Banking industry of Malaysia consist of a diversified range of institution to fulfil the changeable needs of the nation’s economy. Malaysia’s banking industry runs dual banking system which are the conventional banking system and Islamic banking system. Both of these system are co-exist and completely parallel in operation.
The major structure of Malaysia’s banking system including Bank Negara Malaysia, banking institutions such as commercial banks, investment banks, Islamic banks, merchant banks and other finance companies like discount houses and representative offices of foreign banks. Bank Negara Malaysia (BNM) is the central bank of Malaysia, a statutory body which is wholly-owned by the Federal Government. The main objective of BNM exist is to ensure and facilitate stability of monetary and financial system and that is important to the sustainable economy growth of the Malaysia’s economy. In addition, BNM also licenses and regulates businesses which are under the banking system of Malaysia which stated above.
Commercial bank is a financial institution that are licensed to provide services and products like accepting deposits, lending money and provide some basic investment product. Furthermore, commercial bank earn profit from the differential interest rate between depositors and borrowers and the charged for the banking product or service that they provided. Commercial bank are the largest and most significant providers of fund in the banking system. In other words, the soundness of commercial bank will directly affect the nation’s economy.
Therefore, it is important to understand the relationship between bank’s profitability and the risk that banks are bearing.