Complete Overhaul of Bank Negara is required


June 12, 2018

Complete Overhaul of Bank Negara is required

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Reform is not just about the legal framework in which the Bank operates, it is a wider matter of how the Bank is managed. It should be independent and apolitical since it is the custodian of our reserves.

COMMENT

By Geoffrey Williams@www.freemalaysiatoday.com

The recently announced Cabinet decision to accept Muhammad bin Ibrahim’s offer to step down as the Governor of Bank Negara Malaysia offers the new Pakatan Harapan (PH) government an early opportunity to review and reform Malaysia’s monetary system and restore confidence which has been dented by recent events. Personnel turnover like this is often seen as an indicator that a central bank is not independent and that the Governor and senior managers are hired and fired at the whim of the government.

Reform is not just about the legal framework in which the Bank operates, it is a wider matter of how the Bank is managed. This requires a review of the structure, conduct and performance of the Bank to manage perceptions amongst stakeholders outside of the Bank and particularly outside of Malaysia in the international financial community.

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One of the first reforms necessary is to end the Bank’s involvement in non-core activities. The Financial Education Hub (FEH), for example, which involved the purchase of 56 acres of land from the Government is a prime example. The Bank’s involvement in this project is at the core of the controversy surrounding the Governor’s resignation.

Both the Governor and the Bank in its statement of 24 May 2018 have made clear that the transaction complied with all the governance requirements and relevant laws that govern the Bank but questions remain as to whether these regulations are sufficient to govern such transactions in the wider circumstances of the financial system and whether a central bank should be doing this sort of thing at all.

The specific functions of a central bank are to issue currency, manage the monetary system and national reserves, set monetary policy and act as the government’s banker and “lender of last resort,” anything else is non-essential. Bank Negara has enough on its hands with these core functions and to involve itself in property development, financial education and estate management has proved a step too far. Apart from distracting the Bank’s managers from core functions, activities of this type create the perception that the Bank’s decisions in financial regulation and supervision might be influenced by its own real estate investments and worse, that its independence might be compromised if these investments are related, directly or indirectly, to the financing of other government projects, such as 1MDB. There is an urgent need to end this perception by placing activities such as the FEH into a separate independent organisation and to change governance systems to avoid such issues in the future.

A second and related reform is to separate financial supervision and regulation from the Bank. In Malaysia, financial regulation is carried out by Bank Negara under the Financial Services Act 2013 (FSA) and the Islamic Financial Services Act 2013 (IFSA). These consolidate the supervision and regulation of the structure, conduct and performance of banks, insurance companies and other financial services providers into one authority. This is an onerous job and current international best practice suggests that it may be better to separate these functions into independent specialist authorities accountable to parliament not to the Cabinet or Prime Minister.

The FSA also gives the Bank wide powers which allow the Bank to assume control over the whole or part of the business, affairs or property of financial institutions under its supervision. This includes the power to manage such businesses or appoint any person to manage them on behalf of the Bank. These are wide powers which are arguably necessary in extreme circumstances but the exercise of such powers must be conducted with transparency, independence and accountability to parliament rather than to the government as is currently the case. This aspect must be reviewed in any reform of the FSA.

A third area of reform relates to the Monetary Policy Committee (MPC) which is responsible for setting interest rates. Although in principle the MPC is independent, which is considered essential to avoid manipulation of interest rates for political purposes, the current MPC has six internal officers of the Bank appointed by the Bank itself and two external members appointed by the Finance Minister. The balance of internal and external members should be reviewed and greater transparency in the appointment of members, as well as the terms of their membership, should be introduced including scrutiny by parliament.

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There also needs to be greater clarity on how the MPC decides on monetary policy and particularly how the forecasts are made so that the process and underlying assumptions of these forecasts, on which many government and private sector decisions rely, can be assessed independently. We also need to see the publication of detailed MPC minutes, as is routine for the MPC at the Bank of England, to take us beyond the current monthly Bank Negara Monetary Statement which amounts to little more than a press release with little or no substantive analysis.

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Recent events at Bank Negara have caused concern in many quarters and raise issues of the independence of Malaysia’s central bank at an operational level. Confidence, independence and credibility are essential to underpin the integrity of any financial system and when questions arise, such as those currently affecting Bank Negara, they are not solved simply by replacing the leaders and putting the, “right people,” at the helm. A thorough review and reform of monetary policy institutions and how they operate is needed and it is timely for the new government to begin this process.

Professor Geoffrey Williams is a Professor at ELM Graduate School at HELP University. He was also a member of the Bank of England Commission of HM Opposition (1999-2000) in the United Kingdom.

The views expressed are those of the author and do not necessarily reflect those of FMT.

Bank Negara Governor offered to resign over Land Deal with 1MDB


June 6, 2018

Bank Negara Governor offered to resign over Land Deal with 1MDB

By Elffie Chew and Anisah Shukry

https://www.bloomberg.com/news/articles/2018-06-05/malaysia-central-bank-governor-is-said-to-have-offered-to-resign

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Malaysia’s central bank Governor Muhammad Ibrahim offered to resign from his post two years into his term, according to people familiar with the matter, who declined to be identified because the discussions are confidential.

The move comes less than a month after Prime Minister Mahathir Mohamad won a surprise election victory and his newly installed Finance Minister, Lim Guan Eng, raised questions about the central bank’s purchase of land from the previous administration.

It’s unclear what the government’s response was to his resignation offer. A spokesperson for the central bank declined on Tuesday to comment on whether the governor had offered to resign. An official at the Finance Ministry also declined to comment. Muhammad didn’t respond to several calls and text messages to his mobile phone and office.

Lim said in May that the previous administration of Najib Razak had used money raised from a land sale to the central bank — valued at about $520 million — to pay off some of the debts of 1MDB, the state investment fund that’s been mired in a corruption scandal.

Bank Negara Malaysia has said the purchase was transacted at fair value and complied with all governance requirements and relevant laws.

The ringgit erased earlier gains to trade little changed at 3.9730 per dollar after the report, while the benchmark stock index pared earlier losses of as much as 0.4 percent to close steady at 1,755.14.

Ongoing Investigation

“It is still part of the ongoing investigation into the previous government’s alleged corruption,” Andy Ji, Asian currency strategist at Commonwealth Bank of Australia in Singapore, said by phone. “At this stage, it is hard to see the development would lead to a change to monetary policy stance.”

Muhammad was promoted to lead the central bank for a five-year term in May 2016 when Zeti Akhtar Aziz — who was appointed by Mahathir — stepped down after 16 years of leadership. He had risen through the ranks of the central bank since joining it in 1984 and was endorsed by Zeti when she left as a successor able to provide policy stability.

Born in 1960 and with a master’s degree from Harvard University, Muhammad has had to navigate volatile financial markets since he took the helm at Bank Negara Malaysia. He cut interest rates in a surprise move shortly after taking office and implemented curbs on some foreign-exchange trading that has drawn criticism from currency traders.

The economy has rebounded since then, with the currency among the top performers in emerging markets globally this year.

— With assistance by Pooi Koon Chong, and Y-Sing Liau

Luckily we have a new Government


May 30, 2018

Luckily we have a new Government

By Lim Sue Goan @ Sin Chew Daily

http://mysinchew.com/node/119710?tid=12

Luckily we had a new government after the May 9 General Elections. If Barisan Nasional (BN) were to continue running this country, more unimaginable things could pop up.

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Najib Razak belongs in jail for betraying Malaysia. What is wrong with you, Zahid Hamidi?

Imagine Najib were to remain as our Prime Minister. First of all, the economy would continue to go downhill because BN would have to honor its election pledges, including pay raise for 1.6 million civil servants from July and RM5,000 bonuses for each Felda settler.

Government’s operating expenditure would continue to rise at the expense of development expenditure. If this goes beyond what the government could cope, GST rate would be further revised upward.

Secondly, the hidden debts could burst, including RM199.1 billion government-guaranteed debts (14.6% of GDP) and RM201.4 billion lease payments for public-private partnership (PPP) projects. The government would be victimized if the companies involved could not settle their debts.

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The BN government would likely siphon resources elsewhere to settle 1MDB’s immediate debts. Bank Negara reportedly purchased a 22.58-hectare plot of land for RM2 billion in the name of constructing a financial education center. The money was subsequently used to settle 1MDB’s end-2017 debt.

With 1MDB unable to honor its debts and interests, if BN were to remain as federal government, it would continue to cover up and siphon resources from somewhere else to settle 1MDB’s debts, which would snowball to unthinkable proportions, while the world would continue to be kept in the dark over the scandal.

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The New Gabenor. Bank Negara Malaysia

Meanwhile, politics has penetrated deep into key national institutions, infinitely expanding the executive powers and rendering the checks and balances mechanism basically dysfunctional. The Parliament and other institutions would not raise a question over such irregularities and acts of contempt of law would keep happening in future.

From the many things revealed after the 14th General Elections, including the confession by AirAsia Group CEO Tony Fernandes that he had come under tremendous pressure from the Prime Minister’s Office to express open support for BN shortly before GE-14; and revelation by MACC Chief Commissioner Mohd Shukri Abdul that his life was in danger while he was probing SRC International and the RM2.6 billion political donation, forcing him to momentarily flee to the United States.

All these point to the fact that BN leaders were in jitters to cling on to power. If BN were to remain the government, press freedom would be further eroded.

The previous administration also exploited all sorts of racist and religious tactics to divide the people, trying to raise fears among the Malays for DAP. All these are time bombs that could go off anytime.

Fortunately we now have a two-party system that would bring acts of racism under control.

The so-called TN50 is just an excuse, and the damages inflicted upon democracy and the Malaysian society by the autocratic ex-regime will only grow by the day.

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Mahathir 2.O Administration faces daunting challenges

Given the complete mess left behind by the previous BN administration, little wonder Prime Minister Tun Dr Mahathir has described his premiership this time as a very challenging one given the highly uncertain environment when compared to when he took over the same job for the first time in 1981.

Tun Mahathir also said he was inheriting a practically destroyed country, financially and institutionally. It is foreseeable that rebuilding the country is never an easy task. It will take a lot of drastic measures to trim the debts (the PM has announced to scrap the KL-Singapore HSR project), not to mention PH needs to honor its election pledges, including financial aid ahead of Hari Raya, RM50 monthly EPF contributions for housewives, deferment of PTPTN loan settlement for borrowers earning less than RM4,000 a month, abolition of highway tolls, etc.

With the saving from axed mega projects channeled instead to fulfilling election pledges, do we still have anything left to stimulate the country’s economy?

Moreover, the eroded independence of the three branches of government need to be restored through legislation to accord independent status to the Attorney-General’s Chambers and MACC, among others.

Consequently, PH may need to enlist the help from outside to reverse the existing racist policies and antiquated economic models while drawing up more liberal new policies to lure foreign funds and expertise in pushing ahead institutional reforms and economic transformation.

PH’s electoral victory is widely perceived by the world as a positive development. It is now time for the new government to introduce new policies to expedite the rebuilding and re-engineering of this country.

While the 2018 elections have buried the hypocritical “1Malaysia” in favor of a “New Malaysia”, the journey ahead of us is by no means smooth, and we all must do our part to see to its success.

Open Letter to Dr. Mahathir Bin Mohamad–Bank Negara Forex Losses


December 26, 2017

Open Letter to Dr. Mahathir Bin Mohamad–Bank Negara Forex Losses

by Second Finance Minister Johari Abdul Ghani

http://www.malaysiakini.com

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COMMENT | Dear Tun Dr Mahathir Mohamad,

Many of my friends who are readers of Tun’s blog, have contacted me for clarification regarding Tun’s latest writing entitled “Dear Mr Johari” on the issue of the speculative foreign exchange transaction.

At first, I told them that I have already said enough about the subject matter and I do not want to prolong the discussion on this issue especially since there is already an independent team at the Royal Malaysian Police (PDRM) investigating this matter.

The subject of foreign exchange activities can sometimes be too technical a subject for the ordinary man on the street to understand, particularly in relation to the role of Bank Negara Malaysia (BNM) in the management of the country’s international reserves. However, I felt it best that I try to hopefully close the discussion by putting the matter in simple perspective for ease of understanding.

It is very important for the public at large to understand the difference between speculative foreign exchange activities and orderly management of the foreign exchange market. The speculative foreign exchange activity, to put it in simpler words, is a kind of “gambling” activity with the hope of quick returns.

The orderly management of the foreign exchange market, however, is very much different in that it is a facilitation of liquidity by BNM to market participants in the country for the purpose of mitigating imbalances with respect to the ringgit’s supply and demand in the market.

To put the matter in perspective, it was highlighted in an internal audit report prepared by BNM’s internal auditors dated January 21, 1994 that the Foreign Exchange Operation Division of the Banking Department in BNM was involved in voluminous foreign exchange trading activities, so much so that the monthly maturing buying and selling of foreign exchange transactions which amounted to an average of RM140 billion in 1992 had increased to a staggering RM750 billion in 1993!

The substantial portion of such transactions was very speculative in nature and did not reflect BNM’s mandate to maintain the orderly condition of the foreign exchange market as per Section 4 of the Central Bank of Malaysia Ordinance 1958.

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Malaysia’s Notorious Currency Trader who broke Bank Negara Malaysia, Nor Mohamed Yakcop

The said internal audit report also highlighted that the magnitude of such foreign exchange speculative transactions was considered very excessive given that the shareholders’ fund of BNM was only RM4.4 billion and the country’s international reserves were merely RM43.98 billion at that material time. These speculative activities had caused BNM to suffer foreign exchange transaction losses amounting to RM31.5 billion during the period under review.

The Audit Report also stated that the voluminous speculative foreign exchange trading activities that the central bank had undertaken during that time were carried out by the Foreign Exchange Division of the Banking Department of BNM, headed by its advisor/manager then, Nor Mohamed Yakcop, whom later became the Minister of Finance II of the country.

Transfer of shares

Because of the scale of these foreign exchange speculative activities losses, the government was forced to transfer its shares in Telekom and Tenaga Nasional Berhad (TNB) to BNM at the nominal value of RM1 per share and these shares were immediately revalued by BNM at RM22.10 per share and RM19.30 per share for Telekom and TNB respectively.

In addition, BNM had to dispose off its Malaysia Airlines (MAS) shares to a third party at the price of RM8 per share and MISC shares at RM10 per share to Kumpulan Wang Pencen in order to realise the gain. If these speculative foreign exchange losses were not real, the government would not have taken these drastic actions in order to cover the BNM losses at that material time.

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Members of Royal Commission on Bank Negara Forex Losses

BNM and the country have since come a long way, particularly in instituting the necessary reforms and checks and balances with regard to its foreign exchange forward transaction activities. As a result of these reforms, despite the volatility of capital flows and the ringgit in the recent period, our economy continues to remain resilient and BNM’s ability to safeguard the financial and economic stability remains uncompromised.

In fact, our international reserves have continued to strengthen ever since and as at the end of November 2017, the reserves amounted to US$101.9 billion and were able to support 7.5 months of retained imports. I have said enough on this subject and if the understanding of the truth is not the objective of the discussion, then there is nothing much I can say on this.

I wish Tun and family the very best of health and a very Happy New Year; may the New Year be peaceful and prosperous for all of us Malaysians.


JOHARI ABDUL GHANI is Finance Minister II.

Bank Negara Malaysia: Why Dr. Sukhave Singh Resigned


December 10, 2017

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Thank you, Dr. Sukhave for your service to Bank Negara Malaysia. What you have done by resigning is just examplary. It took courage and firm moral conviction to do it. As a Bank Negara alumnus who was with the Bank in 1960s, I am proud of you and wish you all the best. –Din Merican

Letter from outgoing Deputy Governor BNM–Why Dr. Sukhave Singh Resigned

If you are in a position of leadership, remind yourself, and remind yourself often, that leadership is a responsibility and not a privilege. Remember that nothing shines a brighter light into the depths of your character than your behaviour when you believe that you have power over others. It is never leadership to try to make yourself look good by depriving your subordinates of opportunities to be their best. It is also never acceptable to use bullying as a means to exert your leadership. Respect yourself; respect those who work for you.– Dr. Sukhave Singh

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Last week a long-standing and respected official, the Deputy Governor, Bank Negara Malaysia Dr Sukhdave Singh, resigned and people ought to take that move as a heavy hint as to what is going on behind the scenes.

Dear Friends and Colleagues,

As you all know by now, I am leaving the Bank soon. Some of you have asked me why I am leaving and I must confess that I have evaded the question.

All I can say is that my life in the Bank has been based on certain professional expectations, and when I find myself put in circumstances where those expectations can no longer be met, there could have been no other decision for me.

This past week has been an emotional roller-coaster. The days have flown by so fast and saying goodbye has been harder than I had anticipated. Meeting many of you has brought back a flood of memories and emotions. But I am grateful for the opportunity to personally wish you goodbye, and I thank you for the kind wishes you have expressed to me.

In parting, I want to express my gratitude to those of you who have worked with me and helped me succeed in my job. No one gets to my position without the help of others. I am unable to thank each of you individually but I hope you know that I am referring to you and please accept my heartfelt thanks.

If I have contributed to your own professional success, I am glad; but you do not need to thank me. Pay it forward – be a part of someone else’s success.

If you are in a position of leadership, remind yourself, and remind yourself often, that leadership is a responsibility and not a privilege. Remember that nothing shines a brighter light into the depths of your character than your behaviour when you believe that you have power over others. It is never leadership to try to make yourself look good by depriving your subordinates of opportunities to be their best. It is also never acceptable to use bullying as a means to exert your leadership. Respect yourself; respect those who work for you.

Well, my journey with BNM has come to an end, but yours will continue. I wish you fair weather and good sailing.

Goodbye and God bless.

Sukhdave Singh

– http://www.sarawakreport.org

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Forex RCI blames Ex-Khazanah Nasional Vice Chairman Nor Yakcop


December 1, 2017

Forex RCI blames  Ex-Khazanah Nasional Vice Chairman Nor Yakcop

by http://www.malaysiakini.com

Bank Negara suffered losses amounting to RM31.5 billion in foreign exchange (forex) trading between 1992 and 1994, the Royal Commission of Inquiry (RCI) into the matter said.

The RCI also established that Nor Mohamed Yakcop, who was part of Bank Negara’s management at the time, was the person in charge of the forex dealing operations. The commission is also of the opinion that this incident involved a criminal breach of trust under Sections 406 and 409 of the Penal Code.

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Nor Mohamed (pic above) was in charge of portfolios at Bank Negara between 1986 and 1993, including managing external reserves and regulation of domestic financial markets.

However, the RCI said, other parties had to share the blame as well.“Although he had dominion over BNM’s funds and seemed to have had a free hand in forex dealings, he could not have carried on for such a long time without the direct or tacit approval of his superiors and/or other persons in authority.

“Therefore, the commission assessed the joint liability of these persons, which could fall either under Section 34 or Section 107 of the Penal Code and explained as having the common intention or abetting,” the commission adds in its report, which was released today.

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A former deputy governor of Bank Negara Malaysia (BNM), Dr. Lin See Yan told the Royal Commission of Inquiry (RCI) that he was shocked at the scale of the foreign exchange (forex) losses suffered by the central bank 25 years ago.

These individuals, according to the RCI, are then Bank Negara governor Jaafar Hussein, his deputy Lin See Yan, Bank Negara’s board of directors, then Finance Minister Anwar Ibrahim and then Prime Minister Dr Mahathir Mohamad.

Dr M and Anwar’s role

Furthermore, the RCI said, the incident involved an element of cheating in violation of Sections 417 and/or 418 of the Penal Code.

“The possibility of joint liability was also examined. It could be proven that several persons from Bank Negara, the Finance Ministry, Auditor-General’s Department, including Bank Negara’s board of directors and the Finance Minister, had all the information on the forex losses and were involved in the concealment of actual losses in Bank Negara’s forex dealings.

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“Therefore, they should be jointly liable for the offence,” the report states. The RCI also accused Mahathir and Anwar of withholding information on the forex losses from the cabinet.

“The Finance Minister was also the main person responsible for withholding the facts and information of the forex losses to the cabinet.

“The Prime Minister, who also had knowledge of the forex losses, did not correct or offer more information when the losses informed to the cabinet were not the actual losses,” reads the report.

No further recommendations

The RCI also concluded that Bank Negara’s forex trading activities at the material time contravened Section 31(a) of the Central Bank Ordinance 1958 as the volume of transactions exceeded the reserves.

The RCI also opined that there was a deliberate concealment of the forex losses as it was not accurately reflected in the Bank Negara annual reports.

“The commission is of the opinion that the then Finance Minister had deliberately concealed facts and information and made misleading statements to the cabinet.

“The commission is also of the opinion that the then prime minister had condoned the actions of the Finance Minister,” the report states.

Apart from criminal investigations, the RCI said, no further enhancements to Bank Negara were necessary as substantial measures had been implemented to improve governance of reserves.

“No further enhancements are being recommended, as the various measures for improvement in the overall governance and internal controls of the bank have been adequately addressed in the Central Bank of Malaysia Act 2009,” the report says.

The RCI began its investigations on July 15 and was tasked with establishing whether Bank Negara made losses in the 1990s through forex speculation, whether laws governing Bank Negara were violated, whether there was concealment of facts, recommending action against those responsible and recommending action to prevent the incident from recurring.

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The five-member panel (pic above) comprised Mohd Sidek Hassan (chairperson), Justice Kamaludin Md Said, Tajuddin Atan, Saw Choo Boon and SAK Pushpanathan.

 

RELATED REPORTS

RCI brands Bank Negara’s forex activities ‘excessive’

RCI recommends Dr M and Anwar be probed, claims Daim abetted CBT