers. The
investments must not be financed by ringgit borrowings.
(b)
Multimedia Super Corridor Companies
• Companies operating in Multimedia Super Corridor (MSC) which are incorporated as separate legal
entities, are given exemption from foreign exchange administration regulations upon the companies
being awarded the MSC status by the Multimedia Development Corporation. The exemption granted to
the MSC companies is solely for transactions undertaken on their own account. However, prior
permission should be obtained to deal with Specified Persons and in Restricted Currencies of Israel,
Serbia and Montenegro. In addition, the MSC companies are also required to submit the necessary
statistical forms/reports/statements for monitoring purposes.
(c)
Approved Operational Headquarters
• Approved Operational Headquarters (OHQs) may –
(i)
Open FCA with onshore licensed banks to retain export proceeds in foreign currency up to an
aggregate overnight balance equivalent to USD100 million, regardless of the amount of export
receipts.
(ii) Open FCA with onshore licensed banks, licensed offshore banks in Labuan or overseas banks
for crediting foreign currency receivables, other than export proceeds, with no limit on the
overnight balances.
(iii) Obtain domestic credit facilities in ringgit not exceeding RM50 million, provided the ringgit
funds are used in Malaysia.
(iv) Obtain any amount of foreign currency credit facilities from onshore licensed banks and licensed
merchant banks in Malaysia, and from any non-resident, provided the OHQ does not on-lend to, or
raise the funds on behalf of, any resident. Proceeds from such foreign currency credit facilities can
be extended to their related companies overseas or invested abroad provided their aggregate
domestic credit facilities in ringgit does not exceed RM50 million.


P8
(d)
Approved International Procurement Centres
• Approved International Procurement Centres (IPCs) may –
(i)
Retain any amount of export proceeds in FCA maintained with onshore licensed banks for
approved IPC activities only.
(ii) Enter into forward foreign exchange contracts with onshore licensed banks to hedge exchange
risk based on projected volume of export.
(e)
Approved Regional Distribution Centres
• Approved Regional Distribution Centres (RDCs) may –
(i)
Retain any amount of export proceeds in FCA maintained with onshore licensed banks for
approved RDC activities only.
(ii) Enter into forward foreign exchange contracts with onshore licensed banks to hedge exchange
risk based on projected volume of import and export.


Annex
P9
Funds /  
Guarantee Facility
Terminated Funds
Ship Financing Facility 
Fund for Food 
Bumiputera Entrepreneurs Project  Fund 
Fund For Small and Medium Industries 2 
New Entrepreneurs Fund 2 
Rehabilitation Fund for Small Businesses 
Special Relief Guarantee Facility8
30-Oct-92
600
1,3003
3003
2,0001,3
1,1502,3
800
04-Jan-93
10-Feb-00
15-Apr-00
15-Jul-01
01-Nov-03
21-May-03
06-Feb-88
18-Jun-90
29-Oct-93
10-Mar-90
05-Feb-91
01-May-98
04-Jan-93
02-Jan-98
12-Dec-89
23-Nov-98
03-Jul-01
01-Jan-91
29-Feb-92
31-Oct-95
31-Dec-97
04-Aug-99
04-Aug-99
03-Apr-00
03-Apr-00
15-Jul-01
01-Nov-03
01-Nov-03
  1,000
38
6,946
596
1,929
1,336
–
  –
38
8,176
893
3,527
1,952
0
  73
0
1,230
297
1,598
616
0
  73
577
1,296
317
1,049
652
–
 –
 –
 –
577
1,411
438
2,285
1,077
0
  40
0
115
121
1,236
425
0
  40
543
1,299
362
1,588
807
0
341
698
92
1,410
771
0
Enterprise Rehabilitation Fund 
Abandoned Housing Projects Fund 
Fund to Accelerate the Construction 
    of Low-Cost Houses 
Special Fund for Tourism
Industrial Adjustment Fund
Special Scheme for Low and Medium
    Cost Houses 
Bumiputera Industrial Fund 
Fund for Small and Medium Industries 
New Entrepreneurs Fund 
Rehabilitation Fund for Small and Medium
    Industries 
Entrepreneurs Rehabilitation and
    Development Fund
 5003
 2003
 1,8503
 1,2503
 3303,4
 104
 600
 500
 100
 100
 1,000
1   The allocation was increased from RM650 million to RM2,000 million in 2003 
2   The allocation was increased from RM500 million to RM1,150 million in 2003
3   Revolving funds 
4   Unutilised allocations were transferred to Rehabilitation Fund for Small Businesses 
5   Approval withdrawn by banks/borrowers and/or amount required were reduced by banks/borrowers 
6   Additional funding requirements 
7   Borrowers’ outstanding loan balances with the lending institutions 
8   A guarantee scheme through Credit Guarantee Corporation Malaysia Berhad funded by Bank Negara Malaysia to assist businesses affected by the Severe Acute Respiratory Syndrome (SARS)
Funds and Guarantee Facility Administered/Funded by Bank Negara Malaysia: Fund Utilisation
Date 
established
Fund 
allocation 
(RM m)
Fund 
allocation 
(RM m)
Number of applications approved
Number of applications approved
Amount approved (RM m)
Total disburse- 
ments as at 
end 2003 
(RM m)
Outstanding 
as at end 
20037
(RM m)
Total disburse- 
ments as at 
end 2003 
(RM m)
Outstanding 
as at end 
20037
(RM m)
Annual 
change
Annual 
change
Total as at end
Annual 
change
Date 
established
Date 
terminated
2002
2003
2002
2003
2002
2003
Amount approved (RM m)
Total as at end
Annual 
change
2002
2003
Total as at end
Total as at end
764
894
74
331
54
297
194
25
203
95
98
660
95
99
5,426
3,825
3,140
297
21
764
74
54
194
25
96
99
5,420
3,126
322
33
0
0
0
0
0
-25
0
-65
-145
25
12
1,432
323
2
896
331
297
203
95
604
95
3,776
1,421
352
3
26
0
0
0
0
-565
0
-495
-115
29
1
850
346
297
203
95
579
91
3,724
1,396
306
1
109
12
0
43
14
13
51
2,097
445
236
1


P10
Licensed Banking Institutions (as at 31 December 2003)
Commercial Banks
1. ABN AMRO Bank Berhad
2. Affin Bank Berhad
3. Alliance Bank Malaysia Berhad
4. AmBank Berhad
5. Bangkok Bank Berhad
6. Bank of America Malaysia Berhad
7. Bank of China (Malaysia) Berhad
8. Bank of Tokyo-Mitsubishi (Malaysia) Berhad
9.
10.
Bumiputra-Commerce Bank Berhad
11.
Citibank Berhad
12.
Deutsche Bank (Malaysia) Berhad
13.
EON Bank Berhad
14.
Hong Leong Bank Berhad
15.
HSBC Bank Malaysia Berhad
16.
J.P
.
 Morgan Chase Bank Berhad
17.
Malayan Banking Berhad
18.
OCBC Bank (Malaysia) Berhad
19.
Public Bank Berhad
20.
RHB Bank Berhad1
21.
Southern Bank Berhad
22.
Standard Chartered Bank Malaysia Berhad
23.
The Bank of Nova Scotia Berhad
United Overseas Bank (Malaysia) Berhad
Islamic Banks
1. Bank Islam Malaysia Berhad
2. Bank Muamalat Malaysia Berhad
1  Merged with Bank Utama (Malaysia) Berhad with effect from 1 May 2003


Annex
P11
Finance Companies
1. AFFIN-ACF Finance Berhad
2. Alliance Finance Berhad
3. AmFinance Berhad
4. Bumiputra-Commerce Finance Berhad
5. EON Finance Berhad
6. Hong Leong Finance Berhad
7. Kewangan Bersatu Berhad
8. Mayban Finance Berhad
9. Public Finance Berhad
10. RHB Delta Finance Berhad
11. Southern Finance Berhad
Merchant Banks
1. Affin Merchant Bank Berhad
2. Alliance Merchant Bank Berhad
3. AmMerchant Bank Berhad
4. Aseambankers Malaysia Berhad
5. Commerce International Merchant Bankers Berhad
6. Malaysian International Merchant Bankers Berhad
7. Public Merchant Bank Berhad
8. RHB Sakura Merchant Bankers Berhad
9. Southern Investment Bank Berhad
10. Utama Merchant Bank Berhad


P12
Financial Institutions Offering Islamic Banking Services
(as at 31 December 2003)
Islamic Banks
1. Bank Islam Malaysia Berhad
2. Bank Muamalat Malaysia Berhad
Participating Banks in the Islamic Banking Scheme
Commercial Banks
1. Affin Bank Berhad
2. Alliance Bank Malaysia Berhad
3. AmBank Berhad
4. Citibank Berhad
5. EON Bank Berhad
6. Hong Leong Bank Berhad
7. HSBC Bank Malaysia Berhad
8. Malayan Banking Berhad
9. OCBC Bank (Malaysia) Berhad
10. Public Bank Berhad
11. RHB Bank Berhad
12. Southern Bank Berhad
13. Standard Chartered Bank Malaysia Berhad
Finance Companies
1. Affin-ACF Finance Berhad
2. AmFinance Berhad
3. EON Finance Berhad
4. Hong Leong Finance Berhad
5. Mayban Finance Berhad
6. Public Finance Berhad
7. Southern Finance Berhad


Annex
P13
Merchant Banks
1. Affin Merchant Bank Berhad
2. Alliance Merchant Bank Berhad
4. Commerce International Merchant Bankers Berhad
3. AmMerchant Bank Berhad
Discount Houses
1. Abrar Discounts Berhad
2. Affin Discount Berhad
3. Amanah Short Deposits Berhad
4. CIMB Discount House Berhad
5. KAF Discounts Berhad
6. Malaysia Discount Berhad
7. Mayban Discount Berhad
Development Financial Institutions Offering Islamic Banking
Facilities
1. Bank Kerjasama Rakyat Malaysia Berhad
2. Bank Simpanan Nasional
3. Bank Pembangunan dan Infrastruktur Malaysia Berhad
4. Bank Industri & Teknologi Malaysia Berhad


P14
National Shariah Advisory Council Members
for Islamic Banking and Takaful – Session 2001-2003
1. Yang Amat Arif Dato’ Sheikh Ghazali Abdul Rahman
-
Chairman
Director General
Shariah Judiciary Department Malaysia
2. Datuk Haji Md. Hashim Haji Yahaya
-
Deputy Chairman
Academic Fellow
International Islamic University Malaysia
3. Sohibus Samahah Dato’ Haji Hassan Haji Ahmad
-
Member
Mufti of Pulau Pinang
4. Dato’ Dr. Abdul Monir Yaacob
-
Member
-
Member
Director General
Institute of Islamic Understanding Malaysia
5. Dato’ Dr. Abdul Halim Ismail
Executive Director
BIMB Securities Sdn. Bhd.
6. Assoc. Prof. Dr. Mohd Daud Bakar
-
Member
Deputy Rector
Student Affairs & Discipline
International Islamic University Malaysia
7. Assoc. Prof. Dr. Joni Tamkin Borhan
-
Member
Department of Shariah and Economics
Academy of Islamic Studies
University of Malaya


Annex
Key Economic and
Financial Statistics
Annex


Annex
P17
1999
2000
2001
RM million
Agriculture
17,596
18,062
17,897
Mining and quarrying
15,344
15,385
15,258
Manufacturing
56,840
67,250
63,346
Construction
6,926
6,964
7,108
Services
106,293
113,409
119,962
Less: Imputed bank service charges
14,896
15,832
17,678
Plus: Import duties
5,319
4,721
4,746
GDP at purchasers' prices1
193,422
209,959
210,640
Annual change (%)
Agriculture
0.5
2.6
-0.9
Mining and quarrying
6.9
0.3
-0.8
Manufacturing
11.7
18.3
-5.8
Construction
-4.4
0.6
2.1
Services
4.5
6.7
5.8
Less: Imputed bank service charges
6.7
6.3
11.7
Plus: Import duties
20.1
-11.2
0.5
GDP at purchasers' prices
6.1
8.5
0.3
2002
2003p
2004f
18,438
19,453
15,826
16,581
65,908
71,311
7,275
7,417
124,939
130,030
18,614
19,570
5,537
5,489
219,309
230,710
19,952
17,494
78,550
7,525
136,727
20,851
5,158
244,555
3.0
5.5
3.7
4.8
4.0
8.2
2.3
1.9
4.1
4.1
5.3
5.1
16.7
-0.9
4.1
5.2
2.6
5.5
10.2
1.5
5.2
6.5
-6.0
6.0 ~ 6.5
1     Numbers may not necessarily add up due to rounding 
p  Preliminary
f   Forecast
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
Table A.1
Gross Domestic Product by Kind of Economic Activity in Constant 1987 Prices


P18
Table A.2
Growth in Manufacturing Production (1993=100)
2000
2001
2002
2003
2001
2002
2003
Index
Annual change (%)
Export-oriented industries
223.3
200.1
210.2
-10.4
5.0
Electrical machinery, apparatus
appliances and supplies
272.4
229.2
247.8
-15.9
8.1
Electronics
337.2
269.1
305.2
-20.2
13.4
Electrical products
171.2
166.6
158.2
-2.8
-5.1
Radio and television sets
186.3
170.6
157.4
-8.4
-7.8
Cables and wires
172.6
180.6
145.8
4.6
-19.2
Manuf. of office, computing
and accounting machinery
261.2
227.1
176.1
Manuf. of refrigerating, exhaust,
ventilating and air-conditioning
machinery
113.2
132.3
161.8
16.9
22.2
Textiles and wearing apparel
129.6
118.8
111.4
-8.3
-6.2
Wood and wood products
103.6
104.9
98.6
1.2
-6.0
Chemicals and chemical products1
247.9
228.7
235.0
-7.7
2.7
Rubber products1
174.2
180.0
183.5
3.3
2.0
Off-estate processing
186.6
200.9
215.1
7.7
7.1
Others
129.1
106.2
115.1
-17.7
8.3
Domestic-oriented industries
172.1
184.1
190.4
7.0
3.4
Construction-related products
168.4
176.1
182.9
4.6
3.8
Non-metallic mineral products
156.3
171.3
180.0
9.6
5.1
Basic iron and steel and
non-ferrous metal
183.5
182.3
186.6
-0.7
2.4
Transport equipment
199.3
237.1
251.9
19.0
6.2
Food products
148.3
154.7
168.2
4.3
8.7
Beverages
134.2
138.5
121.9
3.2
-11.9
Tobacco products
174.9
164.4
148.0
-6.0
-10.0
Petroleum products
166.3
198.3
190.2
19.3
-4.1
Fabricated metal products
192.6
200.0
201.7
3.9
0.8
Paper products
162.0
165.0
186.2
1.9
12.8
Total
209.7
195.8
204.7
235.3
271.7
351.3
147.1
134.4
128.8
156.6
180.6
109.0
99.5
283.8
217.9
240.5
120.9
202.0
201.6
197.5
206.7
238.0
183.0
147.3
153.8
194.7
216.5
201.2
226.1
-6.6
4.5
1 As of second quarter of 2001, chemicals and chemical products and rubber products were reclassified as export-oriented
industries rather than domestic-oriented industries given that about three-quarters of the total output are related to export
demand
Source: Department of Statistics, Malaysia
-13.1
-22.5
11.9
9.6
15.1
-7.0
-14.6
-11.7
11.6
-2.2
0.9
20.8
18.7
11.8
5.1
6.1
10.2
9.7
10.8
-5.5
8.8
20.8
3.9
2.3
7.4
8.0
10.5
-11.1


Annex
P19
Table A.3
Production of Primary Commodities
1999
2000
2001
2002
2003p
1999
2000
2001
2002
2003p
Volume
Annual change (%)
Crude palm oil
(‘000 tonnes)
10,554 10,842 11,804 11,909
26.9
2.7
8.9
0.9
Rubber
(‘000 tonnes)
769
615
547
589
Saw logs
(‘000 cu. metres)
21,776 23,074 18,923 20,649
0.5
6.0
-18.0
9.1
Cocoa
(‘000 tonnes)
84
70
58
48
Crude oil
(‘000 bpd)
691
681
666
698
-4.7
-1.5
-2.1
4.9
Natural gas
(mmscfd)
3,952
4,367
4,542
4,674
6.2
10.5
4.0
2.9
Tin-in-concentrates
(‘000 tonnes)
7.3
6.3
5.0
4.2
13,355
698
21,381
36
736
4,916
3.6
12.1
18.4
3.5
-24.0
5.4
5.2
-14.2
27.6
Source: Malaysian Palm Oil Board
Department of Statistics, Malaysia
Forestry Departments (Peninsular Malaysia, Sabah & Sarawak)
Malaysian Cocoa Board
PETRONAS
Minerals and Geoscience Department Malaysia
-13.2
-20.0
-11.1
7.7
-7.2
-16.0
-17.9
-17.4
-14.1
-21.2
-15.2
p  Preliminary


P20
Table A.4
GNP by Demand Aggregates
1999
2000
2001
2002
2003p
2004f
at Current Prices
(RM million)
Consumption
158,100
Private consumption
125,056
Public consumption
33,044
Investment
65,841
Private investment
31,375
Public investment
34,466
Change in stocks1
1,476
Exports of goods and services
364,861
Imports of goods and services
289,514
GDP at purchasers' value
300,764
Net factor payments abroad
-20,886
GNP at purchasers' value
279,878
at Constant 1987 Prices
(RM million)
Consumption
107,862
Private consumption
84,377
Public consumption
23,485
Investment
51,568
Private investment
24,574
Public investment
26,994
Change in stocks1
1,254
Exports of goods and services
212,085
Imports of goods and services
179,347
GDP at purchasers' value
193,422
Net factor payments abroad
-13,628
GNP at purchasers' value
179,794
p  Preliminary
f   Forecast
1   Includes statistical discrepancy
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
181,031
145,355
35,676
87,729
44,102
43,627
5,378
427,004
358,530
342,612
-28,909
313,703
192,741
150,644
42,097
83,345
34,528
48,817
-3,268
389,256
327,765
334,309
-25,623
308,686
209,521
159,506
50,015
83,764
30,066
53,698
1,251
415,040
348,918
360,658
-25,061
335,597
223,706
169,813
53,893
87,089
30,785
56,304
-1,456
450,592
367,918
392,012
-22,614
369,398
242,669
186,244
56,425
87,807
34,479
53,328
3,048
502,550
418,030
418,044
-24,715
393,329
119,238
95,370
23,868
64,840
32,596
32,244
2,785
246,158
223,062
209,959
-19,271
190,688
125,549
97,630
27,919
63,050
26,120
36,930
-1,778
227,685
203,866
210,640
-17,642
192,998
133,282
101,946
31,336
63,249
22,702
40,547
1,677
237,904
216,802
219,309
-17,253
202,057
140,927
107,111
33,816
64,960
22,956
42,004
-607
253,006
227,577
230,710
-15,302
215,408
150,968
115,739
35,229
65,202
25,596
39,606
2,742
283,598
257,954
244,555
-17,020
227,535


Annex
P21
f  Forecast
Table A.5
Savings-Investment Gap
1999
2000
2001
2002
2003p
2004f
(RM million)
Public gross domestic capital formation
34,466
43,627
48,817
53,698
56,304
Public savings
50,694
55,391
53,534
63,496
66,313
Deficit/surplus
16,228
11,764
4,717
9,798
10,009
Private gross domestic capital formation
32,851
49,480
31,260
31,317
29,329
Private savings
64,517
69,969
54,230
52,013
70,081
Deficit/surplus
31,666
20,489
22,970
20,696
40,752
Gross domestic capital formation
67,317
93,107
80,077
85,015
85,633
(as % of GNP)
24.1
29.7
25.9
25.3
23.2
Gross national savings
115,211
125,360
107,764
115,509
136,394
(as % of GNP)
41.2
40.0
34.9
34.4
36.9
Balance on current account
47,895
32,252
27,687
30,494
50,761
(as % of GNP)
17.1
10.3
9.0
9.1
13.7
53,328
61,305
7,977
37,527
79,596
42,068
90,855
23.1
140,900
35.8
50,045
12.7
 Includes the change in stocks. Previously, the change in stocks was distributed between the public and private sector gross
 domestic capital formation
p  Preliminary
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
1
1


P22
Table A.6
Balance of Payments
2000
Item
RM million
Goods1
374,033
 294,889
 79,144
Trade account
 373,270
 311,459
 61,811
Services
 52,971
 63,641
-10,670
Transportation
 10,646
 22,382
-11,736
Travel
 19,043
 7,885
 11,158
Other services
 22,794
 32,824
-10,030
Government services n.i.e.3
 488
 550
-62
Balance on goods and services
 427,004
 358,530
 68,474
Income
 7,547
 36,456
-28,909
Compensation of employees
 1,301
 2,276
-975
Investment income2
 6,246
 34,180
-27,934
Current transfers
 2,872
 10,185
-7,313
Balance on current account
 437,423
 405,171
 32,252
% of GNP
10.3
Capital account
–
–
Financial account
-23,848
Direct investment
 6,694
Abroad
-7,699
In Malaysia
 14,393
Portfolio investment
-9,395
Other investment
-21,147
Official sector
 3,936
Private sector
-25,083
Balance on capital and
financial account
-23,848
Errors and omissions
-12,107
of which:
Exchange revaluation
gain (+) / loss (-)
-5,335
Overall balance
(surplus + / deficit -)
-3,703
Bank Negara Malaysia
international reserves, net4
RM million
113,541
US$ million
29,879
Reserves as months of
retained imports
 4.5
1
Adjusted for valuation and coverage to the balance of payments basis. Imports include military goods which are not
included in trade data
2
Include undistributed earnings of foreign direct investment companies. The counterpart of these earnings is shown as
reinvested earnings under “Direct Investment” in the Financial Account
3
Include transactions of foreign military and diplomatic establishments
4
All assets and liabilities in foreign currencies have been revalued into ringgit at rates of exchange ruling on the balance 
sheet date and the gain/loss has been reflected accordingly in the Bank’s account
e  Estimate
f   Forecast
Note: Numbers may not necessarily add up due to rounding
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
2001
334,326
 264,472
 69,854
334,284
 280,229
 54,055
54,929
 63,295
-8,366
10,443
 21,795
-11,352
26,081
 9,933
 16,148
17,932
 31,119
-13,187
473
448
25
389,255
 327,767
 61,488
7,018
 32,641
-25,623
 1,395
 2,409
-1,014
5,623
 30,232
-24,609
2,040
 10,218
-8,178
398,313
 370,626
 27,687
9.0
-14,791
1,091
-1,014
2,105
-2,466
-13,416
7,114
-20,530
-14,791
-9,234
-4,060
3,662
117,203
30,843
5.1
+                   -                 Net
+                   -                Net


Annex
P23
2002
2003e
2004f
RM million
 358,504
286,387
72,117
398,998
301,297
97,701
357,682
303,063
54,619
398,882
317,746
81,136
56,536
62,532
-5,996
51,594
66,620
-15,026
10,847
22,419
-11,572
10,514
23,787
-13,273
 27,049
 9,947
 17,102
 22,423
 10,816
 11,607
 18,166
29,408
-11,242
18,206
31,225
-13,019
474
758
-284
452
793
-341
 415,040
348,919
66,121
450,592
367,917
82,675
8,129
33,190
-25,061
13,116
35,730
-22,614
 1,653
2,832
-1,179
2,170
3,120
-950
 6,476
30,358
-23,882
10,946
32,610
-21,664
 2,513
13,079
-10,566
 1,929
11,229
-9,300
  425,682
395,188
30,494
465,638
414,876
50,761
9.1
13.7
–
–
-11,941
-12,063
 4,935
-7,238
 12,173
-6,506
-10,370
 4,720
-15,090
-4,362
 6,627
 14,191
 131,394
34,577
5.4
 4,242
-5,172
9,414
4,176
-20,481
-11,210
-9,271
360
443,429
346,991
94,438
443,297
366,765
76,532
59,121
71,039
-11,918
12,410
27,034
-14,624
 27,127
 12,084
 15,043
19,120
31,267
-12,147
464
654
-190
502,550
418,030
84,520
13,700
38,415
-24,715
2,164
3,125
-961
11,537
35,290
-23,753
 2,062
11,823
-9,761
518,312
468,267
50,045
12.7
 11,927
 39,059
 170,453
44,856
6.8
+                  -               Net
+                 -                Net
+                  -                 Net
-12,063
-11,941


P24
Table A.7
Principal Markets for Manufactured Exports
1999
2000
2001
2002
2003p
Country
ASEAN
Singapore
Thailand
Indonesia
Philippines
Brunei Darussalam
EU
United Kingdom
Germany
Netherlands
Others
United States
Japan
Hong Kong China
Chinese Taipei 
Korea
The People’s  
  Republic of China
Australia
Canada
West Asian Countries
Latin American
  Countries
Rest of the World
Total
65,004
48,390
8,396
3,415
4,170
633
44,837
11,438
6,955
13,880
12,564
68,058
28,027
13,395
12,835
5,481
5,660
5,924
2,262
5,042
2,242
12,963
271,730
26.8
20.1
3.2
1.6
1.7
0.2
14.5
3.5
2.7
4.4
3.9
23.3
11.2
5.0
3.6
2.3
2.5
2.2
0.9
1.8
1.3
4.6
100.0
72,140
52,483
9,816
4,983
4,113
745
40,894
8,355
7,176
13,609
11,754
65,830
32,413
14,327
9,767
6,692
 11,266
 5,862
1,977
6,885
3,436
13,827
285,316
26.1
18.5
4.1
1.9
1.4
0.2
12.7
2.6
2.3
3.7
4.1
24.0
9.3
6.3
3.8
2.6
4.6
2.0
0.7
2.0
1.0
4.9
100.0
82,705
57,647
13,513
6,287
4,324
934
41,194
8,123
8,065
10,336
14,670
75,035
28,818
24,765
11,575
7,143
17,445
7,123
2,160
7,549
2,959
18,479
326,950
25.2
17.6
4.1
1.9
1.3
0.3
12.6
2.5
2.5
3.2
4.4
22.9
8.8
7.6
3.5
2.2
5.3
2.2
0.7
2.3
0.9
5.8
100.0
RM
million
share
%
RM
million
share
%
RM
million
share
%
RM
million
share
%
RM
million
share
%
25.0
10.3
23.9
3.1
1.3
1.5
0.2
16.5
4.2
2.6
5.1
4.6
4.9
4.7
2.0
2.1
2.2
0.8
1.9
0.8
4.9
100.0
17.8
74,165
35,763
85,210
10,166
5,064
5,537
675
  46,057
11,067
8,682
13,843
12,465
15,795
11,421
7,363
7,979
7,054
2,900
5,717
4,169
14,315
317,908
63,768
18.4
1.8
1.4
2.9
25.3
3.4
0.3
14.3
100.0
2.5
4.8
4.1
3.9
2.1
0.7
23.1
11.4
5.0
3.4
2.3
2.4
1.2
4.9
78,859
708
38,493
302,275
12,355
55,996
7,836
7,064
11,084
12,509
13,994
5,906
1,991
72,427
28,253
19,031
11,409
7,867
5,992
3,022
15,031
5,629
4,171
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
p  Preliminary


Annex
P25
Table A.8
Principal Export Markets for Electronics
1999
2000
2001
2002
2003p
Country
United States
41,660
28.8
42,378
25.4
34,793
24.9
42,281
26.8
Singapore
28,621
19.8
 41,048
24.6
30,335
21.7
33,079
21.0
Chinese Taipei 
9,153
6.3
7,289
4.4
6,520
4.7
 7,863
5.0
Japan
12,621
8.7
15,970
9.6
13,502
9.7
11,209
7.1
Hong Kong China
6,506
4.5
8,017
4.8
7,470
5.3
 12,525
7.9
Others
44,132
30.4
48,595
29.1
41,000
29.4
42,914
27.3
Total
144,885
100.0
166,791
100.0
139,632
100.0
157,663
100.0
45,352
27.1
32,067
19.1
 8,061
4.8
10,479
6.3
The People's 
  Republic of China
2,192
1.5
3,494
2.1  
6,012
4.3
7,792
4.9
9,028
5.4
 18,041
10.8
44,592
26.5
167,620
100.0
RM 
million
% 
share
RM 
million
% 
share
RM 
million
% 
share
RM 
million
% 
share
RM 
million
% 
share
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
p  Preliminary
Table A.9
Principal Export Markets for Electrical Products
1999
2000
2001
2002
2003p
Country
United States
13,817
27.5
17,358
27.3
17,324
28.6
17,427
31.7
Singapore
7,958
15.9
 8,665
13.6
8,120
13.4
7,442
13.6
United Kingdom
1,542
3.1
1,601
2.5
1,435
2.4
 1,400
2.6
Japan
6,778
13.5
9,337
14.7
9,207
15.2
7,584
13.8
Hong Kong China
2,263
4.5
2,992
4.7
2,534
4.2
 2,483
4.5
Others
14,218
28.4
18,983
29.9
16,854
27.6
14,007
25.5
Total
50,162
100.0
63,638
100.0
60,675
100.0
54,890
100.0
16,379
29.3
8,539
15.3
 1,351
2.4
Germany
1,662
3.3
1,794
2.8
1,865
3.1
 1,410
2.6
 1,438
2.6
6,848
12.2
The People's 
  Republic of China
865
1.7
1,428
2.2
1,770
2.9
1,579
2.9
2,137
3.8
 2,403
4.3
15,167
27.1
55,927
100.0
RM 
million
% 
share
RM 
million
% 
share
RM 
million
% 
share
RM 
million
% 
share
RM 
million
% 
share
Thailand
1,059
2.1
1,480
2.3
1,566
2.6
 1,558
2.8
 1,665
3.0
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
p  Preliminary


P26
Table A.10
Principal Export Markets for Chemicals and Chemical Products
1999
2000
2001
2002
2003p
Singapore
1,454
13.1
1,900
12.7
1,646
11.1
1,736
10.1
Hong Kong China
993
8.9
1,373
9.1
1,176
7.9
1,239
7.2
Japan
1,199
10.8
1,586
10.6
1,566
10.5
1,750
10.2
United States
922
8.3
1,426
9.5
1,218
8.2
1,042
6.1
Chinese Taipei 
409
3.7
671
4.5
620
4.2
882
5.1
Thailand
680
6.1
976
6.5
1,164
7.8
1,387
8.0
Indonesia
617
5.6
1,153
7.7
999
6.7
1,302
7.6
The People’s
Republic of China
647
5.8
1,054
7.0
1,533
10.3
2,294
13.3
2,929
13.8
2,165
10.2
2,125
10.0
1,771
8.3
1,551
7.3
1,532
7.2
1,060
5.0
960
4.5
7,143
33.7
21,236
100.0
Others
4,184
37.7
4,872
32.4
4,957
33.3
5,596
 32.4
Total
11,105
100.0
15,011
100.0
14,879
100.0
17,228
100.0
Country
RM
million
share
%
RM
million
share
%
RM
million
share
%
RM
million
share
%
RM
million
share
%
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
p  Preliminary
Table A.11
Principal Export Markets for Manufactures of Metal
1999
2000
2001
2002
2003p
Country
RM
%
million
share
RM
%
million
share
RM
%
million
share
RM
%
million
share
RM
%
million
share
Singapore
2,155
2,270
27.4
24.3
United States
633
8.0
687
755
445
5.2
495
476
23.2
2,134
20.3
2,289
9.0
1,016
7.4
837
4.9
558
6.3
714
3.9
443
7.4
486
8.5
594
5.5
665
5.8
504
4.1
398
2.8
368
39.9
3,430
8.0
644
8.8
736
26.3
2,020
5.7
501
4.3
360
3.6
240
34.8
3,475
374
310
2,994
5.5
Japan
667
8.5
6.8
The People’s
Republic of China
341
4.3
7.6
Thailand
458
5.8
5.7
Indonesia
314
4.0
4.5
3.8
432
3.6
403
40.8
4,611
100.0
11,303
2.8
217
3.3
240
288
Korea
279
3.5
2.5
Hong Kong China
447
5.7
4.2
Others
2,568
32.8
     38.9
Total
7,862
8,618
8,692
8,796
100.0
100.0
100.0
100.0
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
p  Preliminary


Annex
P27
1999
2000
2001
2002
2003p
Country
RM
million
%
share
RM
million
%
share
RM
million
%
share
RM
million
%
share
RM
million
%
share
United States 
1,141 
23.6 
1,999 
29.3 
2,132 
27.3 
1,874 
23.0 
2,007 
21.8
Singapore 
696 
14.4 
859 
12.6 
1,110 
14.2 
1,572 
19.3 
1,749 
19.0 
Japan 
765 
15.8 
1,004 
14.7 
1,163 
14.9 
1,186 
14.6 
1,393 
15.1
Netherlands 
140 
2.9 
291 
4.3 
415 
5.3 
511 
6.3 
649 
7.0
The People's
 Republic of China 
84 
1.7 
173 
2.5 
232 
3.0 
199 
2.4 
455 
4.9
Hong Kong China 
284 
5.9 
342 
5.0 
408 
5.2 
429 
5.3 
442 
4.8
Germany 
361 
7.5 
584 
8.6 
437 
5.6 
408 
5.0 
405 
4.4
Others 
1,363 
28.2 
1,573 
23.0 
1,905 
24.5 
1,972 
24.1 
2,113 
23.0
  
Total 
4,834 
100.0 
6,825 
100.0 
7,802 
100.0 
8,151 
100.0 
9,213 
100.0
Table A.12
Principal Export Markets for Optical and Scientific Equipment
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
p  Preliminary
Table A.13
Principal Export Markets for Petroleum Products
1999
2000
2001
2002
2003p
Country
RM
%
million
share
RM
%
million
share
RM
%
million
share
RM
%
million
share
RM
%
million
share
Singapore
1,337
2,457
29.6
39.9
United States
108
2.4
239
1,371
746
9.2
119
921
34.6
3,043
38.3
3,605
5.6
525
19.5
1,836
2.9
274
4.3
408
2.9
274
270
3.3
188
11.8
1,001
11.0
412
2.4
188
1.3
257
257
31.2
2,274
2.9
276
16.9
991
30.2
2,906
1.5
201
2.8
110
36.0
2,637
231
2,927
2.5
Japan
576
12.8
13.1
The People’s
Republic of China
505
11.2
5.4
Australia
249
5.5
2.5
355
7.9
3.4
2.9
23.6
2,224
100.0
9,416
4.4
0.5
366
41
Korea
101
2.2
3.4
Hong Kong China
1,282
28.4
29.8
Others
Total
4,513
8,131
8,408
7,620
100.0
100.0
100.0
100.0
Source: Department of Statistics, Malaysia and Bank Negara Malaysia
p  Preliminary
Table A.14
Export Prices of Major Commodities
1999
2000
2001
2002
2003p
1999
2000
2001
2002
2003p
Annual change (%)
Palm oil (RM/tonne)
1,615
1,122
944
1,367
-31.8
-30.5
-15.9
44.9
Rubber (sen/kg)
238
263
230
269
-16.7
10.4
-12.7
17.0
Saw logs (RM/cu. metre)
395
384
315
359
14.8
-2.9
-17.9
13.9
Sawn timber
(RM/cu. metre)
996
1,050
943
990
5.8
5.4
-10.2
5.0
Crude oil  (US$/barrel)
18.18
29.58
25.53
24.81
1,617
379
366
926
30.27
29.9
62.7
-13.7
-2.8
18.3
41.0
1.9
-6.5
22.0
Source: Department of Statistics, Malaysia
p  Preliminary


P28
Table A.15
Principal Export Markets for Palm Oil
1999
2000
2001
2002
2003p
1999
2000
2001
2002
2003p
('000 tonnes)
% share
The People's
Republic of China
783
1,023
1,364
1,940
8.7
11.5
13.0
17.9
India
2,402
2,029
2,066
1,670
26.8
22.9
19.7
15.4
European Union
1,071
988
1,610
1,478
12.0
11.1
15.4
13.6
Netherlands
637
530
1,028
847
7.1
6.0
9.8
7.8
Italy
100
121
155
127
1.1
1.4
1.5
1.2
Sweden
67
76
100
102
0.8
0.8
1.0
0.9
United Kingdom
39
25
51
50
0.4
0.3
0.5
0.5
Others
228
236
276
352
2.6
2.6
2.6
3.2
Middle East
1,217
1,168
1,236
1,449
13.6
13.2
11.8
13.4
Pakistan
1,028
1,075
1,143
1,059
11.5
12.1
10.9
9.8
Singapore
468
358
423
441
5.2
4.0
4.0
4.1
United States
124
178
208
270
1.4
2.0
2.0
2.5
Japan
356
353
379
434
4.0
4.0
3.6
4.0
Bangladesh
53
98
178
230
0.6
1.1
1.7
2.1
Korea
190
198
241
218
2.1
2.2
2.3
2.0
Myanmar
145
124
115
114
1.6
1.4
1.1
1.1
Others
1,127
1,271 
1,503
1,551
12.5
14.5
14.5
14.1
Total
8,964
8,863
10,466 10,854
2,502
1,650
1,648
974
98
106
90
380
1,749
1,105
489
231
430
272
211
159
2,063
12,509
20.0
13.2
13.2
7.8
0.8
0.8
0.7
3.1
14.0
8.8
3.9
1.8
3.4
2.2
1.7
1.3
16.5
100.0
100.0
100.0
100.0
100.0
Source: Department of Statistics, Malaysia
p  Preliminary
Country
Table A.16
Principal Export Markets for Rubber
('000 tonnes)
% share
European Union
356
350
318
309
36.2
35.8
38.7
33.3
Germany
100
107
119
119
10.2
10.9
14.5
12.8
Belgium
48
51
44
30
4.8
5.2
5.4
3.2
Italy
36
33
30
28
3.7
3.4
3.6
3.0
United Kingdom
51
35
25
24
5.2
3.6
3.0
2.6
Netherlands
17
17
12
15
1.7
1.7
1.5
1.6
Others
104
107
88
93
10.6
11.0
10.7
10.1
The People’s
Republic of China
66
94
85
129
6.7
9.6
10.3
13.9
United States
111
101
66
81
11.3
10.3
8.0
8.7
Korea
84
73
58
59
8.5
7.5
7.1
6.4
Iran
Turkey
26
30
24
24
2.7
3.1
2.9
2.6
Chinese Taipei 
15
11
12
14
1.6
1.1
1.5
1.5
Japan
25
21
18
14
2.5
2.1
2.2
1.5
Others
262
255
181
253
26.5
26.1
22.0
27.3
Total
984
978
822
928
100.0
100.0
100.0
100.0
Source: Department of Statistics, Malaysia
p  Preliminary
Country
39
43
60
45
305
129
19
29
22
12
94
207
76
69
25
14
10
191
945
48
4.0
4.4
7.3
4.8
32.3
13.7
2.0
3.1
2.3
1.3
9.9
21.9
8.0
7.3
2.6
1.5
1.1
20.2
100.0
5.1
2001
2001
2000
2000
1999
1999
2003p
2002
2002
2003p


Annex
P29
Source: Department of Statistics, Malaysia
Table A.17
Principal Export Markets for Saw Logs
1999
2000
2001
2002
2003p
1999
2000
2001
2002
2003p
('000 cubic metres)
% share
Japan
2,280
2,184
1,375
1,641
33.9
33.7
28.4
32.2
The People’s
Republic of China
1,680
1,405
1,071
1,106
25.0
21.7
22.2
21.7
India
838
873
985
998
12.4
13.5
20.4
19.5
Chinese Taipei 
919
898
669
651
13.6
13.8
13.8
12.7
Hong Kong China
440
541
417
188
6.5
8.3
8.6
3.7
Korea
393
301
175
159
5.8
4.6
3.6
3.1
Thailand
95
102
28
39
1.4
1.6
0.6
0.8
Others
93
180
114
322
1.4
2.8
2.4
6.3
Total
6,738
6,484
4,834
5,104
1,356
1,338
1,371
694
103
140
60
446
5,508
100.0
100.0
100.0
100.0
24.6
24.3
24.9
12.6
1.9
2.5
1.1
8.1
100.0
p  Preliminary
Country
Source: Department of Statistics, Malaysia
Table A.18
Principal Export Markets for Sawn Timber
1999
2000
2001
2002
2003p
1999
2000
2001
2002
2003p
(‘000 cubic metres)
% share
Thailand
490
563
532
590
17.4
19.6
22.1
23.8
Chinese Taipei
213
226
170
183
7.6
7.9
7.0
7.4
Netherlands
273
270
197
194
9.7
 9.4
8.2
7.8
The People’s
Republic of China
149
137
151
173
5.3
4.8
6.3
7.0
Japan
237
239
187
200
8.4
8.3
7.8
8.1
Hong Kong China
143
132
135
151
5.1
4.6
5.6
6.1
Singapore
247
219
185
160
8.8
7.6
7.7
6.5
Korea
144
129
120
98
5.1
4.5
5.0
4.0
Republic of Yemen
70
114
83
59
2.5
3.9
3.4
2.4
Belgium
71
69
52
64
2.5
2.4
2.2
2.6
United Arab Emirates
78
82
66
59
2.8
2.9
2.7
2.4
United Kingdom
69
55
52
55
2.4
1.9
2.2
2.2
Germany
39
31
23
30
1.4
1.1
1.0
1.2
Others
595
610
458
458
21.0
21.1
18.8
18.5
Total
2,818
2,876
2,411
2,474
627
214
222
177
196
108
188
92
70
97
55
52
43
675
2,816
100.0
100.0
100.0
100.0
22.2
7.6
7.9
6.3
7.0
3.8
6.7
3.3
2.5
3.4
1.9
1.8
1.5
24.1
100.0
p  Preliminary
Country


P30
Table A.19
Principal Export Markets for Crude Oil
1999
2000
2001
2002
2003p
1999
2000
2001
2002
Source: Department of Statistics, Malaysia
2003p
(‘000 tonnes)
% share
India
2,387
2,161
1,690
2,462
13.5
13.0
11.2
15.2
Thailand
2,306
2,890
2,797
2,358
13.0
17.3
18.6
14.6
Japan
2,004
1,299
1,457
2,131
11.3
7.8
9.7
13.2
Korea
2,540
2,292
2,190
1,838
14.3
13.7
14.5
11.4
The People’s
Republic of China
299
705
838
1,723
1.7
4.2
5.6
10.6
Australia
2,087
1,760
1,852
1,687
11.8
10.6
12.3
10.4
Indonesia
1,658
1,060
753
956
9.4
6.4
5.0
5.9
New Zealand
603
565
487
604
3.4
3.4
3.2
3.7
Myanmar
633
595
453
561
3.6
3.6
3.0
3.5
Philippines
553
527
362
511
3.1
3.2
2.4
3.2
Sri Lanka
353
473
400
485
2.0
2.8
2.7
3.0
United States
1,143
1,054
704
412
6.4
6.3
4.7
2.5
Singapore
626
626
215
203
3.5
3.8
1.4
1.3
Others
533
665
879
261
3.0
3.9
5.7
1.5
Total
17,725 16,672 15,077 16,192
3,396
3,097
1,440
1,271
2,013
2,248
1,290
321
–
466
425
839
467
640
17,913
100.0
100.0
100.0
100.0
19.0
17.3
8.0
7.1
11.2
12.5
7.2
1.8
–
2.6
2.4
4.7
2.6
3.6
100.0
p  Preliminary
Country
Source: Department of Statistics, Malaysia
Table A.20
Principal Export Markets for LNG
1999
2000
2001
2002
2003p
1999
2000
2001
2002
2003p
(‘000 tonnes)
% share
Japan
10,070
11,076
11,308
10,782
66.7
71.8
73.3
71.8
Korea
3,210
2,498
2,255
2,304
21.3
16.2
14.6
15.4
Chinese Taipei
1,753
1,802
1,860
1,857
11.6
11.7
12.1
12.4
Others
0.4
0.3
–
0.4
Total
15,088
15,430
15,423
15,007
100.0
100.0
100.0
100.0
71.8
15.4
12.5
0.3
100.0
p  Preliminary
Country
55
54
–
64
12,494
2,687
2,167
17,402
54


Annex
P31
Table A.21
External Debt and Debt Servicing1
1999
2000
2001
2002
2003p
RM million
Medium and long-term debt:
Gross borrowing
Federal Government
NFPEs
Private sector
Repayment and prepayment
Federal Government
NFPEs
Private sector
Net borrowing
Federal Government
NFPEs
Private sector
Outstanding debt
Federal Government
NFPEs
Private sector
Currency composition (% share)
U.S. dollar
Japanese yen
Others
Short-term debt:
Outstanding debt
Banking sector2
Non-bank private sector
Total external debt:
Total external debt (US$ million)
% GNP
Annual change (%)
Total servicing (including short-term 
   interest payment)
of which:
Medium and long-term debt
Repayment (excluding
prepayment)
Federal Government
NFPEs
Private sector
Interest payment
Federal Government
NFPEs
Private sector
Debt service ratio (% of exports of 
  goods and services)
Total debt
Medium and long-term debt
Federal Government
NFPEs
Private sector
1    Data on MAS was included under private sector up to 2000 and under NFPEs from 2001 
2    Excludes currency and deposits held by non-residents with resident banking institutions
p  Preliminary
Note: Numbers may not necessarily add up due to rounding
Source: Ministry of Finance and Bank Negara Malaysia
21,410
23,390
31,550
23,853
4,763
4,767
7,030
10,465
6,080
7,719
11,311
3,655
10,567
10,903
13,209
9,732
16,152
17,941
22,323
23,104
1,840
3,903
735
2,445
2,230
3,836
10,447
6,942
12,082
10,203
11,141
13,717
5,259
5,448
9,227
749
2,923
864
6,295
8,020
3,850
3,883
865
-3,287
-1,515
701
2,068
-3,985
139,706
143,465
149,346
153,587
18,369
18,821
24,328
36,283
57,021
59,566
67,415
64,330
64,315
65,077
57,604
52,974
100
100
100
100
20
18
15
14
8
22,427
17,600
24,072
32,055
12,661
9,271
11,926
21,894
9,766
8,329
12,147
10,162
162,133
161,065
173,419
185,643
42,667
42,385
45,636
48,853
57.9
51.3
56.2
55.3
-4.6
-0.7
7.7
7.0
23,312
25,043
26,954
28,020
15,726
16,370
19,612
20,780
1,840
3,903
735
2,445
2,230
2,506
7,886
6,942
11,656
9,962
10,991
11,393
6,058
7,117
6,345
6,484
883
1,187
1,150
1,879
2,755
3,408
3,574
3,430
2,420
2,522
1,621
1,174
6.3
5.8
6.8
6.7
5.8
5.4
6.6
6.5
0.7
1.2
0.5
1.0
1.3
1.4
2.9
2.5
3.8
2.9
3.2
3.0
7
7
6
74
75
78
77
20,969
3,144
5,157
12,668
28,892
6,854
12,437
9,602
-7,923
-3,710
-7,279
3,066
152,788
37,284
59,558
55,946
100
13
10
34,462
24,597
9,865
187,250
49,276
50.7
0.9
28,287
21,491
3,861
10,017
7,612
6,149
1,930
3,287
932
6.1
6.0
1.2
2.9
1.8
77


P32
–
Table A.22
Gross Overseas Investment by Country1   
1999
2000
2001
2002
2003
Countries
RM million
Cayman Islands
Bermuda 
Mauritius
Isle of Man
Labuan2
125
349
37
2,082
906
4,014
3,924
513
553
532
270
153
United States
5,714
Singapore
15
1,683
–
…
1
398
313
100
...
Sudan
 435
Hong Kong China
400
410
125
1,057
United Kingdom
Indonesia
Namibia
201
134
58
83
…
–
304
...
The People's Republic of China
292
536
158
…
2,920
1,635
 
151
Thailand
Egypt
Australia
1,099
172
28
45
306
...
900
Chad
Japan
Bahrain
 
2
46
142
Korea
28
Pakistan
104
4
5
...
122
8,523
4,720
3,164 
4,625
142
50
88
2
101
928
Netherlands
Vietnam
59
Philippines
India
29
76
77
Germany
Ireland
Others
     of which: 
Total
13,391
13,809
13,107
16,424
1   Refers to direct equity investment, purchase of real estate and extension of loans to non-residents abroad. Includes capital 
   invested or loans extended by the foreign-owned companies in/to their parent companies abroad. For the purpose of 
   compiling balance of payments statistics, capital invested in or loans extended to parent companies abroad must be offset 
   against the capital invested in or loans extended to Malaysia by the parent companies abroad. At present, the Cash BOP 
   Reporting System is not able to segregate this type of transaction
2  Labuan IOFC is treated as a non-resident for exchange control purposes
Source: Cash BOP Reporting System, Bank Negara Malaysia
73
16
14
100
33
192
14
–
–
…
…
28
21
531
43
22
156
209
54
–
159
104
109
2,392
2,972
1,130
1,647
1,622
2
1
36
7
420
787
59
82
420
386
–
–
–
–
175
994
492
520
600
Chinese Taipei
30
10
28
34
666
844
138
167
215
225
243
266
356
117
120
137
100
51
3,996
87
66
54
57
79
10,590
933


Annex
P33
Table A.23
Consumer Price Index (2000=100) Sub-groups of Food
Weights 
(%)
2000
2001
2002
2003
Annual change (%)
Food
33.8
1.9
0.7
0.7
of which:
Food at Home
24.1
1.7
0.4
0.2
Rice, bread and other cereals
5.5
0.3
0.2
0.1
Meat
3.4
3.8
0.0
-1.3
Fish
4.9
5.4
3.5
1.0
Milk and eggs
2.1
-1.4
-0.2
1.0
Oils and fats
0.8
-1.5
-6.4
1.8
Fruits and vegetables
5.0
-0.7
-1.0
0.2
Sugar
0.5
-0.2
-0.1
-1.9
Coffee and tea
0.8
0.0
0.1
0.4
Other foods
1.1
1.1
-0.2
0.3
Food away from home
9.7
2.6
1.3
2.0
1.3
1.6
0.4
2.4
1.3
2.2
4.4
2.5
0.2
1.6
0.5
0.7
Source: Department of Statistics, Malaysia
Table A.24
Producer Price Index (1989=100)
Weights
(%)
1999
2000
2001
2002
2003
Annual change (%)
Domestic Economy
100.0
-3.3
3.1
-5.0
4.4
of which:
Food and live animals chiefly for food
14.9
-2.3
0.4
0.4
0.4
Beverages and tobacco
2.1
10.2
0.4
1.8
3.9
Crude materials, inedible except fuels
18.0
-2.7
1.3
-5.9
7.0
Mineral fuels, lubricants and
related materials
18.8
14.2
33.9
-10.6
0.0
Animal and vegetable oils and fats
8.5
-29.4
-31.9
-17.6
46.5
Chemicals and related products N.E.C. 
4.4
1.5
1.0
-1.1
-0.7
Manufactured goods classified 
  chiefly by material
10.8
-0.9
0.9
-0.5
-0.2
Machinery and transport equipment
18.3
-0.5
-0.1
-0.1
-0.3
Miscellaneous manufactured articles
3.6
1.4
0.9
-0.6
-0.3
Commodities and transactions not  
  classified elsewhere in the S.I.T.C. 
0.6
-0.9
0.4
10.3
2.6
Local Production
79.3
-3.9
3.6
-6.1
5.7
Imports
20.7
-0.6
1.1
-0.3
-0.7
5.7
-0.2
0.9
7.5
11.4
15.7
1.4
1.8
0.1
0.9
0.5
6.8
0.8
Source: Department of Statistics, Malaysia


P34
Table A.25
Supply of Office Space, Retail Space, Condominiums and Apartments in the Klang Valley1 
Condominiums 
and Apartments
Office Space
Retail Space
Year
Square  
metres
Square  
metres
Occupancy
rate2 (%)
Occupancy
rate2 (%)
Units
1993
332,246
91.5
130,345
97.3
18,232
1994
192,808
94.3
117,340
98.5
9,331
1995
362,851
94.9
341,091
96.1
17,822
1996
296,742
95.5
136,964
92.8
14,568
1997
869,394
94.9
362,574
90.5
5,473
1998
1,158,776
79.9
364,027
61.7
14,151
1999
265,645
76.2
89,787
76.6
9,547
2000
1,374,452
76.9
218,562
78.5
5,466
2001
2003 (Jan-Sep)
 177,576
74.7
95,663
79.9
17,067
 2002
200,195
75.5
141,644
83.0
20,465
92,800
77.2
190,175
83.3
19,060
1   Refers to Kuala Lumpur and Selangor
2   Refers to end period
Source: NAPIC, Valuation and Property Services Department 
Year
Table A.26
Average Monthly Rentals for Prime Office and Retail Space in the Klang Valley1
Prime Office Space
Prime Retail Space
RM/sq.m
Annual change (%)
RM/sq.m
Annual change (%)
1998
46
-19.3
162
-39.3
1999
42
-8.7
175
8.0
2000
48
14.3
194
10.9
2001
48
0.9
215
11.0
2002
2003
45
-6.7
226
5.0
45
0.0
226
0.0
1  Refers to Kuala Lumpur and Selangor
Source: CH Williams Talhar & Wong Sdn. Bhd.


Annex
P35
Table A.27
Broad Money (M3)
Annual change
As at end 
2003
1999
2000
2001
2002
2003
RM million
Broad money (M3)1
33,131
21,906
13,022
31,607
Currency2
6,019
-1,949
-92
1,751
Demand deposits
12,403
7,623
2,882
6,718
Broad quasi-money
14,709
16,232
10,232
23,138
Fixed deposits
29,745
8,207
-358
12,648
Savings deposits
7,908
6,380
4,454
5,590
NIDs
-21,864
-932
600
3,575
Repos
-2,461
-314
4,186
2,507
Foreign currency deposits
1,382
2,890
1,350
-1,182
Factors Affecting M3
Net claims on Government
2,248
4,388
-1,542
11,538
Claims on Government
-2,906
3,326
4,165
-867
Less: Government deposits
-5,155
-1,062
5,707
-12,405
Claims on private sector
-9,792
25,968
20,335
27,737
Loans
-20,377
21,566
17,081
19,288
Securities
10,585
4,402
3,255
8,449
Net external operations
31,391
7,336
6,741
1,237
Bank Negara Malaysia3
19,164
1,633
7,722
7,564
Banking system
12,227
5,703
-980
-6,327
Other influences
9,284
-15,786
-12,513
-8,905
48,502
2,232
11,187
35,083
17,065
5,602
1,965
8,016
2,435
12,878
3,890
-8,988
32,424
21,723
10,701
19,467
27,131
-7,664
-16,267
549,627
25,943
77,358
446,326
327,308
62,458
10,977
33,177
12,406
8,494
32,836
24,342
567,482
475,605
91,877
136,271
138,097
-1,826
-162,620
1   Excludes interplacements among banking institutions
2   Excludes holdings by banking system
3   Includes exchange rate revaluation loss/gain
Table A.28
Money Supply: Annual Change and Growth Rates
M35
M23
M11
Deposits 
 with other 
banking 
institutions4
Demand
deposits
Narrow 
quasi-money2
Total
Total
Total
Currency
RM m
RM m
RM m
RM m
RM m
RM m
RM m
%
%
%
%
%
%
%
1999 33,131
8.3
40,666 13.7
19,313 35.7
6,534 35.8 12,778 35.6
21,354
8.8
-7,535
-7.2
2000 21,906
5.0
17,564
5.2
4,769
6.5
-2,517 -10.2
7,287 15.0
12,795
4.9
4,342
4.5
2001 13,022
2.9
7,810
2.2
2,512
3.2
-115
-0.5
2,627
4.7
5,298
1.9
5,213
5.1
2002
2003
31,607
6.7
21,030
5.8
8,344 10.3
1,749
7.9
6,595 11.3
12,686
4.5
10,577
9.9
48,502
9.7
42,497 11.1
13,009 14.6
2,204
9.2 10,805 16.6
29,488 10.0
6,005
5.1
1   Currency in circulation and demand deposits of the private sector placed with commercial banks and Islamic banks
2   Comprising savings and fixed deposits, negotiable instruments of deposits (NIDs), repos and foreign currency deposits of the
   private sector placed with commercial banks and Islamic banks
3   M1 plus narrow quasi-money
4   Comprising fixed deposits and repos of the private sector placed with finance companies, merchant banks and discount
   houses. Also includes saving deposits with finance companies, NIDs with finance companies and merchant banks, foreign
   currency deposits placed with merchant banks and call deposits with discount houses. Excludes interplacement among the
   banking institutions
5   M2 plus deposits placed with other banking institutions


P36
Table A.29
Interest Rates (%)
Average rates at end-year
Average rates at end-month in 2003
1999
2000
2001
2002
Jan.
Feb.
Mar.
Apr.
May
Jun.
Jul.
Aug.
Sep.
Oct.
Nov.
Dec.
3-month interbank
Commercial banks
Fixed deposit:
3-month
12-month
Savings deposit
Base lending rate (BLR)
Finance companies
Fixed deposit:
3-month
12-month
Savings deposit
Base lending rate (BLR)
Treasury bills
(91 days)
Government securities
(1 year)
Government securities
(5 years)
3.18
3.33
3.95
2.76
6.79
3.49
4.13
3.50
7.95
2.71
3.37
5.21
3.25
3.48
4.24
2.72
6.78
3.52
4.27
3.44
7.95
2.98
3.36
4.80
3.27
3.21
4.00
2.28
6.39
3.22
4.01
2.94
7.45
2.73
2.93
3.18
3.13
3.20
4.00
2.12
6.39
3.20
4.00
2.65
7.45
2.82
2.94
3.15
2.91
3.20
4.00
2.10
6.39
3.20
4.00
2.58
7.45
2.80
2.89
3.10
2.86
3.20
4.00
2.07
6.39
3.20
4.00
2.58
7.45
2.80
2.89
3.12
2.90
3.20
4.00
2.04
6.39
3.20
4.00
2.57
7.45
2.79
2.89
3.10
2.86
3.20
4.00
2.04
6.39
3.20
4.00
2.51
7.45
2.79
2.88
3.08
2.86
3.00
3.69
1.95
6.00
3.02
3.72
2.25
6.90
2.78
2.87
3.05
2.88
3.00
3.70
1.92
6.00
3.01
3.72
2.22
6.90
2.77
2.88
3.09
2.88
3.00
3.70
1.92
6.00
3.00
3.68
2.22
6.90
2.77
2.95
3.63
2.90
3.00
3.70
1.87
6.00
3.00
3.68
2.23
6.90
2.82
2.93
3.93
2.86
3.00
3.70
1.87
6.00
3.00
3.68
2.23
6.90
2.82
2.92
3.94
2.88
3.00
3.70
1.87
6.00
3.00
3.68
2.22
6.90
2.77
2.86
4.44
2.87
3.00
3.70
1.86
6.00
3.00
3.68
2.19
6.90
2.78
2.93
4.38
2.87
3.00
3.70
1.86
6.00
3.00
3.68
2.18
6.90
2.77
2.93
4.28


Annex
P37
Table A.30
1999
2000
2001
2002
2003e
RM million
General government
Revenue
70,887
96,763
% growth
2.2
5.6
Operating expenditure
54,274
75,450
% growth
8.0
4.4
Current surplus
16,612
21,312
NFPEs
Revenue
98,242
126,275
% growth
33.8
20.4
Operating expenditure
61,596
80,951
% growth
24.4
23.8
Current surplus
36,646
45,324
Public sector current surplus
53,258
66,637
% of GDP
17.7
18.5
Net development expenditure
46,422
69,125
% growth
-0.8
15.7
General government
20,964
36,828
% growth
22.4
3.2
NFPEs
25,458
32,297
% growth
-14.2
34.4
Overall balance
6,835
-2,488
% of GDP
2.3
-0.7
General government
-4,352
-15,515
NFPEs
11,187
76,002
7.2
64,445
18.7
11,556
112,929
14.9
71,725
16.4
41,204
52,761
15.4
50,439
8.7
27,079
29.2
23,360
-8.2
2,322
0.7
-15,522
17,844
91,633
20.6
72,299
12.2
19,334
104,876
-7.1
65,392
-8.8
39,484
58,818
17.6
59,724
18.4
35,692
31.8
24,032
2.9
-906
-0.3
-16,358
15,452
13,026
110,408
14.1
84,809
12.4
25,600
149,183
18.1
104,556
29.2
44,627
70,227
17.9
71,951
4.1
43,727
18.7
28,225
-12.6
-1,725
-0.4
-18,127
16,402
e  Estimate
Source: Ministry of Finance, state governments and non-financial public enterprises
Consolidated Public Sector Finance


P38
Table A.31
Major Industrial Countries: Key Economic Indicators
1999
2000
2001
2002
2003e
2004f
Annual change (%)
REAL GDP
Major Industrial Countries
3.4
3.9
1.0
1.5
2.2
United States
4.1
3.8
0.3
2.4
3.1
Japan
0.2
2.8
0.4
-0.4
2.7
Euro Area
2.8
3.5
1.5
0.9
0.4
Germany
2.0
2.9
0.8
0.2
-0.1
United Kingdom
2.4
3.1
2.1
1.7
2.3
INFLATION
Major Industrial Countries
1.4
2.2
2.2
1.5
1.8
United States
2.2
3.4
2.8
1.6
2.3
Japan
-0.3
-0.9
-0.7
-0.9
-0.3
Euro Area
1.1
2.1
2.4
2.3
2.0
Germany
0.6
1.4
1.9
1.3
1.0
United Kingdom1
2.3
2.1
2.1
2.2
2.8
(% of labour force) 
UNEMPLOYMENT
Major Industrial Countries
United States
4.2
4.0
4.8
5.8
6.0
Japan
4.7
4.7
5.0
5.4
5.3
Euro Area
9.4
8.5
8.0
8.4
9.1
Germany
8.4
7.8
7.9
8.6
9.5
United Kingdom
6.0
5.5
5.1
5.2
3.0
(% of GDP)
CURRENT ACCOUNT BALANCE
Major Industrial Countries
United States
-3.2
-4.2
-3.9
-4.6
-5.1
Japan
2.6
2.5
2.1
2.8
2.9
Euro Area
0.4
-0.5
0.2
0.9
0.8
Germany
-1.1
-1.4
0.0
2.3
2.4
United Kingdom
-2.2
-2.0
-1.3
-0.9
-1.0
FISCAL BALANCE
Major Industrial Countries
United States
1.2
2.1
0.7
-2.2
-4.3
Japan
-8.7
-7.2
-6.7
-6.3
-6.1
Germany
-1.3
1.3
-1.1
-1.5
-1.9
United Kingdom
1.2
4.1
0.9
-1.4
-2.6
2.9
3.9
2.0
1.6
1.2
2.3
1.3
1.3
-0.6
1.6
0.6
2.5
5.7
5.4
9.2
9.8
5.2
-4.7
2.9
0.8
2.1
-0.9
-4.2
-5.4
-1.7
-2.8
1    Refers to Retail Price Index excluding mortgage interest
e  Estimate
f  Forecast
Source:   IMF World Economic Outlook, September 2003
              OECD Economic Outlook, December 2003
              Datastream, National Sources


Annex
P39
Table A.32
East Asia: Key Economic Indicators
1999
2000
2001
2002
2003e
2004f
REAL GDP
Annual change (%)
Regional Countries
 6.7
7.8
4.1
6.2
6.2
The People’s Republic of China
7.1
8.0
7.3
8.2
 9.1
Korea
10.9
9.3
3.1
6.3
2.9
Chinese Taipei
5.4
5.9
-2.2
3.6
3.2
Singapore
6.4
9.4
-2.4
2.2
1.1
Hong Kong China
3.4
10.2
0.5
2.3
3.3
Malaysia
6.1
8.5
0.3
4.1
5.2
Thailand
4.4
4.6
1.9
5.4
6.7
Indonesia
0.8
4.9
3.4
3.7
4.1
Philippines
3.4
4.4
3.0
4.4
4.5
CONSUMER PRICES
Annual change (%)
Regional Countries
1.3
1.2
2.4
1.3
1.8
-2.9
0.4
0.7
-0.8
 1.2
0.8
2.3
4.1
2.7
3.5 
0.2
1.3
0.0
-0.2
-0.3
0.0
1.3
1.0
-0.4
0.5
-4.0
-3.8
-1.6
 -3.0
-2.6
2.8
1.6
1.4
1.8
1.2
0.3
1.6
1.6
0.7
1.8
24.0
3.8
11.5
11.9
6.6
6.7
4.4
6.1
3.1
3.4 
4.0 ~ 5.0 
CURRENT ACCOUNT BALANCE
( % of GDP)  
Regional Countries
The People’s Republic of China
1.6
1.9
1.5
2.8
1.4
Hong Kong China
7.3
5.4
7.5
10.8
13.9
FISCAL BALANCE2
( % of GDP) 
Regional Countries
Korea
-2.6
1.4
1.8
1.0
1.3
Chinese Taipei
-1.3
-3.2
-6.6
-3.0
-2.3
Philippines
-3.8
-4.0
-4.0
-5.2
-4.6
6.6 ~ 6.8
 8.3
5.2
4.7
3.5 ~ 5.5
6.0
6.0 ~ 6.5
6.3 ~ 7.3
4.0 ~ 5.0
4.9 ~ 5.8
2.4 ~ 2.7
 3.0
3.0
0.4
0.5 ~ 1.5
-1.0
1.5
1.0 ~ 2.0
4.5 ~ 6.5
1.3
Korea
6.0
2.7
1.9
1.3
1.6
1.8
Chinese Taipei
2.9
2.9
6.4
9.1
8.5
8.8
Singapore
25.9
16.7
19.0
21.5
23.7
23.0
14.3
Malaysia
15.9
9.4
8.3
8.5
 12.9
 12.0
Thailand
10.2
7.6
5.4
6.0
5.3
4.8
Indonesia
 4.1
5.3
4.9
4.3
2.7
1.9
Philippines
10.0
11.3
1.8
5.4
2.6
1.9
The People’s Republic of China
-2.1
 -2.8
-2.6
-3.0
-2.7
n.a.
n.a.
n.a.
Singapore
3.4
2.5
-1.8
0.1
 -1.1
 n.a.
Hong Kong China
0.8
-0.6
-5.0
-4.9
-4.0
n.a.
Malaysia
-3.2
-5.8
-5.5
-5.6
-5.3
n.a.
Thailand
-3.3
-2.2
-2.4
-1.4
0.3
n.a.
Indonesia
-2.1
-5.1
-2.3
-1.7
-1.9
n.a.
n.a.
1
 Refers to composite prices
2
 Refers to central government balance
e
 Estimate
f
 Forecast
n.a. Not available
Source: National Sources 
              CEIC
              IMF World Economic Outlook, September 2003
The People’s Republic of China
Korea
Chinese Taipei
Singapore
Hong Kong China1
Malaysia
Thailand
Indonesia
Philippines


P40
9,417.1
Table A.33
Sources and Uses of Funds of the Financial System
1999
2000
2001
2002
2003p
RM million
Sources of Funds:
Capital, reserves and profit
113,197.9
120,990.7
123,863.2
134,871.7
Currency
30,483.1
26,708.9
25,385.4
27,137.4
Demand deposits
75,077.8
83,205.3
92,129.0
87,539.5
1
486,187.1
503,079.1
508,836.0
547,135.3
49,282.5
45,385.0
44,971.3
44,767.7
117,586.8
110,791.5
102,161.7
122,405.2
312,338.3
339,770.3
354,996.6
372,884.1
Other deposits  (of which):
Public sector
Other financial institutions2
Private sector
Foreign
6,979.5
7,132.3
6,706.4
7,078.3
Borrowings
31,949.8
34,820.5
37,380.8
44,948.0
69,576.7
67,603.3
68,552.4
70,836.8
52,792.3
51,355.6
53,448.2
46,973.0
Funds from other financial institutions
Domestic2
Foreign
16,784.4
16,247.7
15,104.2
23,863.8
Insurance, provident and pension 
  funds
213,892.6
236,640.1
256,000.6
274,384.5
Other liabilities
153,893.9
190,138.4
193,163.0
208,266.6
Total Liabilities
1,174,258.9
1,263,186.3
1,305,310.4
1,395,119.8
Uses of Funds:
Currency
8,834.4
5,336.7
7,369.8
178,785.1
183,470.2
177,108.1
187,883.0
164,139.5
162,274.1
156,669.0
166,670.3
Deposits with other financial institutions
Domestic
Foreign
14,645.6
21,196.1
20,439.1
21,212.7
16,458.1
16,572.4
16,286.0
19,001.8
3,702.3
4,260.4
4,063.5
5,680.0
Bills
Treasury
Commercial
12,755.8
12,312.0
12,222.5
13,321.8
489,449.9
512,428.5
531,745.7
560,459.4
4,418.4
5,529.4
5,188.8
10,191.1
25,672.1
26,450.3
25,984.9
23,746.4
456,557.7
477,954.0
498,374.6
524,393.4
Loans and advances
Public sector
Other financial institutions
Private sector
Foreign
2,801.7
2,494.8
2,197.4
2,128.5
244,851.6
281,460.8
321,280.5
342,111.4
75,441.0
88,197.3
103,714.8
104,354.9
1,516.1
1,233.9
2,183.0
3,189.7
162,996.8
186,728.5
208,854.7
226,671.9
Securities
Malaysian government
Foreign
Corporate
Others
4,897.7
5,301.1
6,528.0
7,894.9
Gold and forex reserves
113,765.9
109,835.5
113,542.3
127,515.1
Other assets
121,531.2
150,584.5
140,011.1
150,779.3
Total Assets
1,174,258.9
1,263,186.3
1,305,310.4
1,395,119.8
158,808.6
29,445.4
92,094.8
617,353.0
40,583.0
161,350.9
406,032.3
9,386.8
48,035.6
88,877.7
61,867.4
27,010.3
297,068.8
232,378.1
1,564,062.0
6,264.4
224,560.8
209,345.0
15,215.8
16,751.2
3,539.8
13,211.4
600,844.8
8,816.3
23,436.8
566,251.7
2,340.0
393,321.3
124,285.8
3,469.4
258,980.3
6,585.8
166,139.3
156,180.2
1,564,062.0
1
Equals savings, fixed and other (NIF,  LPHT, etc.) deposits + NIDs + repos
2
Effective 1998, the statutory reserves of banking institutions have been reclassified as “Funds from other financial
institutions” instead of “Other deposits from other financial institutions”
p Preliminary
2


Annex
P41
Table A.34
Commercial Banks1: Commitments and Contingencies
As at end
1999
RM 
million
%
share
2000
RM 
million
%
share
2001
RM 
million
%
share
2002
RM 
million
%
share
2003
RM 
million
%
share
Assets sold with recourse and commitments with
  drawdown 
12,091.4
131,915.7
17,296.9
48,348.1
13,174.3
6,914.2
17,959.4
1,858.1
9,954.6
Credit extension commitments
Direct credit substitutes
Foreign exchange related contracts
Interest rate related contracts
Trade-related contingencies
Transaction-related contingencies
Underwriting obligations
Others
Total
259,512.7
4.7
50.8
6.7
18.6
5.1
2.7
6.9
0.7
3.8
100.0
4.0
44.4
4.8
27.3
5.2
4.8
6.0
0.5
3.1
100.0
11,282.3
159,824.0
13,894.6
81,445.1
32,667.8
13,465.3
19,025.6
1,768.1
11,293.9
344,666.6
3.3
46.4
4.0
23.6
9.5
3.9
5.5
0.5
3.3
100.0
2.7
39.9
3.0
20.4
21.6
4.2
4.9
0.5
2.8
100.0
2.9
35.8
3.0
21.4
25.7
4.1
4.3
0.4
2.4
100.0
13,818.0
169,490.0
14,156.4
101,331.6
121,497.6
19,404.9
20,448.1
1,818.4
11,600.3
473,565.2
11,440.7
167,530.0
12,705.8
85,361.0
90,528.5
17,438.5
20,639.0
1,952.0
11,838.6
419,434.0
12,249.3
137,597.3
14,999.8
84,506.6
15,987.1
14,785.5
18,485.7
1,664.4
9,518.3
309,794.0
1 Excludes Islamic banks
Note: Numbers may not necessarily add up due to rounding


P42
Table A.35
Finance Companies: Commitments and Contingencies
As at end
1999
RM 
million
%
share
2000
RM 
million
%
share
2001
RM 
million
%
share
2002
RM 
million
%
share
2003
RM 
million
%
share
Assets sold with recourse and commitments with
  drawdown 
5,536.1
9,654.0
968.6
0.0
667.0
0.0
18.8
0.0
306.5
Credit extension commitments
Direct credit substitutes
Foreign exchange related contracts
Interest rate related contracts
Trade-related contingencies
Transaction-related contingencies
Underwriting obligations
Others
Total
17,150.9
32.3
56.3
5.6
0.0
3.9
0.0
0.1
0.0
1.8
100.0
41.8
49.2
3.1
0.0
5.1
0.0
0.2
0.0
0.5
100.0
9,990.7
8,779.9
198.3
0.0
1,389.0
0.0
40.7
0.0
32.6
20,431.3
48.9
43.0
1.0
0.0
6.8
0.0
0.2
0.0
0.2
100.0
53.0
34.6
0.5
0.0
11.8
0.0
0.1
0.0
0.0
0.0
100.0
51.4
36.5
0.5
0.0
11.6
0.0
0.1
0.0
0.0
100.0
13,010.2
9,241.1
136.3
0.0
2,929.0
0.0
15.9
0.0
25,332.6
13,983.8
9,136.1
141.6
0.0
3,109.0
0.0
29.1
0.0
0.0
26,399.5
8,186.1
9,640.4
611.0
0.0
1,007.0
0.0
41.6
0.0
105.4
19,591.7
Note: Numbers may not necessarily add up due to rounding


Annex
P43
Table A.36
Merchant Banks: Commitments and Contingencies
As at end
1999
RM 
million
%
share
2000
RM 
million
%
share
2001
RM 
million
%
share
2002
RM 
million
%
share
2003
RM 
million
%
share
Assets sold with recourse and commitments with
  drawdown 
302.0
4,967.8
4,310.6
707.7
9,372.8
0.1
1,014.5
717.0
76.5
Credit extension commitments
Direct credit substitutes
Foreign exchange related contracts
Interest rate related contracts
Trade-related contingencies
Transaction-related contingencies
Underwriting obligations
Others
Total
21,469.1
1.4
23.1
20.1
3.3
43.7
0.0
4.7
3.3
0.4
100.0
0.6
16.0
8.2
3.8
61.0
0.0
3.4
6.4
0.5
100.0
1,425.5
2,639.7
1,325.1
1,320.1
39,658.8
0.1
790.4
1,617.5
80.0
48,857.2
2.9
5.4
2.7
2.7
81.2
0.0
1.6
3.3
0.2
100.0
2.2
2.7
1.3
1.9
89.7
0.0
1.0
1.2
0.1
55.4
100.0
1.3
2.0
1.0
1.2
93.0
0.0
0.7
0.9
0.0
100.0
1,595.2
2,444.0
1,228.6
1,459.9
115,332.1
0.0
818.2
1,138.9
124,072.3
1,736.0
2,089.1
1,039.3
1,506.6
70,701.1
0.0
749.0
937.5
44.1
78,802.7
161.0
4,114.8
2,111.4
964.7
15,686.3
1.2
886.0
1,653.5
118.3
25,697.1
Note: Numbers may not necessarily add up due to rounding


P44
Table A.37
Commercial Banks : Income and Expenditure
1
For the financial year
For the calendar year
2000
2001
2002
2001
2002
2003p
RM million
Interest income net of
interest-in-suspense
25,416.7
24,969.7
25,472.5
 25,055.5
(Interest-in-suspense)
3,148.8
3,488.2
4,087.2
3,759.7
Less:     Interest expense
13,455.8
12,961.4
13,341.4
12,808.6
Net interest income
11,960.9
12,008.4
12,131.0
12,247.0
Add:     Fee-based income
Add:     Other income
2,304.3
2,429.6
2,552.7
2,871.8
Gross operating profit
     
7,677.0
7,171.9
7,033.2
7,255.3
Gross operating profit
     after provision
3,472.8
1,168.7
837.6
3,447.9
2,648.7
3,475.6
3,669.4
2,909.4
Less:     Loan loss provisions
4,204.3
6,003.2
6,195.6
3,807.4
Less:     Staff cost
3,299.6
3,624.3
3,768.7
3,688.1
Overheads
3,288.6
3,641.8
3,881.9
4,175.3
Pre-tax profit
6,121.4
4,644.3
25,157.7
3,959.0
12,876.2
12,281.5
2,827.1
7,357.1
3,372.8
2,986.8
3,984.2
3,635.1
4,116.4
6,359.7
4,507.1
6,357.3
 26,533.4
3,169.2
13,505.2
13,028.2
3,213.2
7,811.8
4,255.5
2,652.3
3,556.3
3,907.9
4,521.8
6,907.8
1  Excludes Islamic banks
p Preliminary
Note: Numbers may not necessarily add up due to rounding
Table A.38
Finance Companies: Income and Expenditure
For the financial year
For the calendar year
2000
2001
2002
2001
2002
2003p
RM million
Interest income net of
interest-in-suspense
9,002.4
7,637.4
8,865.2
 8,824.1
(Interest-in-suspense)
1,153.7
1,161.5
1,330.6
1,521.6
Less:     Interest expense
4,867.1
3,375.8
3,947.5
3,884.2
Net interest income
4,135.3
4,261.6
4,917.7
4,939.8
Add:     Fee-based income
Add:     Other income
116.9
224.8
132.9
104.2
Gross operating profit
     
2,660.7
3,036.6
3,259.9
3,242.6
Gross operating profit
     after provision
979.0
1,664.9
1,600.8
1,871.7
482.5
369.2
520.0
507.7
Less:     Loan loss provisions
1,681.7
1,371.6
1,659.1
1,370.9
Less:     Staff cost
683.6
663.0
772.9
783.0
Overheads
907.9
786.8
1,017.8
1,018.5
Pre-tax profit
1,461.5
2,034.1
9,299.7
1,452.4
4,094.5
5,205.1
103.0
3,412.2
1,887.8
524.2
1,524.4
802.1
1,093.9
2,412.0
2,120.8
2,379.4
 9,250.6
1,361.7
4,020.8
5,229.8
101.1
3,558.4
2,161.1
516.6
1,397.3
812.7
959.8
2,677.7
p Preliminary
Note: Numbers may not necessarily add up due to rounding


Annex
P45
Table A.39
Merchant Banks: Income and Expenditure
For the financial year
For the calendar year
2000
2001
2002
2001
2002
2003p
RM million
Interest income net of
interest-in-suspense
1,803.4
1,783.7
1,728.8
 1,601.0
(Interest-in-suspense)
421.7
313.8
311.9
296.8
Less:     Interest expense
1,205.2
1,176.9
1,146.7
1,070.1
Net interest income
598.2
606.8
582.1
530.9
Add:     Fee-based income
Add:     Other income
288.3
296.3
277.8
338.2
Gross operating profit
     
622.2
580.1
537.1
521.2
Gross operating profit
     after provision
108.8
-314.6
-405.5
203.1
439.6
624.6
700.3
388.3
Less:     Loan loss provisions
513.4
894.7
942.6
318.2
Less:     Staff cost
147.3
204.9
204.2
226.5
Overheads
116.9
118.1
118.6
121.3
Pre-tax profit
548.4
310.0
1,714.3
328.1
1,138.7
575.5
306.2
549.9
178.3
488.3
371.6
214.8
117.0
666.6
294.8
591.3
 1,636.5
220.9
1,146.6
489.9
327.6
424.6
101.9
590.2
322.7
260.6
132.2
692.1
p  Preliminary
Note: Numbers may not necessarily add up due to rounding
Table A.40
Commercial Banks1: Lending Guidelines to the Priority Sectors
Loans to Bumiputera
community
Total outstanding loans
(RM billion)
Total outstanding loans (%)
Non-compliance
(no. of institutions)
Housing Loan
Commitments2
Total number of houses
(units)
Non-compliance
(no. of institutions)
1   Excluding performance of Islamic banks
2   Compliance date for 2000 Lending Guideline in respect of housing loan commitments has been extended
   from end-December 2001 to end-December 2002
3   Target achieved as at 31 December 2003
Target
Compliance Date of 31 December 2002
Achieved3
Achieved
170,571
3
Target
94.8
30.0
Achieved
93.1
29.4
12
Target
112,515
32,825
78,114
20.6
9.07
Loans to Small
and Medium Enterprises
Total loans approved
  (RM billion)
2000 Lending Guidelines 2002 Lending Guidelines
2003/2004 Lending Guidelines
(Compliance Date of 
31 December 2004)


P46
Table A.41
Finance Companies: Lending Guidelines to the Priority Sectors
Loans to Bumiputera
community
Total outstanding loans
(RM billion)
Total outstanding loans (%)
Non-compliance
(no. of institutions)
Housing Loan
Commitments1
Total number of houses
(units)
Non-compliance
(no. of institutions)
1   Compliance date for 2000 Lending Guideline in respect of housing loan commitments has been extended from 
   end-December 2001 to end-December 2002
2   Target achieved as at 31 December 2003
Target
Compliance Date of 31 December 2002
Achieved
Achieved
46,989
3
Target
27.8
30.0
Achieved2
44.4
47.9
1
Target
31,200
5,675
18,935
1.92
6.8
Loans to Small
and Medium Enterprises
Total loans approved
  (RM billion)
2000 Lending Guidelines 2002 Lending Guidelines
2003/2004 Lending Guidelines
(Compliance Date of 
31 December 2004)


Annex
P47
Table A.42
Commercial Banks1: Direction of Lending
As at end
2003
  2002
Loans by Sectors
Agriculture, hunting, forestry and fishing
10,278.1
3.0
Mining and quarrying
835.1
0.3
Manufacturing
56,750.3
16.8
Electricity, gas and water supply
5,985.7
1.8
Wholesale and retail trade, restaurants and hotels
32,892.1
9.7
Wholesale trade
19,351.1
5.7
Retail trade
9,868.3
2.9
Restaurants and hotels
3,672.7
1.1
Broad property sector
144,345.1
42.7
Construction
24,189.9
7.2
Purchase of residential property
86,246.4
25.5
Purchase of non-residential property
22,551.3
6.7
Real estate
11,357.5
3.4
Transport, storage and communication
7,608.2
2.3
Financial, insurance and business services
27,524.0
8.1
Financial services
19,830.7
5.9
Insurance
588.4
0.2
Business services
7,104.9
2.1
Consumption credit
23,436.5
6.9
Personal uses
13,541.7
4.0
Credit cards
8,990.2
2.7
Purchase of consumer durables
368.5
0.1
Purchase of passenger cars
536.0
0.2
Purchase of securities
15,707.8
4.6
Purchase of transport vehicles
465.5
0.1
Community, social and personal services
4,552.2
1.4
Others
7,860.9
2.3
Total loans outstanding2
338,241.5
100.0
9,292.4
2.6
942.1
0.3
56,666.8
15.9
4,630.5
1.3
34,878.6
9.8
20,472.9
5.8
10,448.7
2.9
3,957.0
1.1
160,346.9
45.0
22,453.8
6.3
101,829.3
28.6
24,240.1
6.8
11,823.7
3.3
8,233.1
2.3
27,296.2
7.7
19,990.1
5.6
192.1
0.1
7,113.9
2.0
25,627.6
7.2
14,188.3
4.0
10,577.6
3.0
351.5
0.1
510.1
0.1
14,546.8
4.1
726.4
0.2
3,807.7
1.1
9,014.0
2.5
356,009.1
100.0
1    Including lslamic banks
2    Including loans sold to Cagamas
Note: Numbers may not necessarily add up due to rounding
RM million
% share
RM million
% share


P48
RM million
% share
Table A.43
Finance Companies: Direction of Lending
As at end
2003
2002
Loans by Sectors
RM million
% share
Agriculture, hunting, forestry and fishing
562.9
0.6
Mining and quarrying
113.0
0.1
Manufacturing
2,513.9
2.5
Electricity, gas and water supply
50.1
0.1
Wholesale and retail trade, restaurants and hotels
3,466.0
3.5
Wholesale trade
1,361.7
1.4
Retail trade
1,576.1
1.6
Restaurants and hotels
528.1
0.5
Broad property sector
25,880.9
25.8
Construction
5,504.1
5.5
Purchase of residential property
14,042.2
14.0
Purchase of non-residential property
4,895.8
4.9
Real estate
1,438.7
1.4
Transport, storage and communication
1,785.2
1.8
Financial, insurance and business services
1,419.2
1.4
Financial services
271.5
0.3
Insurance
16.5
0.0
Business services
1,131.2
1.1
Consumption credit
56,880.5
56.6
Personal uses
789.5
0.8
Credit cards
1,601.2
1.6
Purchase of consumer durables
38.9
0.0
Purchase of passenger cars
54,450.9
54.2
Purchase of securities
3,950.5
3.9
Purchase of transport vehicles
2,570.1
2.6
Community, social and personal services
962.0
1.0
Others
317.6
0.3
Total loans outstanding1
100,471.7
100.0
569.4
0.5
106.3
0.1
2,766.3
2.6
50.8
0.1
3,638.1
3.4
1,428.8
1.3
1,626.0
1.5
583.3
0.6
25,533.5
23.9
5,333.9
5.0
14,647.6
13.7
4,409.8
4.1
1,142.1
1.1
1,651.8
1.5
1,381.0
1.3
237.3
0.2
14.5
0.0
1,129.2
1.1
63,585.1
59.5
958.9
0.9
1,658.8
1.6
21.3
0.0
60,946.1
57.0
3,637.4
3.4
2,577.4
2.4
1,065.8
1.0
366.7
0.3
106,929.6
100.0
1  Including loans sold to Cagamas
Note: Numbers may not necessarily add up due to rounding


Annex
P49
Table A.44
Merchant Banks: Direction of Lending
As at end
   2003
  2002
Loans by Sectors
RM million
% share
RM million
% share
Agriculture, hunting, forestry and fishing
807.4
6.0
Mining and quarrying
69.2
0.5
Manufacturing
2,012.1
14.9
Electricity, gas and water supply
779.8
5.8
Wholesale and retail trade, restaurants and hotels
705.2
5.2
Wholesale trade
156.5
1.2
Retail trade
148.3
1.1
Restaurants and hotels
400.4
3.0
Broad property sector
3,859.9
28.6
Construction
2,495.3
18.5
Purchase of residential property
77.1
0.6
Purchase of non-residential property
209.0
1.6
Real estate
1,078.4
8.0
Transport, storage and communication
363.0
2.7
Financial, insurance and business services
938.3
6.9
Financial services
768.2
5.7
Insurance
0.0
0.0
Business services
170.2
1.3
Consumption credit
40.3
0.3
Personal uses
21.1
0.2
Purchase of consumer durables
Purchase of passenger cars
19.1
0.1
0.0
Purchase of securities
1,981.6
14.7
Purchase of transport vehicles
0.3
0.0
Community, social and personal services
203.9
1.5
Others
1,720.0
12.8
Total loans outstanding1
13,481.0
100.0
1   Including loans sold to Cagamas
Note: Numbers may not necessarily add up due to rounding
0.0
652.3
5.9
47.7
0.4
1,667.9
15.1
384.7
3.5
655.3
5.9
97.4
0.9
92.8
0.8
465.1
4.2
2,858.8
25.9
1,708.0
15.5
78.2
0.7
150.0
1.4
922.6
8.3
845.3
7.7
633.1
5.7
535.2
4.8
0.0
0.0
97.9
0.9
57.0
0.5
35.5
0.3
21.5
0.2
0.0
1,709.4
15.5
0.5
0.0
98.4
0.9
1,432.6
13.0
11,042.9
100.0
0.0


P50
1   Excludes Islamic banks 
2   Includes commercial vehicles 
Note: Numbers may not necessarily add-up due to rounding
Table A.45
Commercial Banks1: Non-performing Loans by Sector
NPL by sector
RM million
As at end
As percentage of total loans to the sector  
%
1999
2000
2001
2003
2002
2000
2001
2002
2003
Business enterprises
Households 
Others
Agriculture, hunting, forestry and fishing
Mining and quarrying
26,337.1
Manufacturing
Electricity, gas and water supply
160.4
533.8
6,765.7
Wholesale and retail trade, restaurants  
   and hotels  
31.0
Wholesale trade
Retail trade 
Restaurants and hotels
1,656.6
Broad property sector
Construction 
Purchase of residential property
Purchase of non-residential property 
Real estate
Transport, storage and communication 
Finance, insurance and business services
12,598.3
Consumption credit
5,185.6
   Personal use
3,198.2
Credit cards 
Purchase of consumer durable goods 
2,071.0
Purchase of securities
Community, social and personal services
1,809.2
1,433.6
163.0
1999
6,436.8
3,633.1
1,081.3
895.2
2,143.5
1,289.0
2,997.1
212.5
450.6
1,957.4
548.0
677.6
Total
33,451.5
28,164.7
150.4
556.3
7,714.6
179.5
1,869.6
13,818.5
5,395.4
3,342.8
2,539.9
2,016.7
1,661.6
64.5
6,865.3
4,021.8
1,057.6
1,094.6
2,540.4
1,090.8
2,387.7
290.6
409.8
2,192.1
491.7
630.6
35,660.6
37,022.8
173.8
737.6
10,662.9
208.7
1,924.1
18,951.2
7,366.9
4,939.3
3,806.0
1,986.3
1,621.2
52.5
8,616.2
4,219.0
1,127.9
1,166.9
2,839.0
796.1
3,856.6
312.6
226.7
2,927.7
892.3
1,273.1
46,912.1
32,900.4
109.2
825.7
10,857.5
196.3
1,630.5
18,635.3
6,508.3
6,425.2
2,916.7
2,082.7
1,675.4
43.1
9,882.3
3,524.6
1,007.9
886.2
2,785.1
751.5
2,361.8
364.1
179.7
2,389.6
868.8
1,150.0
43,932.7
28,993.1
101.3
672.1
8,634.9
1,316.8
1,570.5
17,713.1
5,065.8
7,523.5
2,538.9
2,198.4
1,681.5
39.2
11,017.8
3,823.9
1,248.2
1,005.2
2,584.9
776.7
1,808.7
477.7
135.1
2,321.6
508.4
866.9
40,877.8
12.6
14.8
7.3
12.5
0.5
9.9
11.7
19.9
6.6
17.8
10.7
12.1
21.1
8.6
12.1
12.2
19.6
10.0
12.6
11.0
5.0
26.4
12.9
9.9
10.5
13.2
13.1
6.0
13.7
2.6
10.5
11.8
21.3
5.7
21.4
10.8
13.8
9.3
7.9
12.9
11.5
25.6
12.0
12.5
8.4
4.9
37.4
14.4
10.5
6.9
17.6
17.4
7.4
19.1
4.8
10.6
14.7
30.3
7.0
30.1
9.9
13.2
12.1
8.7
13.4
12.0
29.5
13.3
10.5
13.0
4.3
18.9
20.7
19.5
15.6
15.9
13.6
8.2
19.7
3.5
8.6
13.3
28.5
7.7
25.8
9.3
12.8
13.3
8.6
10.8
10.3
24.2
12.8
10.0
8.7
4.1
30.8
15.5
19.3
15.0
14.0
10.9
7.4
15.7
28.7
7.8
11.4
24.0
7.6
21.6
9.0
12.3
12.6
8.4
11.1
12.1
25.5
11.1
9.6
6.7
4.6
27.1
16.2
13.6
9.8
Purchase of transport vehicle2 


Annex
P51
1 Includes commercial vehicles
Table A.46
Finance Companies: Non-performing Loans by Sector
NPL by sector
RM million
As at end
As percentage of total loans to the sector  
%
1999
2000
2001
2003
2002
2000
2001
2002
2003
Business enterprises
Households
Others
Agriculture, hunting, forestry and fishing
Mining and quarrying
8,012.4
Manufacturing
Electricity, gas and water supply
70.0
117.2
1,031.5
Wholesale and retail trade, restaurants 
   and hotels  
16.8
Wholesale trade
Retail trade
Restaurants and hotels
255.1
Broad property sector
Construction
Purchase of residential property
Purchase of non-residential property
Real estate
Transport, storage and communication
Finance, insurance and business services
4,979.5
Consumption credit
1,989.4
   Personal use
1,211.9
Credit cards
Purchase of consumer durable goods
550.3
Purchase of securities
Community, social and personal services
268.0
178.8
26.5
1999
6,318.2
546.4
174.8
116.5
1,227.8
564.0
841.4
62.7
3,973.5
1,729.6
192.6
7,904.3
59.4
120.3
768.1
15.9
153.9
5,910.6
2,060.3
1,712.2
587.0
313.7
210.8
15.8
6,205.9
511.8
210.0
147.9
1,551.1
750.2
554.7
87.2
3,507.6
1,344.7
253.2
9,026.6
70.3
100.0
870.8
16.7
158.0
6,919.0
2,328.8
1,801.9
789.8
354.7
239.4
18.5
6,046.7
568.2
203.4
206.7
1,998.5
735.3
637.0
96.8
3,203.0
1,374.2
224.2
8,474.9
45.6
59.9
859.1
17.8
191.5
6,900.2
2,139.7
2,058.7
756.6
264.6
180.0
14.5
5,747.9
610.7
189.1
230.1
1,945.2
616.7
604.0
70.1
2,843.7
1,161.7
238.8
7,498.8
37.5
55.2
644.4
5.9
148.5
7,084.4
2,234.4
2,284.7
598.3
287.1
186.0
5.0
5,605.6
536.1
152.3
235.3
1,967.1
339.5
433.8
96.1
2,578.1
911.5
190.7
25.4
27.4
14.8
31.6
22.6
21.2
18.9
27.3
10.2
32.2
12.0
17.9
19.4
13.0
15.3
11.2
14.7
22.0
24.1
37.8
5.7
12.7
25.1
19.6
28.2
31.8
16.4
26.6
26.9
13.7
23.3
33.6
13.8
38.4
13.8
26.3
15.1
11.2
15.6
13.0
27.3
29.2
36.1
28.2
6.4
9.2
22.8
27.5
33.6
40.0
15.6
29.0
35.5
11.8
26.6
38.7
13.8
51.2
14.4
26.5
46.8
9.2
17.0
13.5
40.9
36.8
39.5
43.7
6.4
6.7
28.7
23.5
34.3
40.4
10.6
34.2
35.6
14.1
26.7
38.9
14.7
52.6
10.9
22.8
37.2
7.6
17.6
12.0
43.6
39.7
34.5
42.6
4.4
5.0
29.4
24.8
31.3
35.3
9.7
23.3
11.7
10.4
27.7
41.9
15.6
52.4
10.9
19.4
23.3
6.8
14.7
9.4
40.3
44.6
20.6
31.4
5.8
4.1
25.1
17.9
Note: Numbers may not necessarily add-up due to rounding
84.6
Total
14,415.2
145.2
14,255.4
220.7
15,294.0
135.6
14,358.4
94.0
13,198.4
12.5
30.9
56.4
42.7
25.6
Purchase of transport vehicle1


P52
1 Includes commercial vehicles
Note: Numbers may not necessarily add-up due to rounding
Table A.47
Merchant Banks: Non-performing Loans by Sector
NPL by sector
RM million
As at end
As percentage of total loans to the sector  
%
1999
2000
2001
2003
2002
2000
2001
2002
2003
Business enterprises
Households
Others
Agriculture, hunting, forestry and fishing
Mining and quarrying
3,131.7
Manufacturing
Electricity, gas and water supply
0.0
39.5
475.7
Wholesale and retail trade, restaurants 
  and hotels  
54.2
Wholesale trade
Retail trade
Restaurants and hotels
48.4
Broad property sector
Construction
Purchase of residential property
Purchase of non-residential property
Real estate
Transport, storage and communication
Finance, insurance and business services
1,372.0
Consumption credit
852.0
   Personal use
25.9
Credit cards
Purchase of consumer durable goods
417.9
Purchase of securities
Community, social and personal services
6.7
6.7
0.0
1999
70.6
93.1
20.0
24.7
76.2
229.0
354.2
0.0
0.1
1,058.9
10.4
2,464.6
0.4
25.9
383.1
57.5
35.2
1,144.9
565.5
0.4
510.8
12.9
12.9
0.0
155.5
195.9
32.8
127.9
68.2
79.6
87.9
0.0
0.0
901.8
38.9
3,597.7
0.5
86.5
891.5
133.4
45.4
1,477.3
807.5
0.7
577.8
13.2
13.2
0.0
333.3
197.4
33.1
118.8
91.3
63.6
187.2
0.0
0.1
878.9
121.6
3,222.7
4.1
47.3
792.5
208.4
29.8
1,282.0
756.6
0.2
454.3
12.2
12.2
0.0
343.0
181.4
5.6
146.1
70.9
38.4
139.4
0.0
0.1
821.5
118.7
2,314.5
4.4
22.0
538.1
118.0
9.8
1,004.6
531.2
0.1
407.3
11.5
11.5
0.0
220.2
217.6
6.5
201.3
65.9
22.9
85.6
0.0
0.1
544.4
29.2
20.2
0.0
5.3
20.3
6.8
14.1
24.1
23.6
24.8
25.5
17.9
18.0
0.0
4.0
7.8
8.5
4.0
22.4
18.2
22.2
0.0
0.6
36.5
2.3
17.7
0.5
2.5
17.2
8.2
12.6
23.9
18.3
0.5
36.1
35.2
35.3
0.0
9.3
20.7
15.4
28.2
30.2
8.2
7.1
0.0
0.3
27.5
10.2
30.4
0.5
10.0
40.4
29.3
26.3
33.7
28.8
0.9
45.8
40.4
40.5
0.0
21.2
24.5
17.4
26.8
36.9
10.7
18.2
0.0
1.1
40.0
33.1
30.3
5.9
5.9
39.4
26.7
19.0
33.2
30.3
0.3
42.1
57.4
57.5
0.0
19.9
25.7
3.7
36.5
33.9
10.6
14.9
0.0
0.6
41.5
58.2
26.8
9.1
3.4
32.3
30.7
10.0
35.1
31.1
0.2
44.1
32.4
32.5
0.0
15.4
562.1
464.1
453.4
423.2
283.9
35.1
26.4
37.2
38.2
28.7
33.2
7.0
43.3
43.9
2.7
13.5
0.0
0.4
31.8
29.7
Total
3,764.4
3,084.2
4,384.4
3,988.9
2,818.6
Purchase of transport vehicle1


Annex
P53
Table A.48
Islamic Banking System: Sources and Uses of Funds
Sources
Capital and reserves
4,703
6.9
Deposits
Funds from other
financial institutions
Other liabilities
Total
Uses
Cash
Reserves with
Bank Negara Malaysia
Deposits with other
financial institutions
Financing
Securities
Other assets
Total
1     Denotes the interbranch balances pending settlement
p  Preliminary 
2002
As at end
Islamic 
Banks
Islamic 
Banks
IBS 
Banks
IBS 
Banks
Total
RM million
2003p
RM million
Total
%
share
%
share
1,398
16,421
555
1,786
3,305
36,885
3,889
3,831
53,306
78.3
4,444
6.5
5,617
8.3
200
20,160
47,910
68,070
100.0
40
240
0.3
549
647
1,196
1.8
3,215
4,520
7,735
11.4
9,158
27,560
36,718
53.9
5,721
13,556
19,277
28.3
1,317
1,587
2,904
4.3
20,160
47,910
68,070
100.0
6,784
8.3
1,523
17,584
113
1,734
5,261
42,628
6,872
6,481
60,212
73.2
6,985
8.5
8,215
10.0
231
20,954
61,242
82,196
100.0
24
255
0.3
587
930
1,517
1.9
3,239
5,743
8,982
10.9
9,764
38,851
48,615
59.2
5,764
16,790
22,554
27.4
1,369
-1,0961 
273
0.3
20,954
61,242
82,196
100.0
Table A.49
Islamic Banking System: Commitments and Contingencies
Assets sold with recourse
and commitments with
drawdown
48
8.9
Credit extension
commitments
1,215
5,348
6,563
Direct credit substitutes
448
373
4.8
Foreign exchange related 
contracts
156
0.9
Trade-related contingencies
986
5,290
Transaction-related
contingencies
899
443
1,342
7.8
Underwriting obligations
–
315
315
1.8
Others
31
181
1.2
Total
3,783
13,433
100.0
p Preliminary
As at end
2003p
2002
Islamic
Banks
IBS 
Banks
RM million
Islamic 
Banks
Total
% 
share
IBS 
Banks
Total
% 
share
RM million
1,483
1,531
821
156
6,276
212
17,216
–
36.5
38.1
45
8.6
1,418
8,287
9,705
503
357
3.7
189
0.8
1,103
6,429
1,157
634
1,791
7.8
60
510
570
2.5
64
392
2.0
4,539
18,559
100.0
1,950
1,995
860
189
7,532
456
23,098
–
32.6
42.0


P54
Table A.50
Islamic Banking System: Income and Expenditure
Finance income  net of
1
income-in-suspense
627.9
1,768.6
(Income-in-suspense)
201.1
Less:   Finance expense
291.2
Net finance income
336.7
Add:   Non-finance income
77.2
Less:
Provisions
129.4
Staff cost
105.9
Overheads
102.3
Pre-tax profit
76.3
1 Finance income includes income from securities
p Preliminary
For the financial year
For the calendar year
RM million
Islamic
Banks
Total
Islamic
Banks
IBS
Banks
Total
Islamic
Banks
IBS
Banks
Total
Islamic
Banks
IBS
Banks
Total
2003p
2002
2003p
2002
IBS
Banks
2,396.5
154.0
355.1
848.2
1,139.4
920.4
1,257.1
215.5
292.7
377.4
506.8
51.2
157.1
83.1
185.4
624.2
700.5
596.9
2,266.5
51.6
265.4
331.5
82.5
125.6
104.7
131.3
52.4
2,863.4
141.9
193.5
966.5
1,231.9
1,300.0
1,631.5
356.9
439.4
759.2
884.8
73.5
178.2
144.0
275.3
680.2
732.6
1,096.0
2,300.9
3,195.7
201.2
171.9
373.1
625.2
1,144.8
1,568.8
470.8
1,156.1
1,626.9
116.1
378.9
495.0
143.7
562.3
139.0
60.0
199.0
148.5
120.6
269.1
155.7
792.1
947.8
706.0
925.1
2,944.8
3,869.9
95.0
210.8
305.8
403.0
1,285.5
1,688.5
522.1
1,659.3
2,181.4
111.9
615.4
727.3
163.3
1,155.7
145.2
83.3
228.5
196.0
188.0
384.0
129.5
847.7
977.2
1,319.0


Annex
P55
Table A.51
Islamic Banking System: Financing Activities
Financing approvals
Financing disbursements
Financing repayments
2,056.1
p  Preliminary
For the year
2003p
2002
Islamic
Banks
IBS
Banks
Total
Islamic
Banks
IBS
Banks
Total
RM million
2003p
2002
Islamic
Banks
IBS
Banks
Total
Islamic
Banks
IBS
Banks
Total
RM million
As at end
10,253.7
12,309.8
1,999.2
14,740.0
16,739.2
7,242.9
16,944.4
24,187.3
8,114.9
28,046.6
36,161.5
6,561.0
14,214.9
20,775.9
7,680.7
18,560.6
26,241.3
Outstanding financing
9,158.2
27,559.5
36,717.7
9,764.5
38,850.8
48,615.3
Total outstanding 
    financing
Total non-performing
    financing 
823.2
p  Preliminary
2003p
2002
Islamic
Banks
IBS
Banks
Total
Islamic
Banks
IBS
Banks
Total
RM million
2,674.4
3,497.6
1,759.0
4,407.2
6,166.2
–
–
–
322.9 
289.1 
612.0
Table A.52
Islamic Banking System: Financing to Small and Medium-Sized Enterprises
As at end


P56
Table A.53
Islamic Banking System: Direction of Financing
As at end
2003p
2002
Islamic
Banks
IBS
Banks
Total
RM million
Agriculture, hunting,
forestry and fishing
267.3
 1,326.7
1,594.0
4.3
Mining and quarrying
29.5
 45.0
74.5
0.2
Manufacturing
1,659.5
2,221.7
3,881.2
10.6
Electricity, gas and water
390.6
 143.1
533.7
1.5
Community, social and
personal services
39.5
 174.4
213.9
0.6
Broad property sector
4,682.6
11,053.1 15,735.7
42.8
Real estate
52.5
 616.8
669.3
1.8
Construction
1,318.2
960.0
2,278.2
6.2
Purchase of residential
property
2,451.9
8,310.9 10,762.8
29.3
Purchase of non-
residential property
860.0
 1,165.4
2,025.4
5.5
Wholesale, retail,
restaurants and hotels
391.6
 994.8
1,386.4
3.8
Transport, storage and
communication
100.1
 724.7
824.8
2.2
Finance, insurance and
business services
158.0
 1,113.7
1,271.7
3.5
Purchase of securities
248.0
 687.0
935.0
2.5
Consumption credit
900.7
 8,386.5
9,287.2
25.3
Credit cards
27.8
 32.7
60.5
0.2
Personal uses
409.9
 651.7
1,061.6
2.9
Purchase of consumer
durables
44.7
 18.6
63.3
0.2
Purchase of transport
vehicles
418.3
 7,683.5
8,101.8
22.1
Others
290.8
 688.8
979.6
2.7
Total
9,158.2
27,559.5 36,717.7
100.0
202.2
 1,659.4
1,861.6
3.9
15.0
 48.5
63.5
0.1
1,529.7
2,857.1
4,386.8
9.0
43.0
 205.9
248.9
0.5
63.7
 239.6
303.3
0.6
5,305.2
15,177.5 20,482.7
42.1
90.6
 721.3
811.9
1.7
1,328.5
1,605.0
2,933.5
6.0
3,022.2
11,322.0 14,344.2
29.5
863.9
 1,529.2
2,393.1
4.9
405.9
 1,391.1
1,797.0
3.7
152.8
 871.5
1,024.3
2.1
261.6
 1,671.7
1,933.3
4.0
226.7
 694.2
920.9
1.9
1,431.4  13,440.7 14,872.1
30.6
90.3
 65.9
156.2
0.3
562.0
 1,075.1
1,637.1
3.4
40.3
 13.8
54.1
0.1
738.8  12,285.9 13,024.7
26.8
127.3
 593.6
720.9
1.5
9,764.5
38,850.8 48,615.3
100.0
p Preliminary
%
share
Islamic
Banks
IBS
Banks
Total
RM million
%
share


Annex
P57
Table A.54
Islamic Banking System: Non-performing Financing by Sector1
As at end
NPF by sector
2003p
2002
2002
%
2003p
Islamic 
Banks
IBS 
Banks
Total
RM million
Islamic 
Banks
IBS 
Banks
Total
Agriculture, hunting, forestry and fishing
34.4
42.2
76.6
-0.3
 4.8
Mining and quarrying
4.7
0.2
4.9
2.0
6.6
Manufacturing
208.3
165.5
373.8
-2.1
9.6
Electricity, gas and water
1.7
0.1
1.8
 127.8
0.3
Community, social and personal services
13.0
28.7
41.7
7.9
19.5
Broad property sector
706.9
1,426.5
2,133.4
32.2
13.6
Real estate
0.9
267.9
 268.8
6.2
40.2
Construction
278.8
144.3
 423.1
41.2
18.6
Purchase of residential property
256.9
737.0
993.9
45.4
 9.2
Purchase of non-residential property
170.3
277.3
 447.6
10.1
22.1
Wholesale, retail, restaurants and hotels
88.6
56.3
 144.9
42.4
10.5
Transport, storage and communication
31.4
79.1
 110.5
97.9
13.4
Finance, insurance and business services
25.9
4.3
30.2
35.8
 2.4
Purchase of securities
88.4
111.3
199.7
-29.4
21.4
Consumption credit
178.8
256.3
435.1
19.8
4.7
Credit cards
0.2
2.2
2.4
229.2
4.0
Personal uses
126.3
39.2
165.5
17.6
15.6
Purchase of consumer durables
6.3
0.6
6.9
-34.8
10.9
Purchase of transport vehicles
46.0
214.3
260.3
20.7
3.2
Others
14.3
8.6
22.9
247.2
2.3
Total
1,396.4
2,179.1
3,575.5
32.0
44.4
76.4
4.8
0.2
5.0
202.2
163.9
366.1
4.1
...
4.1
27.8
17.2
45.0
865.3
1,955.6
2,820.9
0.1
285.4
 285.5
359.8
237.8
 597.6
317.6
1,127.3
1,444.9
187.8
305.1
 492.9
66.4
139.9
 206.3
51.3
167.4
 218.7
31.6
9.4
41.0
59.5
81.5
141.0
226.8
294.3
521.1
4.8
3.1
7.9
140.9
53.7
194.6
4.3
0.2
4.5
76.8
237.3
314.1
3.7
75.8
79.5
1,575.5
2,949.6
4,525.1
26.6
4.1
7.9
8.4
 1.6
14.8
13.8
35.2
20.4
10.1
20.6
11.5
21.4
2.1
15.3
3.5
5.1
11.9
8.3
2.4
11.0
1  Based on actual classification
p Preliminary
Change
As percentage of total
financing to sector


P58
 
 
1   Excludes Islamic banks
2   Based on Malaysian operations only
3   Cost = Staff cost and overheads (excluding loan loss provisions)
Pre-tax profit /
      Average assets (%)
Pre-tax profit / 
      Average shareholders' funds (%)
Pre-tax profit /
      Average employee (RM'000)
Cost3 incurred per ringgit of revenue 
      earned4 (sen) 
Cost3 incurred per ringgit of net interest
      income4 (sen)
Overheads to staff 
      cost ratio (%)
Staff cost
      per employee (RM'000) 
Loan deposit
      ratio5 (%)
Loans per office
      (RM million)
Deposits per office5
      (RM million)     
Commercial banks1
Finance companies
As at calendar year end
Merchant banks
Banking system1
1999
2000
2001
2002
2003
1999
2000
2001
2002
2003
1999
2000
2001
2002
2003
1999
2000
2001
2002
2003
1.3
16.5
84.1
38.1
54.9
41.4
87.9
164.3
186.8
104.2
1.4
17.4
94.5
39.0
54.7
49.8
87.7
175.4
200.1
98.4
114.6
0.9
10.7
63.4
41.5
62.6
54.8
101.0
89.6
190.7
213.0
113.2
1.2
14.3
95.4
43.6
64.2
55.4
88.4
201.7
228.1
115.7
1.2
14.7
103.9
44.6
64.7
58.8
83.3
205.6
246.7
162.4
-0.8
-14.5
-43.1
37.9
44.5
27.8
88.5
84.3
95.2
123.5
1.7
33.2
91.6
31.2
35.7
36.7
100.4
90.2
89.8
131.7
1.8
31.0
102.9
32.1
36.4
37.5
108.0
106.0
98.2
130.1
1.9
29.1
127.0
32.5
36.5
41.8
111.1
133.1
119.8
118.1
2.0
32.9
143.7
30.3
33.9
43.6
115.8
146.7
126.6
125.2
-0.4
-4.9
-70.1
26.0
60.4
56.5
72.9
857.7
1,175.9
70.0
1.5
16.8
248.6
19.6
43.6
70.0
70.1
789.1
1,125.5
58.1
0.8
7.4
124.8
20.7 
55.5
86.4
57.6
768.8
1,334.6
53.6
1.4
13.1
244.5
27.7
65.5
93.6
51.3
792.9
1,547.1
50.7
1.6
14.4
284.9
27.9
80.2
107.3
37.6
649.4
1,725.4
0.8
10.5
50.7
37.4
52.6
38.6
87.2
141.9
162.7
101.7
1.4
19.3
97.7
36.2
49.3
47.4
89.0
151.1
169.7
104.2
1.0
13.1
73.9
38.2
55.0
51.8
91.2
166.1
182.1
113.1
1.3
16.3
106.3
40.3
56.5
53.5
90.6
184.3
203.4
112.7
1.4
17.2
117.4
40.5
56.5
56.9
86.4
191.1
221.0
Table A.55
Banking System1,2: Selected Indicators
4   Net of interest-in-suspense
5   Including NIDs and repos


Annex
P59
Table A.56
Banking System1: Key Data
As at end
1999
2000
 2001
2002
2003
Number of institutions
68
62
47
45
- Commercial banks1
33
31
25
24
- Finance companies
23
19
12
11
  - Merchant banks
12
12
10
10
Risk-weighted capital ratio (%)
12.5
12.5
13.0
13.2
- Commercial banks1
12.8
12.3
12.8
13.2
  - Finance companies
10.8
11.5
12.1
12.0
  - Merchant banks
14.5
17.1
19.6
19.0
Office network
2,749
2,713
2,557
2,403
- Commercial banks1
1,767
1,758
1,664
1,631
  - Finance companies
960
933
874
755
  - Merchant banks
22
22
19
17
ATM network
3,883
3,906
3
8
3,983
4,027
- Commercial banks1
3,302
3,346
3,378
3,476
  - Finance companies
581
560
605
551
Number of banks with internet services
–
12
- Commercial banks1
12
Persons served per office
- Commercial banks1
12,854
13,256
13,959
14,899
  - Finance companies
23,659
24,920
26,474
32,185
Number of employees
92,630
93,290
90,288
87,747
- Commercial banks1
69,714
70,226
67,398
65,866
  - Finance companies
20,543
20,725
20,488
19,430
  - Merchant banks
2,373
2,339
2,402
2,451
44
23
11
10
13.4
13.6
11.3
18.4
2,430
1,684
729
17
4,184
3,707
477
12
12
15,026
33,536
87,521
66,458
18,634
2,429
1 Excludes Islamic banks
–
3
8


P60
Table A.57
Housing Credit Institutions
Lending
rate for new
housing loans (%)
2002
2003
2002 2003
Commercial banks
4.41
1,594
Finance companies
4.51
746
Treasury Housing
1970
To  provide housing loans to 
Government employees
4.0
Loans Division
Malaysia Building
1950
To be the nation’s single largest
provider of property finance and
to contribute to the continuous
growth of the nation
3.5 ~ 8.5
22
–
Society Berhad
Borneo Housing Mortgage
1958
To provide housing loans mainly
to Sabah and Sarawak State
Government employees
4.5 ~ 8.9
2
Finance Berhad
Sabah Credit Corporation
1955
To  improve the social economic
development of Sabah through
loans mainly to the property,
agriculture and business sectors
8.0 ~ 10.5
11
Bank Kerjasama Rakyat
1954
A co-operative society which
collects deposits and provides
conventional banking facilities
as well as according to Syariah
principles
7.11 
98
Malaysia Berhad
Bank Simpanan Nasional
1974
To promote and mobilise savings
particularly from small savers
and to inculcate the habit of
thrift and savings 
4.71
4.51
4.01
4.0
2.0 ~ 6.5
7.5 ~ 8.5
8.0 ~ 10.5
7.41 
4.01
421
1,700
672
22
–
2
11
100
398
1  Average
Source: Bank Negara Malaysia and various housing credit institutions
Year of
establishment
Objective
No. of
branches
–
–


Annex
P61
Table A.58
Outstanding Housing Loans
2002
2003p
2003p
2002
2002
2003p
RM million
Annual change (%)
% share
Commercial banks
86,246
18.0
68
Treasury Housing Loans Division
22,172
13.9
17
Finance companies
14,042
7.7
11
Bank Kerjasama Rakyat Malaysia Berhad
1,108
-13.0
Bank Simpanan Nasional
1,133
-11.7
Malaysia Building Society Berhad
1,236
-1.0
Borneo Housing Mortgage Finance Berhad
650
3.9
Sabah Credit Corporation
293
-0.8
Total
126,880
101,829
24,754
14,648
1,371
1,058
1,207
680
290
145,837
15.0
18.1
11.6
4.3
23.7
-6.6
-2.4
4.7
-1.0
14.9
100
p
Preliminary
… Negligible
Source: Bank Negara Malaysia and various housing credit institutions
1
1
1
1
...
70
17
10
100
1
1
1
...
...
Table A.59
Approved Housing Loans
2003p
2003p
2003p
2002
RM million
Annual change (%)
% share
Commercial banks
26,795
6.8
77
Treasury Housing Loans Division
5,051
23.6
15
Finance companies
2,410
26.2
Bank Kerjasama Rakyat Malaysia Berhad
403
-3.1
Malaysia Building Society Berhad
113
-67.7
…
Borneo Housing Mortgage Finance Berhad
85
12.9
Bank Simpanan Nasional
78
-51.0
…
Sabah Credit Corporation
30
-19.2
…
Total
34,965
27,943
4,738
2,090
567
364
88
65
19
35,874
8.9
4.3
-6.2
-13.3
40.6
221.4
3.4
-16.4
-36.3
2.6
100
p
Preliminary
… Negligible
Source: Bank Negara Malaysia and various housing credit institutions
...
7
1
78
13
1
…
…
100
…
6
2
2002
2002


P62
As at the end of 2003, 292 leasing companies and 28 factoring companies had registered with Bank Negara
Malaysia. However, only 114 leasing companies and 15 factoring companies submitted statistics pertaining to
their operations to the Bank. Total assets of the 114 leasing companies and 15 factoring companies amounted to
RM21.2 billion and RM2.1 billion respectively at the end of 2003. Nevertheless, of the 114 leasing companies,
only 37 were pure leasing companies, while of the 15 factoring companies, only 10 were pure factoring
companies. The remaining companies only undertook leasing and factoring business as part of their overall
business activities.
Table A.60
Leasing Companies : Sources and Uses of Funds
1
As at end
1999
2000
2001
2002
2003
RM million
Sources
Capital and reserves
654
839
839
770
Borrowings from financial institutions
1,898
1,711
1,923
2,141
Inter-company borrowings
1,296
1,316
1,343
1,454
Others
2,400
2,447
2,400
2,684
Total
6,248
6,313
6,505
7,049
Uses
Cash and bank balances
266
191
229
225
Investments
308
279
309
323
Receivables
3,056
3,107
3,014
3,118
Leasing
1,537
1,495
1,423
1,420
Factoring
17
209
Hire purchase
1,261
1,331
1,275
1,307
Others
254
273
299
182
Others
2,618
2,736
2,953
3,384
1,554
1,759
1,375
2,342
7,030
198
387
2,370
1,508
204
503
155
4,074
1 Statistics shown are for pure leasing companies only
Note: Numbers may not necessarily add up due to rounding
4
8
Table A.61
Leasing Companies : Income and Expenditure
1 
During the period
1999
2000
2001
2002
2003
RM million
Income
Income from
329
315
313
302
Leasing
225
223
217
212
Factoring
3
Hire purchase
102
90
85
76
Others
11
Others
265
224
188
306
Total
594
539
501
607
Expenditure
Interest paid
289
180
187
165
Financial institutions
253
156
166
155
Block discounting
36
24
21
10
Bad debts written off and provision
195
33
108
35
Others
183
168
165
199
Total
667
381
460
398
Pre-tax Profit
-73
158
41
209
326
226
6
75
20
200
526
141
134
7
5
183
329
197
1 Statistics shown are for pure leasing companies only
Note: Numbers may not necessarily add up due to rounding
1
2
0
2
9
1


Annex
P63
25
8
Table A.62
Leasing Companies : Financing by Sector
1
During the period
1999
2000
2001
2002
2003
RM million
Sector
Agriculture
Mining and quarrying
17
Manufacturing
111
0
3
3
17
317
172
102
Electricity
0
General commerce
27
89
266
125
Property sector
29
61
50
38
Construction
24
57
46
36
Real estate
2
Residential property
0
Transport and storage
16
83
805
54
Business, insurance and other services
35
147
113
121
Consumption credit
Others
83
26
108
128
Total
312
771
1,535
585
1 Statistics shown are for pure leasing companies only
Note: Numbers may not necessarily add up due to rounding
3
1
3
5
0
0
0
3
0
0
0
4
4
14
9
126
0
106
207
179
28
0
53
116
53
695
0
25
Table A.63
Factoring Companies : Sources and Uses of Funds
1 
As at end
1999
2000
2001
2002
2003
RM million
Sources
Capital and reserves
89
116
164
164
Borrowings from financial institutions
247
324
445
293
Inter-company borrowings
256
697
600
416
Others
385
896
658
1,092
Total
977
2,033
1,867
1,964
Uses
Cash and bank balances
0
2
0
0
4
0
4
30
5
25
45
255
202
234
Investments
35
Receivables
928
1,458
998
1,170
Leasing
4
Factoring
808
1,312
872
1,111
Hire purchase
Others
118
142
122
55
Others
14
295
622
525
81
267
267
425
1,040
0
14
24
602
4
542
57
401
1 Statistics shown are for pure factoring companies only
Note: Numbers may not necessarily add up due to rounding


P64
Table A.64
Factoring Companies : Income and Expenditure
1
During the period
1999
2000
2001
2002
2003
RM million
Income
Income from
47
47
37
38
Leasing
0
0
0
6
0
9
8
2
0
Factoring
38
38
29
29
Hire purchase
0
9
0
8
Others
Others
15
99
129
28
297
Total
62
146
166
335
Expenditure
Interest paid
42
17
Financial institutions
0
0
0
42
28
28
17
Block discounting
0
Bad debts written off and provision
202
14
28
14
Others
41
49
33
45
Total
285
91
89
76
Pre-tax Profit
-223
55
77
259
31
0
24
0
6
75
106
15
15
0
5
17
37
68
1 Statistics shown are for pure factoring companies only
Note: Numbers may not necessarily add up due to rounding
Table A.65
Factoring Companies : Financing by Sector
1
During the period
1999
2000
2001
2002
2003
RM million
Sector
Agriculture
0
0
0
0
Mining and quarrying
Manufacturing
71
76
66
57
Electricity
General commerce
133
127
140
179
Property sector
222
245
270
103
Construction
174
195
222
76
Real estate
48
50
48
27
Residential property
0
Transport and storage
Business, insurance and other services
86
77
51
50
Consumption credit
Others
23
25
541
513
Total
567
584
1,096
927
1 Statistics shown are for pure factoring companies only
Note: Numbers may not necessarily add up due to rounding
0
0
0
0
3
6
8
5
3
4
3
2
0
0
0
23
20
20
1
46
120
43
36
1
6
37
18
286
0
1
3
17
22


Annex
P65
Table A.66
Capital Market Debt Securities1: Amount Outstanding
As at end
1999
2000
2001
2002
2003p
RM million (nominal value)
Malaysian Government Securities
78,336
89,050
103,450
 109,550
Government Investment Issues
2,000
4,000
4,000
5,000
Khazanah Bonds
8,980
10,000
10,000
 10,000
Malaysia Savings Bonds
359
379
0
464
Danaharta Bonds
10,344
11,140
Danamodal Bonds
11,000
11,000
Cagamas Bonds
13,019
17,312
18,427
22,595
Other Corporate Bonds
78,632
100,494
117,674
103,951
Medium Term Notes
681
1,726
2,910
4,450
Total
203,370
245,081
278,601
278,150
1  Refer to debt securities with an original maturity period of more than one year
p Preliminary
11,140
11,140
11,000
11,000
 130,800
7,000
 11,000
455
25,628
136,002
8,596
328,021
8,539
–


P66
Table A.67
Urban Credit Co-operative Societies1
Annual change
As at end 
2003
2002
2003
Annual 
change (%)
Number
Total co-operative societies
41
Deposit-taking co-operatives
Other credit co-operatives
41
0
1
(‘000)
Total members
92
Deposit-taking co-operatives
Other credit co-operatives
91
RM million
% share
Sources of funds
Share subscriptions
123.0
Reserves
71.9
Borrowings
85.2
Sundry creditors
17.3
Savings and deposits
13.5
Surplus
8.9
Total
319.8
Uses of funds
Investments
74.8
Shares
39.5
Fixed and savings deposits
28.5
Real estates
3.9
Others
2.9
Loans to members
114.3
Fixed assets
72.7
Other assets
37.2
Cash and bank balances
7.8
Others
13.0
11
11
0
1,506
-18,166
-19,672
71.7
27.9
15.3
7.1
22.1
988.6
1,132.7
50.7
3.1
41.3
8.7
-2.4
61.4
11.9
0.8
1,035.0
-26.8
424
418
6
345,834
1,274,473
928,639
1,096.8
242.7
155.6
115.2
177.5
1,588.2
3,376.0
462.9
136.1
197.1
106.2
23.5
1,513.7
224.9
34.7
1,129.0
10.8
2.7
2.7
0
0.4
-1.7
-2.1
7.0
13.0
10.9
6.5
14.3
164.9
216.6
12.3
0.8
2.1
10.0
-0.6
4.2
5.6
2.2
11.0
-71.3
100
98.6
1.4
27.1
100.0
72.9
32.5
7.2
4.6
3.4
5.3
47.0
100.0
13.7
4.1
5.8
3.1
0.7
44.9
6.7
1.0
33.4
0.3
1  Urban credit co-operative societies, which comprise of employees credit societies, thrift and loan societies and thrift and 
 investment societies, were established primarily to provide consumer credit and serve as an investment channel for members
2  Refers to total loans outstanding
Source: Department of Co-operative Development Malaysia
2


Annex
P67
1
As at end
1999
2000
2001
2002
2003
RM million
4,701.3
6,314.2
6,906.6
7,905.3
4,168.9
5,258.5
5,416.9
6,012.4
1,054.6
1,216.6
1,196.2
1,517.0
-522.2
-160.9
293.5
375.9
27,492.1
34,752.2
39,305.7
39,797.6
11,058.1
11,825.4
12,866.0
13,977.0
6,140.2
6,238.3
6,625.7
8,875.4
2,760.9
3,034.8
3,321.7
3,434.3
2,157.0
2,552.3
2,918.6
1,667.3
6,543.5
8,470.4
8,987.6
10,766.5
49,795.0
61,362.2
68,065.9
72,446.4
7,210.5
11,493.2
12,265.2
15,720.7
16,352.5
17,506.6
21,968.0
19,268.1
2,072.0
2,497.1
3,715.0
3,495.8
4,250.9
4,759.8
5,099.4
6,427.4
3,885.1
4,203.5
4,478.5
5,325.6
365.8
556.3
620.9
1,101.8
18,736.8
21,998.0
24,486.3
29,442.4
1,870.2
2,090.2
3,011.6
3,606.7
5,625.0
8,274.2
6,334.8
4,408.5
49,795.0
61,362.2
68,065.9
72,446.4
4,228.3
4,211.8
3,342.4
3,160.1
136.1
204.5
148.3
151.5
4,364.4
4,416.3
3,490.7
3,311.6
9,497.6
7,192.3
1,395.1
910.2
42,382.6
16,076.5
11,356.3
3,035.7
1,684.5
11,135.3
79,092.0
17,113.4
21,141.7
3,562.0
5,798.6
5,322.5
476.1
32,548.1
3,706.0
4,582.8
79,092.0
3,652.7
125.6
3,778.3
Table A.68
Development Financial Institutions : Sources and Uses of Funds
Sources:
Shareholders’ funds
Paid-up capital
Reserves
Retained earnings
Deposits accepted
Borrowings
Government
Multilateral/International
    agencies
Others
Others
Total
Uses:
Deposits placed
Investments
of which:
Government securities
Shares
Quoted
Unquoted
Loans and advances
Fixed assets
Others
Total
Contingencies:
Guarantee
Export credit insurance
Total
1 Refers to Bank Pembangunan dan Infrastruktur Malaysia Berhad, Bank Industri & Teknologi Malaysia Berhad, Bank Kerjasama
Rakyat Malaysia Berhad, Bank Simpanan Nasional, Export-Import Bank of Malaysia Berhad, Malaysia Export Credit Insurance
Berhad, Malaysian Industrial Development Finance Berhad, Sabah Development Bank Berhad, Borneo Development
Corporation (Sabah) Sendirian Berhad, Borneo Development Corporation (Sarawak) Sendirian Berhad, Bank Pertanian
Malaysia, Credit Guarantee Corporation Malaysia Berhad, Sabah Credit Corporation and Lembaga Tabung Haji


P68
Table A.69
Development Financial Institutions  under DFIA : Sources and Uses of Funds
1
2
As at end
1999
2000
2001
2002
2003
RM million
Sources:
Shareholders’ funds
3,188.8
3,417.0
3,942.7
Paid-up capital
2,526.4
2,552.0
2,675.5
Reserves
637.0
732.7
885.1
Retained earnings
25.4
132.3
382.1
Deposits accepted
15,953.1
20,911.6
25,102.5
Borrowings
6,802.3
7,822.4
8,283.4
Government
3,177.8
3,310.8
3,420.3
Multilateral/International
    agencies
2,247.0
2,562.9
2,891.7
Others
1,377.5
1,948.7
1,971.4
Others
3,330.1
4,656.5
5,418.8
Total
29,274.3
36,807.5
42,747.4
Uses:
Deposits  placed
4,282.4
6,585.6
7,849.9
Investments
7,376.4
7,126.4
10,713.7
of which:
Government securities
1,731.2
1,920.1
3,340.0
Shares
1,492.3
1,511.4
2,282.9
Quoted
1,444.1
1,433.9
2,203.8
Unquoted
48.2
77.5
79.1
Loans and advances
13,643.5
16,866.4
18,962.1
Fixed assets
855.0
865.4
836.8
Others
3,117.0
5,363.7
4,384.9
Total
29,274.3
36,807.5
42,747.4
Contingencies:
Guarantee
998.3
806.8
673.4
Export credit insurance
136.1
204.5
148.3
Total
1,134.4
1,011.3
821.7
1 Refers to Bank Pembangunan dan Infrastruktur Malaysia Berhad, Bank Industri & Teknologi Malaysia Berhad, Bank
Kerjasama Rakyat Malaysia Berhad, Bank Simpanan Nasional, Export-Import Bank of Malaysia Berhad and Malaysia Export
Credit Insurance Berhad
2 Development Financial Institutions Act 2002
4,739.6
3,246.0
863.0
630.6
25,869.3
8,865.4
5,261.7
3,135.1
468.6
6,848.4
46,332.7
10,257.2
9,981.2
3,216.2
2,040.6
1,939.8
100.8
22,827.5
1,377.4
1,879.4
46,322.7
575.4
151.5
726.9
5,977.6
4,125.0
745.9
1,106.7
26,977.3
10,723.4
7,541.7
2,811.1
370.6
7,184.7
50,863.0
10,836.0
10,962.9
3,370.5
1,775.1
1,705.2
69.9
25,515.4
1,433.3
2,115.4
50,863.0
543.3
125.6
668.9


Annex
P69
Table A.70
Development Financial Institutions : Direction of Lending
1
As at end
1999
2000
2001
2002
2003
RM million
Agriculture, forestry and fishery
2,260.3
2,584.9
2,750.2
2,964.3
Mining and quarrying
44.7
47.4
46.1
90.0
Manufacturing
3,272.8
3,086.1
3,147.6
3,356.6
Electricity, gas and water supply
34.8
265.0
335.0
453.8
Import and export, wholesale and retail
trade, restaurants and hotels
532.6
522.1
618.0
240.4
Broad property sector
4,097.8
4,687.0
5,700.3
7,840.6
Construction
1,151.6
1,613.7
2,346.9
3,790.5
Purchase of residential property
2,102.5
2,090.6
2,593.7
2,785.2
Purchase of non-residential property
188.8
163.1
268.8
393.4
Real estate
654.9
819.6
490.9
871.5
Transport, storage and communication
1,166.4
2,028.9
2,860.6
4,362.1
Maritime
992.0
801.5
733.1
530.4
Finance, insurance and business services
1,053.0
1,213.0
1,300.7
1,780.5
Consumption credit
4,006.6
5,084.5
5,404.2
6,716.1
of which:
Purchase of motor vehicles
674.0
997.6
819.2
816.5
Credit card
33.5
42.9
47.8
48.0
Purchase of securities
290.1
330.0
356.2
173.2
Others
985.7
1,347.5
1,234.3
934.4
Total
18,736.8
21,997.9
24,486.3
29,442.4
3,265.9
96.1
3,654.4
624.2
406.3
8,407.9
4,019.0
2,947.7
443.0
998.2
4,442.5
473.3
1,876.0
8,066.6
884.0
23.7
136.2
1,098.7
32,548.1
1  Refers to Bank Pembangunan dan Infrastruktur Malaysia Berhad, Bank Industri & Teknologi Malaysia Berhad, Bank
 Kerjasama Rakyat Malaysia Berhad, Bank Simpanan Nasional, Export-Import Bank of Malaysia Berhad, Malaysian Industrial
 Development Finance Berhad, Sabah Development Bank Berhad, Borneo Development Corporation (Sabah) Sendirian
 Berhad, Borneo Development Corporation (Sarawak) Sendirian Berhad, Bank Pertanian Malaysia, Credit Guarantee
 Corporation Malaysia Berhad, Sabah Credit Corporation and Lembaga Tabung Haji


P70
Table A.71
Development Financial Institutions  under DFIA  : Direction of Lending
1
2 
As at end
1999
2000
2001
2002
2003
RM million
Agriculture, forestry and fishery
301.7
397.0
454.4
459.6
Mining and quarrying
29.5
33.5
34.5
80.5
Manufacturing
2,118.2
2,154.2
2,204.2
2,130.2
Electricity, gas and water supply
34.8
265.0
335.0
453.8
Import and export, wholesale and retail
trade, restaurants and hotels
235.9
135.2
129.0
125.9
Broad property sector
3,415.7
4,054.7
5,078.2
6,846.8
Construction
943.9
1,427.6
2,192.1
3,641.3
Purchase of residential property
1,783.8
1,779.8
2,288.0
2,480.3
Purchase of non-residential property
186.3
160.9
267.3
391.3
Real estate
501.7
686.3
330.8
333.9
Transport, storage and communication
974.9
1,871.1
2,746.5
4,321.6
Maritime
992.0
801.5
733.1
530.4
Finance, insurance and business services
944.6
1,096.8
1,198.0
877.6
Consumption credit
3,959.3
5,037.5
5,339.6
6,567.8
of which:
Purchase of motor vehicles
626.7
950.6
754.6
 741.2
Credit card
33.5
42.9
47.8
48.0
Purchase of securities
290.1
330.0
356.2
173.2
Others
346.8
689.8
353.4
260.1
Total
13,643.5
16,866.3
18,962.1
22,827.5
395.1
79.5
2,375.4
624.2
307.3
7,402.1
3,852.1
2,648.1
440.6
461.3
4,398.7
473.2
1,077.4
7,813.0
 800.2
23.7
136.2
433.3
25,515.4
1 Refers to Bank Pembangunan dan Infrastruktur Malaysia Berhad, Bank Industri & Teknologi Malaysia Berhad, Bank
Kerjasama Rakyat Malaysia Berhad, Bank Simpanan Nasional and Export-Import Bank of Malaysia Berhad
2 Development Financial Institutions Act 2002
Table A.72
Bank Industri & Teknologi Malaysia Berhad
Year of establishment
1979
Objectives
The principal activity of Bank Industri & Teknologi Malaysia Berhad 
is to finance capital intensive and high technology industries 
in priority sectors such as shipping industry and manufacturing.
Loans Approved (RM million)
Loans Disbursed (RM million)
Sector
2003
2002
2003
2002
Maritime
202.1
47.0
Shipping industry
143.2
20.2
Shipyard industry
25.5
17.1
Marine-related industries
33.4
9.7
Manufacturing
99.9
79.7
of which:
High technology
22.2
14.5
Total
302.0
76.3
57.4
1.2
17.7
211.4
16.8
287.7
126.7
83.7
52.8
17.5
13.4
54.6
6.1
138.3
Source: Bank Industri & Teknologi Malaysia Berhad


Annex
P71
Objectives
Table A.73
Export-Import Bank of Malaysia Berhad
Year of establishment
1995
Establishing an institutional support mechanism to facilitate the
exports of goods and services by providing medium and long
term credit to Malaysian exporters and investors, as well as foreign
buyers of Malaysian goods. Effective January 1998, the Export
Credit Refinancing facility was transferred  from Bank Negara
Malaysia to Export-Import Bank of Malaysia Berhad.
Loans Approved (RM million)
Loans Disbursed (RM million)
Facility
2003
2003
2002
2002
Buyer credit facility
144.4
43.0
Overseas investment credit facility
50.9
17.3
Supplier credit facility
168.2
190.6
Export of  services financing facility
15.0
Export credit refinancing
6,149.0
6,149.0
Others
–
–
–
Total
6,527.5
22.8
239.4
209.1
–
6,611.2
–
7,082.5
10.7
40.7
109.4
–
6,611.2
–
6,772.0
6,399.9
Source: Export-Import Bank of Malaysia Berhad
Table A.74
Malaysia Export Credit Insurance Berhad
Year of establishment
1977
Objectives
Support and strengthen Malaysian exports through the provision of
export credit insurance facilities to exporters to cover against 
commercial and non-commercial risks and issuing guarantees for
banks and financial institutions to facilitate access to export 
finance, and encouraging reverse investment by Malaysian investors 
through the provision of political risk insurance for investment.
Contingent Liabilities
Business Coverage
(RM million)
(RM million)
As at end-2002
As at end-2003
2002
2003
Short-term Policies
Comprehensive policies
114.8
Banker’s  export finance insurance policy
Bank letter of credit policy
Specific policies
Bond indemnity support
Sub-total
Medium and Long-term Policies
Specific policies
Buyer credit guarantee
375.7
Bond indemnity support
23.1
Sub-total
433.5
Total
550.9
1,225.1
Source: Malaysia Export Credit Insurance Berhad
0.6
0.5
–
34.7
117.4
1.5
847.2
377.9
0.2
Oversea investment insurance
–
–
375.7
2.0
–
–
3.2
–
844.0
121.4
331.4
23.2
364.0
496.6
1,412.2
8.9
–
–
1.9
132.6
2.3
1,102.2
310.0
23.1
7.5
8.4
276.5
2.0
–
–
24.9
–
1,077.3


P72
Table A.75
Bank Simpanan Nasional
Year of establishment
1974
Objectives
Bank Simpanan Nasional is a savings bank, incorporated under the 
National Savings Bank Act 1974 and focuses on retail banking and
personal finance especially for small savers.
Deposits Accepted
(RM million)
Interest Rate /
Rate of Return (%)
Deposits facility
As at end-2002
As at end-2003
2002
2003
Savings deposits
Fixed deposits
GIRO deposits
1.30 ~ 2.30
Islamic deposits
294.0
2.21 ~ 4.88
Premium savings certificates
1.50
Total
RM million
Investments
As at end-2002 As at end-2003
Quoted shares
Malaysian Government Securities
Private debt securities
Subsidiary companies
437.8
Associate companies
231.8
Total
9,430.2
Number of branches
421
Number of account holders (‘000)
 11,230
Number of automatic teller machine (ATM)
593
Source: Bank Simpanan Nasional
1,478.2
785.6
1.30 ~ 4.50
1,639.6
4,573.0
437.8
231.8
398
 11,365
591
1,923.7
671.1
1,510.5
4,774.9
1,231.7
3,741.6
3,341.4
821.5
292.4
9,435.2
1,163.9
3,478.6
3,595.9
904.4
3.20 ~ 4.00
1.30 ~ 2.30
1.96 ~ 3.40
1.50
1.30 ~ 4.50
3.00 ~ 3.70
Table A.76
Bank Kerjasama Rakyat Malaysia Berhad
Year of establishment
1954
Objectives
Bank Kerjasama Rakyat Malaysia Berhad mobilises savings and
provides financing services to its members as well as
non-members.
Financing Outstanding  (RM million)
As at end-2002
As at end-2003
Sector
Members
Non-members
Members
Non-members
Agriculture
48.0
14.0
Purchase of property
980.1
658.6
General commerce
33.5
487.7
Purchase of securities
21.8
119.8
Purchase of motor vehicles
117.6
0.6
Consumption credit
5,078.4
700.2
Manufacturing
–
–
Construction
Others
–
122.3
9.8
124.7
Total
6,401.7
Source: Bank Kerjasama Rakyat Malaysia Berhad
2,115.4
45.2
11.7
1,228.3
670.1
46.4
424.7
15.8
101.5
278.3
0.7
6,120.0
735.3
–
100.3
–
–
–
178.4
7,734.0
2,222.7


Annex
P73
Table A.77
Bank Pembangunan dan Infrastruktur Malaysia Berhad
Year of establishment
1973
Objectives
To increase the participation and involvement of the Bumiputera
community in business and industry through financing and equity
participation and to provide financing for infrastructure projects,
in particular Government-identified projects.
Loans Approved (RM million)
Loans Disbursed (RM million)
Sector
2002
2003
2002
2003
Infrastructure
2,790.1
2,997.6
Government programmes
1,551.1
2,177.2
Private programmes
1,239.0
820.4
SME  
728.8
534.8
of which:
Bumiputera
638.2
449.4
Total
3,518.9
4,753.8
2,883.0
1,870.8
1,086.8
1,059.6
5,840.6
3,532.4
1,589.8
853.9
735.9
649.7
526.4
2,239.5
Source: Bank Pembangunan dan Infrastruktur Malaysia Berhad
Table A.78
Other Development Financial Institutions : Core Activities
1
As at end
1999
2000
2001
2002
2003
RM million
Lending Activity
Agriculture
Manufacturing
1,154.6
931.8
943.3
1,226.4
Broad property sector
682.2
632.3
622.2
993.8
Construction
207.6
186.1
154.8
149.2
Purchase of residential property
318.7
310.7
305.7
305.0
Purchase of non-residential property
2.7
2.2
1.5
2.1
Real estate
153.2
133.3
160.2
537.5
Consumption credit
47.3
47.0
64.6
148.4
Others
Total
5,093.3
Other Activities
Deposits accepted
11,538.9
13,840.6
14,203.2
13,928.3
of which:
Savings
8,471.4
10,066.9
11,161.9
11,134.4
Guarantee issued
1 Refers to Malaysian Industrial Development Finance Berhad, Sabah Development Bank Berhad, Borneo Development Corporation
(Sabah) Sendirian Berhad, Borneo Development Corporation (Sarawak) Sendirian Berhad, Bank Pertanian Malaysia, Credit
Guarantee Corporation Malaysia Berhad, Sabah Credit Corporation and Lembaga Tabung Haji
1,958.6
2,187.9
2,295.8
2,504.8
1,250.6
1,332.6
1,598.3
1,741.6
5,131.6
5,524.2
6,615.0
3,230.0
3,405.0
2,669.0
2,584.7
1,279.1
1,005.8
166.9
299.6
2.4
536.9
253.6
15,405.3
12,160.4
2,870.9
1,623.3
7,032.7
3,109.4


P74
Table A.79
Development Financial Institutions: Selected Data
As at end
2002
2003
DFIs under DFIA1:
Branch
ATM
Staff
Branch
ATM
Staff
Bank Pembangunan dan Infrastruktur
Malaysia Berhad
13
603
Bank Kerjasama Rakyat Malaysia Berhad
98
104
2,752
Bank Simpanan Nasional
421
593
5,043
Bank Industri & Teknologi Malaysia Berhad
276
Export-Import Bank of Malaysia Berhad
80
Malaysia Export Credit Insurance Berhad
63
Sub-total
532
697
8,817
Other DFIs: 
Bank Pertanian Malaysia
143
144
2,309
Malaysian Industrial Development Finance
Berhad
224
Sabah Development Bank Berhad
82
Borneo Development Corporation (Sabah)
Sdn Bhd
23
Borneo Development Corporation (Sarawak)
Sdn Bhd
41
Credit Guarantee Corporation Malaysia Berhad
12
251
Sabah Credit Corporation
11
207
Lembaga Tabung Haji
119
1,408
Sub-total
292
144
4,545
Total
824
841
13,362
13
100
398
–
–
–
511
119
7
–
–
–
17
11
119
273
784
–
111
591
–
–
–
695
142
–
–
–
–
–
–
–
142
837
640
2,804
5,069
303
73
60
8,949
2,349
228
83
18
37
272
206
1,543
4,736
13,685
1 Development Financial Institutions Act 2002.
–
–
–
–
–
–
–
7
–
–
–
–
–
–
–
–
–
–


Annex
P75
Table A.80
Development Financial Institutions: Government Special Funds
Loans (RM million)
Approved
Disbursed
Outstanding
as at end
2002
2003
2003
2003
2002
2002
Bank Pembangunan dan Infrastruktur Malaysia Berhad
Fund for Publication
0.5
0.3
0.7
Fund for Film Industry
16.7
17.4
13.0
Venture Capital Fund
0.2
4.7
6.6
Tourism Infrastructure Fund
10.0
6.8
6.8
Small Scale Enterprises1
5.9
New Entrepreneurs Fund 2
53.6
59.2
43.1
Fund for Small and Medium Industries 2 
8.5
6.0
Seed Capital Scheme
20.3
23.3
57.8
Graduate Entrepreneurs Fund
1.0
2.7
7.2
Terengganu Entrepreneurs Fund
15.1
5.2
3.3
Financing Scheme for Indian Rural Economic Development
Financing Scheme for Rural Economic Development
6.1
8.0
29.1
0.5
0.2
0.2
Food and Furniture Scheme
–
0.6
20.3
Special Fund for Tourism
Third Window Financing Scheme (Tanmiah1)
Financing Programme for Wholesalers and 
 Distributors (Tanmiah2)
–
–
–
–
–
–
Bank Kerjasama Rakyat Malaysia Berhad
Financing Scheme for Rural Economic Development
8.9
7.3
8.9
Bank Industri & Teknologi Malaysia Berhad
New Ship Financing Facility
54.7
22.2
39.0
High Technology Fund
22.3
14.5
33.0
Easy Financing Scheme - PAKSI
2.5
3.7
10.2
Women Entrepreneurs Fund
7.0
4.7
7.5
New Technology Investment Fund
–
–
–
Export-Import Bank of Malaysia Berhad
Export Credit Refinancing (ECR) Scheme2
6,149.0
6,149.0
1,076.1
Malaysian Industrial Development Finance Berhad
Soft Loan for Small and Medium Enterprises
78.8
30.0
30.0
Bank Pertanian Malaysia
Agricultural Mechanisation and Automation Scheme
3.0
2.3
6.1
Bumiputera Commercial & Industrial Community Scheme
8.9
9.2
11.0
Credit Scheme for Paddy
32.7
31.6
29.5
Commercial Agriculture Graduate Entrepreneurs Scheme
0.7
0.3
0.7
Modernisation Automation Scheme1 
–
–
16.0
Special Fund for Terengganu-based 
 Small and Medium Enterprises
–
–
–
Malaysian Industrial Energy Efficiency Improvement Project
–
–
–
Special Fund for Fishery
7.6
9.9
17.1
Low Intensity Tapping System
0.6
0.1
0.1
Oil Palm Replanting Scheme
32.9
17.5
19.7
–
–
0.2
–
1.5
4.0
–
0.6
7.6
132.5
9.2
16.3
4.9
–
118.7
90.1
8.9
5.9
27.1
13.8
56.1
5.4
2.8
8.0
11.0
17.3
10.6
5.6
5.3
29.5
–
0.2
0.3
19.9
1.6
2.4
187.2
3.5
–
–
33.4
33.2
–
–
–
–
–
14.5
11.0
9.0
15.6
4.2
21.4
49.9
16.8
6.1
34.3
–
0.8
7.8
–
3.2
8.3
30.0
–
–
6,611.2
6,611.2
1,128.7
46.8
37.5
62.9
1.6
4.0
9.0
16.7
9.5
16.2
4.4
31.2
27.3
0.5
0.6
0.9
–
–
15.3
1.2
0.8
0.8
2.0
–
–
1.1
1.1
16.2
0.2
0.2
0.2
31.6
10.9
30.0
1 Fund has been fully utilised
2  Inclusive of funds from Bank Negara Malaysia and these funds are channelled through 24 participating  banks
–
–
–
–
6.2
4.6


P76
Table A.81
Development Financial Institutions: Bank Negara Malaysia Funds1
Loans (RM million)
Outstanding
Approved
Disbursed
as at end
2002
2003
2002
2003
2002
2003
Bank Pembangunan dan Infrastruktur Malaysia Berhad
New Entrepreneurs Fund2
5.8
141.2
New Entrepreneurs Fund 2
81.7
38.7
58.2
Fund for Small and Medium Industries2
–
–
1.3
119.5
Fund for Small and Medium Industries 2 
12.6
Bumiputera Industrial Fund2
–
–
–
–
0.1
0.6
–
–
–
5.1
8.6
–
–
–
21.1
Industrial Adjustment Fund2
0.3
Rehabilitation Fund for Small and Medium Industries3
3.9
36.4
Fund for Food
1.6
5.7
Special Fund for Tourism2
9.6
Bank Industri & Teknologi Malaysia Berhad
New Entrepreneurs Fund2
6.0
Fund for Small and Medium Industries2
46.6
Fund for Small and Medium Industries 2
5.1
Bumiputera Industrial Fund2
0.1
Industrial Adjustment Fund2
14.6
Rehabilitation Fund for Small and Medium Industries3
8.0
Ship Financing Facility
3.4
0.7
356.4
Malaysian Industrial Development Finance Berhad
New Entrepreneurs Fund2
0.7
9.1
New Entrepreneurs Fund 2
11.3
Fund for Small and Medium Industries2
–
–
–
–
–
–
–
–
–
–
–
–
–
9.1
11.1
2.1
5.5
7.9
–
0.2
1.8
47.6
Fund for Small and Medium Industries 2 
13.1
Bumiputera Industrial Fund2
2.5
Industrial Adjustment Fund2
3.7
Rehabilitation Fund for Small and Medium Industries3
3.9
Bank Pertanian Malaysia
Fund for Small and Medium Industries2
–
–
–
8.8
90.1
Rehabilitation Fund for Small and Medium Industries3
15.2
Fund for Food
282.2
195.9
464.2
Credit Guarantee Corporation Malaysia Berhad4
New Entrepreneurs Fund 2
418.0
243.1
299.2
Fund for Small and Medium Industries 2
569.3
106.5
–
–
–
4.1
–
17.9
–
–
–
–
– 
–
–
–
–
–
3.1
–
–
–
–
22.1
–
–
121.0
–
–
294.4
0.3
115.1
0.9
–
–
–
–
0.3
4.4
–
–
–
20.2
15.9
–
–
–
5.1
–
0.9
–
4.2
1.2
–
0.5
171.0
71.4
99.9
452.1
128.9
167.6
108.2
19.9
0.3
39.9
5.1
8.1
2.2
–
New Entrepreneurs Fund 2
–
1.1
1.8
0.5
0.5
22.9
–
9.9
4.6
341.1
7.9
13.8
6.5
25.5
19.4
31.4
1.7
3.7
2.9    
84.9
Fund for Small and Medium Industries 2 
–
–
–
6.8
3.1
3.0
14.1
551.1
350.4
450.0
1  Bank Negara Malaysia fund for the ECR scheme administered by EXIM Bank is merged with the Government fund in Table A.83 
2  Funds have been fully utilised 
3  Fund was closed on 1 November 2003 and replaced by Rehabilitation Fund for Small Businesses
4  Administers and channels the funds through various lending institutions


Annex
P77
Table A.82
Development Financial Institutions: Funds from Multilateral and International Agencies
Loans (RM million)
Approved
Disbursed
Outstanding
as at end
2002
2003
2002
2003
2002
2003
Bank Pembangunan dan Infrastruktur Malaysia Berhad
ASEAN-Japan Development Fund-Overseas Economic
Cooperation Fund1
20.3
15.1
64.3
Japan Bank for International Cooperation-Fund for Small and
Medium Scale Industry Promotion Programme1
3.1
10.5
45.0
Japan Bank for International Cooperation-Fund for Small and
Medium Industries
3.6
33.2
92.6
Japan Bank for International Cooperation 1- JEXIM1
–
742.5
1,182.1
Islamic Development Bank
–
14.9
48.9
Bank Industri & Teknologi Malaysia Berhad
–
–
–
27.0
15.2
–
–
2.7
–
–
–
143.3
30.8
–
–
–
ASEAN-Japan Development Fund-Overseas Economic
Cooperation Fund1
8.8
The Export-Import Bank of Japan1
26.9
Overseas Economic Cooperation Fund-Fund for
    Small and Medium Scale Industry Promotion Programme1
25.9
Japan Bank for International Cooperation 3001
151.8
Japan Bank for International Cooperation 2001
55.8
Japan Bank for International Cooperation-Fund for Small and
Medium Industries1
60.5
23.6
52.2
Export-Import Bank of Malaysia Berhad
Japan Bank for International Cooperation 3001
268.9
Japan Bank for International Cooperation 2001
168.0
Malaysian Industrial Development Finance Berhad
Japan Bank for International Cooperation-Fund for Small and
Medium Industries
46.0
53.5
136.2
ASEAN-Japan Development Fund-Overseas Economic
Cooperation Fund
37.8
14.0
40.8
Japan Bank for International Cooperation-Fund for Small and
Medium Scale Industry Promotion Programme
3.0
6.0
16.9
48.8
–
–
–
–
–
52.3
-
–
–
–
45.9
22.0
30.8
–
5.4
25.1
17.8
33.2
44.1
15.7
–
–
–
39.5
6.4
–
–
–
26.0
47.4
24.2
–
20.3
Bank Pertanian Malaysia
ASEAN-Japan Development Fund-Overseas Economic
Cooperation Fund1
134.0
78.5
50.5
110.5
1,191.5
49.0
5.1
29.3
21.6
161.8
43.9
64.3
227.5
142.2
152.3
51.1
12.1
48.7
1 Fund has been fully utilised