A former banker has proposed that the power to create money be taken away from financial institutions and instead given to the government under the authority of Parliament.
Muhammad Zahid Abdul Aziz of the Movement for Monetary Justice said at the moment, commercial banks possess the power to create credit under the conditions laid out by Bank Negara Malaysia (BNM).
According to these conditions, the loans given out cannot at any one time exceed a BNM chosen percentage, for example 80% of the commercial banks' total deposits.
Nevertheless, commercial banks are also allowed to create deposits in order to lend out more than the actual amount of cash deposits.
Speaking to MalaysiaNow, Zahid said this was validated by both the Bank of England and the European Central Bank.
"Without realising it, we have appointed commercial banks as the creators of money," he said.
"In Malaysia, 95% of the money is created by commercial banks. Only 5% is created by the government."
The money created by commercial banks is in the form of numbers in bank accounts, while the money created by the government comes in the form of bills and coins.
Zahid said statistics show that 65% of bank loans are private loans such as loans for personal use, credit cards and housing, while only 35% is given to the real economy.
This has landed the country in a situation of avoidable general inflation as new money is created without production or goods, in addition to bubble inflation in the housing sector, he said.
"Much of the money that goes to the real economy goes to the big companies because the banks are afraid of the risk of giving loans to small businesses," Zahid said.
Under the existing system, for example, SMEs which contribute roughly 40% of GDP and produce 70% of jobs in the country only receive about 16% of the money given by banks.
Commercial banks originally held on to gold and produced what were known as promissory notes as proof of their depositors' savings.
Eventually, they began producing promissory notes without adding to their stock of gold, as the gold itself was rarely withdrawn by depositors.
According to Ahmed Razman Abdul Latiff of the Putra Business School, this is how banks gained the right to create credit without accepting additional cash deposits, but this time through the creation of temporary customer deposit accounts each time they approve loans.
The statutory reserve requirement ratio was also lowered by BNM during the pandemic to 2%, a move which he said had increased liquidity while contributing to the current inflationary situation.
Zahid, who has more than 30 years of experience in Islamic finance, said the government could create a central monetary authority with the authority to create money.
Adding that such a method had already been proposed by monetary reformers, he said the body should be placed under Parliament.
"After it is approved by Parliament, the money can be given to a new entity, that is a state investment bank, and fully channelled to the real economy," he said.
He said this would increase economic output, eliminate graduate and youth unemployment, increase their starting salaries and reduce the general inflation rate, in addition to lowering house prices, shrinking the wealth gap and strengthening the ringgit.
By placing the power to create credit under Parliament and the government, Zahid said, instead of nine local commercial banks profiting a total of RM34 billion a year, this profit would now belong to the new entity from which it could be withdrawn and made into government property to be spent on the people.
"Right now, the government can also create money, but it chooses to borrow from banks and pay RM34 billion a year in interest," he added.
He also said that transferring the right to create money from banks would generate approximately RM64 billion in annual revenue for the government.
This, he said, could be spent on basic income for the B40 group and free education until the university level for Malaysians, and possibly reduce the burden of income tax for the low- and middle-income brackets.
He said banks could fall in one of two categories: payment banks that manage the country's payment system without being involved in loans or financing, and investment banks that receive investment money from customers without handling current accounts.
Razman meanwhile said that banks could still operate without the right to create credit.
"Only the authority to create money would rest with one body, while the operations could be handled by commercial banks.
"They can still generate income through transaction charges and investments," he said.