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Malaysian Banking Law – Development Finance Institutions Are Not Banks
Case Scenario
Sabah Development Bank Bhd provided financing facilities to SKBS (Sabah) Sdn Bhd. The facilities included:
  • Documentary import credit,
  • Revolving credit facilities,
  • Letters of credit,
  • Import advances,
  • Trust receipts,
  • Working capital financing.
When the borrower failed to repay the facilities, Sabah Development Bank sued to recover the outstanding debt together with interest.
The defendants argued that:
  • Sabah Development Bank was not licensed as a commercial bank under the Banking Act 1973,
  • Therefore the transactions were illegal and void under section 24 of the Contracts Act 1950.
Sabah Development Bank replied that:
  • It was a development finance institution and not a commercial bank,
  • Its financing activities did not amount to banking business,
  • Therefore no banking licence was required.
The court therefore needed to determine:
Whether Sabah Development Bank was carrying on banking business without a banking licence.


Sabah Development Bank Bhd v Skbs (Sabah) Sdn Bhd & Ors
[1992] 1 MLJ 454 (High Court)


General Overview
This case is one of the leading Malaysian authorities distinguishing:
  • Commercial banks,
  • Development finance institutions.
The High Court held that:
Development finance institutions are specialised financial institutions and are not automatically banks merely because they provide financing facilities or use the word “bank”.
The court clarified that:
  • Lending money alone does not amount to banking business,
  • A corporation does not become a bank simply because it uses the word “bank”.
The court relied heavily on:
  • Paget’s Law of Banking,
  • United Dominions Trust Ltd v Kirkwood,
  • Vernes Asia Ltd v Trendale Investment Pte Ltd & Anor.


Definition of Banker in the United Kingdom
In the United Kingdom, there is no single exhaustive statutory definition of “bank” or “banker”.
The definition developed through:
  • Judicial decisions,
  • Common law principles,
  • Banking textbooks,
  • Commercial understanding.


UK Judicial Development of the Definition of Bank
Bank of Chettinad Ltd v IT Commissioners of Colombo
In Bank of Chettinad Ltd of Colombo v IT Commissioners of Colombo, the Privy Council recognised that:
  • Banking changes over time,
  • Banking differs across countries,
  • No universal exhaustive definition exists.


Bank of New South Wales v Commonwealth
In Bank of New South Wales v Commonwealth, Dixon J explained that:
  • Banking has a wide meaning,
  • Banking forms part of the economic and social structure of society,
  • A complete definition is impossible.


United Dominions Trust Ltd v Kirkwood
The leading authority is:
  • United Dominions Trust Ltd v Kirkwood.
The Court of Appeal identified three classic banking characteristics:
  1. Conducting current accounts;
  2. Paying cheques drawn by customers;
  3. Collecting cheques for customers.


Lord Denning’s Contribution
Lord Denning famously stated:
“A banker is easier to recognise than to define.”
Lord Denning explained that courts may consider:
  • Reputation,
  • Stability,
  • Soundness,
  • Commercial understanding,
when determining whether an institution is a bank.


Paget’s Law of Banking
According to:
  • Paget’s Law of Banking,
no one can be a banker unless it:
  1. Takes current accounts;
  2. Pays cheques drawn on itself;
  3. Collects cheques for customers.
This definition strongly influenced the decision in this case.


Halsbury’s Laws of England
According to:
  • Halsbury’s Laws of England,
a banker is:
A person or corporation whose predominant business is banking, namely receiving deposits and paying and collecting cheques.


Dr HL Hart’s Definition
Dr HL Hart defined a banker as:
A person or company receiving money, collecting drafts, and honouring customer cheques.


Definition of Bank and Banking Business in Malaysia
In Malaysia, banking business is mainly governed by statute.
Under the Financial Services Act 2013, banking business generally includes:
  1. Accepting deposits;
  2. Paying and collecting cheques;
  3. Providing finance;
  4. Other prescribed financial activities.
Malaysia therefore adopts:
  • A licensing system,
  • Regulatory supervision,
  • Oversight by Bank Negara Malaysia.


Licensed Business, Approved Business, and Authorised Business Under Malaysian Law
Licensed Business
Under the Financial Services Act 2013, “licensed business” refers to businesses requiring a licence under section 10.
Licensed business includes:
  • Banking business,
  • Insurance business,
  • Investment banking business.
A person carrying on licensed business must obtain a licence from Bank Negara Malaysia.


Approved Business
“Approved business” refers to businesses that require approval under section 11 of the Financial Services Act 2013.
Approved businesses include activities listed in Schedule 1, such as:
  • Operation of payment systems,
  • Issuance of designated payment instruments,
  • Insurance broking,
  • Money-broking,
  • Financial advisory business.
These businesses require approval but do not necessarily make the institution a bank.


Authorised Business
“Authorised business” means:
  • Licensed business; or
  • Approved business.
Therefore, authorised business is a broader category covering both:
  • Businesses requiring licences; and
  • Businesses requiring approval.


Authorised Person
An “authorised person” means:
  • A person licensed under section 10; or
  • A person approved under section 11.
Thus, a person may become an authorised person either through:
  • A banking licence; or
  • Approval for specific financial activities.


Facts of the Case
Sabah Development Bank Bhd:
  • Was established by the Sabah State Government,
  • Functioned as a development finance institution,
  • Provided medium and long-term financing.
The plaintiffs provided:
  • Documentary import facilities,
  • Revolving credit,
  • Trust receipts,
  • Import advances,
  • Letters of credit.
The defendants argued that:
  • Sabah Development Bank was not licensed as a bank,
  • Therefore the transactions were illegal.


Legal Issue
The main legal issue was:
Whether a development finance institution providing financing facilities was unlawfully carrying on banking business.


Decision
The High Court held that:
Sabah Development Bank was not carrying on banking business.
The financing transactions were therefore lawful and enforceable.


Court’s Reasoning
Development Finance Institutions Are Specialised Financial Institutions
The court referred to Bank Negara Malaysia’s publication Money and Banking in Malaysia (1959–1989).
The court explained that development finance institutions:
  • Promote industrial and agricultural investment,
  • Provide medium and long-term financing,
  • Complement commercial banking services.
Thus:
  • Their role differs from ordinary commercial banks.


Use of the Word “Bank” Does Not Automatically Create Banking Status
Although Sabah Development Bank had ministerial approval to use the word “bank” under section 9 of the Banking Act 1973, the court held that:
Using the word “bank” does not automatically make an institution a bank under section 2 of the Banking Act 1973.
The approval merely allowed the use of the name.


Essential Banking Characteristics Were Missing
The court relied heavily on:
  • Paget’s Law of Banking,
  • United Dominions Trust Ltd v Kirkwood.
The court stated:
No one can be a banker unless they:
  1. Take current accounts;
  2. Pay cheques;
  3. Collect cheques.
There was:
  • No evidence that Sabah Development Bank performed these functions.
The evidence only showed:
  • Lending,
  • Trade financing,
  • Documentary credit facilities.
Therefore:
  • Sabah Development Bank was a financier rather than a commercial bank.


Reliance on Vernes Asia Ltd v Trendale Investment Pte Ltd & Anor
The court relied strongly on:
  • Vernes Asia Ltd v Trendale Investment Pte Ltd & Anor.
In Vernes Asia, the Singapore High Court held that:
Banking business requires all banking characteristics together.
Thus:
  • Making advances alone does not amount to banking business.
The Malaysian High Court adopted the same reasoning.


Comparison With Other Malaysian Cases
Bank of China v Lee Kee Pin
In Bank of China v Lee Kee Pin, the court held that:
Recovering debts does not amount to banking business.
This supports the principle that not every financial activity amounts to banking.


Koh Kim Chai v Asia Commercial Banking Corporation Ltd
In Koh Kim Chai v Asia Commercial Banking Corporation Limited, the court held that:
  • Taking and enforcing security alone does not amount to banking business.
Both cases distinguish:
  • Core banking activities,
  • Ancillary financial activities.


Practical Application
Suppose a government-owned development institution provides:
  • Industrial financing,
  • Trade financing,
  • Long-term project loans,
but:
  • Does not accept deposits,
  • Does not maintain current accounts,
  • Does not process cheques.
Applying this case:
  • The institution may be treated as a development finance institution,
  • Not necessarily as a commercial bank.


Critical Analysis
This case is important because it separates:
  • Development finance,
  • Commercial banking.
The decision ensures that:
  • Development finance institutions can provide financing without automatically requiring a banking licence.
However, the traditional banking test heavily relies on cheque-related functions. Modern banking increasingly involves:
  • Digital payments,
  • Electronic transfers,
  • Online banking,
  • FinTech platforms.
Thus:
  • Traditional cheque-based definitions may not fully reflect modern financial realities.


Further Analysis
The case strongly supports:
  • A conjunctive interpretation of banking business.
Meaning:
  • Lending alone is insufficient,
  • All essential banking functions must exist together.
This protects:
  • Development finance institutions,
  • Finance companies,
  • Specialised lenders,
from being wrongly classified as banks.


Unresolved Issues
Digital Banks Without Cheques
Can digital banks qualify as banks without cheque systems?


FinTech Regulation
Should digital financial platforms be regulated as banks?


Modernisation of Banking Law
Traditional banking definitions may require reform to address digital finance.


Solutions to the Case Scenario
Solution 1
Sabah Development Bank should be allowed to recover the outstanding debt because it was not unlawfully carrying on banking business.


Solution 2
The defendants’ argument should fail because there was no evidence that Sabah Development Bank:
  • Accepted current accounts,
  • Paid cheques,
  • Collected cheques.


Solution 3
The court should continue distinguishing:
  • Development finance institutions,
  • Commercial banks.


Solution 4
Bank Negara Malaysia should continue supervising financial institutions to ensure that non-bank institutions do not conduct licensed banking business without proper authorisation.


Conclusion
Sabah Development Bank Bhd v Skbs (Sabah) Sdn Bhd & Ors confirms that development finance institutions are not automatically banks merely because they provide financing or use the word “bank”. The court adopted traditional UK banking principles developed through United Dominions Trust Ltd v Kirkwood, Paget’s Law of Banking, Lord Denning’s observations, and Vernes Asia Ltd v Trendale Investment Pte Ltd & Anor. The case reaffirmed that the essential characteristics of banking include accepting deposits, paying cheques, and collecting cheques, and that lending activities alone do not automatically amount to banking business.

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