The government started issuing MTBs in 1955 (until 1973) based on demand. The discount rate was predetermined by the government based on central bank recommendation

Instruments of Monetary Policy

Even at the initial stages of the Bank’s operation, there were four key instruments or operations which are still presently in use, albeit with some modification or variation;

1. Statutory Reserve Requirement (SRR)
2. Liquid Asset Ratio Requirement (replaced by Liquidity Framework 1998)
3. Discounting Operations (replaced by Standing Facilities 2004)
4. Open Market Operations

The Bank also used the following strategies from the period of 1959 to 1978, which were:

1. Administration of bank borrowing and lending rates of interest
2. Selective credit measures involving use of credit ceilings
3. Direction of bank credit

These were considered complimentary to the main four instruments.

Over the years, new instruments were introduced to enhance monetary operations; which include the present use of unsecured direct borrowings, issuance of central bank bills, repo and foreign exchange swaps.

Discount houses played the role as the borrower and lender of short-term money, and were the only group of institutions that were permitted to accept money at call. Discount houses mobilized deposits from the financial institutions and corporations in the form of money at call, overnight money and short term deposits and invest these funds into treasury bills, short-term government securities and money market instruments. Being a natural warehouse for short-term papers, discount house became important market maker that can provide fair two-way quotations to other players that need to purchase or sell such instruments.

Prior to Aug 1973, MTB were made available “on tap” which were issued as and when an investor wanted to buy them and the rates of discount were pre-determined by the Government on the recommendation of the Bank.

Since then, the tenders were conducted at the Bank and were also attended by representatives of the Treasury and Auditor General.

In an effort to foster market-based pricing system, the administered interest rate regime was liberalized, allowing banks to determine their own deposit rates and prime lending rates. However, maximum lending rates to special group which are important to the country’s growth would still apply.

As the development of the money market reached a stage where supply of MTBs and MGS was no longer sufficient to meet the growing and diverse needs of the market, BA and NID were introduced. The strong demand for these two instruments reflected the shift of preference in favour of negotiability for deposits and risk-free recourse in trade bills in the event of default

Islamic Banking Act came into effect in March 1983
The Act allows for the establishment of Islamic banks in the country and confers the Bank with similar powers to supervise and regulate these banks.

Government Investment Act 1983 was enacted
The Act empowers the government to issue Shariah-compliant bills and securities, which are regarded as liquid assets and serve as important assets for Islamic bank to comply with prescribed liquidity requirements.

Government Investment Issues (GII) were introduced in July 1983
With the issuance of GII, which subsequently followed by Malaysian Islamic Treasury Bills, Malaysia became the first country in the world to issue government securities on an Islamic basis.

Bank Islam Malaysia was established and commenced operations in July 1983
The establishment of the first Islamic bank was one of the key starting point in developing an Islamic banking system.

10 year Strategic Plan to create an Islamic banking system
The Bank drawn up a 10 year strategic plan that will focus on key areas required to achieve the objective of developing an Islamic banking system that functions on a parallel basis with the conventional system. The three key areas were identified as follows:

1. Large number of players
2. Broad variety of instruments
3. An Islamic interbank market

Introduction of Base Lending Rate (BLR) as a system for interest rate determination for commercial banks in November 1983
Lending to customers would be anchored to a particular bank’s declared BLR (rate quoted based on cost of funds; after provisions for the cost of holding cash, SRR, liquid asset requirements and overhead costs) plus an interest margin which would depend on the customer’s credit standing.

The National Mortgage Corporation of Malaysia (Cagamas) was established to support the national objective of achieving widespread home ownership and promoting long term development of the capital market. Cagamas assumes the role of an intermediary in purchasing mortgage loans from primary lenders (i.e. banks), which helps to improve the liquidity and asset quality of the banks so that these banks can continue to provide mortgage financing at reasonable rates. To fund these purchases, Cagamas issues highly rated short and long term securities in both the conventional and Islamic market which can cater to investors’ maturity preference.

KLIBOR serves as a reference rate that can be used for the pricing of loans and other products and serves as an indicator of the conditions in the interbank money market.

FRNIDs have a specified tenure similar to NIDs, but the interest rates are adjusted every 3 or 6 months based on KLIBOR.

In order to enhance liquidity in the secondary market, BNM appointed selected banking institutions as Principal Dealers (PDs) for the purpose of enhancing primary market participation and secondary market liquidity of government and central bank papers.

Due to the limited availability of government securities for the Bank to conduct open market operations (OMO) i.e. sell and purchase of government securities to absorb or inject liquidity in the banking system, unsecured direct borrowing has been actively used to absorb liquidity, especially during the period of 1991 and 1992 when liquidity increased significantly due to large inflows from abroad.

Introduction of Bank Negara Bills (BNB)
BNB was issued by the Bank as discounted paper (up to 1 year) as a monetary instrument to absorb surplus liquidity in the market and also provide a highly liquid asset for the banking institution to hold for purposes of liquidity requirement framework

Diversity of Islamic financial products (since 1983)
By the beginning of 1993, a total of 21 Islamic banking products were approved by the Bank, thereby fulfilling one of the 3 criteria for a fully-fledged Islamic system i.e. broad variety of Islamic financial instruments to meet the various needs of financial institutions and customers.

Introduction of Islamic Banking Scheme (SPI) in March 1993
This scheme allow conventional banking institutions to offer Islamic banking products and services using the existing infrastructure and provided impetus to propel Islamic banking as a viable alternative system in the Malaysian banking system

Islamic money market commenced trading in January 1994,
As the first Islamic money market in the world, the market provides for

• Interbank trading in Islamic financial instruments
• Islamic interbank investments; and
• Islamic inter-bank cheque clearing system

The Islamic money market continued to evolve and also interacts with the conventional banking system

Issuance of the Malaysian Code of Conduct (MCC) for Principals and Brokers in the Wholesale Money and Foreign Exchange Markets
The MCC sets out the best practice and dealing principles which governs the conduct of participants in the wholesale money and foreign exchange markets, in order to ensure the integrity of the markets and standards of professionalism among participants.

FAST is a web-based tendering system designed to facilitate the primary issue of all debt securities and money market instruments approved by the Bank and /or relevant authorities which are either issued via tender of on a private placement basis. FAST is also used by the Bank to conduct monetary operations.

Reforms were undertaken in early 1998 to enhance the signaling mechanism for the efficient transmission of monetary policy. The Bank announced the BNM’s 3 month intervention rate as the policy rate to provide a clear signal to the market of the direction of monetary policy.

In addition, the Bank announced the daily liquidity forecast and its daily tender operations results to the public – which served as a reinforcing role to convey the policy intention to the market.

Changes to computation of BLR
To allow for a faster transmission effect of changes in the policy rate to the retail rate under the prevailing environment, the 3 month interbank rate was replaced with the 3 month intervention rate as the anchor rate for computation of BLR.

The Bank issued guidelines on SBL, which enable two parties to exchange securities between each other for an agreed period to meet the temporary needs of either or both parties.

The SBBA, similar to a conventional repo, enables counterparties to trade securities for cash in the Islamic money market that complies with Sharia principles. This provides additional avenue for Islamic money market participants to source their funding requirements.

The Overnight Policy Rate (OPR) is adopted to replace the 3-month intervention rate as the indicator of the monetary policy stance. The OPR has a dual role – as a signalling device to indicate the monetary policy stance and as a target overnight rate for the day-to-day liquidity operations of the Bank. Liquidity operations are also conducted at other maturities to manage the overall liquidity of the system.

Introduction of Standing Facilities
BNM Standing Facilities are introduced to ensure that overnight interbank rates trade within the corridor around the OPR by providing a lending facility and deposit facility at the upper (ceiling rate) and lower limit (floor rate) of the corridor respectively.

ISCAP is a web-based custodian system developed by the Bank to encourage participation of institutional investors in securities lending activities.

Active use of repurchase agreements (repo) as monetary instrument
Through ISCAP, the Bank is able to use the borrowed securities from institutional investors for repo operations to manage liquidity in the banking system. Active use of repo would act as a catalyst to encourage market participants to use repos as an alternative funding and liquidity management instrument.

Introduction of Guidelines on Regulated Short Selling of Securities in the Wholesale Money Market
The regulated short selling framework is extended to interbank participants, consistent with the objectives to further improve secondary market liquidity and enhance development of the domestic bond market

The guidance notes serve to provide a set of best practices on repo transactions as well as specific regulatory requirements that should be observed by licensed institutions when undertaking repo transactions.

Subsequent to the enactment of the Central Banking Act 2009, BNM introduced the BNMN, replacing BNB as a monetary instrument to absorb excess liquidity in the financial system.

Six full-fledged Islamic banks were appointed as Islamic Principal Dealers to increase efficiency in the primary and secondary markets of the Islamic financial market.

The FSB charts the future direction of the financial system over the next ten years, with 9 focus areas – one of which is developing deep and dynamic financial markets. Specifically to the money market, key measures will be taken to promote an efficient and competitive money market with greater depth and liquidity by offering a wide range of liquid and multi-currency money market instruments with participation by a wide variety of players.

A new Reference Rate Framework will be introduced to replace the existing BLR, which was first introduced in 1983. BLR is now less relevant for loan pricing as retail loans are being offered at substantial discounts to the BLR. The new framework aims to provide a more transparent reference rate to enable better decision by consumers on the many loan products offered by financial institution