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Investor Information
Center |
The Banking
System in Malaysia
The Securities
Market in Malaysia
Commodity
Futures
Offshore
Financial Services
Exchange Control
Practices
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.
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