FAKULTI PENGAJIAN ISLAM

IJAZAH SARJANA MUDA KEWANGAN

ISLAM

BIF5083
INSTITUSI DAN PASARAN KEWANGAN

TOPIC
FINANCIAL SYSTEM STRUCTURE

NAMA PELAJAR:
MUHAMMD FAIQ DANISH BIN ABDUL WAHID
PPB22006

NAMA PENSYARAH:
PUAN CHE NU

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Table of Contents
Introduction …..…………………………………………………………………………………………………………………… 3

Definition 4

Non-Bank Financial 4

Functions and Role of Non-Bank Financial Boards 4

Type of Non-Bank Financial Institution 6

Characteristic 7

Non-Banking Financial Institution Structure 8

Development Financial Institution(DFIs) ……………………………………………………………..….………….. 8

Application in Financial Institution…………….………….…………………………………………………………..… 9

Issue and Challenge ……………………………………………………………………………………………………….…... 9

Conclusion ………………………………………………………………………………………………………………………..11
Reference ………………………………………………………………………………………………………………………… 12

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INTRODUCTION

Malaysia has a sophisticated and complete financial system that is constantly changing
in response to the local and global environment. A more diversified, broader, and deeper
financial system has emerged because of financial reforms, including the structural
changes that followed the Asian financial crisis. This has strengthened Malaysia's
connections to the global economy and the international financial system and supported
Malaysia's economic growth through more effective intermediation.
Banks and nonbank lenders, insurers, securities markets, and investment funds
are all part of a nation's financial system. Central banks, payment processors, clearing
counterparties, and financial regulators and supervisors are also included.
The financial system carries out the crucial economic task of transferring money
from net savers who spend less than their income to net spenders those who want to
invest or spend more than their income. The financial system enables net savers to lend
money to net spenders.
Banks and other credit institutions act as middlemen for the transfer of funds,
which can also be done directly on financial markets by issuing securities. Financial
stability and effective resource management both support economic expansion and
prosperity.
Typically, households are the biggest lenders, although businesses, government
agencies, and non-residents may also disburse extra cash. The government and non-
financial firms are frequently the biggest borrowers, but households and non-residents
will occasionally also take out loans to pay for their purchases.
There are two ways that money moves from lenders to borrowers. In direct or
market-based financing, debtors obtain cash from financiers directly by offering them
financial instruments, sometimes known as securities (such as debt securities and
shares), which represent claims on the borrower's potential future earnings or assets.
Indirect finance is used when financial intermediaries have a further role in the
distribution of funds. Credit institutions, other monetary financial institutions, and other
financial intermediaries are several types of financial intermediaries that are a part of the
financial system.
A strong financial system promotes capital allocation in a way that is most
conducive to economic growth, which is one of its key characteristics. Financial systems
that are working properly can carry out their fundamental functions even under
challenging economic circumstances and do not easily veer into financial crises.
The payment and settlement mechanisms that carry out financial market
operations are referred to as the financial system's infrastructure. Financial stability is
supported by the efficient and dependable operation of payment and settlement systems,
which encourage efficient capital transfers in the economy.

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DEFINITION

A financial institution is a firm that deals in financial and financial transactions, such as
currency exchange, loans, investments, and deposits. Capitalist economies rely on
financial institutions to connect individuals in need of capital with those who can lend it
or invest in it. Banks, insurance companies, brokerage firms, and investment dealers are
just a few of the many business operations that fall under the umbrella term "financial
institutions" in the financial services industry. Financial institutions come in all shapes,
sizes, and locations, it also typically connects investors' or savers' money with
individuals in need of money, including borrowers or companies looking to exchange
ownership for cash. The borrower or firm will often pay the saver or investor in the
future because of this. Products like loans and markets like stock exchanges are the tools
for connecting all these parties.

NON-BANK FINANCIAL

Non-bank financial companies (NBFCs), also known as non-bank financial institutions

(NBFIs), are financial institutions that offer various banking services but do not have a
banking license. Generally, these institutions are not allowed to take traditional Giro
deposits — available funds, such as those in checking accounts or savings accounts —
from the public.
Examples of non-bank financial institutions are insurance companies, venture
capital, currency exchange, some micro-lending organizations, and pawnshops. These
Non-Bank Financial Institutions provide services that are not necessarily suitable for
banks, function as competition with banks, and specialize in sectors or groups.
Based on that understanding, there are several characteristics of NBFI as follows:
Provide the same financial services as a bank, except for carrying out payment traffic in
the community. Not subject to banking regulations and the supervision currently carried
out by the authorities is carried out by The Financial Services Authority (OJK) in the
same way as banks; Examples include investment banks, mortgage lenders, money
market funds, insurance companies, hedge funds, private equity funds, and P2P lenders.

Functions and Roles of Non-Bank Financial Boards

Many people consider using NBFI when they want to get a small business, personal or
business loan. That is, the function of the existence of this NBFI is specifically for
entrepreneurs who cannot afford to borrow funds from banks, which, incidentally, have
large conditions and amounts.
As for some of the most visible roles of non-bank financial institutions:
Firstly, reduce accumulation of funds by bringing lenders (or savers) and
borrowers together, NBFI reduces hoarding of cash by people under the "mattress", as
people usually say. Helping the household sector, the household sector relies on NBFI to
utilize their surplus funds and to provide consumer credit loans, mortgage loans, etc. So,
one of the roles of the Non-Bank Financial Board is to promote the habit of saving and
investing among ordinary people (households). Helping small businesses, NBFI also
helps the non-financial business sector by financing it through loans, mortgages,
purchase of bonds, shares, etc. Thus, they facilitate investment in plants, equipment, and
inventory. Next, assist the regional government. Helping local governments, generally
by buying bonds, this only happens in developed countries, but does not rule out the
possibility of happening in developing countries.

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 Besides that, giving profits to lenders and NBFI when savers deposit their money
in NBFI, they earn interest. When NBFI lends to the last borrower, they make a profit.
In fact, the intermediation fee arises from the difference between the return rate of the
main securities owned by NBFI and the interest or dividend rate they pay on their
indirect debt. Provide Liquidity, NBFI provides liquidity as they convert assets into cash
easily and quickly without losing value in terms of money. When NBFI issues claims for
itself and supplies their funds, especially banks, always try to maintain its liquidity. This
they do by following two rules: first, they give short-term loans and finance them by
making claims against themselves for a longer period; and second, they diversify loans
among different types of borrowers. Helps Lower Interest Rates, Competition between
NBFI causes interest rates to drop. NBFI prefers to keep it in cash. NBFI, in turn, invests
it in primary securities. As a result, the price of securities is raised, and interest rates are
lowered. In addition, when people keep their cash holdings in safe and liquid NBFI, the
demand for money decreases thus lowering the interest rate. Fund Investment, NBFI
exists because they want to make a profit by investing the mobilized savings. Different
financial intermediaries follow different investment policies. For example, savings and
loan associations and mutual savings banks invest in mortgages, and insurance
companies invest in bonds and securities. So, the intermediary mobilizes public savings,
invests them, and thus helps in capital formation and economic growth.
Other than that, Forming New Assets and Liabilities NBFI adds to the inventory
of financial assets available to savers and for each additional asset, they also create an
equivalent new financial liability. However, as an intermediary, NBFI does not affect
total net worth. He concludes that although intermediation does not increase total wealth
or income, it can be assumed that it increases welfare. Economies of Scale, NBFI reaps
several economies of specialization and scale in mobilizing savings and investing. It will
be expensive and impractical for individual savers to lend their funds to individual
borrowers. NBFIs do larger transactions with major lenders and borrowers. They
specialize in trading large financial assets and thus have lower costs in buying and
selling securities. They employ expert staff as well as efficient machines and equipment,
thus increasing productivity in fund transfers.
Bringing Stability to the Capital Market, NBFI deals with various assets and
liabilities that are mostly traded in the capital market. If there is no NBFI, there will
often be changes in the demand and supply of financial assets and their relative yields,
thus bringing instability to the capital market. Improve the People's Economy, NBFI
helps in the process of economic growth. They mediate between final lenders who are
savers and final borrowers who are investors. By carrying out this function, they prevent
hoarding by the public, mobilize their savings and lend them to investors. Thus, NBFI
encourages savings and investment which is important to encourage economic growth.
Such are some of the roles of Non-Bank Financial Institutions that are very significant in
supporting the growth and development of the national economy.

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Types of Non-Bank Financial Institutions

Based on the description above, examples of non-bank companies have been clearly
given. However, to make it easy to understand, the following will be described in a
separate discussion.

Provident and Pension Funds represent the most important form of long-term
contractual saving for the household sector. The annual contribution to them is currently
running at double the rate of annual contribution to life insurance, another major form of
long-term contractual saving. Under the law, provident funds have been made
compulsory in the organized sector of industry, coal mining, plantations, and services
(such as government, banking, insurance, and teaching). Separate provident fund
legislation exists for coal mining, industries, and Assam tea plantations. With the growth
of the organized sector of the economy and in wage employment, savings mobilization
through provident funds will grow further. The wage employees are encouraged to join
provident fund schemes and make contributions to them, because thereby alone they
earn employers’ matching contribution to the fund. Then, for income-tax purposes,
deductions are allowed for provident fund contributions. Provisions also exist in all
cases for borrowing against one’s provident fund accumulation. The provident fund
collections are made through deduction at source. Pension fund a pension fund is an
example of a Non-Bank Financial Institution which has activities in the form of
collecting investments from employees which will later be used to pay other employees
who have retired. Funds are paid out by employees, employers, or both. Companies and
all levels of government provide pensions.

Unit trust is an unincorporated mutual fund structure that allows funds to hold
assets and provide profits that go straight to individual unit owners instead of reinvesting
them back into the fund. Mutual funds are investments that are made up of pooled
money from investors, which hold various securities, such as bonds and equities.
However, a unit trust differs from a mutual fund in that a unit trust is established under a
trust deed, and the investor is effectively the beneficiary of the trust. Pilgrim Fund
means the cash, investment securities and other assets of the Qualified
Decommissioning Fund and the Non-qualified Decommissioning Fund held in the
Decommissioning Trust maintained for the Pilgrim NPS.

Next, Savings and Loans Cooperative simply put, a savings and loan
cooperative (KSP) are an example of a non-bank financial institution that operates in the
framework of running a business in the form of savings and loans and then
distributes it to members.
Pawnshop Company, institutions that offer loans in exchange for personal property as
equivalent collateral. If the loan is repaid within the timeframe agreed in the contract,
the collateral can be repurchased at the initial price plus interest. If the loan cannot be
repaid on time, the collateral can be disbursed by the pawnshop through a pawnshop or a
second-hand dealer through sales to customers. Insurance Companies, Insurance
companies provide risk management to individuals, businesses, and institutional clients
through contracts. Although there are many types of insurance companies, the basic
principle is that the insurance company guarantees payment or reimbursement in the
event of loss for the insured. Thanks to the risk pooled, insurance companies have
historically been able to offer clients affordable rates in most cases. Insurance
companies offer policies that offer coverage for losses related to accidents, health,

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property, home ownership, professional liability, malpractice, and accidents,
among other areas.

Besides that, Cagamas Berhad (Cagamas), the National Mortgage Corporation

of Malaysia was established in 1986 to promote the broader spread of home ownership
and growth of the secondary mortgage market in Malaysia. It issues corporate bonds and
sukuk to finance the purchase of housing loans and receivables from financial
institutions, selected corporations, and the public sector. The provision of liquidity at a
reasonable cost to the primary lenders of housing loans encourages further financing of
houses at an affordable cost. The Cagamas model is well regarded by the World Bank as
the most successful secondary mortgage liquidity facility. Cagamas is the largest issuer
of debt instruments in the Malaysian capital market. Since incorporation in 1986,
Cagamas has cumulatively issued RM381 billion (as of 31 December 2022) of bonds
and sukuk, which includes issuances by its wholly owned subsidiaries, Cagamas Global
P.L.C. and Cagamas Global Sukuk Berhad which are also guaranteed by Cagamas.

Other than that, Venture Capital Companies is a form of financing consisting

of funds or companies providing 'venture capital', to support companies and other
organizations with the hope of delivering a large return on investment (ROI). Leasing
Company, is an institution that provides physical assets or services for use by
commercial or individual clients for a specified period (sometimes with provisions to
purchase the assets at the end of the contract) in return for regular payments, which is
known as a financial lease. The lessee is the recipient of the asset or service under the
leasing contract and the lessor is the owner of the asset or service provider. Leasing
assets include passenger vehicles, light duty trucks, furniture, office equipment, tools,
and heavy equipment, such as earth movers, large machines, industrial equipment, ships,
heavy duty trucks and aircraft. In some cases, the leasing company owns and services
the physical asset being leased and is responsible for installing and operating the asset,
which is known as operating leasing.

Lastly, factoring companies, also known as factoring, are financial transactions

in which a company sells its receivables to a finance company that specializes in buying
receivables (called factors) at a discount. Accounts receivable factoring is also known as
invoice factoring or receivables financing. Factoring is a financial transaction in which a
company sells its receivables to a finance company (called a factor). The factory collects
payments receivable from the company's customers. Companies choose factoring if they
want to receive cash quickly rather than waiting for a credit period. Factoring allows
companies to quickly build their cash flow and pay off outstanding obligations.
Therefore, factoring helps companies free up capital tied up in receivables and transfers
the default risk associated with receivables to factors.

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Characteristics

Financial institutions are usually strictly regulated, this is due to the sensitivity of their
functions and the problems that poor management of financial institutions can generate
for a country (bankruptcy of a bank, for example). There is little differentiation. The
financial services offered by the institutions are usually very similar to each other, which
is why they compete in the interest rate and the commissions they charge (although these
are also usually regulated). They add great value to the economy. The reirradiations
activity solves a great problem of inefficiency in the markets, by managing to satisfy the
demand of those who require financing.

Non-Banking Financial Institution Structure

As part of its mandate to promote financial stability, Bank Negara Malaysia (the Bank)
undertakes surveillance on significant non-bank financial institutions that have
important interlinkages with the financial system. This is supported by the establishment
of the Financial Stability Executive Committee (FSEC) under the Central Bank of
Malaysia Act 2009 which is chaired by the Governor and whose members include the
Secretary General of the Treasury, the Chairman of the Malaysia Securities
Commission, the Chief Executive Officer of the Malaysia Deposit Insurance
Corporation and an independent external member.

Based on the Bank’s surveillance, the Bank and the FSEC may, from time-to time, issue
advice to significant non-bank institutions as a pre-emptive measure to promote the
sound financial standing of such institutions and avoid any systemic implications on the
financial system. In relation to Lembaga Tabung Haji, the institution has proactively
taken appropriate measures to further strengthen its risk management practices, both on
its own initiative and in response to earlier engagements with the Bank. These will
reinforce a sustainable and healthy financial position of the institution going forward.

While Lembaga Tabung Haji is not under the direct supervision of the Bank, advisories
issued by the Bank to non-bank financial institutions are aimed at ensuring the
institutions will continue to be well managed and effectively perform the role for which
they have been established. This in turn will contribute to financial stability.

Development Financial Institutions (DFIs)

The DFIs in Malaysia are specialized financial institutions that the government formed
with a clear mandate to develop and promote important sectors that are thought to be
strategically significant to the overall socio-economic development goals of the nation.
Agriculture, small and medium-sized businesses (SMEs), infrastructure, maritime,
export-oriented sectors, as well as capital-intensive and high-tech industries, are some of
these critical sectors.
The DFIs in Malaysia are specialized financial institutions established by the
Government with specific mandate to develop and promote key sectors that are
considered of strategic importance to the overall socio-economic development
objectives of the country. These strategic sectors include agriculture, small and medium

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enterprises (SMEs), infrastructure, maritime, export-oriented sector as well as capital-
intensive and high-technology industries.

Application in Financial Institutions

By law, all applications must be submitted in the form prescribed by the Commissioner.
The Commissioner has available certain forms for trust companies and no depository
financial services loan companies. Generally, where there is no available DFI form,
application may be made in letter form, stating in detail the nature and scope of the
requested consent or approval, and all information. If there is a comparable form
required by a federal agency such as the Federal Deposit Insurance Corporation (FDIC),
Board of Governors of the Federal Reserve System (FRB), or National Credit Union
Administration (NCUA), to which the applicant must submit an application, the
applicant may submit to DFI a copy of the application that is filed or to be filed with the
respective federal agency, supplemented by any additional information. More
specifically, the generally acceptable application form for each type of financial
institution is as follows:
For a bank, the applicant may include any additional information that DFI may
need in accordance with State law, as well as a copy of the FDIC or FRB Forms that
they file with the Federal Deposit Insurance Corporation or Federal Reserve Bank.
For a savings bank, the applicant may include any extra information that DFI
may need in accordance with State law, as well as a copy of the FDIC or FRB Forms
that the applicant files with the Federal Deposit Insurance Corporation or Federal
Reserve Bank.
For a credit union, the applicant may also include any other information that DFI
may need in accordance with State law, as well as a copy of the NCUA Forms that they
file with the National Credit Union Administration.
For a depository financial services loan company, the applicant may include any
additional information that DFI may need in accordance with State law, as well as a
copy of the FDIC Forms that they file with the Federal Deposit Insurance Corporation.
For a Hawaii state branch or agency of a foreign bank, the applicant shall submit
the same information as required by the Board of Governors of the Federal Reserve
System for an application to establish a branch or agency in the United States, and a
statement under oath appointing an agent in this State for receipt of service of process in
accordance with Section 415-113, HRS, if the license is granted; plus any additional
information that DFI may require under State law.

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Issue and Challenges

Growth

This is a common goal for banks and financial institutions: enhancing market share
through new products and capabilities, as well as completing mergers and acquisitions.
The question is how to grow strategically, without exceeding a sustainable pace or
exceeding the organization’s risk tolerance.

Digital Adoption

Adoption could also be called ‘adaptation’ the race to build new or better digital
experiences for retail and business customers and bring business systems up to par in the
cloud. This might include digital customer onboarding, faster loan approval or real-time
payments. At the same time, these new approaches can’t disrupt core business systems,
and focusing on customers shouldn’t mean forgetting about profits.

Process & profitability

Talking of profits, one of the clearest paths to enhanced profitability is introducing

operational efficiencies based on automation and analytics. The goal is optimizing
processes for greater efficiency and better customer experience; the challenge is to
innovate without neglecting existing lines of business, and to transform without getting
bogged down in the transformation itself.

Systems & security

As with digital adoption, many banks and financial institutions are weighed down by
legacy technology on the operational side of their business. Outdated back-end systems
may no longer be fit for purpose and are unlikely to integrate well with newer systems.
In some cases, this ‘technical debt’ may lead to vulnerabilities, requiring frequent and
expensive security checks.

Changing Business Models

Financial institutions are being forced to alter their business practices due to a number of
issues facing the banking industry, including the cost of compliance management.
Traditional sources of banking profitability are under pressure from the rising cost of
capital, continued low interest rates, declining return on equity, and declining
proprietary trading. Shareholder expectations are unaffected by this.

Customer Retention

Customers of financial services demand simple, intuitive interfaces with personalised,

relevant experiences available anytime, anywhere, and on any device. Customer

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experience can be difficult to measure, yet customer churn can be seen, and the idea of
client loyalty is swiftly disappearing. Customer loyalty is the result of strong client
relationships that start with getting to know the client and their expectations as well as
by consistently putting the client first.

Virtual Payment

One of the most disruptive and dynamic areas of banking is still payments. Global
rivalry is getting more intense because of innovations raising customer expectations. The
search for seamless digital payment experiences is ongoing because friction is pervasive
in practically all legacy payment systems.

Virtual Customer Service

Whether they are physical locations or online, banks must provide excellent customer
care. client service should provide prompt, polite solutions to client issues so that banks
can save money. It should also maximize customer lifetime value. Large departments
that are not making effective use of their human resources provide a significant problem
for the banking sector.

Adoption of New Technology

The implementation of new technologies is currently one of banks' biggest challenges.

According to experts, larger organizations struggle to implement new procedures and
tools because of legacy systems and antiquated business processes.

Investment Banking

Investment banks typically act as a bridge between parties with money to invest and
parties in need of finance. Performance in investment banking has been impacted by
economic and financial issues. Big or small, divisional, or full-service, investment banks
are currently subject to stringent rules and high operational costs. Current market
conditions prevent traditional investment banking models from becoming successful.

Customer expectation

Customers currently have differing opinions regarding the type of service they prefer
online vs. offline. Nevertheless, both types of customers seek to gain as much as
possible and as early as possible. Customer expectations, in any case, are what spark
transformation.

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Conclusion

The financial sector has shown great resilience coming through the Covid-19 pandemic
in good state, but financial markets now face increased volatility and uncertainty in light
of rising inflation, interest rates and geopolitical risk. Moreover, more lightly regulated
non-bank financial intermediaries continue to increase their share of credit markets and
equity investments. The pandemic boosted the adoption of new technologies and the
move to a carbon neutral economy. Against this backdrop, successful market
participants are embracing new technologies that bring novel business models, products
and services to the market, as well as responding to the challenges and risks they pose,
such as over consumer protection and cybersecurity. Due to their crucial role in helping
economies expand the money supply through fractional-reserve banking, financial
institutions are highly regulated in most nations where they operate. Although regulatory
frameworks vary by nation, they often include prudential control, consumer protection,
and market stability. While some nations have distinct agencies for different types of
institutions like banks, insurance companies, and brokers, others have a single body that
oversees all financial organizations.

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References
1. https://www.slideshare.net/naveensaini7/non-banking-financial-institution
2. https://govtvacancy.net/sarkari-job/financial-institution-what-is-it-
characteristics-functions-types-and-more-2#:~:text=Characteristics%20of%20a
%20financial%20institution&text=There%20is%20little%20differentiation.,these
%20are%20also%20usually%20regulated
3. https://www.bnm.gov.my/dfi-overview
4. https://www.investopedia.com/terms/f/financialinstitution.asp#:~:text=The
%20most%20common%20types%20of,%2C%20investments%2C%20and
%20currency%20exchange.
5. https://www.bnm.gov.my/regulations/fsp-directory
6. https://www.wallstreetmojo.com/financial-institutions/

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