The Overall Profit Of The Banks docx.

Running head: MONEY AND BANKING
MONEY AND BANKING
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MONEY AND BANKING1
Introduction
The overnight policy rate (OPR) was decreased by 25 basis points to about 3 percent in
Bank Negara Malaysia (BNM) during 2019. This has resulted the commercial banks to hit their
bottom line such that banks has either suffered a dip in income or a rise in expenses. The overall
profit of the banks went down by the action taken by BNM. The value of OPR was expected to
remain the same till the end of that year that can affect the performance of commercial banks.
The impacts can be demonstrated from the demand and supply conditions of decreasing the SRR
rate. This decision can affect the overall deficit of government. The aim of the paper is to
estimate the impacts of lowering the SRR rate with respect to demand and supply conditions and
address its impacts on government deficit and economic goals.
Discussion
The OPR is an interest rate that is implemented by BNM to give directions for the proper
functioning of the monetary policy. It is used as a target rate for the management of day-to-day
liquidity operations of the BNM. At this rate, the depository or financial institution lends the
available funds to other financial institutions overnight by balancing the money with the central
bank. The money available to the bank for lending purposes fluctuates on a daily basis as it is
dependent on the deposition and withdrawing activities of customers (Zainudin et al. 2019). The
interest rate of the OPR is influenced by the central bank with the maintenance of short–term
interest rates. OPR affects fixed deposit rate, short-term interest rates, foreign exchange rates,
and a range of economic indicators. A new base rate is introduced in the system that determines
the benchmark cost of funds and Statutory Reserve Requirement.
Impact of reducing the SRR to maintain the supply and demand of money in the economy

MONEY AND BANKING2
The liquidity is managed by maintaining the Statutory Reserve Requirement. Bank needs
to hold a certain amount of customer deposits in reserve without loaning to individuals or
businesses. This rate is referred to as the reserve requirement. When the reserve ratio is lowered
through an expansionary monetary policy, commercial banks need to keep a small amount of
cash on hand and increase the value of loan amounts for helping businesses and consumers. This
is because when the SSR rate is reduced, it is easy for investors to invest a higher amount of
money in new projects and businesses to finance such projects.
SRR is used to maintain the liquidity of the domestic financial system and helps to
support an efficient domestic financial market. Demand and supply of maintained by SRR. If the
reserve ratio is about 20 percent then banks need to maintain 20 percent of the overall deposit in
banks. The remaining 80 percent is recalled as the excess reserve that can be loaned out to the
public (Amanullah 2015). The federal bank can raise or lower the reserve requirement rate to
maintain the money supply in the economy.
A decrease in the base lending rate of the commercial banks increases the demand for
money and lowers availability of money. A fall in lending or borrowing rate, increases consumer
demand for buying goods and services. This means that more money can be loaned out due to
increase in the value of excess reserves. Money that is not reserved in the banks is used to make
loans. The loaned amount can be filtered into the economy and get multiplied by the process of
multiple deposit expansion (Saha, Ahmad and Yeok 2016). A change in the value of the reserve
requirement ratio effectively changes the money supply of the economy because of a change in
the multiplier effect. A lower cash rate
Borrowing money becomes easier and businesses or investors can effectively increase the
level of investment that helps in the growth of businesses. Money supply in the economy goes up

MONEY AND BANKING3
as people can borrow money from banks and use it for their own purpose. When investment goes
up, businesses can increase the flow of capital, use innovative technologies and inputs which
ultimately leads to a rise in output of the goods and services at compelling prices. This raises
consumer demand and enhances the profitability of the firms (Eldersevi and Haron 2019).
Businesses are able to reinvest for future production from the earned profits. Customers deposit a
percentage of their profits that enables banks to maintain an effective state (Mohamad and Rahim
2019). This leads to an expansion of bank credits and deposit levels. This positively lowers the
rate of interest and increases consumer demand as well as the transaction of goods and services
in the economy.
The net transaction goes up that improves the performance of the banks as they are able
to retain profits from the increased transaction and deposited money. As the cost of funding
decreases, businesses earn an efficiency in production and enhance the economic activities.
According to Bank Negara Malaysia (BNM), a deduction of SSR from 10 percent to 8 percent
would release 8 billion Ringitt Malaysia to the financial institutions. The bank lending rate of the
commercial banks and finance companies will decrease to 0.21 percent and 0.27 percentage.
Thus, money supply increases in the economy that increases the purchasing power of the people
and encourages investors to raise the amount of investment (Mohamad et al. 2019). This boosts
the confidence of the investors and leads to a rise in productivity of the firms. Consumer demand
goes up by successive amounts that raises the amount of consumption expenditure and increases
the profitability of the firms due to multiplier effect. It is a tool used by government for
maximize the bank credit and maintain the government deficit (Jomo 2019). Therefore, lowering
SRR rate will effectively improve the performance of the banks and overall economy as a whole
due to increment of excess reserves.