LEARNINGOUTCOMES

Bythe endof thischapter,studentsshouldbeableto:

✓ DescribeabouttheBanking institutionsinMalaysia.

✓ Define bank and describe the banking business

✓ To describe about sourcesand uses the funds by the
banking institutions.
Four(4) Banking
institutions
 What is BANK

“A person who carries

a banking business”
 WHAT IS BANKING BUSINESS?

Under CBA 2009 [Act 701] , banking business means:

The business of:

Accepting
Paying or i. Accepting deposits on current account, deposits account,
collecting saving accounts and other similar account;
deposits
cheques
ii. Paying or collecting cheques drawn by or paid in by customers;
Such iii. Provision of finance including lending of money; leasing
Provision
other
of finance business; factoring business; purchase of bills of exchange,
business
promissory notes, certificates of deposit, debentures or other
negotiable instruments; and the acceptance or guarantee of
any liability, obligation or duty of any person;
iv. Such other business as prescribed by Ministry of Finance, on
the recommedation of BNM.
2.2 COMMERCIAL BANKS
• Commercial banks are the largest and most significant providers of
funds in the banking system.

• There are currently 26 commercial banks (excluding Islamic banks).

• These banks are governed by the Financial Services Act (FSA) 2013.

Why commercial bank is important:

i. The only financial institutions allowed to provide
current account facilities, where payment can be
made by issuing cheque;
ii. Receive major role in facilitating the payments
system within the country and overseas;
iii. Authorize to deal in foreign exchange
transactions; and
iv. Act on behalf of the BNM in administering
Malaysia’s foreign exchange control system.
 2.3 FUNCTIONS OF COMMERCIAL BANKS
i) MOBILIZATIONOF SAVINGS
iv) PROVISIONOFFINANCE Accepting deposits through
Provide various finance business current account, saving
such as trade finance facilities, account, fixed deposit
cross boarder payment services, account, and negotiable
custody services and foreign P M instrument of deposits (NIDs)
exchange transaction.
ii) PROVISIONOFFACILITIES
Provide various banking
v) FINANCINGOFGOVERNMENT facilities to enable their
Provide fund to F P customers in making
government by purchasing payments and receiving
the government securities money thru cheque,
such as treasury bills and
Malaysian Government
G credit card, ATM, cash
deposit machine, and
Securities (MGS). others.
iii) GRANTING LOAN AND ADVANCES
Provide loan and advances to business entity and
individual for working capital, investment and
consumption.
 2.4 SOURCES OF FUNDS FOR COMMERCIAL
BANKS

• Deposits received from customers is liability to commercial bank, due to the customers can claim back their
deposits from the bank. The bank has no right on the funds.
2.5 USES OF FUNDS FOR COMMERCIAL
BANKS
• Loan given out is asset to commercial banks, due to the bank can claim back their funds from
the customer. The bank has right on the funds.
 2.6 ISLAMIC BANKS
• Islamic banking activities in Malaysia began as a result of
the pressure from Muslims to conduct their banking activities ,
in accordance with the Islamic principles.
• There are currently 16 Islamic banks (excluding commercial
banks).
• These banks are governed by the Islamic Financial Services
Act (IFSA) 2013.
• The Islamic banks are carrying out their operations in
accordance with the Islamic shariah.
 2.7 ISLAMIC BANKING PRINCIPLES
1.AL-WADIAH YAD DHAMANAD (safekeeping deposit with
guarantee)
• Refer to safekeeping deposit with guarantee.
• Wadiah is a trust.
• Depository (bank) act as a guarantor that guarantee to payment of deposit

WA •
on demand.
Depositor (customer) may receive a gift (Al-hibah) for depositing the money
for a specific period of time with the depository.

2. AL-MUDHARABAH (profit sharing)

• Refer to profit sharing between two parties.
• One party will provide capital (bank) and another party (agent) will provide
entrepreneurship.
• Entrepreneur will operate the business.
MUD • If the business make profit, both parties will share the profit according to
their equity participation .
• If loss, the loss will be borne by the bank only.
 3. AL-MUSYARAKAH(joint venture or partnership)
• Refer to a partnership between two parties.
• Profits are shared according to what have been agreed by

MUS both parties.

• If loss, both parties will bear the loss.

4. AL-MURABAHAH (cost-plus financing)

• Refer to sell of goods at a price which includes a profit margin
which have been agreed by both parties (the seller and the
buyer).
• Selling price = Cost of goods + Profit margin
MUR • The bank will purchase the goods that is wanted by the customer
and sell the goods at a higher price (including the profit margin).
• Buyer will make payment at a single amount.
 5. BAI BITHAMAN AJIL (deferred payment sale)
• Similar to the Al-Murabahah principle.
• Except the payment of the goods is on deferred

BBA payment basis.

6. BAI AL-DAYN (debt financing)

• Refer to sell of debt by a business entity.
• Such as sell of account receivables for a specific amount

BAD (lower tha n its principal value) for the business entity to
raise funds in a short term.
 7. AL-IJARAH (leasing)
• Refer to lease an asset.
• Two parties involved comprise of lessor and lessee.
• The lessor is a bank, the owner of the asset .
• The lessee is a customer, the user of the asset.
I • In return for using the asset, the lessee pays monthly
rental for an agreed time.

8. AL-TAKJIRI (leasing and subsequently purchase)

• Similar to al-ijarah, the concept of leasing.
• Except t he owner of the asset (lessor) agrees to sell the

T asset to the lessee (user of the asset) after an agreed time

period and at an agreed price.
 9. AL-QARDHUL HASSAN (benevolent loan)
• Refer to a loan without interest.
• The loan is lent out by a bank for a charity purpose.
• The borrower shall repay the principal amount only.
Q • If the borrower paid more, the bank would consider the extra
payment as a gift.

10. AL-WAKALAH (nominating another person to act)

• Refer to a nominator nominates a person namely
nominee to do something on his behalf.

WAK • Nominator is a bank customer.

• Nominee is a bank.
• The bank charges al ujr (fee) for the services rendered
 11. AL-KAFALAH (guarantee)
• Refer to a bank guarantee.
• A bank will guarantee a third party (another bank) that

K their customer will fulfil his obligation to the third party.

• The bank would compensate any losses if the customer
failed to fulfill their obligation to the third party.

12. AL-RAHN (collateralized borrowing)

• Refer to borrowing with collateral.
• If the borrower fails to repay his debt, their collateral can be
disposed (sold) in order for the bank to recover their loan.
R • Balance from the asset sold (proceed) will be given to the
borrower.
 13. AL-HIWALAH (remittance)
• Refer to remittance facility.
• Remittance means transfer of funds from a payer’s
account to a receiver’s account.
H • In return, the bank charges “al-ujr” (fee) for the services
rendered.

14. AL-UJR (fee)

• Refer to “ujr” (fee) charges for banking services.

U
 2.8 ISLAMIC BANKING SERVICES

Fee (Ujr) based Interest-free based

services: services:
Al-Hiwalah (remittance) Al-Mudharabah (profit sharing)

Al-Ijarah (leasing) Al-Musyarakah (partnership)

Al-Kafalah (guarantee)
Al-Murabahah (cost-plus financing)

Al-Sarf (FOREX) Al-Wadiah (deposit)

 2.9 THE SIMILARITIES BERWEEN THE
CONVENTIONAL AND ISLAMIC BANKS
Thesimilarities:

i. Both conventional and Islamicbanks offer similar banking business.

ii. Both conventionaland Islamic banks charge fee and interest for their

banking business.
 2.10 THE DIFFERENCES BETWEEN THE
CONVENTIONAL AND ISLAMIC BANKS
The differences: Conventional bank Islamic bank
i) Governed by Governed by FSA 2013 Governed by IFSA 2013
what act
ii) Profit and Does not apply the profit and sharing Apply the profit and loss sharing
loss sharing concept. Interest is charged even concept. Loss is shared when
concept though their customer suffers losses in customer suffers losses based on the
their business mode of finance used (Mudarabah,
Musharakah).

iii) Bank- Such creditor and debtors relationship Such partners, entrepreneurs,
customer investors, and buyer and seller
relationship relationship

iv) Aqad Does not apply the “aqad” concept Apply the “aqad” concept
 INVESTMENT BANKS

• Creationof IB isaimat :-
• Strengthening the capacity and capabilities of domestic banking
groups in developing a more resilient, competitive and dynamic
financial system in order to face the challenges of liberalization
and globalization.

• Enhancing the efficiency and effectiveness by minimizing

duplication of resources and activities.

• Strengthening the potential to capitalize on business

opportunities, increase competitive advantage and leverage on a
larger capital base, wider range of activities, and an increase
access to financial services at more cost-effective prices for
customers.
 INVESTMENT BANKS

• The Malaysian Investment Banking Association (MIBA) was

incorporated on 9 September 1975 as a Association of Merchant
Bank in Malaysia to promote and safeguard the interest of
investment banks, uphold sound business practices and ethics and
the highest standard professionalism whilst strengthening the bond
and goodwill within the investment baking fraternity.

• New image of MIBA was rebranding by Ybhg Tan Sri Dato’ Dr Zeti
Akhtar Aziz, Garvenor of BNM launched Malaysia Investment
Banking Association with new name and logo to support country
aspirations of developing a dynamic, efficient, innovative and
competitive capital market.
 INVESTMENT BANKS

• Activities of IB’s
• Toacceptwholesaledepositsminimum amount of RM500,000.
• Toconduct lending activities to complement the fee basedactivities.
• To provide a wide array of Corporate Financial Advisory Services which
include capital raising such as underwriting, loan syndication, corporate
financing, investment portfolio management and partnership opportunities
and undertaking of feasibility studies.
• Toassistcorporation in mergersand acquisition through CFAS.
• To provide ancillary services such as market making of derivatives, fixed
income instruments, foreign exchange , commodity and equity securities.
• To advise and assist client with specialized industry expertise (such as
technology and real estate).
 INVESTMENT BANKS

• Feebasedactivities of IB’s
• Corporate FinancialAdvisory Services (CFAS)
which include share underwriting and issuing, corporate advice on
equity restructuring, advise on merger and take over, advise on
investment and partnership opportunities and undertaking of
feasibility studies.

• Investment and Fund Management Services (IFMS)

such as management of business investment and portfolios, trustee
and management of trust funds and unit trusts and nominee services.

• BankingIntermediation Services(BIS)
such as management of loan syndication, acceptance and guaranteeof
bills and block discounting.
 INVESTMENT BANKS

No Name Ownership

1 Affin Hwang Investment Bank Berhad L

2 Alliance Investment Bank Berhad L

3 AmInvestment Bank Berhad L

4 CIMB Investment Bank Berhad L

5 Hong Leong Investment Bank Berhad L

6 KAF Investment Bank Berhad L

7 Kenanga Investment Bank Berhad L

8 MIDF Amanah Investment Bank Berhad L
9 Maybank Investment Bank Berhad L
10 Public Investment Bank Berhad L
11 RHB Investment Bank Berhad L
 Offshore banking

• Offshore banking is generally used to describe

international banks, companies, and investment
• An offshore bank is a bank which is regulated under
international banking license (often called offshore license)
• People who bank offshore do so in a part of the world
outside their home country.
• Offshore banking has previously been associated with
the underground economy, organised crime, tax evasion,
and money laundering.
 Offshore banking

Benefits of offshore market

• 3%tax onnet audited results or aflat rate of
RM20,000 to trading companiesand0%for non
trading companies

• low operational costs –infrastructure provided,

incentive, subsidies,tax exemption, lower fees etc.
• liberalexchangecontrols
• Political stability

• The host of other advantages including readily

available, experienced and professional service
providers.

• Easyaccess byair
Easy accessible by air from manycapital cities in the
region and same time zone making business
convenient
 Offshore banking

Labuan FSA
•Effective from 11 February 2010, Labuan Offshore Financial
Services Authority (LOFSA) has changed its name to Labuan
Financial Services Authority (Labuan FSA)

• Established in 1996 to:

• Focus on business development and promotion
• Process application and supervise offshore activities
• Develop national objectives, policies and set
priorities
• Administer and enforce legislation
• Incorporate/register offshore companies
 Offshore banking

Labuan FSA'sMission and

Vision
LabuanFinancialServicesAuthority
(LabuanFSA)shallact asa one-stopagency
to realise the Government’svisionto
developLabuanasa premierLabuan
InternationalBusinessand Financial
Centre(IBFC) by ensuringthe highest level
of integrity, commitmentand
professionalism.
 Offshore banking

Objectives&Functionsof Labuan FSA

Labuan FSA was established as a single regulatory agency on 15th February
1996 with the following roles and functions:-
i.To be responsible for setting the national objectives, policies and priorities for the
orderly development and administration of the Labuan IBFC.

ii.To be responsible for the promotion and development aspects of the IBFC and
recommend to the Government on new measures to speed up the growth and
development of the Labuan IBFC.

iii.Focus will be directed particularly on promoting and coordinating the "software aspects"
of the IBFC such as policy and legal matters, while the physical infrastructure
("hardware") side continues to be coordinatedbythe Labuan Coorporation.
 Offshore banking

Objectives & Functionsof Labuan FSA

• To supervise the activities and operation of the Labuan
financial services industry and to process applications
to conduct business in the Labuan IBFC
► Specifically in Labuan banking, insurance and insurance related
business, trust and fund management, incorporating and
registration of Labuan companies as well as for the setting up of
Labuan trust companies
• To administer and enforce the financial services
legislation and work together with the industry players in
Labuan IBFC to promote Labuan financial services
► TheLabuanlegislation mustadminister, enforce,carryout andgiveeffect to
whatare listed in the legislationsection.
 Offshore banking

Business offered at Labuan FSA

1. Providing credit facilities,
2. Providing consultancy and advisory services relating to
corporate and investment matters or making investments on
behalf of any person,
3. Undertaking foreign exchange transactions, interest rate
swaps, dealings in derivative instruments or derivative
financial instruments or any other similar risk management
activities,
4. Such other business as the Authority with approval of the
Minister may specify in any currency other than Malaysian
currency.
5. Offshore investment banks are not allowed to acceptdeposits.
Labuan International Business and Financial Centre
(Labuan IBFC)
• Launched on 28 January 2008

• Was created as an offshore financial hub on October 1990 under

the name of Labuan International Offshore Financial Centre (IOFC)

• Malaysia’s only offshore Centre

• Strategically located on Labuan island off the northwest coast of

Sabah

• Home to more than 6,500 offshore companies and more than 300
licensed financial institutions