INTERNATIONAL MONETARY FUND (IMF)

Objectives:
1. Promote international monetary cooperation and provide machinery for consultation &
collaboration on int. monetary problem.
2. Facilitate the expansion & balanced growth of int. trade & contribute to the promotion &
maintenance high levels of employment & real income
3. Promote exchange stability to maintain exchange arrangement among member & avoid
competitive exchange depreciation
4. Assist in the establishment of multilateral system payment in respect of current transaction
between members.
5. Making general resources to provide them opportunities to correct maladjustments destructive
to national and int. prosperity.
Activities:
1. Surveillance economic policies
a. Exchange rate, monetary & fiscal policies advice on issues exchange rate.
b. Financial sector issues banking crisis
c. Assessment of risks & vulnerabilities
d. Inst. Issues
e. Structural policies
2. Lending provide loans to countries experience balance of payments problem by provide
facility:
a. Stand-By Arrangements (SBA)
b. Extended Fund Facility (EFF)
c. Supplemental Reserve Facility (SRF)
d. Compensatory Financing Facility (CFF)
3. Technical assistance in areas:
a. Macroeconomic policy
b. Tax policy & revenue admin.
c. Exp. Management
d. Monetary policy
e. Exchange rate system
f. Financial sector sustainability
g. Macroeconomic & financial statistics.
WORLD BANK
Objectives:
1. Eradication of poverty
2. Provide financing & advice to countries
3. Encouraging & safeguarding int. investments
4. Assist & enhance eco. Growth & development less-developed countries.
Role of International Bank of Reconstruction & Development (IBRD)
1. Lending to middle-income & creditworthy poor countries
2. Financial intermediaries, borrowing funds in int. capital market for lending to member countries
3. Investment lending to finance g&s in support eco. & social development projects
4. Development lending social, structural & inst. Reforms
Role of International Development Association (IDA)
1. Lending without interest / very low interest to poorest countries
2. Largest resources of financial assistance to poorest countries
3. Amount lending received depends on countries quality of policies to promote growth & reduce
poverty
4. Finance by its own resources & by donor government
THE EUROPEAN MONETARY SYSTEM
Mission & objectives:
1. Responsible for monetary policy of the EU
2. Formulate monetary policy, conduct foreign exchange, hold currency reserves & authorize
issuance bank notes
3. Represent the state of monetary integration within the community
4. Strengthen central bank cooperation & monetary policy co-ordination
Other tasks:
1. Banknotes exclusive right to authorize the issuance of banknotes within euro area
2. Statistics cooperate with National central banks to collects statistical information
3. Financial stability & supervision smooth conduct of policies

Internal

4. Int. & European cooperation

ASIAN DEVELOPMENT BANK
Functions:
1. Promote investment in the region
2. Utilize the resources at disposal for financing development
3. Assist in coordination of development policies & plans to achieve better utilization resources
4. Provide technical assistance for preparation, financing & execution of dev. Projects
BANK OF INTERNATIONL SETTLEMENT
Functions:
1. A meeting place for central bank organize meeting & produce analytical statistical papers
2. Research & statistic hub sharing statistical info amongst central bank
3. Seminar & workshops
4. Bank services for central bank assist central bank & other monetary inst. In manage their
foreign reserves
ISLAMIC DEVELOPMENT BANK
To promote & strengthen Islamic fin. Inst. Worldwide by 5 strategy:
1. Develop & using innovative instruments Islamic finance to mobilize resources.
2. Help financial industry by identifying its future needs
3. Promote dialogue among stakeholders
4. Create necessary financial infrastructure inst. & support adoption of harmonized standards
5. Extend technical assistance for capacity building
Major contributions:
1. Development of Modes of Financing
2. Participation in the Equity of Islamic Fin. Inst.
3. Support activities of Standard Setting Bodies
4. Research & Training
5. Policy Dialogue
Functions:
1. Participate in equity capital & grant loan for productive projects
2. To establish & operate special funds for specific purposes include fund assistance to muslim
communities in non-member countries.
3. Authorize to accept deposits & mobilize financial resources through shariah guideline
4. Provide technical assistance to member countries
5. Provide training facilities for personnel engaged in development act. In muslim countries.
Operational activities:
1. Technical assistance for studies, trade financing aiming promotion of cooperation between
countries through exchange expertise & trade for their eco & social development
2. Extend support to muslim communities in non-member countries under Special Assistance
Program
3. Offers two scholarship to meritorious students more in science & tech.
Types of Islamic Banking Inst.
1. Islamic banking windows conventional banks offer Islamic banking products & services using
existing infrastructure, including staffs & branches
2. Full-pledged Islamic Bank bank dedicated to offer Islamic banking products & services
3. Subsidiary to conventional banks operations & management clearly separate between
subsidiary Islamic bank & parent conventional bank
Three
1.
2.
3.

core component in Islam

Aqidah (Iman) faith / believe in God
Syariah (Islam) Islamic law
Akhlak (Moral & Ethics) behavior, attitude

Man to God worship Ibadah

Man to man relationship (Muamalah)
man to man activities
(Fiqh Muamalah)
Islamic Economic
1. Nation economic
a. Macroeconomic, eco policy, development program, incentive scheme, creation revenue &
wealth, creation employment opportunities, distribution wealth

Internal

2. Economic of commerce & industry

a. Covers all business & trade activities, objective making profit & wealth accumulation,
activities include investment, finance, banking & capital mobilization
3. Socio-Economic
a. Promote socio-eco & welfare activities, helping poor people & those in need, activities
includes baitulmal, zakat, waqf
Primary sources of Shariah Law
1. Al-Quran
2. Assunah the word of Prophet
3. Ijmak collective opinion & consensus of scholars
4. Qias analogy & comparison
5. Uruf custom/practice
Fundamental Philosophy
Principle applied in making profit
1. Al Ghorm Bil Ghonm no pain no gain, profit come with risk, willingness to take risks
2. Al Kharaj bil Daman profit come with responsibilities
Objective Maqasid Shariah
1. To protect religion
2. To protect aqal mind
3. To protect the life of human being
4. To protect individual descendent of generation
5. To protect asset / wealth of individual & public
To protect the interest of public by:
Removing the Haram (IBQA)
- Maisir Gambling (to secure easy money elements of betting)
- Riba interest on loan
- Gharar uncertainty of contracts/goods (contracts not clear the goods not sure existence, price
uncertain)
- Prohibited products / goods
- Market manipulation (al tanajusy) by syndicates/collaboration
- Hiding defects/weaknesses (tadlis al aib) of the good to be sold
- Big loss (al ghabnu al fahisy)
Securing of Benefits (TAHSIL)
- Manfaat
- Wealth creation
- Values
- Satisfaction
- Welfare
Two principles:
1. Removal of hardship (raf al haraj)
2. Prevention of haram (daf al darar)
Maslahah:
1. Daruriyyat (urgently needed)
- In very critical conditions, etc. urgently need for food but there is no halal food without food
she/he will die
2. Hajiyyat (basic need)
- Etc. no Islamic banking system offer halal financial product, allow to use conventional banking to
acquire 1st house
3. Tahsiniyyat (extra/comfort)
- Governing law shall be apply in this condition

Classification of Riba (Usury)

1. Buy and sell
- Riba Al Fadhlu (created when buying & selling transaction incorrect, fraud / short measure /
short weight)
- Riba Annasiah/Al Yadu (different in time of delivery & payment for trading ribawi goods such as
gold, silver, wheat, salt, dates, cereal) including currency

Internal

2. Lending and borrowing

- Riba Al Qardhu (any extra amount as condition/promised to be given to the lender for giving
loan)
- Riba Al Jahiliyah (excessive extra repayment (interest) over principal of loan when repayment
period extended due to borrowers request)
Factors to be observe in structuring Islamic products.
1. Shariah principle & maqasid shariah (ensure product in accordance to the parameter of maqasid
shariah)
2. Economic & commercial value (have economic value, bring beneficial. Be able to generate
profit/income to investor)
3. Risk factors (high risk product should be able to generate high return otherwise it will not be
justifiable)
4. Governing laws (monitor proper documentation on aqad/contract, transaction and operation.
Provide legal protection to all parties involved. Also to avoid gharar & big losses.
Shariah contracts approved by SAC of SC Malaysia
1. Bai Bithaman Ajil (deferred-payment sale) S&P on deferred & instalment basis with preagreed
payment period
2. Bai Inah (sale with immediate repurchase) sale on deferred payment & buy back transaction
on spot payment by seller to provide cash facility to customer
3. Bai Istijrar (Supply sale) between client & supplier. Supplier agrees to supply product ongoing
basis ex. Monthly basis at agreed price & mode of payment
4. Bai Salam (advance purchase) S&P payment made in cash at point of contract but delivery
will be deferred at predetermined date.
5. Bai Wafa (sale & repurchase) when seller pays back price of goods sold, buyer return the
goods to seller
6. Ijarah (leasing) lessor (owner) leases out to lessee at agreed lease rental for predetermined
lease period. o/ship of leased asset remain with lessor
7. Ijarah thumma bai (lease to purchase) renting out lessors asset to lessee. At the end of
contract, lessee will purchase at agreed price by execute purchase contract
8. Istisna (purchase order) buyer request seller/contractor to deliver/construct asset to be
completed in future based on specifications in S&P contract. Payment term as agreed by both
parties in contract.
9. Mudharabah (Profit Sharing) two parties consist of rabbul mal (capital provider) & mudarib
(entrepreneur). Distribution profit from business will be based on pre-agreed ratio. Losses be
borne by capital provider solely.
10. Murabahah (cost plus sale) S&P of assets. Cost & profit margin (mark-up) are made known.
11. Musharakah (profit & loss sharing) two/more parties to finance business. All parties contribute
capital either in cash/any terms purpose for business. Profit derived will distributed based on
pre-agreed profit sharing ratio. Loss based on capital contribution
12. Qard Hassan (benevolent loan) two parties on basis social welfare/to fulfill short term financial
need borrower. Amount repayment must equivalent to amount borrowed.
13. Tawarruq (tripartite sale) purchase commodity on deferred price and selling to a third party for
cash
14. Wakalah (agency) one party authorize one party to act on behalf based on agreed terms &
conditions as long as he alive
15. Baidayn (debt trading) S&P securities of debt certificates (inline with shariah). Securities
issued by debtor to creditor as an evidence of indebtedness.
16. Bai muzayadah (open-bidding trading) sell asset in open market through bidding process.
Asset will awarded to person who offered higher price. Like tender
17. Kafalah (guarantee) provided in the event of debtor fails to fulfill his debt obligation.
18. Haq tamalluk (o/ship right) asset in the form of o/ship rights
19. Hibah (gifts) rewarded to person on voluntary basis
20. Ibra (rebate) withdraw rights to collect payment from a person who repay the amount
borrowed
21. Hiwalah (remittance) allows debtor to transfer his debt obligation to 3rd party
22. Ittifaq dhimni (preagreed contract) sale & repurchase of assets prices agreed by parties prior
to complete the contract. An external agreement which must reached before contract can be
concluded to allow for bidding process
23. Rahn (collateral) valuable asset made as collateral for debt. Will be used to settle debt when is
in default

Internal

24. Ujrah (fee) charge for utilization of services/manfaat.

Condition to valid contract
Sale (Seller, Buyer, Item to be sold, Price & Contract / aqad)
Ijarah (lessor, lessee, asset, benefit use/usufruct, rental, contract/aqad)
Trading contract (sale/ijarah) debt financing BBA / Inah/ Istisna/ Tawarruq/ Ijarah rahn,
kafalah/dhaman, wakalah, waad
Partnership contract equity financing Mudharabah/ Musharakah Hibah, Ibra, Tabarru, Hiwalah
Trading contract
Types of sales to be done immediate payment (ribawi items spot & equal)
1. Cash sales
- Sarf (foreign exchange)
- Sale of gold & silver
- Bai dayn (debt trading)
2. Deferred payment
- Bai murabahah (cost plus)
- Bai wadhiah (at a loss)
- Bai bithaman ajil (deferred payment sale)
- Bai salam (advance payment sale)
- Bai istisna (sale by order)
- Bai istijrar (supply/ wholesale financing)
- Bai inah (purchase for cash)
- Ijarah (leasing)
- Al ijarah thumma bai (AITAB)
Conventional vs. Islamic
Conventional banking base on loan contract, lending money with charging interest
Islamic Banking financing by trading transactions & other non-interest bearing, dealing with asset,
asset based/economic activity based financing
Aqad
Parties of contract, objective of contract, subject matter and offer & acceptance
Underlying asset asset traded/ subject matter of the transaction
Security asset used to provide security
*seller must have o/ship over the subject/asset to be sold
*asset must free from encumbrances
HIBAH
- Gift made by one person to another
- No consideration (legal) required for hibah
- Made of movable / immovable property
- In financing transaction, hibah of property made by a Deed of Hibah/ Letter of Hibah
- Deed of Hibah necessary in order registered property (donor) to give beneficial title of the
property to another person
- No deeds of hibah are registered with land office to record these hibah transaction. Its by
documents only
Supplementary Agreement
- Used to amend other terms of agreements etc. representation & warranties & negative
covenants
- Must be exercised
- Cannot be used to change the contract of transaction etc. BBA to Ijarah
- Because, this will operate change the nature of aqad and will be invalid
Default
- In BBA, customer has to pay sale price under the contract. Amount to be claimed is balance
outstanding
- Ibra encouraged to be given even to the defaulters

Internal

Early settlement
- Customer can make early settlement earlier than due/expiry date
- For housing financing, normally impose tawidh (compensation) if customer make early
settlement within stipulated time called lock-in period
- Failure to pay any installments of selling price form the date 1 st disbursement until date of
maturity, compensation rate applied 1% per annum on the overdue amount
- Failure to pay any installments which failure continues beyond the maturity date, compensation
rate applied is the banks current Islamic Money Market Rate on principal balance
Banking system in Malaysia
1. Central bank of Malaysia (BNM) to promote monetary & financial stability conducive to
sustainable growth of Malaysian Economic
2. Securities commissions of Malaysia (SC) promote fair, efficient, secure & transparent capital
market & protect investor & to ensure proper conduct by market institutions
3. Labuan financial services authority (LFSA) to spearhead & coordinate efforts to promote &
develop Labuan as an int. business & financial centre
4. Malaysian deposit insurance corporation (PIDM) administration of the deposits insurance
system & takaful sectors & promote sound risks management practices by finance industry
IFSA 2013 Islamic Banking Business
Section 2 (1) means:
1. Accepting Islamic deposits on current, saving and other similar account with or without the
business paying/ collecting cheques drawn by or paid in by customer
2. Accepting money under investment account
3. Provision of finance
4. Such other business as prescribed under sec.3
Basic functions of bank
- Providing financial services
- Accepting/ sourcing deposit
- Providing financing & investment
Basic banking activities
1. Sources of funds: shareholder funds, deposits, other bank/BNM (sourcing/borrowing)
:
bank pays profit, dividend, hibah
2. Source of income: financing, treasury, investment, fee base
: bank obtains profit, fee/service charge, commission
Differences between IB & Conventional
Conventional
Functions & operating modes based on fully
manmade principles
Investor assured on predetermined rate of
interest
Aims at maximizing profit without any restriction
Not deal with zakat
Lending money & getting back with compounding
interest
Charge additional money (penalty & compounded
interest in case of default
Relation with clients is creditor and debtors
Has to guarantee all its deposits

Functions structure of Islamic Bank

Internal

Islamic
Based on principles of Islamic Shariah
Promotes risk sharing between investor & user of
funds
Aim at maximizing profit but subject to Shariah
restriction
Service-oriented functions to be Zakat collection
centre & pay out their zakat
Participation in partnership business
No provision to charge any extra money from
defaulters. Only small amount compensation &
proceeds given to charity.
Is partners, investors and trader, buyer & seller
Can only guarantee deposits or deposit account,
based on principal wadiah

1. Operation divisions responsible to overall branch & banking operation, mobilize deposits &
provide banking services to customers
2. Financing divisions extend financing facilities to customer in carrying out their business &
projects under consumer, commercial, corporate / investment department
3. Treasury manage liquidity , asset & liability, shortage & excesses of bank fund
4. Support provide support requirement such as human resource & IT
Functions of Deposits
Deposits & Money Supply (M1 = Core Deposits, M2 =Deposits of Private Sectors, M3 = M1+M2)
Money supply & financing
Role of financing/loan
Deposit multiplier
Liquidity framework (statuary reserve requirement, liquidity management, capital adequacy
framework)
Increase money supply > increase in credit/ financing > increase in business & eco activities >
increase of GDP
Deposit & money supply
- Level of money supply influence total amount of financing/loan available to offered by banking
system
- Role of credit & financing promote economic & business activities & facilitate the eco growth
- Concept of deposit multiplier is determine among others by Reserve Requirement (RR)
- Supply money & banks financing regulated by BNM
- To ensure increase in money supply & consistent with the growing needed
- Money in circulation & demand deposits of private sector known as M1
- M1 includes saving & fixed dep. , negotiable instrument of dep. (NIDs), REPOs & foreign currency
deposit of private sector place in commercial/ Islamic bank
- A broader money aggregate/ private sector liquidity known as M2
Deposit multiplier & financing
- Total amount deposits mobilized by bank subject to deduction of certain % will be deposited at
BNM
- This deposit known as Statutory Reserved Requirement (SRR)
- Formula total deposited created by a bank from initial deposit
Total deposit created (TD) = initial deposit (D) / SRR (R)
Suppose SRR set at 5% & initial deposits is $100m.
Total deposit = 100m / 0.05
= 2000m
- Formula total money/deposit created by the banking system
Deposit multiplier (MD) = Total Deposit created (TD) / Initial Deposit (D)
Given TD $2000M, D = $100M
MD = 2000/100
= 20 times
Means, every 100m deposit mobilized by bank, will create 2000m total deposit which can be
used for giving financing
Capital adequacy framework
Basel II accords pillars:
1. Pillar 1 specifies min capital requirements of firms to cover credit, market & operational risks
2. Pillar 2 requires firms to assess the need to hold add capital to cover risk not covered under
Pillar 1
3. Pillar 3 requires a set of disclosures to be made which enable market participants to assess
information on firms capital, risk exposures & risk assessment procedures.
Pillar 2 aims to ensure that IB ins. Have adequate capital to support their operation and to comply more
rigorous risk mgt techniques.
IB to have in place the Internal Capital Adequacy Assessment Process (ICAAP).
- For assessing IB overall capital adequacy in relation to risk profile and strategy for maintaining
appropriate capital levels
- Influence IBs decision making & determine mgt process & business application
- Risk captured under Pillar 1: credit, market, operational risks
- Risks not fully captured under Pillar 1: related to under estimation/uncertainty risks such as
parameter, model methodology, securitization risks.

Internal

SRR
-

Risk type not covered by Pillar 1: credit concentration, interest rate/rate of return, reputational
risks

Monetary policy instrument available to BNM for purpose of liquidity mgt.

All banks are required to maintain balances in their Statutory Reserve Account (SRA),
maintained at BNM, equivalent to certain portion of their Eligible liabilities (EL) this portion being
the SRR rate
SRR rate is 4% of EL
Average EL compute fortnightly
Maintenance of balance in SRA flexible.
If fails to comply with min SRR, shall be liable to penalty = 1/10 x 1/100 x shortfall x no of days

Shariah principle in deposit accounts

1. Wadiah Yad Dhamanah (WYD) guaranteed custody
- IB accept deposit from depositors who looking for safe custody their funds
- Have absolute convenience to used the funds when needed.
- Bank requests permission to use the fund for any banking act. While the fund is remain in the
bank
- All profit generated by using this funds is belongs to bank
- But bank may pay hibah/present at certain rate as a token appreciated to depositors
- Used in Saving & Current account
2. Qard Al Hassan (QH) good loan
- Interest free loan, no tangible profit accrue
- Bank actually borrow from customers on the amount deposited by customers
- Bank is free to used the money for banking act.
- No condition imposed to bank on extra payment to customer
- Depositor allow to withdraw their money as long have balances
- Bank may pay hibah/ present
- Used in Saving & Current account
3. Mudharabah trustee profit sharing
- Customers who are looking for investment opportunities
- Bank act as mudarib/entrepreneur/fund manager and customer rabbul mal
- Deposit will have to be specified period of investment
- Profit from investment will be shared between customer and bank on Profit Sharing Ratio
- Losses will be bear by customer
- Saving, current, investment, special investment account.
4. Wakalah agency
- Bank acts as agent of the depositors
- Purpose depositors is for safe keeping or investment
- As custodian, invest the money to make a profit
- Depositor will pay wakalah fee to bank on managing their fund
Current account i
- Min initial amount deposit required
- Cheque book given to customer
- Service charge/wakalah fee will be charged on account for servicing & maintaining account
- Penalty imposed on cheque returns due to insufficient fund
- May access others facilities such as collection of cheques, trade bills, standing instruction, auto
debit, transfer of fund, cash line (Islamic overdraft)
- Any charges be imposed such as stamp duty, cable & telex charges
- Can be opened under personal, company, org/inst.
- Only current account under individual can be issue ATM
- Dishonoring of cheques for valid reasons such as insufficient fund, irregular signature, post
dated
- Unclaimed Money Act 1965, balance from dormant account be transferred under unclaimed
monies
- Stop payment on cheques is allowable for valid reason with early notification. Service charge
may be imposed every request for stop payment
Saving account-i
- For personal/private individual, societies, associations
- Will be provided with passbook, withdrawal & deposit recorded
- Min initial deposit required

Internal

Only one account for one party

Must be aqil. Provide NRIC or birth certificate
Must be undischarged bankrupt
Payment hibah under wadhiah yad dhamanah & qard Hassan if any
Formula Hibah
Cumulative daily balance for the month/no of days in the month x rate x 1/12
Ex: cumulative balance $ 1,230,567
No of day in aug 31 days
Hibah rate 2%
1,230,567/31 x 0.02 x 1/12
= $66.15
General investment account (GIA) operations
- Refer to customer with investment account maintained at IB
- Two types:
o Restricted investment account IAH provides specific investment mandate to IB, etc.
purpose, asset class, economic sector & period for investment
o Unrestricted investment account IAH provides IB with the mandate to make ultimate
decision without specify any particular restriction/conditions.
- Can be opened under mudharabah, wakalah, murabahah/tawaruq
- For mudharabah, bank act as mudarib & investor rabbul mal. Profit share between customer &
bank
- For wakalah, bank act as agent/wakeel of customer who deposit money for investment purpose.
Bank will be paid wakalah fee. Profit belong to customer
- Profit under mudharabah = principal x rate x period of month / 100 x12
- Interim profit paying profit on half yearly basis for longer tenor of investment. Calculation
based on 6 months period.
Special investment account
- Similar to GIA but only open to government/corporate customer
- Specific for investment instruments/projects
- PSR subject to negotiation between bank & customer under mudhrabah
Commodity murabahah investment / deposit account
- Tawaruq commodity
- Deposit taking bank, CMD is a fixed rate liability (FRL) by locking murabahah price, total profit
can be known upfront
- with a promise to repurchase, thus guarantees capital preservation and fixed return
Islamic Inter-bank Money Market (IIMM)
- Any funds from pool of deposit deducted for SRR & LRR
- Balance will be used as funding sources for financing activities
- Surplus of fund after financing activities will be invested in IIMM, while shortage of fund will be
sourcing from IIMM to cover it
- Provide funding & investment for short tem
- Inter-bank liquidity source funding & invest surplus fund
- Overall function IIMM 1. Interbank deposit/placement 2. Islamic money market instrument 3.
Islamic cheque clearing system
- An effective fin. Infrastructure in facilitating growth of IB in Malaysia
- All IB need to square-off their position at the end of day
- IB which are in surplus (long) position will be invest into banks financial asset portfolio who are
in deficit (short) position
- IB who in short, will source capital fund from surplus bank to fund their asset. Then to square-off
their position by end of day.
- Shariah contract Mudharabah based on profit sharing of 12 months gross profit rate for deficit
bank
- Pricing for given amount & tenor depends on:
o PSR which is to be negotiated
o Gross profit rate before distribution of receiving bank on one yr investment that will
declared. Declaration be made by receiving bank at maturity date of mudharabah
investment fund
- Central bank will come into picture when whole market in deficit
- List of IIMM Instruments:
o Treasury bill issued by gov
o Government investment certificates (GIC) now replace with government investment
issues (GII) under concept qard Hassan

Internal

Bank Negara negotiable notes (BNNN)- bay inah

Islamic accepted bills
Cagamas mudarabah bond
Negotiable certificate of deposits (NCD) saving deposit issued by banks.
Repurchase agreement (REPOs) as sell and buy back agreement (SBBA)
Commodity murabahah based on crude palm oil (CPO) intended to be liquidity mgt
tools
Negotiable Islamic Debt Certificate (NIDC)
Two types of concepts:
1. Bai bithaman Ajil (BBA) sale of goods on deferred basis
- IB sells identifies asset to customer at agreed price (sale price) which include customers
markup (profit)
- Sum of money deposited with Banking Inst. And repayable to bearer on specified future date at
nominal value of NIDC
- Form of deposit instrument from customer to bank based on principle bay al inah (sell and buy
back)
- Modus operandi:
o bank sells asset to customer for immediate cash, simultaneously sells back asset to bank
for credit price
o deferred marked up credit price is re-paid by bank to customer within period from
overnight up to 365 days
o bank issues certificate of debt (Shahadah al-dayn) as evidence of banks debt to
customer
o
o
o
o
o
o

2. al mudharabah refers to agreement between 2 parties

a. provider of the funds (customer) provide 100% capital for financing
b. entrepreneur (IB) who manage the project
c. profit arising from project distributed according PSR
d. Loss borne by capital provider
- Specified future date (maturity date) not earlier than 90 days & not later than 60 months from
date issue
- 12 calendar months if the PSR determined every 3 months >1yr, or
- 24 calendar months if PSR is determined every 6 months >2yr
- Nominal value : not less than RM50,000 (min). in multiples of RM50,000 up to max RM10 Mill
Sell and buy back agreement (Islamic repo)
- Transacting parties enter into two separate agreement
1. 1st agreement seller (owner) INI sells and buyer (investor) buys the instruments at specified
price agreed
2. 2nd agreement forward purchase agreement whereby buyer promises to sell back INI to original
owner who shall buy back at specified price on specified future date
- O/ship INI shall transferred to buyer upon conclusion of 1 st agreement
- INI may be sold subject following conditions:
o An issuer shall not but its own INI under SBBA
o Tenor SBBA must be within tenor of INI used for the transaction
- INI used for SBBA not required to be delivered, unless agreed by both parties
- Does not pay interim dividend or coupon profit
Commodity murabahah
- Parallel back-to-back transaction involve commodities takes place simultaneously, does not
expose the parties to price risk associate with underlying commodities
- Serves as deposit placement facility & instrument to mop up surplus cash in banking sector
- Central bank takes up roles of deposit taker, former the role taken by commercial banks
- To accommodate depositors with lower risk appetites
Cheques clearing system (Espick) Tendering (FAST) & Payment system (Rentas)
- Whatever account receives deposit through collection of cheques, all these will be sending to
clearing house known as Espick
- Only for local cheques and outstation cheques.
- Paperless cheque clearing process
- Clearing cheques either through and data truncation or data conversion
Fullt automated system for issuing/tendering (FAST)
- Web-based system that facilitates the issuance of unlisted debt securities and money market
instrument

Internal

Interfaces with RENTAS to facilitate primary market settlement, includes issuance of scrip less
securities with Bursa Malaysia electronic trading platform for reporting of secondary trading
involving debt securities
RENTAS is real-time gross settlement system enable the transfer and settlement of high value
interbank payment and securities.
Multi currency real time gross settlement

Cost of fund and concept of pricing

- Loan activity involved creation of loan, debt/receivable which funded by capital
- Debt capital involved certain elements:
o True cost of capital real interest rate based on true time value of money
o Cost of administration
o Cost of inflation/ cost of money losing value
o Cost of default / cost of not getting repaid
- This cost also known as risk premium requested by owner of capital based on credit rating of
customer.
- This cost of capital also known as pricing of debt capital
Price benchmarking
1. London inter-bank offer rate (LIBOR) for international transactions
2. Kuala Lumpur inter-bank offer rate (KLIBOR) for Malaysia
a. BNM monitoring & managing the eco through monetary policy, by over-night policy rate
(OPR) and SRR policy
b. All commercial bank will react on any movement of OPR. To indicate their offer on lending
interest rate in Inter-bank money market
c. Average lending rates in IMM offer by them known as KLIBOR
d. KLIBOR used as pricing benchmark for banking instruments
3. Based lending rate (BLR) conventional bank
a. IF will develop their own pricing bench marking known as BLR
b. Component is based on KLIBOR and owned internal cost (3month KLIBOR rate, Statutory
reserve cost, operational cost)
c. BLR + Spread (risk premium)
4. Based financing rate (BFR) Islamic bank
a. Develop own pricing bench marking known as BFR
b. Component based on divided for 3 month mudharabah investment account and owned
internal cost (3 month dividend rate for Mudhrabah investment account, statuary
reserved cost, operational cost)
c. BFR + Spread (risk premium)
5. Cost of fund (COF)
a. Used as benchmark pricing for corporate banking for corporate client
b. Cheaper as compared to BLR/BFR while risk premium also lower as client normally having
lower risk rating
c. Component based (3months GIA dividend, SRR cost)
d. COF + Spread (risk premium)
Fixed profit rate financing
- Rate use to determine selling price
- Applicable in Islamic financing products that involve trade/sales contract for home & fixed asset
financing under BBA / murabahah, istisna, inah
- Sale contract (BBA), customer identify house to buy and come to bank for financing. Bank
purchase the house at cost/purchase price and sell to customer at selling price on deferred
payment. Customer make repayment monthly fixed installment
- Advantages. Under home financing, selling price is fixed. So profit for bank & cost to customer is
fixed. Monthly installment fixed. Selling price cannot be changed therefore no compounding on
profit in case of late payment. Flexible whereby also offer profit servicing & staged repayment
amount to suit customer repayment capacity.
- Disadvantages. To customer when interest rate in market declining downward below profit rate.
Dual banking system pricing of product is critical to match the market, IB might lost customer.
No loyalty to some customer. Unhealthy price war. Facing high market risk and mismatch
funding risk.
Floating profit rate financing
- Based on shariah principle

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Ijarah home/fixed asset financing floating rental rate the rate can be change according
market
o Musharakah mutanaqisah home financing monthly rental subject to changes beside buy
back of equity by customer
o BBA / Murabahah home
Rate applied to determine monthly installment subject to changes/fluctuations in market along
the financing period
Modus operandi:
o Bank enters into purchase & sales contract with customer on house purchased by
customer. Diff between PP & SP known as profit/unearned income.
o Profit rate agreed by both party used to determine SP, say 10% p.a. this rate become a
capping/ceiling rate of total profit/cost and cannot change to higher amount
o Floating effective profit rate (EPR) will be introduced based on benchmark rate/BFR. For
example current BFR computed at 6% p.a.
o Pricing for floating rate determine by BFR + spread, say 1.5% pa., EPR become 7.5%
o Diff between inst of SP and EPR (10% - 7.5% = 2.5%) will be waived by granting ibra
(rebate)
o Ibra will be deducted from profit /unearned income portion
o Calculated based on monthly principal balances based on EPR charged
o EPR charged subject to changes of BFR but capped at max profit of 10%
o When BFR changed, EPR also changed/reviewed
Spread for ceiling rate in calculating SP cannot be higher than 4% plus benchmark rate e.g 6%
Max spread for EPR is 2.5% + benchmark rate
Customer is given option to continue paying the same monthly installment. Rescheduling of
facility is allowed
At maturity, any unearned profit will be rebated.
o

Musharakah mutanaqisah house financing

- Modus operandi: (two types of contract involved musharakah (partnership) & ijarah (leasing)
o Customer identify house to purchase and pay deposit of 10% of total PP
o Customer submit application house financing to bank for partially finance the purchase of
house.
o After financing approved, bank & customer enter into agreement musharakah with
agreed on capital contribution ratio (CCR) at 90% bank & 10% customer
o Bank will disburse only 90% to seller. For complete house, full disbursement will be paid
to seller. For house under construction, disbursement will be based on progress
development
o Share buy back/repayment agreement where bank & customer enter into ijarah
o Customer agreed to rent house at certain rental rate for a period
o Monthly rental paid by customer will be used to buy back capital owned by the bank
o Full o/ship will be transferred to customer at the end of financing/ up to full settlement of
banks capital.
Istisna home financing
- Involve manufacturing, producing / constructing
- Modus operandi:
o Customer plan to construct house of bungalow & required financing $225,000.
o He submit application under istisna contract.
o Customer putting 1st order instruct bank to build & complete the house at $393,674 (SP
up to 25yrs)
o Bank placing 2nd order to contractor in form of letter of undertaking to pay contractor
amount $225,000 (PP)
o Contractor construct the house & handing over completed house to customer
o Customer make monthly repayment to bank
BBA/Murabahah house financing
- Sale of good on selling price (cost plus profit) with deferred payment
- Seller must declare cost price of the good to be sold
- BBA contract of buy on deferred payment but not compulsory to declare cost price
- Murabahah deferred lump sum payment for short term financing, while BBA deferred on multi
installment payments for long term financing
- Modus operandi
o Customer purchased house from developer and pay sum deposit/urbun

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Customer comes to bank and submit application. Upon approval bank agreed to purchase
house at PP $270,000 (Financing principal)
o Subsequently bank sell house to customer at SP $472,409 (principal + profit 5%)
o Customer make fixed monthly installment $1578
Tawarruq/home financing
- Modus operandi
o Customer submit application then bank approved $270000 & partially finance 90% PP is
$300000.
o Banks buy commodity from trader 1 at $ 270000.
o Bank sells commodity to customer on SP with profit on deferred payment (amount +
profit) $472409 (principal + profit 5% @ 25 yrs)
o As o/ship of CPO belong to customer, she request the bank as agent to sell commodity to
another trader in the market.
o Agent to customer, bank sells commodity to trader 2
o Bank credit proceeds from sales of commodity $270000 customers House Financing
Account (Financing amount)
o Financing amount used to pay price of the house
o Customer settle debt by monthly installment
o

Ijarah Financing
- Under concept of Ijarah Muntahia bi al tamlik (AIMAT) / al ijarah thumma al bai (AITAB), customer
be able to lease assets from IB with option to acquire leased assets at the end of lease tenure
- AITAB leasing with option to purchase at the end of leasing period
- Bank will purchase vehicle from dealer & pay price of the car
- At the end of period, bank will sell at nominal amount & o/ship of vehicle transferred to
customer
Cash line tawarruq personal financing
- Principal amount of PP and profit potion of SP will be assigned into customer current account
through out financing period
- Amount will be set as facility limit, where customer allow to withdraw/utilize amount up to the
limit given
- o/standing balance will be higher for higher utilization
- when customer bank in deposit into current account, o/standing balance will be reduce
- profit only charge to customers account on the amount utilized & ibra will be given for
unutilized portion
- profit rate: fixed/floating
BBA personal financing
- offered to customer who having valuable asset such as land, building. Asset must be free from
encumbrances
- bank will purchase the asset and pay amount of PP on the spot
- amount will become financing principal. Customer will utilize this amount for personal purpose
- subsequently bank will sell the asset to customer on deferred payment
- selling price include principal, profit over financing period
- customer will make fixed payment
inah personal financing
- applied when customer dont have any asset to be transferred with the bank
- bank 1st sell asset to customer at price comprising financing amount plus bank profit margin.
- Payment selling price by customer on deferred term until end of repayment period
- Subsequently bank purchase back asset from customer on cash basis spot payment which
equivalent to financing amount
Qard Hassan benevolent loan
- Contract of loan between two parties basis on social welfare/ fulfill borrower financial needs
- Bank provide cash loan to borrower with certain period of time
- Bank cannot ask for extra amount of total repayment otherwise will be riba
- However, customer itself on their own willingness can make extra payment to bank. Extra
amount consider hibah
- Bank may structure Cash Note facility with element of profit
- Bank lend cash money to cutomer $127,500. Customer make monthly payment of $2125 for
60mth. Under product structure customer require to purchase US dollar currency amounted to
USD379.95 (1 USD = RM2.98) with $127,500 pay by cash note. Customer then sell USD379.95
with RM100,000 cash

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Business requirement
1. For capital expenditure (CAPEX) to acquire fixed asset land/building/factory. Such as purchase
of land, construction of building/factory, purchase/installation of machinery, renovation of
building/factory
2. For working capital purchase of stock/raw materials. Such as stock for trading business, raw
material for manufacturing company, building materials for constructions company
3. For working capital/overhead expenses production marketing & sale mgt & admin. collecting
payment. Such as require staff/semi & skill worker, employ professional, other business activities
Working capital is amount of money/capital needed to keep the business operations running
Capital expenditure is fixed assets needed by business. To increase capacity/ cost reduction.
Understanding the business
Business nature & size by relating operating & capital investment to the financial statements
1. Asset conversion cycle (the larger cycle)
a. Runs from everything that goes into production process, beginning with people, plants &
equipment, materials, office space & supplies, account receivable from sales made &
cash receivable collected
2. Trading cycle/operating cycle/cash cycle (within the larger cycle)
a. Runs from purchase of inventory/stocks/raw material to production of product or services,
to sales & finally conversion to cash
3. Capital investment cycles (within the larger cycle)
a. To understand requirement for specific assets, estimated costs & estimated eco life span

Operating cycle
A typical operating cycle for trading company involve 3 steps.
Cash > goods for resale are acquired & accounts payable may be created > goods are sold, SG&A
expenses are incurred, account receivable are created > account receivable are collected
A typical cycle for manufacturing company involve 5 steps.
Cash > raw materials are acquired & accounts payable may be created > with value added, RM are
being processed & accrued expenses are incurred > FG are completed with more value added, hence
add accrued expenses are incurred > FG are sold, SG & A expenses are incurred & accounts receivable
are created > collection of accounts receivables.
Murabahah working capital financing (MWCF)
- Profit made known by seller & buyer agreed
- Bank appoints customer as agent to purchase goods, stock / raw material for their business
- Upon receipts document/invoices on purchase of goods from supplier, bank will pay cost of the
goods to supplier
- Bank then sells the good to customer on SP inclusive of cost of the good plus profit margin
- Repayment of SP shall be paid in lump sum amount at maturity date
- Facility is given under revolving basis.
Bai ad dayn working capital (BWCF)
- Sale of a debt arising from trade transaction in form of receivable /deferred payment
- Customer supplied/sold their goods on credit term to their purchaser & issue invoice
- Invoice as representing of debt, then sold to bank at discounted price up to max 80% value of
invoice
- Seller/customer must paid on cash by crediting into their account
- The payment of debt then will be by original debtor before/up to maturity
bai inah cash line (OD) working capital
- Bank should identified valuable asset to facilitate the transaction
- Bank sell the asset to customer at price financing amount + bank profit margin. Payment by
customer on deferred payment term (1st contract)
- As o/ship transaferred from bank to customer, bank will purchase back the asset from customer
on cash basis equivalent to financing amount (2nd contract)
- SP of asset belong to bank in the 1st contract.

Internal