A financial system vital contributor

From what had been stated above, basically the role of Bank Islam is to realize Malaysia's dream of setting up and developing an Islamic financial system that is modern and competitive, as well as being a viable alternative to the more established conventional system (Bank Islam Malaysia Berhad, 2002). Besides that, the introduction of Islamic banking, especially the Islamic financial system is the first step towards realizing the nation's ambition.

The non-banking sector in Malaysia are financial intermediaries that accumulate funds by borrowing from the general public and lend the same in order to meet specialized needs. However, it is prohibited to accept such deposits payable either on demand or by cheque, draft, etc and operate checking accounts for which their liabilities are not a part of the money supply. Non-Banking Financial Intermediaries (NBFI) in Malaysia are such as leasing companies, factoring companies, development finance institutions, saving institutions (Bank Simpanan Nasional, insurance companies, venture capital companies, unit trusts and property trusts. Non-Banking Financial Intermediaries plays important roles in Malaysia's financial system.

An example of a NBFI is Sabah Development Bank Berhad (SDB). SDB was established on 9th of August 1977 as a company limited by shares under the Companies Act 1965. It now begins it operations as a development finance institutions in June 1978. It is wholly owned by the state government of Sabah. Moreover, its primary objectives are to take on any and every aspect of development banking. Therefore, SDB plays an important role as the state government's financial intermediary to raise funds for government's projects, provide advisory services to the state of government, and to manage the state's surplus fund (Sabah Development Bank, 2004).

Yet another example of NBFI is Bank Simpanan Nasional, Malaysia. Bank Simpanan Nasional was established on 1st of December 1974 under the Act of Parliament 146 – Laws of Malaysia 1974. It was launched on 5th December 1974 by the late Tun Abdul Razak which is second prime minister of Malaysia. The bank acted as a statutory body under the minister of finance.

In relation to that, Bank Simpanan Nasional plays important roles such as one who promotes and mobilize savings particularly from the small savers, instilling the habit of thrift and savings, presents the means for savings by the general public, unitizes the funds of the Bank for investment including the financing of economic development of the nation and lastly promotes the interest of its depositors and other customers not in the sense of accepting the deposits payable.

Japan The banking sector in Japan consists of the Central Bank and Banks. The Banking sector consists of banking institution such as commercial banks and retail banks. The Central Bank of Japan is called the Bank of Japan (BOJ). It is an organization that contributes to the stability of the daily lives of the people and sound development of the national economy by appropriately controlling the volume of money in the economy and ensuring the smooth circulation of money (Bank of Japan, 2004). The BOJ was founded in 1882. The bank is managed and operates under the Bank of Japan Law which was comprehensively revised in year 1997 and came into effect in year 1998. The BOJ is very important financial institution in Japan as they play two very important roles in the financial system.

The first role of BOJ is to issue and manage banknotes (officially referred to as BOJ notes). The BOJ is the nation's sole issuing bank. It employs a wide range of measures to prevent counterfeiting, including watermarks, special inks, and micro-lettering. Because worn and soiled banknotes make it more difficult to distinguish genuine notes from counterfeits, the BOJ checks the validity and cleanness of each the banknotes which return to the bank. Badly worn notes are destroyed and those that are in good condition would be put back into circulation. Because banknotes are used in all kinds of transactions, the Bank pays close attention to the control of the physical quality of banknotes so that the public is able to use the notes with confidence.

The second role of BOJ is to conduct monetary policy to achieve price stability, thereby contributing to the stability of the economy as a whole. The bank believes that price stability is a prerequisite for stability in out daily lives and for realizing sustainable and balance economic growth (BOJ, 2004). Price stability is important to Japan because it provides the foundation for the nation's economic activity. BOJ targets monetary policy in pursuit of price stability, contributing to the sound development of the national economy. In other words BOJ's mission is to maintain an economic environment in which there is neither inflation nor deflation. BOJ has also used money market operations to control the overall volume of money in the economy and interest rates to maintain the price stability.

BOJ's third role is to provide settlement services and ensure the stability of the financial system. An example of settlement services is financial transactions between financial intermediaries. Financial transactions between financial intermediaries are settled by transferring funds across current accounts held by each of the intuitions at the BOJ. These are known as settlement services. Because it offers accounts to other financial intermediaries, namely the NBFI's, the BOJ is often referred to as the "bank's bank". Amounts settled across the accounts at the BOJ can total up to 300 trillion yen per day therefore in order to facilitate such funds transfers, the BOJ operates an electronic settlement system known as the Bank of Japan Financial Network System (BOJ-NET) and it's efficiency is constantly upgraded and improved.

To ensure the stability of the financial system, monitoring and examining the financial and management conditions of financial intermediaries is done. The sound management of individual financial institutions is a prerequisite to the stable functioning of the financial system. Thus BOJ monitor the trends of the loans and deposits of the financial institutions very closely. The Bank's staff also regularly visits financial intermediaries to carry out an "on-site examination" to review their financial and management conditions.

Yet another way in which the BOJ ensures the stability of the financial system is by functioning as the "lender of last resort". This means, when a financial institution is in debt and is likely to pose threat to the financial system, BOJ will provide emergency liquidity to the troubled financial intermediaries in an effort to prevent financial disorder in the financial system. The fourth and last role of the BOJ is to conduct Treasury and Government Securities-Related Operations.

The BOJ, is also known as the "government bank" and as the government bank, the BOJ handle receipts and disbursement of treasury funds, including acceptance of tax monies and payment of public works expenditures and public pensions. It also conducts accounting and bookkeeping for government agencies. Furthermore the BOJ deals with the entire business of Japanese Government Securities, namely issuance, registration, interest payment and redemption. Settlement of funds and Japanese government securities arising from the above operations are facilitated by the BOJ-NET.

As there are many types of banks in Japan, we will only discuss one retail bank and one commercial bank. An example of a retail bank is Shinsei Bank. Shinsei Bank commenced in March 2000 and it is one of the main banks available in Japan's market. Shinsei Bank's goal is to achieve sustainable, long-term growth while remaining financially sound. To achieve this goal, Shinsei Bank offers innovative products and services that meet customers' needs without constrains of working within the framework of traditional banking practices in Japan.

Shinsei bank has transformed their institutional banking group into a unified and powerful banking team that integrates relationship management group and our financial products group in order to provide their institutional customers rapid and sophisticated financial solution for their financial and restructuring needs. This group promotes investment-banking activities to achieve sustainable increase in non-interest fee income in addition to trading lending operations.

An example of a commercial bank on the other hand is, The non-banking financial intermediaries (NBFI) sector in Japan are financial intermediaries that accumulate funds by borrowing from the general public and lend the same in order to meet specialized needs. An example of this is Shoko Loans. Shoko Loans is one of the non-bank financial intermediaries. Shoko Loans are small business loans and they focus on providing commercial loans to small businesses in the form of unsecured, non-guaranteed cash loan to individuals, home-equity loans, guaranteed consumer loans to individuals and commercial loans to small businesses. There are two types of Shoko Loans.

The first type of Shoko loans is note-based loans, borrower received loans in exchange for writing commercial promissory note drawn on a current account and when at the loan's maturity, the lender deposits the note to collect the amount they have lend out plus the interest and the fees. The second type of Shoko Loans is common-law contract based loans where the borrower simply signs a contract agreeing to pay the principal, interest and fees future date, usually in a fixed or sliding monthly installment. Common-law contract based loans tend to have a longer terms, generally up to five years.

Shoko Lenders are non-banks therefore they are not allowed to accept any deposit but they are permitted to raise funds by through bond issues, borrowings and other sources. The Law Concerning the Issuance of Non-bank Corporate Debentures (The Non-bank Bond Law, April 1999) introduced in May 1999, has enabled lenders that meet the criteria for registration to directly raise funds in the capital markets, by, for example, issuing corporate debentures and commercial paper for the purpose of making loans. Banks and other financial institutions still require guarantee for loans. Thus, some of the smaller companies that do not hold properties or other large assets find it difficult to or unable to raise funds.

With Shoko loans, screening takes no longer than two or three days. Shoko loans in principle require no collateral and loan amounts are generally smaller, extending to a maximum of around 5 million yen each. Shoko loan customers are mainly small and medium-sized companies and owner-operated businesses. Loans extended are generally for working capital. Customers are those companies, which generally find it difficult to borrow funds for this purpose from banks or other financial institutions. This is because they are either too small despite good business performance, or because their corporate histories are too recent despite operating in high-growth business fields. The Shoko loan is considered, as a bridging finance to provide urgently needed capital.

There are a few laws, which are relevant to Shoko loans including the Capital Subscription Law and Interest Rate Restriction Law, which regulate the maximum interest rate, which may be charged. The first law, the non-bank bond law only permits non-banks with one billion yen or more in shareholders' equity to use the proceeds from the issue of bonds, commercial paper and other debt instruments to make loans. Whenever a non-bank wished to issue debt must file its intention with the Ministry of Finance and provide disclosure about its bad debts (including information about past-due accounts, non-performing loans, loans with workouts and loans to bankrupt enterprises).

The new law widens fund-raising options for companies. The second law, the finance industry control law says that Shoko lenders which runs money lending operation much be registered as a loan-business operator and when debtors voluntarily pay the excess portion of interest (as defined in the Interest Rate Restriction Law) such payments are deemed valid. The third law, capital subscription law which says the maximum permissible rate is 40.0004% per annum, not considering of the loan amount.

The forth law, interest rate restriction law says that the non-banks can charge more than the maximum interest rate up to the 40.004% under the Capital Subscription Law if the customer voluntarily agrees to pay the access. The fifth law, The Anti-Boryokudan Law prohibits acts of demand including the payment of a debt with an interest rate higher than the ceiling laid down under the Interest Rate Restriction Law and the settlement of a debt with the planned amount of compensation for default larger than the ceiling laid down under the Interest Rate Restriction Law.