Money, banks and govt: who should call the shots in Malaysia's financial system?

An economist has cautioned against the idea of shifting the power to create money from commercial banks to Parliament, saying the basic objection to such a move would simply be that politicians are not qualified for that sort of authority. 

"They have no knowledge of it," Geoffrey Williams from the Malaysia University of Science and Technology said.

"Their incentives are political, and they could not take on this responsibility with the diligence and flexibility that it requires. 

"It would be analogous to putting the courts under the control of politicians," he said, adding that the debate on this issue was part of monetary theory and policy. 

Muhammad Zahid Abdul Aziz, a former banker from the Movement for Monetary Justice (MMJ), had said that the power to create money should be taken away from financial institutions and given to the government under the authority of Parliament.

But Williams, a non-resident senior fellow at the Malaysia Institute of Economic Research, said this would amount to a nationalisation of the financial system. 

"It would severely limit access to credit for consumers and businesses, and it would destroy innovation and enterprise," he said. 

"And in a country like Malaysia, it would be prone to corruption and allocations based on non-commercial considerations such as ethnicity and patronage." 

Zahid had argued that stripping commercial banks of the power to create money would decrease inflation, but Williams said there were fundamental errors to such an analysis. 

In the first place, he said, it was not true that Malaysia had avoidable inflation. 

He also questioned the notion that inflation was always controllable by controlling the money supply. 

"Thirdly, it is not true that money creation through access to credit in the Malaysian commercial finance system is harmful," he added. 

"In fact, quite the opposite. Without it, we would be in a Soviet system." 

Williams added that the current system allowing banks to create money was nothing out of the ordinary. 

In Malaysia, he said, that had always been the case, with conditions for such power regulated by the central bank, Bank Negara Malaysia (BNM). 

"It is the role of commercial banks to create money according to market demand and prudential financial management. This is how they run their business for their depositors, their borrowers and their shareholders. 

"Without this, businesses and consumers would not have access to credit, and they would be very restricted in what they could buy, sell or invest in," he said, adding that BNM regulates these processes through monetary policy, including the creation of base money, notes and coins. 

Other measures include the management of the price of money and debt, the overnight policy rate, and the regulation of bank management. 

Williams said commercial banks had been creating money because the banking system was established centuries before central banks or monetary authorities began to exist. 

The banks would take deposits and lend them out at a certain interest rate which pays back their depositors and pays their shareholders the cost of running the bank, he said.

"Loans are given to viable applicants based on a commercial assessment that they can be paid back from economic activity," he said.

"Every loan creates another deposit which can be lent out again, so we get a multiplier effect which creates more money than was originally deposited."

When contacted by MalaysiaNow, Zahid defended his suggestion of a central monetary authority, saying such a body should be staffed by the best and the brightest, independent of government interference. 

"Money needed by the government is submitted in the form of a budget by the finance ministry and debated for approval in Parliament," he said. 

"When approved, money is then created and passed to the state investment bank, to be directed in its entirety to the real economy. This bank, too, can be made to report to Parliament."

On Williams' remarks on credit, he said the lack of access to credit for businesses was the thrust of money reforms. 

"In Malaysia, an average of 65% of loans and financing go to the personal sector of personal loans, credit cards and housing while only 35% go to the real economy to create economic output and employment," he said. 

"Do we prefer the current situation where only 16% of loans are given by private banks?"

Zahid also questioned central banks' approach to inflation, suggesting that the target should be to remove it entirely instead of merely controlling it. 

But while Williams maintained that BNM had created stability and regulated the money creation processes by commercial banks, Zahid's organisation MMJ said the central bank had failed to regulate the banking system.

MMJ chairman Ahamed Kameel Mydin Meera also said that BNM had failed in its role of partly managing the economy through its control of the overnight policy rate. 

"Controlling inflation and the ringgit exchange rate are among its basic functions.  Yet look at the inflation.  

"If one roti canai cost 10 sen in the early 1970s, now it costs about RM2 – a 1,900% increase. So what is the actual role of BNM?

"All we see is that BNM protects the banks at the expense of the people and businesses," he said in a statement to MalaysiaNow.