Role of Financial Institutions III Promoting Investment

Financial institutions historically. have always played a pivotal role in stimulating economic growth and development. This role stems largely from their basic fundamental function in the ‘capitalization’ of savings through which surplus funds are mobilized in financing productive investments. With the new Banking and Financial Institutions Act coming into effect on 1st October 1989, the connotation of “financial institutions†now includes a whole multitude of institutions ranging from commercial banks, finance companies, merchant banks, discount houses and money market intermediaries to institutions involved in credit, development fmance. leasing and factoring. In this paper, the term “banks†is used very broadly and interchangeably with “financial institutions†. The expansion and development of the Malaysian financial system, has been fundamentally guided by the development of the domestic economy and the growing sophistication of its financial requirements. Over the years, the gradual transformation of the economy and shifts in national policies and priorities have exerted direct and indirect requirements on multitudes of services offered by the financial sector. The financial system has demonstrated that it can effectively inter- mediate over the nation’s past five-year development plans. However, its strength was severely tested in the unprecedented economic downturn of 1985-86. As in ail recessions, the fundamental weakness of a number of financial institutions were laid bare, in terms of banking practices and prudence, controls and procedures, professionalism and ethics. While some banks were experiencing major loan defaults and incurred large losses, others experienced frauds, collapse or near coilapse. The Government and the Central Bank have stepped in strongly to inject capital into the troubled financial institutions, bringing a host of new laws and regulations as a safety net over the system.