Afore-mentioned non banking financial systems such as the insurance , provident and pension funds insurance companies, and tactful operators, complement the banking sector by actually adding value to the economy and giving the banking sector more financial business to regulate and control. The non-financial institutions are the institutions that actually take risk to gain more and therefore are the primary economic enablers. The banking sector is more of a tool or machine that is used or that processes the economic gains created by other institutions, making the financial distribution and financial conducts and activities easy for the profit generators (Yong Poh Chief 1988). It is through the risk that all the non-financial institutions take that they make profit and therefore creating the need for banking. The bankers then come in to help with the financial storage, controls and management. The stability of the banking sector in any economy including Malaysia therefore largely relies on the Investors Risk Tolerance.
Objective of the study
The main objective of the study is to
- Understand the financial stability in Malaysia’s banking sector
- Understand the concept of risk tolerance
- Reflect the relationship between risk tolerance and financial stability in the banking sector
- Measure the level in which risk tolerance determines or influences financial stability
Hypothesis
Alternate Hypothesis
Risk tolerance levels largely influence and determine financial stability in Malaysia Banking Sector.
Null Hypothesis
Risk tolerance levels do not determine or influence financial stability in Malaysia
Methodology
The methodology is the strategy used to collect the research data in the studied area field.
Data Collection
Questionnaires were distributed to 5 banks in Malaysia to find out or reflect how much the personnel in banks value the non-financial institutions contributions to their stability as an (monetary) industrial sector.
Fewer questionnaires were distributed to non-financial institutions to find out the risk levels they had that is the investment risk, returns and how much they relied on the banks
On Spot Interviews were also conducted on randomly selected Malaysian residents on how stable and reliable they thought the banks were and also to have an idea of their perception on the performance of the economy.
Secondary Data was also collected through internet and books on the financial trends of Malaysian economy and banks and also on the top investment companies and their interdependence with the banking sector.
Research Design
A literature review on the banking and other economic institutions performance that is analysis of the views of authors and financial analysts on risk tolerance and the Malaysian banking sector and their interdependence.
The research which will be conducted relying heavily in the primary and secondary data is to be designed in a broad information rich style. The research will be conducted on randomly selected respondents for both the questionnaires and the interviews for as long as the respondent s fit the description of the targeted respondent which were, bank employees, non-financial institutions personnel and the residence of Malaysia involved in ordinary economic activities.
The analysis was done measuring and showing the factors that cause financial stability in the banking sector and how great it depends on the risk tolerance levels of economic players and activities.
There was a swot analysis to show the influences of the environment on the variables studied and the limitations were also exposed. The researcher gave recommendations and concluded.
Interviews structure /schedules
The interviews were simply structured and designed to give a feed back of the stability of the banking sector’s finance. Stability in terms of consistency in operations and standardized procedures and interest rates charged by banks.
*See Appendix for Interview Questions and Questionnaire samples
Literature Review
The Association of Banks in Malaysia (ABM) said that Malaysia’s banking sector remains strong and well capitalized despite the turmoil in the global financial markets. Whilst it is acknowledged that the immediate outlook for the global financial markets and ensuing world economic growth prospects appear challenging, the commercial banks operating in Malaysia are healthy and will remain resilient. ”ABM is confident that the commercial banks are in the position to continue to perform their intermediation function in full support of domestic economic activities,” said Dato' Sri Abdul Hamidy Abdul Hafiz, ABM Chairman.
There has been an improvement in banks’ assets quality, that being the 3-month Non-Performing Loan ratio, to 2.5 per cent in August 2008 versus a high of 11.5 per cent in 2001. Furthermore, domestically, Malaysia has a savings rate of 37 per cent which is high by international standards. In addition, through the consolidation process, Malaysian banks are now much stronger. There are presently a total of 22 commercial banks, comprising nine domestic banks and 13 locally incorporated foreign banks, which operate in Malaysia and which are members of ABM. Commercial banks constitute the largest and most important group of all financial institutions in Malaysia with total assets of approximately RM1,231 billion as at 30 June 2008.
Risk tolerance is an ability or willingness to accept declines in the prices of while waiting for them to increase in value. An investor with a high risk tolerance is likely to invest in , such as in companies, and is willing to accept the possibility that the of his/her will decline, at least in the short-term.
Case Study
The levels of risk tolerance to financial stability of Malaysian banks rely on a variety of environmental risk factors that impact investment risk. It is through investment that banks have business and finance to regulate and synthesize, store and use to invest. Banks are institutions that largely rely on their accountability, reliability and liability. It is through their liability that they generate revenues that are their risk in being held liable for other institutions funds.
Credit risk
This is the chance that a borrower won't repay what is owed. Bondholders face this risk, too. So do investors in money market funds, which are short-term loans in the money markets. But the risk is much greater for bondholders because the term of the debt is longer. Marketability risk is the chance that there will be no ready market for your investment if you want to sell it in a hurry. That's certainly a big risk if you buy a piece of land, or if you buy a stock that is very thinly traded. But it's not a risk when you buy a mutual fund, which you can sell back on any business day. The Malaysian economy as mentioned before is stable and actually improving and therefore allows for standard and consistent transaction methods that are effective and allows for efficiency in credit repayments made by the bank clients. The clients are always in a position to pay back the loans from banks from their different well rewarded occupations due to economic stability
Political risk
The government has a generally favourable attitude toward foreign investment, especially regarding projects that facilitate technology transfers, create high-skilled jobs and contribute capital to the economy. (Terry S. Manes 1998 )New ventures in the manufacturing sector may be 100% foreign-owned, the financial sector is being liberalized and capital controls on overseas investments have been relaxed. Politically investors have less risk of losing from their investments since the government policies are favourable. The investors therefore make the profits which the banks benefit from through service tax and banking activities. The political environment in Malaysia allows for high risk tolerance levels.
Economic Risk
Malaysia has managed to transform itself from a primary commodity producer to a newly industrialized country (NIC) in a period of 20 years. (G Mott 1993) The Gross Domestic Product (GDP) is a basic measure of a country's economic performance. It is the market value of all final goods and services made within the borders of a nation in a year. The most common approach to measuring and quantifying GDP is the expenditure method:
GDP for Malaysia = private consumption + gross investment + government spending + (exports − imports), or,
GDP = C + I + G + (X − M). = 528,860 Million Malaysian Ringgits
The Inflation Rate usually range from 1.6% to not more than 4% at every year and has been stable around that range for over 50 years.
The risk tolerance level is also higher due to the economic stability and therefore banks benefit from the investments attracted by the market economic conditions and also benefit from larger financial activities due to being held responsible for large financial gains .There is potential in the market to large economic boost and therefore the higher the risk the higher the returns and this paves way for high risk tolerance as investors forecast on higher returns with large investments into the Malaysian market. This in turn means large sums of deposits into the banks giving them large Loans in the form of deposits therefore stabilising their finance.
Social Risk /Environment
The Malaysian Social environment is mostly Islamic a religion with much ethical values and therefore the local banks are mostly Islamic banks following the Shariyah law which leaves no room or chance for fraudulent banking activities.
The Malaysian people therefore are of good conduct and therefore less threaten the banking system with criminal activities such as bank robberies and fraud. Interest is not allowed to be charged in most banks as a way of profiteering as it is viewed as not fair and ethic.
Key Economic Indicators
Source : www.mida.my
SWOT ANALYSIS
Strengths
• Excellent customer service by Malaysian Banks
• Offer more than just checking and savings account
• Variety of accounts to suit individuals’ needs
Weaknesses
• High fees reduces market share
• No free checking accounts
• Market limited to local area and surrounding counties for Malaysian Banks
Opportunities
• Growing demand for increased customer service in banking
• Growing demand for increased accountability and responsibility in banking Threats
• Increasing competition in local market
• Competes with Integra and Fifth-Third
Threats
Locality of Malaysian banks reduce their market. Because of this local Banks has had to impose the new fee schedules that the government has imposed on the banking industry while its competitors have not. This means local banks does not have a free checking account anymore unlike its competitors. (www.mida.com)
Timescale
The research took 2 months and 1 week to finish conducting. Time consuming activities such as primary data collection and primary data analysis were still the reason the mini- research took a long time. The timescale however did not make our research irrelevant as it was conducted on and about macro-economic activities
Research Proposal Financial Budget
Personnel
Research Assistant 1…………………………………..$400
Research Assistant 2………………………………….$ 390
Total Wages…………………………………………………………………..$790
Supplies
Office Supplies ………………………………………$ 600
Electronic Supplies & Computers…...…………… $ 850
Total Supplies……………………………………………………………….$1 450
Services
Typing …………………………………………………..$50
Photocopying…………………………………………..$10
Total Cost………………………………………………………………………..$60
Travel
Accomodation……………………………………..$300
Food…………………………………………………$150
Transportation……………………………………….$ 80
Total Cost……………………………………………………………………….$ 530
TOTAL RESEARCH EXPENSES...............................…………………….$ 2830
Limitations of the research
The research largely relied on secondary data and therefore accuracy of findings and analysis cannot be published as factual. The questionnaires were not fully answered and some were not answered at all. This reduced the target respondents (Sample size). The interviews were not very effective in giving information as expected due to the communication barriers and misunderstanding between the interviewees and the interviewer.
Recommendations
It is recommended that the Government and the legal authorities maintain their foreign direct investment policies and even try to make it more flexible and effective. Global marketing techniques should be used to increase the market awareness of the business opportunity in Malaysia.
Conclusion
There is a very high and inclining financial stability in the Banking sector of Malaysia and the economy at large. The financial firms have large business opportunities due to the rewarding economic probabilities that are directly returning if the high risk high return concept is observed. The Malaysian environment allows for high risk tolerance.
Reference
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Jordan Miller 2008 Fundamentals of Investments 4th edition McGraw-Hill
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Dennis G, Uyemura etal 1993 Risk Management In Banking The theory and Application of Asset and Liability Management Int. edition McGraw hill
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Yong Poh Chief 1988 Latest Malaysian Investment Incentives...Longman
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Richard Pike & Bill Neale 2006 Corporate Finance and Investment Decisions and Strategies Prentice Hall
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G Mott 1993 Investment Appraisal 2nd edition FDS limited Singapore
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Bishop Crapp and Twitte Corporate Finance 2nd edition Holt RineHart and Winston Toronto Canada
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Terry S. Manes 1998 Short Term Financial Management The Dayden Press
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Keown Petty Scott 1998 Martin Foundations of Finance The logic and Practise of Financial Management 2nd edition . PEARSON
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Author J. Kowen 1999 Financial Management Principles and Application International Edition Pearson Press
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Zvi Bodie etal 1995 Essential of Investments 2nd Edition Irwin
Researching in Accounting and Finance FE2040
