Banking, Finance and Exchange Control
The Banking System in Malaysia
The Securities Market in Malaysia
Offshore Financial Services
1. The Banking System in Malaysia
1.1 The Central Bank
Bank Negara Malaysia is the central bank and is responsible for supervising the banking system. It also issues the Malaysian currency, acts as banker and financial adviser to the government, administers foreign exchange control regulations, and is lender of last resort to the banking system.
1.2 Financial Institutions
In Malaysia, 35 licensed commercial banks operate through a total of 1714 branches, while representative offices have been established by 36 foreign banks. These representative offices are not permitted to conduct normal banking business.
A wide range of merchant banking services are provided by 12 merchant banks with a network of 22 branches, many of which have affiliations with merchant banks established overseas.
Other banks include an Islamic bank which provides all the conventional banking services, based on Islamic concepts of banking and credit. Bank Islam Malaysia has 80 branches in the country.
Twenty-five (25) finance companies operate through 1070 branches which accept retail deposits and provide finance for installment (hire-purchase) and leasing transactions and housing loans. The services of these finance companies are supplemented by 290 registered leasing companies.
The banking system (comprising the commercial banks, merchant banks and finance companies) and the industrial finance institutions are the major institutional sources of credit to the industrial sector in Malaysia. The development finance institutions in the country comprise Malaysian Industrial Development Finance Berhad (MIDF) and its subsidiary, Malaysian Industrial Estates Sendirian Berhad (MIEL), Bank Pembangunan dan Infrastruktur Malaysia Berhad, Bank Industri dan Teknologi Malaysia Berhad (BITM), Sabah Development Bank Berhad, Borneo Development Corporation (Sabah), Borneo Development Corporation (Sarawak) and Export - Import Bank of Malaysia (Exim Bank).
Seven discount houses in Malaysia accept short-term funds. They are only permitted to invest the funds in treasury bills, government securities, bankers’ acceptances, and negotiable certificates of deposit and private debt securities. There are also 19 factoring companies offering facilities to factor receivables.
Exim Bank was established in August 1995 for the purposed of financing and facilitating Malaysia’s foreign trade and investments. It concentrates on providing medium to long-term credit to Malaysian exporters and investors as well as buyers of Malaysian goods.
Another institution, Malaysia Export Credit Insurance Berhad (MECIB), offers export insurance cover and guarantees.
2. The Securities Market in Malaysia
The Kuala Lumpur Stock Exchange (KLSE) was established in 1973 to provide a central market place for buyers and sellers to transact business in the shares, bonds and various other securities of Malaysian-listed companies.
Trading on the KLSE is fully computerized. The computerized system has been continually enhanced and today enables stock broking companies to closely monitor and minimize their risk exposure on a real-time and online basis.
The Central Depository System (CDS), is the automated clearing and settlement system of the KLSE. The CDS replaces the practice of holding and moving physical scrip of quoted shares with a safe and dependable computerized book entry system. The KLSE had successfully prescribed the ordinary securities and non-equity securities of all listed companies into the CDS.
The Securities Commission (SC), was established in 1993 to encourage and promote the development of the securities and futures market in Malaysia. It is a self-funding statutory body that reports to the Minister of Finance. The SC regulates all matters relating to securities and futures contracts, take-overs and mergers of companies and unit trust schemes. It is also responsible for licensing and supervising all licensed persons, exchanges, clearing houses and central depositories besides encouraging self-regulation and ensuring proper conduct of market institutions and licensed persons.
The Malaysian Exchange of Securities Dealing and Automated Quotation
(MESDAQ), is a new exchange separate from the KLSE. Companies with high growth
potential, and technology based companies can raise equity capital through this
exchange. Unlike companies seeking listing on the KLSE, these companies need not
have a track record but must demonstrate the potential for strong growth and
therefore have strong profit potential.
3. Commodity Futures
The Kuala Lumpur Commodity Exchange (KLCE), established in 1980, caters for futures trading in commodities. Presently, the futures contract traded at the KLCE is the Crude Palm Oil (CPO) futures. All futures contracts traded on the KLCE is registered and cleared by the clearing house known as the Malaysian Derivative Clearing House Bhd. (MDCH).
With effect from 16 April 1997, the KLCE functions under the supervision of
the Securities Commission and is regulated by the Futures Industry Act 1993
(FIA) which replaces the Commodities Trading Act (CTA).
4. Offshore Financial Services
The Labuan Offshore Financial Services Authority (LOFSA) is the regulatory body set up to spearhead and coordinate efforts to promote and develop Labuan as an International Offshore Financial Centre (IOFC).
LOFSA is expected to streamline the government machinery in supervising the offshore financial services industry and undertake research and development works as well as to draw up plans for further growth and efficiency of the Labuan IOFC.
LOFSA administers major offshore operations in the area of banking, insurance, securities, trust and fund management, and incorporation/registration of companies.
Todate more than 1600 offshore companies had set up operations in Labuan. These include trust companies, offshore banks and insurance and insurance related companies.
Incentives offered under this legislation include the following:-
4.1 Minimum Tax
An offshore company carrying on an offshore trading activity can choose to pay a tax at the rate of 3% of its net audited profits or a fixed sum of RM20,000 a year;
An offshore company carrying on an offshore non-trading activity for the basis period for a year of assessment is not subject to tax for that year of assessment. An offshore company which has no basis period for a year of assessment is taxed a fixed rate of RM20,000 for that year of assessment.
4.2 Abatement of Tax for Professional Services
Income derived by a person or his employee or a company from qualifying professional services rendered to an offshore company in Labuan is exempt from tax up to an amount equivalent to 65% of the statutory income from that source. This exemption is applicable from the Year of Assessment 1992 to the Year of Assessment 2000. Qualifying professional service means legal, accounting, financial or secretarial service and includes the services provided by a trust company as defined in the Labuan Trust Companies Act 1990.
4.3 Abatement of Tax for Business Relating to or Letting of a Qualified Asset
Income of a person derived from the carrying on of a business which relates to a qualifying asset or the letting of a qualifying asset in Labuan, is exempt from tax up to an amount equivalent to 50% of the adjusted income from that source. This exemption applies where the person has undertaken the construction project of the qualifying asset himself or has purchased that qualifying asset from the person who undertook the construction project of that asset.
This exemption is applicable for a period of five consecutive years of assessment, commencing from the year of assessment in which the adjusted income first arises from that source, that is, the total exemption given to both the person who constructed and the person who purchased the qualifying asset will not exceed five years of assessment.
The incentive is available if the construction project of a qualifying asset has commenced before 1 October 1996 or Pioneer Status/Pioneer Certificate or Investment Tax Allowance has been granted under the Promotion of Investments Act 1986 in respect of the business which relates to or the letting of the qualifying asset.
4.4 Abatement of Tax for Employment
Income derived by a non-citizen individual from an employment exercised in a managerial capacity in an offshore company in Labuan is exempt from tax up to an amount equivalent to 50% of the gross income from that employment. This exemption applies from the Year of Assessment 1992 to the Year of Assessment 2000.
4.5 Exemptions from Tax
The following exemptions are available under the Income Tax Act 1967 effective from the Year of Assessment 1991:
(a) Dividend received by an offshore company from a Malaysian resident company is not subject to income tax and no refund or set-off is given in respect of tax deducted from such dividend.
(b) Dividend paid by an offshore company out of income derived from an offshore business activity or out of exempt income is not subject to income tax in the hands of the recipient. Such dividend will be paid gross without any tax deducted at source.
(c) Distribution made by an offshore trust is not subject to income tax in the hands of the beneficiary.
(d) Royalty paid by an offshore company to a non-resident person or another offshore company is not subject to income tax and hence is not subject to withholding tax.
(e) Interest paid by an offshore company to a non-resident person or another offshore company is not subject to income tax. However, where the interest accrues to a banking, finance company or insurance business carried on by the non-resident person in Malaysia, that interest will be subject to income tax as part of business income.
(f) Interest paid by an offshore company to a resident person, other than a person carrying on a banking, finance company or insurance business in Malaysia, is not subject to income tax.
(g) Technical or management fee paid by an offshore company to a non-resident or another offshore company is not subject to income tax.
5. Exchange Control Practices
The present exchange control regime applies uniformly to transactions with all countries except Israel, Serbia and Montenegro, against which special restrictive rules apply. The main exchange control rules which are of direct relevance to foreign investors, are as follows:
5.1 Direct Investment
No permission is required from the Controller of Foreign Exchange (hereinafter referred to as “the Controller”) for a non-resident to undertake direct investment in Malaysia.
5.2 Remittance Abroad
Payments to countries outside Malaysia may be made in any foreign currency other than the currencies of Israel, Serbia or Montenegro.
All payments in foreign currency to non-residents for the repatriation of profits by foreign direct investors, dividends, interest, rental and commissions are freely permitted. Payments to non-residents for repatriation of portfolio capital and profits are subject to payment of levy by the non-residents. Payments for imports of goods and services are also freely allowed but must be made in foreign currency. The commercial banks are authorized to effect such payments.
For investments abroad and payments under a guarantee for non-trade purposes, prior approval of the Controller is required if the amount exceeds the equivalent of RM 10,000.
5.3 Export Proceeds
A simple form (KPW X) must be completed for all exports, the of which the value exceeds RM100,000 f.o.b. per shipment. This form does not require any authorization and is given to the customs authorities at the time of shipment. However, exporters who declare their exports through Electronic Data Interchange (EDI) are exempted from completing the form with effect from 1.1.1997.
Export proceeds must be in foreign currency (other than the currencies of Israel, Serbia or Montenegro) and must to be repatriated to Malaysia within the period of payment specified in the export contract. The period should not exceed a maximum period of six months from the date of export.
Exporters are allowed to retain a portion of the proceeds in foreign currency provided these are deposited in foreign currency accounts with designated banks in Malaysia subject to the following limits:
- USD10 million for exporter with average monthly export receipts exceeding RM20 million;
- USD5 million for exporter with average monthly export receipts above RM10 million and up to RM20 million;
- USD3 million for exporter with average monthly export receipts between RM5 and RM10 million; or
- USD1 million for new exporter or those with average monthly export receipts of less than RM5 million.
5.4 Inter-Company Accounts
No permission is required from the Controller for a company in Malaysia to maintain inter-company accounts in foreign currency with associate companies, branches or other companies outside Malaysia, provided monthly returns as specified by the Controller are submitted to the Controller and the following are excluded from the inter-company accounts:
- Proceeds from the export of goods from Malaysia; and
- Proceeds from loans extended to the Malaysian companies.
With the prior written permission of the Controller, companies are allowed to offset the export proceeds through inter-company accounts against payables to overseas companies for the supply of raw materials, parts, components and other items. This would enable the companies concerned to repatriate to Malaysia only the value-added in the form of services performed by the Malaysian companies.
Where the companies have been given permission for the above offsetting arrangements, they are required to observe certain procedures in reporting and lodging monthly returns to enable the Controller to monitor their inter-company accounts and to ensure that the value-added in their exports are repatriated to Malaysia in the prescribed manner.
5.5 Domestic Borrowing by Non-Resident Controlled Companies (NRCCs) Operating in Malaysia
A Non-resident Controlled Company (NRCC) in Malaysia may borrow up to a total of RM10 million from all sources in Malaysia without the permission of the Controller, provided at least 60% of its credit facilities from banking institutions is from Malaysian-owned banking institutions. The limit for exchange control approval applies to all forms of credit, excluding trade financing facilities where the tenure of the credit is less than 12 months, guarantees, and foreign exchange lines.
For borrowing in Malaysia in excess of RM10 million, the permission of the Controller is required and such approval will be given based on the genuine needs of the NRCC, the credit situation in the country, and the amount of eligible capital funds of the NRCC.
Domestic borrowing for NRCCs should not be more than three times their eligible capital funds. NRCCs are encouraged not to resort to the maximum use of borrowed funds in Malaysia, while bringing in only a nominal amount of capital of their own for their projects in Malaysia. This is to ensure that an NRCC brings in a relatively significant amount of funds of its own to finance its project in Malaysia as a long-term proposition and not merely as a venture for quick profits without any semblance of permanence.
5.6 Borrowing in Foreign Currency
Residents may borrow in foreign currency from banks in Malaysia and non-residents up to a total of RM5 million equivalent in aggregate without the permission of the Controller, to supplement their financial requirements for business and productive purposes in Malaysia. Commercial banks may effect remittances of loan repayments and interest on approved foreign borrowing to non-residents, provided such repayments and interest payments are in accordance with the terms approved for the borrowing.
5.7 External Accounts of Expatriates in Malaysia
There are no restrictions on the sources of funds, uses of funds and their conversion into foreign currency for external accounts held by non-resident individuals working in Malaysia and students studying in Malaysia. This includes accounts held by their spouses, children and parents residing in Malaysia.
5.8 Multimedia Super Corridor (MSC) Status Companies
MSC Status Companies will continue to be exempted from all exchange control rules to meet their own requirements.