THE FINANCIAL SECTOR
Stock market investors watching the rise of the Kuala Lumpur Composite Index when it broke the 1000 point level for the first time on 10 February 2000.
After Independence, the development of the financial system was complicated by the separation of Singapore from Malaysia in 1965 and resulting issues related to the currencies and the stock markets of the two countries. By 1970, however, the foundations of the three major systems that define the current Malaysian financial landscape were in place: the banking system, non-bank financial intermediaries and the capital markets.
Local institution building, including the establishment of key regulatory bodies such as Bank Negara Malaysia (the Central Bank of Malaysia) led to the decline in the number of financial institutions. Rationalization of the banking industry has seen the merger of finance companies and commercial banks. In 2006, the merger of merchant banks, stockbroking companies and discount houses to form investment banks is underway.
Capital markets such as the stock market and the private debt securities market play the role of matching investors with companies seeking funds. Starting with four stockbrokers in 1960, the capital market has evolved and matured significantly. Key developments arose in response to market needs: the Kuala Lumpur Stock Exchange (KLSE) Second Board was established to cater to smaller companies seeking funds; the Malaysian Exchange of Securities Dealing and Automated Quotation (MESDAQ) was created as a market in which technology companies could source for funds; and derivatives market trading tools were introduced to provide investors with the capacity to manage the risks inherent in capital market transactions. The capital market was instrumental in the privatization exercises of the 1980s.
Malaysia pioneered Islamic banking in 1983, which led to the emergence of two parallel financial systems, with Islamic financial products based on the principle of profit-sharing offered as an alternative to conventional, interest-based products. Following the success of Islamic banking, Islamic insurance and Islamic money markets and capital markets were established. Efforts to position Malaysia as an international Islamic financial hub are underway.
The Asian financial crisis of 1997–98 occurred when the actions of currency speculators set off a series of interrelated events in Asia that very quickly led to a period of immense economic and social hardship. At the heart of the crisis lay the financial sector, faced with the problem of a depreciating currency, non-performing loans, collapsing share and property prices, and corporations going bankrupt. The government reacted by creating a stable environment through pegging the Ringgit at 3.80 to the US dollar, and establishing the National Economic Action Council to formulate recovery measures, aided by institutions such as Danamodal Nasional Berhad, Pengurusan Danaharta Nasional Berhad and the Corporate Debt Restructuring Committee. With the subsequent strengthening of the economy, a shift in the exchange rate regime to a managed float was adopted in July 2005.
The financial services sector is a driving force in the economy. Growing at an average rate of 8.1 per cent per annum, it increased its share of GDP from 12.7 per cent in 2000 to 15.1 per cent in 2005.