THE announcement of the cabinet decision to accept Tan Sri Muhammad Ibrahim’s offer to step down as Bank Negara governor offers the Pakatan Harapan (PH) government an early opportunity to review and reform Malaysia’s monetary policy system and restore confidence, which has been dented by recent events.
Personnel turnover like this is often seen as an indicator that a central bank is not independent and that the governor and senior managers are hired and fired at the whim of the government.
Reform is not just about the legal framework in which the bank operates, it is a wider matter of how the bank is managed.
This requires a review of the structure, conduct and performance of the bank to manage perceptions among stakeholders outside of it and particularly the international financial community.
One of the first reforms necessary is to end the bank’s involvement in non-core activities.
The Financial Education Hub, for example, which involved the purchase of 22.55haof land from the government is a prime example.
The bank’s involvement in this project is at the core of the controversy surrounding the governor’s resignation.
The governor and the bank, in its statement on May 24, have made clear that the transaction complied with the governance requirements and laws that govern the bank.
However, questions remain as to whether these regulations are sufficient to govern such transactions and whether a central bank should be doing this sort of thing at all.
The functions of a central bank are to manage the monetary system, set monetary policy (interest rates) and act as the government’s banker or “lender of last resort”. Anything else is non-essential.
Bank Negara has enough on its hands with these core functions, and to involve itself in property development, financial education and estate management has proved a step too far.
Apart from distracting the bank’s managers from core functions, activities of this type create the perception that the bank’s decisions in financial regulation and supervision might be influenced by its own real estate investments and, worse, that its independence might be compromised if these investments are related, directly or indirectly, to the financing of other government projects, such as 1Malaysia Development Bhd.
There is an urgent need to end this perception by placing activities, such as the hub, into a separate independent organisation and to change governance systems to avoid such issues in the future.
A second and related reform is to separate financial supervision and regulation from the bank.
In Malaysia, financial regulation is carried out by Bank Negara under the Financial Services Act 2013 (FSA) and the Islamic Financial Services Act 2013 (IFSA).
These consolidate the supervision and regulation of the structure, conduct and performance of banks, insurance companies and other financial services providers into one authority.
This is an onerous job and international best practice suggests that it may be better to separate these functions into independent specialist authorities accountable to Parliament not to the cabinet or prime minister.
FSA also gives the bank wide powers that allow the bank to assume control over the whole or part of the business, affairs or property of financial institutions under its supervision.
This includes the power to manage such businesses or appoint any person to manage them on behalf of the bank.
These are wide powers that are arguably necessary in extreme circumstances, but the exercise of such powers must be conducted with transparency, independence and accountability to parliament rather than to the government as is currently the case.
This aspect must be reviewed in any reform of the FSA.
A third area of reform relates to the Monetary Policy Committee (MPC) which is responsible for setting interest rates.
Although, in principle, MPC is independent, which is considered essential to avoid manipulation of interest rates for political purposes, the current MPC has six internal officers of the bank appointed by the bank and two external members appointed by the finance minister.
The balance of internal and external members should be reviewed and greater transparency in the appointment of members, as well as the terms of their membership, should be introduced including scrutiny by Parliament.
There also needs to be greater clarity on how MPC decides on monetary policy and particularly how the forecasts are made so that the process and underlying assumptions of these forecasts, on which many government and private sector decisions rely, can be assessed independently.
We also need to see the publication of MPC minutes, as is routine for the MPC at the Bank of England, to take us beyond the monthly Bank Negara monetary statement, which amounts to little more than a press release with little or no substantive analysis.
Recent events at Bank Negara have caused concern in many quarters and raise issues of the independence of the central bank at an operational level.
Confidence, independence and credibility are essential to underpin the integrity of any financial system and when questions arise, such as those affecting Bank Negara.
They are not solved by replacing leaders and putting the “right people”, at the helm.
A review and reform of monetary policy institutions and how they operate is needed and it is timely for the new government to begin this process.
Dr Geoffrey Williams is a professor at ELM Graduate School at HELP University. He was a member of the Bank of England Commission of HM Opposition (1999-2000) in the United Kingdom