FIN324: Banking Operations &...

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FIN324: Banking OperationsFIN324: Banking Operations& Documentation& Documentation

CH# 1: The Financial SystemCH# 1: The Financial System

The Structure of Malaysian The Structure of Malaysian Financial SystemFinancial System

The Malaysian Financial SystemThe Malaysian Financial System

Financial Institutions:Financial Institutions:--Banking SystemBanking SystemNonNon--Bank Financial IntermediariesBank Financial Intermediaries

The Financial Markets (4 types)The Financial Markets (4 types)

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NonNon--Bank Financial IntermediariesBank Financial IntermediariesProvident and Pension FundsProvident and Pension FundsDevelopment Financial InstitutionDevelopment Financial InstitutionSavings InstitutionsSavings Institutionsa.a. National Savings BankNational Savings Bankb.b. CoCo--operative Societiesoperative SocietiesOthersOthersa.a. Unit TrustsUnit Trustsb.b. Pilgrims Fund BoardPilgrims Fund Boardc.c. Housing Credit InstitutionsHousing Credit Institutionsd.d. Cagamas Bhd. Cagamas Bhd. e.e. Leasing Cos.Leasing Cos.f.f. Factoring Cos.Factoring Cos.g.g. Venture Capital Cos.Venture Capital Cos.

Banking SystemsBanking Systems[monetary inst][monetary inst]Bank Negara MalaysiaBank Negara MalaysiaBanking InstitutionsBanking Institutionsa.a. Comm. Bks (incl. Fin Cos & Comm. Bks (incl. Fin Cos &

Insurance and Takaful)Insurance and Takaful) and and Islamic BksIslamic Bks

b.b. Merchant Bks Merchant Bks [non[non--$tary inst]$tary inst]OthersOthersa.a. Discount Houses Discount Houses [non[non--$tary inst]$tary inst]b.b. Rep. Office of Foreign BksRep. Office of Foreign Bksc. Offshore Banks in Labuan IOFCc. Offshore Banks in Labuan IOFCd. Credit Guarantee Corporation d. Credit Guarantee Corporation

[non[non--$tary inst]$tary inst]

(1) FINANCIAL INSTITUTIONS(1) FINANCIAL INSTITUTIONS

The Structure of Malaysian Financial SystemThe Structure of Malaysian Financial System

Derivative MarketsDerivative MarketsCommodity FuturesCommodity FuturesBursa Malaysia (KLSE) CI FuturesBursa Malaysia (KLSE) CI FuturesKLIBOR FuturesKLIBOR Futures

Offshore MarketOffshore MarketLabuan International Offshore Labuan International Offshore

Financial Center (IOFC)Financial Center (IOFC)

Money & Foreign Exchange MarketsMoney & Foreign Exchange MarketsMoney MarketMoney MarketForeign Exchange MarketForeign Exchange Market

Capital MarketsCapital MarketsEquity MarketEquity MarketBond MarketBond Marketa.a. Public Debt SecuritiesPublic Debt Securitiesb.b. Private Debt SecuritiesPrivate Debt Securities

(2) FINANCIAL MARKETS(2) FINANCIAL MARKETS

Structure of the Malaysian Financial SystemStructure of the Malaysian Financial System

The Banking SystemThe Banking System

The Monetary Institutions:The Monetary Institutions:--principal principal liabilities = $liabilities = $Central Bank = BNMCentral Bank = BNMCommercial BanksCommercial Banks

The NonThe Non--Monetary Institutions:Monetary Institutions:--principal liabilities = near$principal liabilities = near$closely linked to $tary instclosely linked to $tary instMerchant Banks,Discount House,CGCMerchant Banks,Discount House,CGC

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The NBFIsThe NBFIs

The largest groupThe largest group –– provident, pension & provident, pension & insurance fundsinsurance funds-- mobilizemobilize membersmembers’’ resources in the form of resources in the form of provident & pension provident & pension contributions contributions & insurance & insurance premium to premium to the retirement & ins. schemesthe retirement & ins. schemes..

The largest sourceThe largest source of nonof non--inflationary inflationary long term financing for the public sector.long term financing for the public sector.

The NBFIs The NBFIs (cont.)(cont.)

Provident & pensions funds: nonProvident & pensions funds: non--profit profit devote resource for the benefit of the devote resource for the benefit of the members & their beneficiaries.members & their beneficiaries.

Insurance Cos: profitInsurance Cos: profit--making making –– offer offer protection against loss of property, protection against loss of property, income or life for a income or life for a feefee. .

The Financial MarketsThe Financial Markets

Comprise the money & FOREX mkts, the Comprise the money & FOREX mkts, the capital mkt & the commodity futures capital mkt & the commodity futures mkt.mkt.

Later was complemented by the financial Later was complemented by the financial futures & options mkts.futures & options mkts.

Most of banking inst operate in the Most of banking inst operate in the money & forex mkts and the capital mkt. money & forex mkts and the capital mkt.

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The Banking System is controlled & The Banking System is controlled & supervised by BNMsupervised by BNM

Bank Negara Malaysia

Comm Banks

Finance Cos

Merchant Banks

Discount Hse

Money & Forex Mkt

CGC

Financial SupervisionFinancial Supervision

Govt supervision of fin inst by regulatorsGovt supervision of fin inst by regulators To uphold regulationsTo uphold regulations To maintain stability of financial marketsTo maintain stability of financial markets

Aims of SupervisionAims of Supervision

To minimize financial lossTo minimize financial loss To enforce applicable lawsTo enforce applicable laws To prosecute cases of market misconductTo prosecute cases of market misconduct To license providers of financial servicesTo license providers of financial services

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BNM also superviseBNM also supervise……

Labuan IOFCLabuan IOFC Money & Foreign ExchangeMoney & Foreign Exchange Malaysian Govt SecuritiesMalaysian Govt Securities Private Debt SecuritiesPrivate Debt Securities

Securities Commission supervise:Securities Commission supervise:

Financial Futures & Options ExchangesFinancial Futures & Options Exchanges-- KL Futures MktKL Futures Mkt-- KL Options & Financial Futures ExchangeKL Options & Financial Futures Exchange

Stock ExchangesStock Exchanges-- Bursa Malaysia (then KLSE)Bursa Malaysia (then KLSE)-- Bumiputra Stock ExchangeBumiputra Stock Exchange

Private Debt SecuritiesPrivate Debt Securities

Others:Others:

Registrar of CompaniesRegistrar of Companies-- Stock ExchangesStock Exchanges

Commodities Trading CommissionCommodities Trading Commission-- Commodity Futures: KL Commodity ExchangeCommodity Futures: KL Commodity Exchange

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Bank Negara Malaysia (BNM)Bank Negara Malaysia (BNM)

HistoryHistory……Bank Negara was established on January Bank Negara was established on January 26, 1959 to:26, 1959 to:

1. issue currency, 1. issue currency, 2. act as banker to the Government, and 2. act as banker to the Government, and 3. influence the country3. influence the country’’s credit situation.s credit situation.

Since its inception there has been seven Since its inception there has been seven governors.governors.

Historical event Historical event –– attack to devalue the attack to devalue the pound sterling in 1992.pound sterling in 1992.

CBCB’’s Objectives s Objectives –– s 4 of the CBOs 4 of the CBO

To To issue currency & keep reservesissue currency & keep reservessafeguarding the value of the currencysafeguarding the value of the currency;;

To To actact as a as a banker & financial adviserbanker & financial adviser / / agentagent to the Government;to the Government;

To To promote monetary stability & a sound promote monetary stability & a sound financial structurefinancial structure; and; and

To To influence the credit situationinfluence the credit situation to the to the advantage of the country.advantage of the country.

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The Functions of BNM to act as:The Functions of BNM to act as:

The banker for currency issue The banker for currency issue To hold/keep the countryTo hold/keep the country’’s official s official

external reserves & safeguarding the external reserves & safeguarding the value of the ringgitvalue of the ringgit

The banker & financial adviser to the The banker & financial adviser to the GovernmentGovernment

Cont.Cont.

The banker to the banksThe banker to the banks To promote monetary policy & sound To promote monetary policy & sound

financial structurefinancial structure To influence the credit situation to the To influence the credit situation to the

advantage of the countryadvantage of the country

1.Bank for Currency Issue1.Bank for Currency Issue

Arrange for the printing of currency notes Arrange for the printing of currency notes and minting of coinsand minting of coins

Issue, reIssue, re--issue & exchange notes and issue & exchange notes and coinscoins

Arrange for the safe custody of unissued Arrange for the safe custody of unissued stock of currencystock of currency

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2.Keeper of Intl Reserves & 2.Keeper of Intl Reserves & Safeguarding the Value of the RMSafeguarding the Value of the RM

BNM is the main keeper of the countryBNM is the main keeper of the country’’s s official external / international reserves.official external / international reserves.

Intl reserves Intl reserves –– gold, reserves position in gold, reserves position in IMF, SDR, & diversified portfolio of ForEx IMF, SDR, & diversified portfolio of ForEx assets denominated in foreign currencies assets denominated in foreign currencies ((bank balances, treasury bills & long term bank balances, treasury bills & long term securitiessecurities).).

3.Govt3.Govt’’s Banker & Fin Advisors Banker & Fin Advisor

As a banker, fiscal agent & fin advisor to Fed & As a banker, fiscal agent & fin advisor to Fed & State Govt and Statutory Auth.State Govt and Statutory Auth.

As a fiscal agent & financial advisor As a fiscal agent & financial advisor --manage manage national debt and the raising of national debt and the raising of govtgovt loan thru loan thru well managed loan well managed loan programmesprogrammes

GovtGovt’’s Banker: manages Govts Banker: manages Govt’’s accounts.s accounts. Provides temporary advances & finances GovtProvides temporary advances & finances Govt’’s s

investment in Treasury Bills & other Govt investment in Treasury Bills & other Govt securities. securities.

Fin Advisor: represents in Fin Advisor: represents in GovtGovt bodies or bodies or committees as nationcommittees as nation’’s policy maker.s policy maker.

4.Banker to the Banks4.Banker to the Banks

The financial institution maintain various types The financial institution maintain various types of account with BNMof account with BNM

EgEg: SRR and clearing accounts: SRR and clearing accounts To distribute currency when receive order from To distribute currency when receive order from

comm bks & charge to their clearing account.comm bks & charge to their clearing account. Lender of last resort Lender of last resort -- by extending credit to by extending credit to

ensure confidence in orderly operations of the ensure confidence in orderly operations of the banking systembanking system

To recommend MoF to issue license to comm To recommend MoF to issue license to comm bks, merchant bks & fin cos. bks, merchant bks & fin cos.

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5. Promote monetary stability & a 5. Promote monetary stability & a sound financial structuresound financial structure

To regulate the volume of money & To regulate the volume of money & generation of credit thru wide range of generation of credit thru wide range of monetary instrumentsmonetary instruments

By ensuring price stability By ensuring price stability –– which means which means ensuring that inflation rate is stable/ ensuring that inflation rate is stable/ remains lowremains low

6. 6. To influence the credit situation to To influence the credit situation to the advantage of the countrythe advantage of the country

BNM has to ensure that money supply in BNM has to ensure that money supply in the country is flexible and sufficient to the country is flexible and sufficient to sustain the economic growthsustain the economic growth

By imposing statutory reserve By imposing statutory reserve requirements, interest rates regulationrequirements, interest rates regulation

Additionally, CB is responsible:Additionally, CB is responsible:

To To supervise, regulate & develop the supervise, regulate & develop the insuranceinsurance industry.industry.

To To administer the Exchange Control Actadminister the Exchange Control Act19531953..-- in 1989, it was made in 1989, it was made directly responsible for alldirectly responsible for all

exchange matters.exchange matters.

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To meet those objectives, the CB To meet those objectives, the CB is vested with comprehensive legal is vested with comprehensive legal powers to regulate & supervise powers to regulate & supervise the financial system.the financial system.

Various Acts & OrdinancesVarious Acts & Ordinances

The CBOThe CBO The Islamic Banking Act 1983The Islamic Banking Act 1983 The BAFIA 1989The BAFIA 1989 The Essential (Protection of Depositors) The Essential (Protection of Depositors)

Regulations 1986Regulations 1986 The Insurance Act 1963The Insurance Act 1963 The Takaful Act 1984The Takaful Act 1984

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The introduction of BAFIA marked The introduction of BAFIA marked a special milestone in the a special milestone in the legislation (lawmaking) governing legislation (lawmaking) governing the financial institutions.the financial institutions.

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Bank & Fin. Inst. Act 1989Bank & Fin. Inst. Act 1989

Came into force on Oct 1 Came into force on Oct 1 ’’89 for licensed 89 for licensed institution, repealed the Banking Act institution, repealed the Banking Act 1973 & Fin Companies Act 1969.1973 & Fin Companies Act 1969.

The CBThe CB’’s power to supervise & regulate s power to supervise & regulate was extended from depositwas extended from deposit--taking to taking to finance & credit institutionsfinance & credit institutions

Ensure proper conduct and Ensure proper conduct and expansion/development of banking & expansion/development of banking & financial business in the countryfinancial business in the country

The establishment of Labuan as an The establishment of Labuan as an IOFC on Oct 1 IOFC on Oct 1 ’’90 also 90 also necessitated the enactment of 5 necessitated the enactment of 5 new legislations & the amendment new legislations & the amendment of an existing legislation.of an existing legislation.

These are:These are: Offshore Companies Act 1990Offshore Companies Act 1990 Offshore Banking Act 1990Offshore Banking Act 1990 Offshore Insurance Act 1990Offshore Insurance Act 1990 Labuan Trust Companies Act 1990Labuan Trust Companies Act 1990 Labuan Business Activity Tax Act 1990Labuan Business Activity Tax Act 1990 Income tax (Amendment) Act 1990Income tax (Amendment) Act 1990 LabuanLabuan Offshore Financial Services Offshore Financial Services

Authority Act 1996Authority Act 1996

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Cont.Cont. LabuanLabuan Offshore Trusts Act 1996Offshore Trusts Act 1996 LabuanLabuan Offshore Limited Partnerships Act Offshore Limited Partnerships Act

19971997 LabuanLabuan Offshore Securities Industry Act Offshore Securities Industry Act

19981998 AntiAnti--Money Laundering Act 2001Money Laundering Act 2001

The objectives of the BNM are The objectives of the BNM are interinter--related & complementary. related & complementary. The The guiding principle is to act guiding principle is to act only in the public interestonly in the public interest..

In the interest of national In the interest of national economic, BNM is to:economic, BNM is to:

Promote economic growthPromote economic growth Promote high level of employment.Promote high level of employment. Maintain price stability & a reasonable Maintain price stability & a reasonable

balance in the intl pmt positionbalance in the intl pmt position-- ensure the inflation rate remains low & ensure the inflation rate remains low & stablestable

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Cont.Cont.

Eradicate povertyEradicate poverty-- To reduce absolute poverty irrespective To reduce absolute poverty irrespective of race through raising income levels and of race through raising income levels and increasing employment opportunities for increasing employment opportunities for all Malaysiansall Malaysiansegeg: education (free text book, : education (free text book, free free breakfast, free school uniforms, breakfast, free school uniforms, scholarships, good students (study scholarships, good students (study boarding school, oversea )boarding school, oversea )

Restructure the societyRestructure the society-- to reduce income imbalances among the to reduce income imbalances among the major ethnic groups and between the urban major ethnic groups and between the urban and rural areas; and rural areas; -- to restructure the employment pattern at all to restructure the employment pattern at all levels and categories of occupation to reflect levels and categories of occupation to reflect the ethnic composition of the population the ethnic composition of the population -- to restructure the pattern of ownership and to restructure the pattern of ownership and control in the corporate sector so that control in the corporate sector so that Bumiputera will own at least 30 per cent of the Bumiputera will own at least 30 per cent of the equity capitalequity capital-- to create and develop a viable Bumiputera to create and develop a viable Bumiputera Commercial and Industrial Community through Commercial and Industrial Community through its participation in modern commercial and its participation in modern commercial and industrial ventures. industrial ventures.

In particular, the BNM ensures In particular, the BNM ensures that the availability and cost of that the availability and cost of money & credit in the economy money & credit in the economy are consonant (being in are consonant (being in agreement) with national macro agreement) with national macro economic objectives. economic objectives.

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Statutory Reserve &Statutory Reserve &Liquidity Requirements Liquidity Requirements

An effective tool for monetary An effective tool for monetary management in Malaysia where it management in Malaysia where it enables BNM to control the volume enables BNM to control the volume of liquidity in the banking system of liquidity in the banking system and, hence credit creation in the and, hence credit creation in the economy.economy.

SRRSRR

Banking inst. are required to maintain a certain Banking inst. are required to maintain a certain percentage of their reserve with BNM percentage of their reserve with BNM

BNM to control the volume of liquidity BNM to control the volume of liquidity –– the the capacitycapacity of the commercial banks to generate of the commercial banks to generate loans & advances.loans & advances.

ItIt’’s one of the most effective instruments of s one of the most effective instruments of monetary & credit controlmonetary & credit control..

The prescribed SRR is a The prescribed SRR is a percentage of the percentage of the eligible liabilitieseligible liabilities (EL) base.(EL) base.

Earn no interestEarn no interest

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SLRSLR

To maintain a min level of liquidity To maintain a min level of liquidity assets ratio in relation to EL base.assets ratio in relation to EL base.

Primary reason for the comm banks to Primary reason for the comm banks to have a reservoir of liquidity to meet have a reservoir of liquidity to meet unusual deposit withdrawals.unusual deposit withdrawals.

Excess liquid reserves / assets are Excess liquid reserves / assets are maintained voluntarily for the purposes maintained voluntarily for the purposes of meeting dayof meeting day--toto--day contingencies.day contingencies.

Commercial Banks, ForeignCommercial Banks, ForeignBank RepresentativeBank Representative’’s Officess Offices& Credit Guarantee Corp.& Credit Guarantee Corp.

A banking institution was defined A banking institution was defined to mean a licensed bank, to mean a licensed bank, merchant bank or finance merchant bank or finance company as defined in the BAFIA company as defined in the BAFIA ’’89 or an Islamic bank. 89 or an Islamic bank.

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The BAFIA The BAFIA ’’89 defines a 89 defines a ““bankbank”” as as ““a person who conducts a a person who conducts a banking banking businessbusiness””. .

What is What is ““Banking BusinessBanking Business””??

Receiving & mobilization of Receiving & mobilization of depositsdeposits.. Paying or collecting Paying or collecting chequescheques drawn or drawn or

paid by customers.paid by customers. Provision of finance Provision of finance –– granting of granting of loans & loans &

advancesadvances..

Commercial BanksCommercial Banks

Raises funds by collecting deposits thru Raises funds by collecting deposits thru savings, current & FD a/csavings, current & FD a/c

Main characteristic Main characteristic –– provide provide current accountcurrent accountfacilities where payments / deposits can be facilities where payments / deposits can be made thru issuing / receiving of checks.made thru issuing / receiving of checks.

Also accept Also accept depositsdeposits for savings a/c, FD & for savings a/c, FD & negotiable instruments.negotiable instruments.

Also offer Also offer financingfinancing & other & other financial servicesfinancial services ––remittances & letters of credit.remittances & letters of credit.

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Mobilize the savingsMobilize the savings Provide the facilities to make payments Provide the facilities to make payments

& receive money& receive money Extending loans & advances for working Extending loans & advances for working

capital, investment & consumptioncapital, investment & consumption Financing of government paper Financing of government paper –– MGS & MGS &

TBsTBs Provides various banking facilities & Provides various banking facilities &

services as authorized by BNMservices as authorized by BNM

Functions of Commercial Functions of Commercial BankBank

Sources of FundsSources of Funds

DomesticDomesticCapital & ReservesCapital & ReservesDeposits (public & private sectors)Deposits (public & private sectors)Negotiable Certificate of Deposits (Negotiable Certificate of Deposits (NCDsNCDs))Amounts due to financial institutionsAmounts due to financial institutionsBankers Acceptances (BAs)Bankers Acceptances (BAs)Other liabilitiesOther liabilities

ForeignForeignAmounts due to financial institutionsAmounts due to financial institutionsOther liabilitiesOther liabilities

Uses of FundsUses of Funds

DomesticDomesticCashCashStatutory reservesStatutory reservesMoney at callMoney at callAmounts due from financial institutionsAmounts due from financial institutionsInvestments (TInvestments (T--Bills, Govt & Private Securities)Bills, Govt & Private Securities)Loans (overdraft, term loans, trade bills, other loans)Loans (overdraft, term loans, trade bills, other loans)Fixed & other assetsFixed & other assets

ForeignForeignAmounts due from financial institutionsAmounts due from financial institutionsTerm loans, trade bills, investments & other assetsTerm loans, trade bills, investments & other assets

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Direction of Bank LendingDirection of Bank Lending

To finance major sectors:To finance major sectors:-- property sector, manufacturing, general property sector, manufacturing, general commerce and the financing, insurance & commerce and the financing, insurance &

business services sector.business services sector.

More than half of new loans extended More than half of new loans extended was channeled to the property, was channeled to the property, construction & manufacturing sector.construction & manufacturing sector.

Islamic Banking Islamic Banking

Islamic banking is based on Islamic banking is based on ““syariahsyariah”” principles, or more principles, or more particularly under the muamalat particularly under the muamalat section of the syariah principles.section of the syariah principles.

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Islamic banking may be defined as Islamic banking may be defined as ““an organized institutional an organized institutional framework designed to spread the framework designed to spread the application of an application of an interest free interest free banking (SPTF)banking (SPTF) concept by concept by establishing banks & investment establishing banks & investment organizations carrying operations organizations carrying operations in accordance with Islamic in accordance with Islamic economic doctrines (policy, set of economic doctrines (policy, set of guidelines)guidelines)””..

The Islamic Banking Principles of The Islamic Banking Principles of Liability ProductsLiability Products

The Liability Products are:The Liability Products are:

Currents AccountsCurrents Accounts (under the al(under the al--WadiahWadiah YadYad DhamanahDhamanah principle)principle)

Savings AccountsSavings Accounts ( under the Al( under the Al--WadiahWadiah YadYad DhamanahDhamanah principle)principle)

General Investment A/CGeneral Investment A/C ( under Al( under Al--MudharabahMudharabah principle)principle)

Special Investment A/CSpecial Investment A/C (under Al(under Al--MudharabahMudharabah principle)principle)

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AlAl--Wadiah Yad DhamanahWadiah Yad Dhamanah(safekeeping with guarantee)(safekeeping with guarantee)

Current accountsCurrent accounts –– deposits to safe deposits to safe keeping the funds.keeping the funds.

The bank guarantees the absolute The bank guarantees the absolute convenience of use of the funds by the convenience of use of the funds by the depositors.depositors.

The bank requests the permission to The bank requests the permission to utilize the said funds.utilize the said funds.

AlAl--Wadiah Yad DhamanahWadiah Yad Dhamanah(safekeeping with guarantee)(safekeeping with guarantee)

Savings accountsSavings accounts.. As Wadiah is a trust, the bank becomes As Wadiah is a trust, the bank becomes

the guarantor or custodianthe guarantor or custodian The depositor grants the Bank to utilize The depositor grants the Bank to utilize

the money for whatever purpose the money for whatever purpose permitted by SYARIAH.permitted by SYARIAH.

Possibility of earning some profits known Possibility of earning some profits known as a gift (Alas a gift (Al--Hibah) to the depositors as a Hibah) to the depositors as a token of appreciation.token of appreciation.

AlAl--MudharabahMudharabah(profit sharing)(profit sharing)

Al Al MudharabahMudharabah refers to a contract made between refers to a contract made between provider of capital (depositor) and an entrepreneur or provider of capital (depositor) and an entrepreneur or fund manager (the Bank) to enable the Bank to carry fund manager (the Bank) to enable the Bank to carry out business ventures within the out business ventures within the SyariahSyariah guidelines guidelines whereby both parties agree to share the profits from whereby both parties agree to share the profits from investment according to a mutually agreed ratio.investment according to a mutually agreed ratio.

General investment accountsGeneral investment accounts::-- the bank accepts the deposits looking for investment the bank accepts the deposits looking for investment opportunities. The funds accepted for specified opportunities. The funds accepted for specified periods (1, 3, 6, 9, 12 & >15 mths)periods (1, 3, 6, 9, 12 & >15 mths)

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Entrepreneurship (bank) & capital Entrepreneurship (bank) & capital (depositor):(depositor):-- the depositors donthe depositors don’’t participate in the t participate in the management of the investment. If loss, they management of the investment. If loss, they shall bear all. Profits will be distributed at the shall bear all. Profits will be distributed at the agreed preagreed pre--determined ratio and paid when determined ratio and paid when the investment is due. This stated in the the investment is due. This stated in the investment certificate. For >15 mths, interim investment certificate. For >15 mths, interim profits to be paid at 6 monthly intervals.profits to be paid at 6 monthly intervals.


Special Investment A/C :Special Investment A/C :The bank may accept deposits from The bank may accept deposits from govtgovtor cooperate customers or ordinary or cooperate customers or ordinary customers ( on a selective basis only)customers ( on a selective basis only)

the mode of investment & profits the mode of investment & profits distribution are individually negotiateddistribution are individually negotiated

Customers are to bear any lossCustomers are to bear any loss

The Islamic Banking Principles of The Islamic Banking Principles of Asset ProductsAsset Products

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The Asset Products are:The Asset Products are: Project Financing (under the AlProject Financing (under the Al--

MudharabahMudharabah principle)principle) Project Financing (under the AlProject Financing (under the Al--MusyarakahMusyarakah

principle)principle) Asset Acquisition ( under the AlAsset Acquisition ( under the Al--BaiBai

BithamanBithaman AjilAjil principle)principle) Financing the use of services ( under the Financing the use of services ( under the

AlAl--IjarahIjarah Financing the use of services ( under AlFinancing the use of services ( under Al--

IjarahIjarah ThummaThumma AlAl--BaiBai principle)principle)

AlAl--MudharabahMudharabah AlAl--MudharabahMudharabah Project financingProject financing::-- the bank is the provider of capital & will provide the bank is the provider of capital & will provide

100% of the project100% of the project’’s capital.s capital. Participation in project management:Participation in project management:-- the project initiator is the entrepreneur who will the project initiator is the entrepreneur who will

manage the project without the bankmanage the project without the bank’’s s interference. However, the bank has the right to interference. However, the bank has the right to do followdo follow--up & supervise the project.up & supervise the project.

Profits:Profits:-- both will negotiate & agree on how to distribute both will negotiate & agree on how to distribute

the profits that will be generated fm the project.the profits that will be generated fm the project. Loss: Loss: -- any loss will be borne by the bank.any loss will be borne by the bank.

AlAl--MusyarakahMusyarakah(joint venture)(joint venture)

Project financing:Project financing:-- bank & project initiators will both provide the bank & project initiators will both provide the

financing at the agreed proportion.financing at the agreed proportion. Participation in project management:Participation in project management:

-- all parties have the right to participate & have the all parties have the right to participate & have the option to waive the right.option to waive the right.

Profits:Profits:-- profits generated will be distributed as agreed.profits generated will be distributed as agreed.

Loss:Loss:-- all parties will bear the loss in proportion of their all parties will bear the loss in proportion of their

share in the financing.share in the financing.

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AlAl--BaiBai’’ Bithaman AjilBithaman Ajil(deferred payment sale)(deferred payment sale)

Customer identifies the asset he wants to Customer identifies the asset he wants to purchase and approaches the Bank for financing. purchase and approaches the Bank for financing. Under the Under the BaiBai BithamanBithaman AjilAjil concept, the Bank concept, the Bank will purchase the asset at cost and sell the same will purchase the asset at cost and sell the same to the customer at cost plus profit on deferred to the customer at cost plus profit on deferred payment basis at the duration and price agreed payment basis at the duration and price agreed by both parties payable by fixed by both parties payable by fixed instalmentinstalment..

AlAl--BaiBai’’ Bithaman AjilBithaman Ajil(deferred payment sale)(deferred payment sale)

Asset acquisition:Asset acquisition:-- the sales of goods on a deferred payment basis at a the sales of goods on a deferred payment basis at a

price which includes a profit margin agreed to by both price which includes a profit margin agreed to by both partiesparties””..

Financing the purchase:Financing the purchase:-- the customers who wish to purchase an asset but wish the customers who wish to purchase an asset but wish

to defer the payment by making fixed installment to defer the payment by making fixed installment payments. The purchase is first financed by the bank.payments. The purchase is first financed by the bank.

-- The bank will purchase the asset & resell it to the The bank will purchase the asset & resell it to the customer. The selling price will base of the cost of the customer. The selling price will base of the cost of the asset & the bank profit margin.asset & the bank profit margin.

Customer

Seller/Vendor

Bank

1.Customer identifies asset to be purchased

2.Bank buys the asset at RM 20,000

3.Bank sells at RM 20k + profit

4.Customer repays RM 20k + profit in instalments

AlAl--BaiBai’’ Bithaman AjilBithaman Ajil

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AlAl--IjarahIjarah(leasing (leasing –– financing the use of financing the use of services)services)

The bank may buy an asset and then The bank may buy an asset and then lease the asset to its customer for a lease the asset to its customer for a fixed period.fixed period.

The period, lease rental & any other The period, lease rental & any other terms are to be agreed upon by both terms are to be agreed upon by both parties.parties.

AlAl--Ijarah Thumma AlIjarah Thumma Al--BaiBai(leasing (leasing –– financing the use of services financing the use of services & subsequent asset acquisition)& subsequent asset acquisition)

The bank will purchase the asset and The bank will purchase the asset and lease it to the customer.lease it to the customer.

Both parties also agree that at the end of Both parties also agree that at the end of the lease period, the customer will the lease period, the customer will purchase the asset from the bank at an purchase the asset from the bank at an agreed price with all the lease rentals agreed price with all the lease rentals previously paid constituting part of such previously paid constituting part of such a price. a price.

The Islamic Banking Principles of The Islamic Banking Principles of Trade FinanceTrade Finance

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The Trade Finance services are:The Trade Finance services are:

Working Capital Financing (under the Al Working Capital Financing (under the Al Murabahah principle)Murabahah principle)

Letter of Credit (under Al Wakalah, Al Letter of Credit (under Al Wakalah, Al Musyarakah or Al Murabahah)Musyarakah or Al Murabahah)

Bank Guarantee (under al Kafalah Bank Guarantee (under al Kafalah principle) principle)

AlAl--MurabahahMurabahah(financing of trade by way of a lump (financing of trade by way of a lump sum deferred pmt cost plus profit sum deferred pmt cost plus profit sale)sale) The mechanism of financing purchases:The mechanism of financing purchases:

Bank appoints the cust as an agent to purchase Bank appoints the cust as an agent to purchase on its (bankon its (bank’’s) behalf.s) behalf.

Cust acts as an agent to purchase the goods.Cust acts as an agent to purchase the goods.Bank pays the supplier or reimburse the cust.Bank pays the supplier or reimburse the cust.

Bank then sells the goods to the cust. The price Bank then sells the goods to the cust. The price (to be paid at agreed later date) will include (to be paid at agreed later date) will include

the cost plus an agreed profit.the cost plus an agreed profit.

The mechanism of financing sales:The mechanism of financing sales:Bank appoints the cust as an agent to sell on its Bank appoints the cust as an agent to sell on its

(bank(bank’’s) behalf.s) behalf.Bank buys the goods from the cust & pays him Bank buys the goods from the cust & pays him

the cost of the goods.the cost of the goods.The cust as an agent, sells the goods & collects The cust as an agent, sells the goods & collects the proceeds from the sale on maturity of the the proceeds from the sale on maturity of the

credit term sale. Proceeds will be passed on to credit term sale. Proceeds will be passed on to the bank.the bank.

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AlAl--WakalahWakalah (letter of credit)(letter of credit)

The cust requests the bank to open an LC.The cust requests the bank to open an LC. The bank may require the cust to place deposits The bank may require the cust to place deposits

(under Al Wadiah Yad Dhamanah) (under Al Wadiah Yad Dhamanah) –– in full or in full or part of the price of goods to be purchased.part of the price of goods to be purchased.

The bank opens the LC. When the LC is The bank opens the LC. When the LC is negotiated, the bank will pay using the earlier negotiated, the bank will pay using the earlier deposits if all terms are complied.deposits if all terms are complied.

The trade documents will be released to the The trade documents will be released to the cust and the bank charges a fee & commission cust and the bank charges a fee & commission for its services rendered.for its services rendered.

AlAl--MusyarakahMusyarakah (letter of credit)(letter of credit)

The cust informs of his LC requirements & The cust informs of his LC requirements & negotiates with the bank the terms of Alnegotiates with the bank the terms of Al--Musyarakah financing.Musyarakah financing.

The cust deposits his share of the financing.The cust deposits his share of the financing. The bank opens the LC. When the LC is negotiated, The bank opens the LC. When the LC is negotiated,

the bank will pay from the custthe bank will pay from the cust’’s deposits + banks deposits + bank’’s s share of financing. share of financing.

The trade documents will be released to the cust to The trade documents will be released to the cust to take possession of the goods. The cust will dispose take possession of the goods. The cust will dispose them in the matter agreed upon.them in the matter agreed upon.

The bank & cust will share the profit from the The bank & cust will share the profit from the venture as stated / provided for in their agreement.venture as stated / provided for in their agreement.

AlAl--MurabahahMurabahah (letter of credit)(letter of credit)

The cust informs of his LC requirements & The cust informs of his LC requirements & requests the bank to buy the goods indicating he requests the bank to buy the goods indicating he agrees to purchase them upon their arrival.agrees to purchase them upon their arrival.

The bank opens the LC. When the LC is The bank opens the LC. When the LC is negotiated, the bank will pay using its own negotiated, the bank will pay using its own funds.funds.

The bank then resells the goods to the cust at a The bank then resells the goods to the cust at a price (cost + profit margin). Settlement of the price (cost + profit margin). Settlement of the sale to the cust may be in cash or deferral sale to the cust may be in cash or deferral (installment) payments.(installment) payments.

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AlAl--KafalahKafalah(bank guarantee)(bank guarantee)

The bank may provide guarantees to its The bank may provide guarantees to its customers for certain purposes:customers for certain purposes:

Tender Guarantee; Performance Guarantee;Tender Guarantee; Performance Guarantee;Guarantee for SubGuarantee for Sub--Contracts;Contracts;

Guarantee in lieu of Security Deposits;Guarantee in lieu of Security Deposits;Guarantee for Exemption of Custom Duties;Guarantee for Exemption of Custom Duties;

Customs Bond; Credit Guarantee;Customs Bond; Credit Guarantee;

The bank may require the customer to The bank may require the customer to deposit the full or a certain amount for this deposit the full or a certain amount for this facility. A fee will be charged.facility. A fee will be charged.

Other Islamic Banking PrinciplesOther Islamic Banking Principles

AlAl--MurabahahMurabahah(cost plus financing)(cost plus financing)

Its concept refers to the sale of goods at Its concept refers to the sale of goods at a price which includes a profit margin as a price which includes a profit margin as agreed by both parties.agreed by both parties.

In its contracts, the price, other costs & In its contracts, the price, other costs & the profit margin of the seller must be the profit margin of the seller must be stated at the time of the agreement of stated at the time of the agreement of sale.sale.

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AlAl--BaiBai’’ AlAl--DaynDayn(debt trading (debt trading –– bills of exchange)bills of exchange)

Its concept refers to debt financing Its concept refers to debt financing –– the the provision of financial resources required provision of financial resources required for production, commerce & services by for production, commerce & services by way of sale / purchase of trade way of sale / purchase of trade documents & papers.documents & papers.

Only documents evidencing debts carried Only documents evidencing debts carried out in good faith (bona fide) in comm out in good faith (bona fide) in comm transactions can be traded.transactions can be traded.

Short term facility Short term facility –– maturity < a year.maturity < a year.

AlAl--Qardhul HasanQardhul Hasan(benevolent/charitable loan)(benevolent/charitable loan)

Its concept refers to an interest free loan Its concept refers to an interest free loan given mainly for welfare purposes.given mainly for welfare purposes.

The borrower is only required to repay The borrower is only required to repay the principal amount borrowed.the principal amount borrowed.

He may pay an extra amount as a gift (Al He may pay an extra amount as a gift (Al Hibah) at his absolute discretion, as a Hibah) at his absolute discretion, as a token of appreciation.token of appreciation.

AlAl--WakalahWakalah(agency)(agency)

Its concept refers to a situation where a Its concept refers to a situation where a person nominates another person to act person nominates another person to act on his behalf.on his behalf.

Eg; money transfers (including foreign Eg; money transfers (including foreign exchange).exchange).

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AlAl--RahnRahn(collateralized borrowing)(collateralized borrowing)

Its concept refers to an arrangement Its concept refers to an arrangement whereby a valuable asset is placed as a whereby a valuable asset is placed as a collateral for a debt.collateral for a debt.

The collateral may be disposed in the The collateral may be disposed in the event of default.event of default.

AlAl--HiwalahHiwalah(remittance)(remittance)

Its concept refers to a transfer of funds / Its concept refers to a transfer of funds / debt from the depositor / debtordebt from the depositor / debtor’’s s account to the receiver / creditoraccount to the receiver / creditor’’s s account where a commission or fee (Alaccount where a commission or fee (Al--Ujr) may be charged for such service.Ujr) may be charged for such service.

AlAl--UjrUjr(fee)(fee)

Its concept refers to commissions or fees Its concept refers to commissions or fees charged for services.charged for services.

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Representative Office ofRepresentative Office ofForeign Banks Foreign Banks

Foreign BankForeign BankRepresentativeRepresentative’’s Officess Offices

Require banking operation licenses to Require banking operation licenses to conduct conduct international businessinternational business..

Serve as a Serve as a trade & commerce liaisontrade & commerce liaison for for local & foreign clients.local & foreign clients.

Conduct Conduct financial researchfinancial research to collect to collect economic data on the countryeconomic data on the country’’s s investment climate.investment climate.

Eventually to set up Eventually to set up jointjoint--ventureventure banks banks with local partners.with local partners.

The Credit Guarantee Corporation The Credit Guarantee Corporation

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CGCCGC

To assist small borrowers (To assist small borrowers (SSEs and SSEs and hawkers & petty tradershawkers & petty traders) in obtaining ) in obtaining credit facilities from the commercial credit facilities from the commercial banks at reasonable cost.banks at reasonable cost.

Providing Providing guarantee coverguarantee cover to the to the commercial banks for credit facilities commercial banks for credit facilities extended to SSEs.extended to SSEs.

Assisting SSEs with no collateral and also Assisting SSEs with no collateral and also to lessen the lending bankto lessen the lending bank’’s risk.s risk.

In general, eligibility criteria for an In general, eligibility criteria for an SME to qualify for SME to qualify for CGCCGC’’ss guarantee guarantee schemes are: schemes are:

The business must be Malaysian owned The business must be Malaysian owned or residentor resident--controlled companycontrolled company

Operating a registered or licensed Operating a registered or licensed business in Malaysiabusiness in Malaysia

Possess a viable business / projectPossess a viable business / project

Cont.Cont.

Types of credit facilitiesTypes of credit facilities

Term loan, overdrafts, letter of Term loan, overdrafts, letter of credit, export credit refinancing, bills credit, export credit refinancing, bills purchased, purchased, tradelinestradelines, trust receipts, , trust receipts, hire purchase, leasing, bankers hire purchase, leasing, bankers acceptances.acceptances.

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Finance CompaniesFinance Companies

The BAFIA The BAFIA ’’89 defines a 89 defines a ““finance finance companycompany”” as as ““a person who a person who carries on finance company carries on finance company businessbusiness””. .

““Finance Company BusinessFinance Company Business””meansmeans……

The business of receiving deposits on The business of receiving deposits on deposits accounts, savings accounts or deposits accounts, savings accounts or other similar accounts.other similar accounts.

The lending of money; leasing business; The lending of money; leasing business; or the business of HP, including that or the business of HP, including that which is subject to the HP Act 1967.which is subject to the HP Act 1967.

Other such business as BNM, with the Other such business as BNM, with the approval of the Minister in charge of approval of the Minister in charge of Finance may prescribe.Finance may prescribe.

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Finance CompaniesFinance Companies

They are not allowed to accept current / They are not allowed to accept current / checking account deposits (non interest checking account deposits (non interest bearing account). Thus, their costs of funds are bearing account). Thus, their costs of funds are generally higher than that of commercial generally higher than that of commercial banks.banks.

Started with providing consumption loans for Started with providing consumption loans for purchasing consumer goods & motor vehicles.purchasing consumer goods & motor vehicles.

Also give out short to medium term loans for Also give out short to medium term loans for businesses, housing loans, business of credit businesses, housing loans, business of credit cards & travelercards & traveler’’s checks.s checks.


Capital &Capital & reserves.reserves. Deposits Deposits –– fixed, savings, NCDs issued.fixed, savings, NCDs issued. Amount due to financial institutions.Amount due to financial institutions.


Cash & Fixed assets.Cash & Fixed assets. Statutory reserve.Statutory reserve. Money at call.Money at call. Amount due from financial institutions.Amount due from financial institutions. Investments Investments –– TBills, MGS, stocks & TBills, MGS, stocks &

shares & NCDs held.shares & NCDs held. Loans Loans –– HP, leasing finance, housing loans HP, leasing finance, housing loans

& other loans.& other loans.

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Merchant BanksMerchant Banks

The BAFIA The BAFIA ’’89 defines a 89 defines a ““merchant bankmerchant bank”” as as ““a person a person who carries on merchant banking who carries on merchant banking businessbusiness””. .

EgEg: : AmInvestmentAmInvestment Bank Bank BerhadBerhad, RHB Investment , RHB Investment Bank, Public Merchant Bank, Bank, Public Merchant Bank, CIMB Investment Bank etcCIMB Investment Bank etc

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““Merchant banking businessMerchant banking business”” is is defined asdefined as……

The business of: receiving deposits on fixed The business of: receiving deposits on fixed deposits accounts; provision of finance.deposits accounts; provision of finance.

The business of: providing consultancy & The business of: providing consultancy & advisory services relating to corporate & advisory services relating to corporate & investment matters; making or managing investment matters; making or managing investments on behalf of any person.investments on behalf of any person.

Other such business as BNM, with the approval Other such business as BNM, with the approval of the Minister in charge of Finance, may of the Minister in charge of Finance, may prescribe.prescribe.

Merchant banksMerchant banks’’ main activities:main activities:

Deposits taking & money market operations.Deposits taking & money market operations. Medium term lending.Medium term lending. Loan syndication and acting as loan managers.Loan syndication and acting as loan managers. Corporate financial services Corporate financial services –– advising advising

corporate clients on such matters as listing on corporate clients on such matters as listing on the Bursa Malaysia, rights issues, mergers and the Bursa Malaysia, rights issues, mergers and acquisitions.acquisitions.

Fund management.Fund management.

BNM has specified that at least 30% of their income must be derived from fee based activities.


Capital &Capital & reserves.reserves. Deposits Deposits –– fixed, NCDs, repurchase fixed, NCDs, repurchase

agreements.agreements. Amount due to financial institutions.Amount due to financial institutions. Bankers acceptances.Bankers acceptances.

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Cash & Fixed assets.Cash & Fixed assets. Reserves with BNM.Reserves with BNM. Money at call.Money at call. Amount due from financial institutions.Amount due from financial institutions. Investments Investments –– TBills, MGS, NCDs, TBills, MGS, NCDs,

Cagamas bonds, private securities.Cagamas bonds, private securities. Loans Loans –– short term loans, term loans, short term loans, term loans,

revolving credit, trade bills & bankers revolving credit, trade bills & bankers acceptances.acceptances.

Discount HousesDiscount Houses

Discount HousesDiscount Houses

Specialize in ST money market ops.Specialize in ST money market ops. To mobilize surplus ST funds for To mobilize surplus ST funds for

investment.investment. To provide an active secondary market To provide an active secondary market

for the securities of the above for the securities of the above investment.investment.

Lately, shifted their investment portfolio Lately, shifted their investment portfolio towards BA, trade bills, PDS & towards BA, trade bills, PDS & commercial papers commercial papers –– better yield. better yield.

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ShareholdersShareholders’’ funds.funds. Deposits. Deposits. Repurchase agreements (repos).Repurchase agreements (repos).


Investments:Investments:Treasury billsTreasury billsGovernment securitiesGovernment securitiesBankers acceptancesBankers acceptancesNCDsNCDsBNM certificatesBNM certificatesCagamas bondsCagamas bondsPrivate debt securitiesPrivate debt securities

Loans to licensed institutions.Loans to licensed institutions.

LabuanLabuan International OffshoreInternational OffshoreFinancial Center (LIOFC)Financial Center (LIOFC)

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International OffshoreInternational OffshoreFinancial Center (IOFC)Financial Center (IOFC) No income tax or grant extensive tax No income tax or grant extensive tax

exemptions (Bahamas, Bahrain, Cayman exemptions (Bahamas, Bahrain, Cayman Islands).Islands).

No income tax on income from foreign sources No income tax on income from foreign sources (Costa Rica, HK, Panama).(Costa Rica, HK, Panama).

Low tax rates & other incentives (Cyprus, Low tax rates & other incentives (Cyprus, Netherlands, Switzerland).Netherlands, Switzerland).

Low tax & special privileges (British Virgin Low tax & special privileges (British Virgin Islands, Channel Islands, Isle of Man).Islands, Channel Islands, Isle of Man).

Special incentives & privileges to offshore Special incentives & privileges to offshore companies (Luxembourg, Netherlands & companies (Luxembourg, Netherlands & Antilles)Antilles)

Labuan International Offshore Labuan International Offshore Financial Center (LIOFC)Financial Center (LIOFC)

The island has been made a The island has been made a duty free duty free zonezone..

Built a Built a financial parkfinancial park for the financial for the financial institutions to set up their offices.institutions to set up their offices.

Provides all the normal banking services Provides all the normal banking services only in only in foreign currenciesforeign currencies. .

The Incentives Offered:The Incentives Offered:

Minimum tax.Minimum tax. Tax abatement for professional services.Tax abatement for professional services. Abatement of tax for business relating to or Abatement of tax for business relating to or

letting of a qualified asset.letting of a qualified asset. Tax abatement for employment.Tax abatement for employment. Tax exemption.Tax exemption. Exemption from stamp duty.Exemption from stamp duty. Secrecy & confidentiality.Secrecy & confidentiality. Exchange control.Exchange control. Competitive pricing.Competitive pricing. World class teleport.World class teleport.

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International Monetary FundInternational Monetary Fund

International Monetary FundInternational Monetary Fund

As a regulatory function to be the As a regulatory function to be the guardian of the code & conduct.guardian of the code & conduct.

To oversee its membersTo oversee its members’’ monetary & monetary & exchange rate policies.exchange rate policies.

To provide financial & technical To provide financial & technical assistance.assistance.

FIN324: Banking Operations &...

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