The Malaysian Domestic Bond Market: Growing into its Rightful Role

This paper revisits Malaysia’s past for a closer look into the interaction between its dominant banking sector and capital markets, encompassing both domestic bond and equity markets. Data beginning Q4, 1993 on the Malaysian domestic bond market are extracted from Bank for International Settlements (BIS). The sample period ends at Q4, 2011 due to a change in definition for categories of domestic debt securities by BIS. Nine possible determinants of bond market development are identified from the empirical literature. The ARDL modelling approach is used. In the absence of a long-run relationship, the analysis continues with an OLS distributed lag regression. Findings point to competition between the domestic bond market with the established banking sector and equity market, which could have hindered development of the bond market in its earlier years. Since interest rate volatility and exchange rate changes adversely impacted bond market development, credible monetary policy is necessary to support development of the Malaysian bond market. The benefits accruing from a better developed domestic bond market for raising long-term funds and providing financing for post-crisis recoveries can be seen in Malaysia’s example as a policy lesson for other emerging economies