The last major revision of the exchange control rules was made in 1987.
Following sustained rapid growth in the last 8 years, transactions of residents involving foreign exchange have grown significantly, requiring a more liberal exchange control environment. Rules governing capital flows need to be changed to provide impetus for more dynamic growth in the economy. Moreover, Malaysians are now venturing abroad in a big way to tap business opportunities overseas, as well as to globalise their operations. Therefore, exchange control requirements are now liberalized in a number of areas to reduce the cost of compliance and increase the efficiency of the cross-border transactions of residents, by reducing the formalities for businesses, and provide investors with greater access to credit facilities.
2. The most important change is the move to allow exporters to retain a portion of their export proceeds in foreign currency, without the need to first convert such proceeds into Ringgit. Previously, the concept of exchange control was to centralise holdings of all foreign currencies in Bank Negara Malaysia. The liberalisation now allows exporters to hold foreign exchange besides the Central Bank and the commercial banks. The move is timely to reduce business transaction costs and help develop the foreign currency business in Kuala Lumpur and Labuan. The Major changes to the exchange control rules are detailed below.
3. The main cornerstone of exchange control measures is the requirement for exporters not only to repatriate their export proceeds back to Malaysia within a stipulated period, but also to convert these into Ringgit on repatriation. In this manner, all the foreign exchange earnings of residents are centralised into a pool of foreign currencies held by the Central Bank. In a significant move to liberalise exchange control, all exporters, big or small, are now allowed to retain a portion of their foreign currency export proceeds, without converting them into Ringgit, in foreign currency accounts maintained with Designated Banks in Malaysia. The Designated Banks are-
a) Bank Bumiputra Malaysia Berhad;
b) Bank of Commerce (M) Berhad;
c) Development and Commercial Bank Berhad;
d) Hongkong Bank Malaysia Berhad;
e) Malayan Banking Berhad;
f) OCBC Bank (Malaysia) Berhad; and
g) Public Bank Berhad.
4. As a general rule, exporters are allowed to maintain either one foreign currency account or one multi-currency account with any of the Designated Banks to retain export proceeds, without having to seek specific approval from Bank Negara Malaysia. The following overnight limits are to be observed-
a) Up to an overnight balance equivalent to USD5 million for exporters with average monthly export receipts exceeding RM10 million;
b) Up to an overnight balance equivalent to USD3 million for exporters with average monthly export receipts between RM5 million and RM10 million; or
c) Up to an overnight balance equivalent to USD1 million for exporters with average monthly export receipts of not more than RM5 million.
In determining the allowable overnight limit for a particular exporter, the Designated Bank should use the average monthly export receipts for the immediate past 12 months. In the case of a new exporter without any track record, the overnight limit shall be USD1 million.
5. There is a need to impose, for the time being, a limit on the amount that can be retained in the foreign currency accounts in order to ensure there is a continuous inflow of foreign exchange into the pool managed by Bank Negara Malaysia, as well as sustain an active continuous sale of foreign exchange in the country. This is to enable those residents not earning foreign exchange income to obtain foreign exchange without draining down the national pool of reserves. Nevertheless, exporters who need to retain higher amounts of export proceeds than are generally allowed may apply to Bank Negara Malaysia for approval.
6. In addition, residents, including exporters, may open foreign currency accounts as follows-
a) Residents with no domestic borrowing from any source(other than one personal housing loan and one vehicle loan) may open and maintain one or more foreign currency accounts with any Designated Bank and/or the overseas branch of a Malaysian-owned bank. There will be no restriction on the amount held in these foreign currency accounts, provided these accounts are not funded with export proceeds, such residents are free to deposit foreign currency into their accounts, including foreign currency purchased with Ringgit;
b) Residents with domestic credit facilities may open one foreign currency account with either a Designated Bank or a Licensed Offshore Bank to retain up to USD0.5 million of their foreign currency receipts from non-residents, which shall not include export proceeds. Such residents are not allowed to convert ringgit into foreign currency to deposit in their foreign currency accounts; and
c) Resident individuals, irrespective whether they have domestic borrowing or not, may open foreign currency accounts with Designated Banks or any offshore banks(including the licensed Offshore Banks in Labuan) to fund education abroad, or if they are employed abroad, subject to an aggregate overnight limit of USD250,000.
7. Apart from allowing exporters to retain a specified amount of their foreign currency export proceeds in a foreign currency account, the formality to complete the exchange control form for the declaration of exports is also reduced. Bank Negara Malaysia has now raised the threshold for requiring an exporter to submit a Form LPW X for export of goods from RM20,000 f.o.b per shipment to RM100,000 f.o.b. per shipment. The move will reduce at least 66% of the paper work relating to Form KPW X for exporters, especially small exporters.
8. The requirement to complete Form KPW XA to report changes in the value of exports to be received is also liberalised. Exporters are now required to report such changes only when they are more than 10% of the original value declared in Form KPW X(in cases where a form is required to be filled).
9. An exporter is still required to submit a quarterly report to Bank Negara Malaysia, listing all exports exceeding RM100,000 f.o.b. per shipment. However, the exporter is now required to obtain certification from an external auditor or authorised bank officer for the quarterly report on exports only when the total export receipt during the reporting quarter exceed RM2 million(currently RM1 million).
10. The threshold on foreign currency loans requiring approval is now raised from the current level of RM2 million(i.e., RM1 million equivalent each from commercial and merchant banks in Malaysia and from non-residents) to a combined limit of RM5 million from both sources.
11. In addition, residents are also allowed to obtain-
a) Any amount of trade financing with an original tenure of less than 12 months
in foreign currency from the commercial banks and merchant banks
in Malaysia; and
b) Any amount of financial guarantees from the commercial banks and merchant banks in Malaysia, Licensed Offshore Banks in Labuan, and non-residents which are not financial institutions and are either shareholders, subsidiaries, or related or associate companies.
The above credit facilities will not be included in the computation of the RM5 million equivalent limit for foreign currency borrowing.
12. Under the current rules, Non-resident Controlled Companies(NRCCs) operating in Malaysia are allowed to obtain credit facilities of up to RM10 million from all domestic sources. This amount encompasses all types of facilities, including short-term trade financing, guarantees and foreign exchange lines.
13. The NRCCs are now allowed to obtain in Malaysia any amount of short-term trade financing facilities with original tenures of less than 12 months(e.g., trust receipts, banker acceptances, ECR etc.), guarantees and foreign exchange lines. Such facilities are to be excluded in the computation of domestic credit obtained by the NRCCs. In effect, the NRCCs now have greater access to domestic financing. Moreover, for those NRCCs which borrow in excess of the RM10 million limit(excluding the above mentioned credit facilities), the domestic debt to eligible capital funds ratio is increased from 2:1 to 3:1. The current 60:40 requirement remains unchanged, irrespective of amount of domestic borrowing.
14. The aggregate limit of Ringgit credit facilities to non-residents by the banking institutions is also raised to RM200,000 for any purpose, other than to finance the acquisition or development of immovable property in Malaysia. The present limit of RM100,000 includes the property loans.
15. In addition to the above RM200,000 limit, residents, including the banking institutions, are allowed to extend one loan of any amount to-
a) A Malaysia and citizen with foreign permanent resident status and is not residing in Malaysia(classified as a non-resident under exchange control rules), to finance the purchase or construction of a residential property in Malaysia; and
b) Any other non-resident individual to finance the purchase of a residential property in Malaysia (excluding the purchase of land only) as long as the following criteria are met:-
* The non-resident has a valid work permit with at least one year duration before expiry as at the date of application for the loan;
* The loan amount does not exceed 60% of the purchase price or construction cost of the residential property;
* The residential property is for the non-residents own accommodation; and
* The non-resident does not individually or jointly own any other residential property in Malaysia.
16. Further exemption from exchange control rules are now accorded to approved operational headquarters("OHQ") in Malaysia. These exemptions are given in order to support the Government's efforts to promote Malaysia as a regional hub for management and technical support services, facilitate the transfer of technology, create ready markets for Malaysian products and increase utilisation of Malaysian facilities, including the financial services.
17. An OHQ is now allowed to -
a) Retain export proceeds in either one foreign currency account or one multi-currency account maintained with any Designated Bank with an overnight balance equivalent to USD5 million;
b) Open one or more foreign currency accounts with any Designated Bank, Licensed
Offshore Bank in Labuan or overseas bank for the purpose of crediting foreign currency
receipts
(except export proceeds) without any limit;
c) Obtain any amount of foreign currency credit facilities from any source, provided the OHQ does not on-lend to, or raise the funds on behalf of, any resident in Malaysia, without the prior approval of Bank Negara Malaysia;
d) Obtain domestic credit facilities in Ringgit up to RM10 million from any source in Malaysia as long as the Ringgit funds are used within Malaysia;
e) Extend any amount of loans in foreign currency to its related companies outside Malaysia, or invest abroad in any form, provided the OHQ's aggregate domestic credit facilities in Ringgit does not exceed RM10 million; and
f) Obtain, with the approval of Bank Negara Malaysia, domestic credit facilities in Ringgit exceeding RM10 million to lend in foreign currency to its related companies outside Malaysia.
18. Only Designated Banks can open foreign currency accounts for residents who are now freely permitted to do so. The Designated Banks have been chosen on the basis of their capital strength (at least RM500 million in unimpaired shareholders funds), as well as their track record of being well managed. Their choice reflects the first move by the Central Bank to introduce a two-tier system in the regulation and supervision of the banking system, under which the first tier financial institutions are allowed more freedom to undertake activities that other are not permitted to do. Bank Negara Malaysia would like the Designated Banks to have capital of at least RM1 billion, but is prepared, for the time being to be more liberal so long as their capital exceeds RM500 million. Nevertheless, all Designated Banks are expected to work towards increasing their capital to the targetted RM1 billion if they are to remain as designated banks permitted to open foreign currency accounts for residents freely permitted to do so under the more liberal system of exchange control. In addition, their status may not be permanent, since they can be relegated to the second tier if they become less well managed, or their capital becomes impaired to the extent of being less than RM500 million. In a similar manner, those banks not designated at this point of time can graduate to the first tier if their capital base is strengthened, and their management improves.
19. Banks which are not in the list of Designated Banks can only open foreign currency accounts for residents who require, and have received approval from the Controller of Foreign Exchange (Controller). Foreign currency accounts in Malaysia which had been approved by the Controller in the past can remain with the banks at which they had been originally opened. But those banks not designated will not be permitted to accept foreign currency accounts which residents are now freely permitted to open.
Bank Negara Malaysia
Kuala Lumpur
December 1,1995