SUBJECT:

FIN360

INDIVIDUAL ASSIGNMENT:
THE EFFECT OF COVID-19 TO THE BANKING SECTOR

PREPARED FOR:
ANUAR BIN WAHAB

PREPARED BY:
MUHAMAD SYAHIIR SYAUQII BIN MOHAMAD YUNUS

STUDENT ID:
2018428184

GROUP:
KBA1195C
1. Introduction

1.1 Bank
Banks and financial institutions in Malaysia are regulated under the Financial
Services Act 2013 (FSA) and Islamic Financial Services Act 2013 (IFSA). Based on
Section 2 Financial Services Act 2013, a bank defines as any person who conduct a
banking business.

There have many banking businesses that were running by bank. One of that is to
receive deposits (money) in any currency or deposit account. Deposit accounts are
including of current account, fixed deposit account, savings account or other similar
account. For example, the banks will receive a deposit in any currency such as Ringgit
Malaysian, Japanese Yen and Us Dollar. Besides, a bank also carries out its duties as
paying or collecting cheque drawn by or paid in by customer. For example, in case of
customer wants to issue his cheque to his friend or he deposited another bank’s
cheque into his savings account.

Moreover, the banks are providing finance to customers such as loans and advances.
The provision of loans consists of housing loan, car loan, leasing, factoring and
purchase of bills of exchange. Thus, the banks also have any provisions as allowed by
the Ministry of Finance. It’s included of Derivative, REIT and Sukuk.

1.2 Covid-19
In 2020, COVID-19 or Coronavirus is a pandemic with possible give serious impacts
for the health of humans that can also lead to death if the infection is too severe. With
the existence of covid-19 that has been spread out around the world, it continues to
paralyze the financial sector of the country and the world and all of people was
assumed that it will takes a long time to recover. This pandemic is an unexpected
challenge that needs to be faced by the whole world and also affected the global
markets.

According to the case of pandemic Covid-19, the global market and financial
industries such as international banks or even domestic banks have a lot of problems
and have a significant negative effect and also do not function as normal to keep run
their activities. Many operations have been turned down and, because of this present
issue, even the banks themselves do not function well.
2.0 The effect of Covid 19 to the banking sector

Covid- 19 cause many global economic issues in the whole world. With the
existence of this pandemic, the first issue that the banking sector needs to be
throughout is the demand and supply transactions. It is because the process of
demand and supply becomes a bit slow around this pandemic’s time and need to
stop for a while due to the implementation of movement control order (MCO) by
the government. In fact, of that, this causes of bond rates, oil, and equity markets
have sharply decreased since February 2020, and trillions of dollars have sought
security across nearly all asset groups.

Besides, the instability of currency market also occurred during this pandemic.
From a fundamental point of view, the impact of the Covid-19 on currency
markets has made its way through a channel of shifting relative perceptions of
potential economic development. There is a potential for countries with stable
markets to draw foreign capital flows, and capital flows are an important
component of exchange rates. Economic growth forecasts will be downgraded
when the virus first struck a country or region hard, anticipating that areas of the
economy would need to be shut down. So, a lot of investors may search a better
place to keep their currency as well as they can in case of the instability of
currency market occur, The international banking may have a problem in
maintaining their financial market due to uncontrolled financial liquidity occur
during this pandemic

2.1 Covid-19 and domestic bank

a. Reducing rate of interest

The entire population of society and country suffered a serious crisis during the
COVID-19 pandemic as the virus impacts the Malaysian economic market.
Furthermore, since the Movement Control Order was imposed by the Government
of Malaysia, all factories and firms are closed except the supermarket and wet
market. A substantial rise in the unemployment rate has significantly impacted the
entire national economy and many companies and people have lost their incomes
and jobs.

The Government and Central Bank of Malaysia (BNM) have agreed to a deal with
all domestic banks to extend an automatic six-month moratorium to all citizens
and small and medium enterprises (SMEs) involved with loans or funding
repayments in order to reduce the negative effects on the economy cause of this
pandemic. All domestic banks need to face the possibility of declining interest
rates and inflation rates due to the existence of a moratorium on helping
individuals.
 b. Cost of borrowing increased
During this tough period, pandemic Covid-19, banks played a significant role in
assisting the poor with cash flow assistance. Besides, In case of this pandemic, a
lot of applications for borrowing are accepted by the bank due to the loss of a
source of daily income by a society around there. With the moratorium that have
been implemented, domestic banks have provided an opportunity for individuals
affected by salary reduction to apply for a reduction in their loan repayment
amount of at least six months comparable to their salary reduction.

Besides, three forms of redemption flexibility are provided to other borrowers,

including small and medium enterprise whose viable companies may have
incurred cash flow difficulties or have faced trouble repaying loans. By extending
the loan term, they can pay only loan interest for a specific period, decrease
monthly instalments and negotiate to other flexibility before borrowers can restore
full repayment.

3.0 Challenge of the issue

i. High volatility market

COVID-19 has created considerable instability and high volatility in global capital
market. Although the full effect has yet to be defined, it is predicted that the
negative outcome is expected to continue from the knock-on implications of the
virus. According to international financial sector, they are analysing the fields
that most likely to be influenced by the overall banking market, including
valuation and profitability cause it was dropping in all countries. Moreover, price
slump also exists and can be seen by all of banking sector.

ii. Securitization Perspective

Corrective intervention by governments have been directed at mitigating risk
profiles by additional disposal incentives . Due to this order, a lot of banks have
completed substantial impaired loan disposition activities, and it has leading to a
significant decreasement in the NPL ratio. The potential demand for synthetic
securitization is likely to need renovation regarding to the recent developments
and important economic impacts that could arise.

iii. Revision of figures for loan loss provision

 Domestic banks may see a negative effect on credit facilities as the provision of
loan loss continues to rise. In case of the economic outlook still remains quite
volatile and extremely unpredictable, estimated credit losses that previously
computed in the past must need to be modifies to account for the uncertainty and
scale of the pandemic.
iv. Draw-down on credit facilities
Pandemic issue might cause credit facilities may be draw-down. In order to ensure
that the supply of funding is adequate to benefit individuals and companies
without undermining their own liquidity status, banks play a vital role. As a
consequence, if substantial drawdown of loan facilities is needed, banks will need
to recalibrate their current liquidity stress models to cater for enough resources.

4.0 Conclusion

4.1 Strength

The use of banking system has been an intermediary between customers and
sellers over the years. Apart of that, it is very important for both of these
parties to perform money transactions for business and other purposes. In case
of that, government departments and banks are planning the transition to
digital banking and are taking necessary steps. All the banks need to assess the
ability of their online platforms to accommodate an explosion of digital
banking requirements.

In addition to remote working, the department called for, increased

dependence on online banking, telephone banking, and call centre services.
Online banking is the best alternative way for customers and sellers in
performing transaction during the Movement Control Order (MCO) begin
because the government has limited the usage of ATM machines to prevent
the widespread transmission of Covid -19 infections

4.2 Weakness

When large-scale insolvencies between businesses and families occur due to

the global economic slowdown triggered by the Covid-19 crisis, the banking
or financial sector will be under stress due to high levels of credit losses. For
example, many operations in the banking sector have been impacted, such as
debt repayment, investor losses that contribute to a poor profit margin and
need to reduce the interest rate in order of moratorium implemented by the
government. In addition, the bank itself faced liquidity crisis because it was
unable to sustain financial stability and support all the main costs.
5.0 Recommendations

In order to pump new capital into financial markets, governments must need to
introduce capital restructuring programs or forcefully buy shares or sell new
shares. Although such interventions could save a financial institution from
economic ruin, the investments that made in the possession of banks, for example,
be greatly diminished in value or entirely eradicated.

The government can also implement restrictive on financial regulations to

investors who wants enter the high risk investment. These financial regulations
include restrictions on the movement of funds overseas, rescheduling of term
deposits, interest rate decreases and limitations on borrower security. In addition,
this financial regulation will also help reduce the effect of clients that has become
an investor.
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