What was your first memory of banks?
My first memory of the whole banking institution is a bit fuzzy, but I still remember bits and pieces. I vaguely recall snippets of these events:
- my mom taking primary-school-age me to a bank to open a savings account (Maybank’s Yippie);
- receiving piggy banks in the shape of bank mascots and buildings; and
- someone giving a talk to my whole classroom and us receiving a small notebook with visuals explaining the importance of saving money (this is also where I learned the phrase ‘sikit-sikit lama-lama jadi bukit’)
You might have similar memories, or at least received similar messaging. Most of us have been exposed to mostly the consumer-facing side of a bank.
What if I tell you this is just one aspect of banking services; there’s a whole lot more going on.
In this article, I’d like to share with you the other types of banks, other players in the financial ecosystem, and how they work with each other and be part of this smooth machine that runs our financial life in the background.
The 4 types of banks in Malaysia
First, you should know there are four types of banks: commercial, Islamic, investment banks and development financial institutions (DFIs for short).
All of them are under constant supervision and oversight by regulators in various capacities, including Bank Negara Malaysia, Securities Commission Malaysia and Perbadanan Insurans Deposit Malaysia (PIDM).
Let’s go over each type of bank.
#1 and #2 – Commercial and Islamic banks
Commercial and Islamic banks are probably the most familiar to all of us – they mainly target you and me as customers. Some basic services include:
- Opening bank accounts
- Transferring funds (domestically and internationally)
- Making payments
- Offering financing and credit facilities
- And more, depending on the bank
In both commercial and Islamic banks, you can ‘unlock’ better services and special perks if you are an HNWI (high net worth individual) and deposited a certain amount of funds with them (it’s a big amount).
These banks are regulated and supervised by Bank Negara Malaysia while deposits placed in them are protected by PIDM.
PIDM is the government authority that protects you from troubled member banks and insurer members – your deposits in PIDM member banks are protected up to RM250,000 per depositor per member bank, and applies separately to Islamic and conventional deposits.
Here is a list of current PIDM member banks, both commercial and Islamic (accurate as of September 2020):
It’s not a bad idea to use a (or multiple) PIDM member bank as your main deposit account. The banking industry in Malaysia is strong, but 2020 has proven to be unpredictable. If your funds are guaranteed to be safe in those deposit accounts, why not make use of this free service? Why worry if you don’t have to?
PIDM implements an automatic return-your-money-back-to-you system if their member banks go bankrupt. (If. BIG if. But an if nonetheless.) This safety feature is what allows people like you and me to keep our money in bank accounts without worry, WHICH gives the banks sufficient money so that they can offer lower interest rates to borrowers, WHICH lowers default rates, WHICH is good for the economy. See how the wheels turn? Cool stuff, this whole thing.
Let’s talk more about investment banks and development financial institutions (DFIs).
#3 – Investment banks
While commercial and Islamic banks manage individual accounts, investment banks manage corporate or institutional accounts.
These corporate or institutional accounts are assigned to investment bankers – people who ‘help their clients raise money in the capital markets, provide various financial advisory services and assist with mergers and acquisition activity’.
As of September 2020, 11 investment banks are operating in Malaysia and they are co-regulated by Bank Negara Malaysia and the Securities Commission.
Some of you may look at that list and go, eh, I thought their parent banks are PIDM member banks, why not protected?
Well that’s because some investment banks are subsidiaries of PIDM member banks. Therefore, while you see their products distributed through the customer-facing side, the investment funds are separate from deposits and therefore NOT protected by PIDM.
#4 – Development financial institutions (DFIs)
According to Bank Negara Malaysia, DFIs are institutions established by the government to give financial assistance to certain priority sectors of the economy and largely funded by the government. That’s where the money strategically earmarked to improve the country is kept and managed.
As of September 2020, there are 17 DFIs, including some familiar names like Bank Kerjasama Rakyat Malaysia Berhad (Bank Rakyat), Bank Simpanan Nasional and Small Medium Enterprise Development Bank Malaysia Berhad (SME Bank). If you’re dealing with these entities, you’re either conducting business, investing or obtaining financing with or from them.
The Development Financial Institutions Act 2002 was enacted to give Bank Negara Malaysia regulatory purview over selected DFIs (including the three mentioned above). This is to ensure that these DFIs perform their mandated socio-economic functions. DFIs are also part of ADFIM or Association of Development Financial Institutions of Malaysia.
Funds at development financial institutions are NOT protected by PIDM.
How the financial ecosystem works is absolutely fascinating to me. When I was younger, I only knew that the bank is where I keep my money for safety reasons, now I know that it is this complex entity that connects us to the global economy.
And when I say global, I truly mean it. For example, every time I buy a game on Steam, priced in USD, someone around the world gets a cut included in their paycheck and spends the money in their economy. Wild.
The financial ecosystem also evolves to meet the needs of the society of the day, lunges forward with innovation (especially technological).
As you can see, the financial ecosystem and infrastructure is made of many participants, including yourself. What you should do as an informed participant is to know your rights (or lack thereof!) with each bank you deal with, including knowing the role of PIDM in placing different types of fail-safe mechanisms and preparation to weather future financial storms so that IF it ever happens, you AND our financial system is able to bounce back in no time and with minimal damages.
Another way to be an informed participant? To actively embrace the Financial Literacy Month in October and take part in activities organised by members of the Financial Education Network. Check out the calendar here or click on the logo below!