At the core of the financial services sector in Malaysia are commercial banks, investment banks and Islamic banks. Within this sector are 26 commercial banks, 11 investment banks and 16 Islamic banks; of which 30 are locally owned while 23 are foreign-owned. Of these banks, the biggest ones in terms of total assets and market capitalization include Maybank, CIMB, Public Bank, RHB and Hong Leong Bank. All of these financial institutions have to be licensed by Bank Negara Malaysia (BNM) and are regularly assessed and monitored by BNM based on their adequacy of risk management procedures. Other financial service companies will include brokerage firms, insurance companies and fund management companies.
The asset and fund management sector assists firms and individuals in managing their financial portfolio by facilitating investment in financial instruments such as stocks, bonds and sukuk (sharia compliant bonds). Companies with the largest assets under management (AUM) in Malaysia are Public Mutual Berhad, Principal Asset Management Berhad (formerly known as CIMB-Principal Asset Management Berhad) and Affin Hwang Asset Management Berhad.
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There are also many companies that are engaged in investment holding such as holding of stocks, shares and properties, many of which are family owned companies. Stock brokerage firms in Malaysia include Affin Hwang Investment Bank Berhad, CIMB Investment Bank Berhad, and Maybank Investment Bank Berhad. In the insurance sector, the participants in general insurance are AIG Malaysia Insurance Berhad, Allianz General Insurance Berhad, Zurich Insurance Berhad etc.; whilst in life insurance there are companies such as Sun Life Malaysian Assurance Berhad, Hong Leong Assurance Berhad and Prudential Assurance Malaysia Berhad.
Banks’ accounting requirements are unique because most of their assets and liabilities are financial in nature. Life and non-life Insurance companies also have their own unique requirements due to their specialized way of revenue recognition and provision for claims liabilities. All other companies in the financial services sector have accounting requirements relevant to their operations in accordance with the accounting standards. Being mostly service companies, the accounting complexities usually revolve around measurement of Expected Credit Loss (ECL) and valuation of financial investments.
MFRS 9 on Financial Instruments has a significant impact on the financial statements of banks and insurance companies. Under this revised standard, accounting for impairment losses has to be made based on the ECL approach instead of the previous incurred loss approach. The measurement of ECL is required to incorporate forward looking information reflecting the potential future economic environment which in turn, requires the development of new methodologies that involve significant judgment.
For insurance companies, the valuation of insurance contract liabilities is complex because the measurement is subject to uncertain future outcomes as to the ultimate full settlement of insurance contract liabilities. These calculations require the use of valuation models and assumptions such as investment return, interest rate, mortality, morbidity, etc.
Short-term Loans. Short term loans are those paid within any period upto but not more than one year. Consumption credits, mercantile credit,retail credit, import or export credit are generally, loans under this type.
Medium-term (or intermediate) Loans. Medium-term loans are thosepayable after a period of one year but not exceeding five years. Most farmloans or equipment loans fall under this category.
Long-term Loans. Long-term loans are those that are payable withinperiods longer than five years up to twenty-five or more years. Real estateloans, industrial loans, investment loans, developmental loans belong tothis type.
Demand (or call) Loans . Demand loans are loans demandable by thebank within the period of twenty-four hours. The two main purposes of thiscredit are:
a) To restore the position of a bank whose legal reserve isdeficient of the legal reserve requirement; and
b) To finance the buying and/ or selling activities of securities or stock brokers.
Secured Loans. Secured loans are those backed up by any propertyacceptable by the bank, and are pledge as collateral to fulfill therepayment of the loan in case of default of the debtor. Examples are realestate loans, Chattel mortgage loans, and crop loans.
Unsecured Loans. Unsecured loans are not backed up by property of any kind. Consumption loans in general belong to this type.
Agricultural Loans. Agricultural loans extended by our banks todayinclude equipment loans, crop loans, real estate loans, commodity loansand the “Masagana 99”. These loans may be either short, medium; or, consumption or productive; or, of domestic or foreign source.
Commercial Loans. Commercial loans extended by banks are used for the financing of trade and commerce, particularly for production,manufacture and marketing of goods. The primary aim is to providemerchants with adequate working capital. This type of loan can be short or medium term; or secured or unsecured, depending upon the degree of risk.
Investment Loans. Investment loans of this nature are for the financingand construction or purchase of fixed capital for use in business. Theproceeds could also be used to purchase stocks and bonds of alreadyexisting stable corporations, such as those loans extended to members of the SSS or GSIS.
Consumption Loans. Consumption loans, as the term implies, refers toall those advances for the purpose of promoting the consumption activitiesof the individuals. The proceeds are used for either the payment or purchase of final goods and services for the buyer.
Industrial Loans. The proceeds of this loan is for he financing of manufacturers’ productive activities. These are usually big loans whichrequire the substantial banking of the securities that are satisfactory to thelending bank.
Development Loans . Developmental loans are extended for the purposeof speeding up the economic development of the economy. The primaryaim of this type of loan is to help those engaged in productive activitiespromote and accelerate production, employment, income, and standardliving.
Real Estate Loans . Real estate loans are extended generally to homebuilders, subdivision owners or developers and to business firms in order to purchase or improve real estate property for the purpose or another.
Direct Loans. Direct loans are those made directly to the makers of promissory notes, the interests of which are collected at the date of maturity together with the principal.
Discounts. Discounts are advances whereby the bank deducts theinterest at the time the loan is granted from the face value of thepromissory note or commercial paper for the purpose of encashing itbefore the date of its maturity.
Rediscounts. Rediscounts are those advances made on commercialpaper which have previously been discounted.
Overdrafts. An overdraft refers to a special banking accommodationwhereby the amount appearing on the face value of a check, acceptance,promissory note, or other similar commercial paper, exceeds the funds onwhich the instrument are drawn.
Lump Sum. Lump sum releases are loans that are granted in their entireamount to bank barrowers. Usually these are small short-term cash loansof consumption.
Installment. Installment releases refer to the loans involving largeamounts and for long-term. Generally, in granting real estate loans, banksrelease the first fifty percent of the face value of the loan upon the borrower’s meeting some conditions and requirements.
Lump Sum . Lump sum payment loans are those repaid by borrowers at the agreed date of maturity in their entire amounts. These are the smallloans and usually consumptive in nature.
Installment. Installment payments are made by the bank’s borrowers in small amortizations in order to assure full repayment of the loan andinterest at the date of maturity without much difficulty on the part of borrower.
Self-liquidating Loans. Self-liquidating loans extended by theDevelopment Bank of the Philippines, Private Development Banks, thePhilippine national Bank, and Rural Banks are those loans, the repaymentof which whether in lump sum or by installment, comes from the incomeof the investment to which the loan was applied.
Non-self-liquidating Loans. Non-self-liquidating loans are those loansthe repayments of which are made from the income of the borrower regardless of its source.
Here, banks and financial institutions provide loans to borrowers against fixed deposits. The fixed deposits act as primary security for the lender. Further, as the fixed deposit is equivalent to money, banks do not face many risks in the case of loans against FD. Borrowers can avail of loans against FD for an amount up to 60% to 75% of the FD value. In terms of interest rates, while some banks charge a flat interest rate, other banks may charge interest that is 1%-2% rate higher than the FD rate. Currently, the FD rate is anywhere between 5% to 7.5% per annum, depending upon the amount and tenure. Thus, it can be said that loans against FD are one of the most affordable secured loans.
Loans against insurance are also one of the popular secured loans in India. Many people have life insurance policies but seldom do they know that policies can act as a security against which money can be borrowed. To avail of a loan against an insurance policy, the policy must have a surrender value. The LTV in case of loan against insurance is anywhere between 85% to 90% per annum. The interest rate in this case can start anywhere between 10% per annum to 12% per annum.
Working capital loans are extended by banks and financial institutions to help businesses meet their working capital needs. Also known as Cash Credit, here the amount of loan that can be availed of depends upon the creditors, debtors and stock that the business holds which also constitutes the working capital for the business. Each lending institution has its own way of calculating the working capital limit. Further, the interest rate on working capital loans can start from 12% per annum. While the stock and debtors act as a security in the case of working capital loans, the lending institution may require the borrower to furnish collateral security as well.
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