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The objective of the Banking & Financial Institutions Act, 1989 (BAFIA) is "to provide new laws for the licensing and regulation of the institutions carrying on banking, finance company, merchant banking, discount house and money-broking business, for the regulation of institutions carrying on certain other financial businesses, and for the matters incidental thereto or connected therewith".BAFIA was introduced to provide for an integrated supervision of the Malaysian financial system and also to provide the Central Bank with the power to speedily investigate and prosecute, if necessary any illegal activities in an attempt o reduce white-collar crime.

Scope & Ambit Of The Act

BAFIA came into force on 1st October, 1989, Section 128 of BAFIA provides that the Finance Companies Act, 1969 and the Banking Act, 1973 are repealed from the effective date but, notwithstanding the repeal, all regulations, orders, guidelines, circulars, licenses, approvals issued or granted under the 1969 and 1973 Acts and transactions carried out under these Acts continue to be valid and lawful until amended by the provisions of BAFIA

Section 122 of BAFIA provides that where the Minister issues any directive or order under section 24(1) or 93(1) the provisions of the Companies Act, 1965 would continue to apply in addition and not in derogation of such directives and orders, but where there is any conflict between the provisions of the Companies Act and BAFIA regarding any matter under such directive/order, the provisions of BAFIA shall prevail. Section 123 provides the BAFIA shall not affect or derogate from the provisions of the Exchange Control Act, 1953 and in the event of any conflict between the two Acts, the provisions of the Exchange Control Act shall prevail.

Section 124 provides that BAFIA shall not apply to an Islamic Bank.

There are three groups of institutions covered under BAFIA namely :
  1. licensed institutions namely commercial banks, finance companies, merchant banks, discount houses and money brokers
  2. scheduled institutions which include credit and charge card companies building societies, factoring and leasing companies, and development finance institutions and
  3. non-scheduled institutions which include institutions engaged in the provision of finance but other than those named above

All licensed institutions are required to hold a valid license granted by the Minister. Every licensed institution is required to affix or paint on the outside of each of its offices in a prominent position and in a legible manner in the national language its name and words clearly indicating the business for which it is licensed such as "licensed finance company".

A licensed finance company is permitted to carry out the business of :
  1. receiving deposits on deposit account, savings account or other similar account ; and
  2. (i) the lending of money;
    (ii) leasing; or
    (iii)hire-purchase, including that which is subject to the Hire-Purchase Act, 1967; or
  3. such other business as the Central Bank may prescribe
Section 32 of BAFIA prohibits any licensed institution to engage, whether on its own account or on a commission basis, in wholesale or retail except in connection with the realization of security given to or held by it for the purpose of carrying out its licensed activities. Section 33 further does not permit a finance company from accepting money on deposit which is repayable on demand or deal in foreign currency.

The Central Bank is authorized to fix minimum or maximum amounts of deposits or specify the minimum and maximum tenor of any of the deposits accepted by licensed institutions. However, such a specification will not affect an existing deposit account or existing agreement with a customer.

Receiving Deposits

Unsolicited Calls

Section 26 of BAFIA provides that no 'unsolicited calls' (i.e. a personal visit or oral communication made without express invitation) may be made, without the written consent of the Central bank to :
  1. solicit or procure the making of a deposit ; or
  2. enter into or offer to enter into any agreement with a view to the acceptance of a deposit, from any person in Malaysia or outside Malaysia
In a Press Statement made by the Central Bank on 7th October 1989 it was stated that the intention of this provision is to stem 'illegal deposit-taking activities'. What the central Bank meant is far from clear. Though this section is, technically, breached frequently by marketing officers no reported case on an action by the Central Bank under this section is known to the writer.

Priority of Depositors

As licensed institutions are custodian of public funds, Section 81 of BAFIA provides that in the event where a licensed institution is unable to meet any of its obligations, the properties of the institution shall first be used, in priority over its other liabilities, for the payment of deposits, notwithstanding section 292 of the Companies Act, 1965.

Marketing and Advertising

Section 28 makes it an offense to publish any statement which is misleading, false or deceptive or to conceal any material fact in relation to deposit taking. The offense is committed for recklessness whether made dishonestly or not.

Financial Requirements

Every licensed institution may be required by the Central Bank to maintain
  1. a general reserve;
  2. a statutory reserve;
  3. a liquidity ratio;
  4. a capital adequacy ratio; and
  5. any amount or class of assets/li>
Section 40 of BAFIA requires every licensed institution to appoint an approved auditor who meets with the requirement laid down in the section. This section also lays down the duties of the auditor.

Within three months (or such further period as approved by the Central Bank) after the close of each financial year every licensed institution must submit to the Central Bank its latest audited Balance Sheet, Profit & Loss Accounts and Statement of Sources and Uses of Funds together with the report of the auditors, and directors.

Section 42 provides that within fourteen days of laying of its accounts at its annual general meeting, every licensed institution must publish the account in not less two daily newspapers approved by the Central Bank. It mush further, throughout the year, exhibit in a conspicuous position at every of its office in Malaysia, a copy of its Balance Sheet and such other documents as specified by the Central Bank.

Apart from the above the Central Bank also requires licensed institutions to submit a wide range of returns and reports for the purpose of monitoring their activities.

Ownership, Control & Management

Part VIII of BAFIA limits the amount of shares that a person may hold in a licensed institution and also requiring transaction in shares over a prescribed limit to be approved by the Minister of Finance. Furthermore no person may be appointed as a director of a local licensed institution without the prior written consent of the Central bank. The disqualification of directors is provided in section 56.

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