Chapter 1.

INTRODUCTION TO COMMERCIAL BANK

WHAT IS BANK AND COMMERCIAL BANK:

Legal Definition:
Banking is jurisdiction by legislation and regulated by the government.

The activities includes,

-Receive deposits of money from customer
-Make advances or lending to customer
-Pay or collect cheques

Definition by Financial Services Act (FSA) 2013:

“ Person who carries on banking businesses “

The businesses are:

-Accept deposits from current account, deposit account, savings account and other similar
account
-Pay or collect cheque drawn by, or paid in by customer
-Provision of finance
-Other business with approval by minister of finance

FUNCTIONS OF COMMERCIAL BANK:

1. Mobilisation through savings account, current account, fixed deposits account

2. Provision of facilities to customers to make payment and receive money such as using
cheques, saving books and ATM facilities.
3. Granting loan and advances to business and individuals for investment, consumption
4. Provision of various banking facilities and services authorised by BNM like treasury
services, financing services, cross boarding payment services, deal with foreign
exchange, and custody services
5. Financing of government through purchase of government securities such as treasury
bills

Importance Of Banking Business To The Economy:

a) Netting and settlement of payment

-bank act as collection and paying agents for customer, participate in interbank clearing
and settlement system to collect

b) Credit intermediation
-provide borrowing and accept money from depositor, act as intermediaries

c) Credit quality improvement

Chapter 1. INTRODUCTION TO COMMERCIAL BANK

-bank lend money to corporate and personal borrower to maintain or improve the
portfolio management of capital

d) Maturing transformation
-banks borrow more on demand debt and short term debt but provide more longlamic
term loans

Islamic Versus Conventional Bank:

Features:

1)Operation
Islamic Bank
-follow the principles of shariah guided by Islamic Law

Conventional Bank
-guided by conventional bank rules and regulation, not necessary based on shariah concept

2)Arrangement
Islamic Bank
-includes trading and profit sharing arrangement between capital provider ( investor) and user of
funds (entrepreneur)

Conventional Bank
-based on predetermined rates of interest in its lending and borrowing activities

3)Restriction
Islamic Bank
-restriction in dealing with shariah non compliant activities such as riba, gharar and maysir

Conventional Bank
-no restriction to deal shariah non compliant activities

4)Alms Giving
Islamic Bank
-pay out zakat (almsgiving) annually based on income and the value of wealth assets

Conventional Bank
-bank do not have to pay zakat must have to pay tax on its net income

5)Income
Islamic Bank
Chapter 1. INTRODUCTION TO COMMERCIAL BANK

-based on profit sharing basis or profit from trading transactions namely sale based, lease
based, equity based, and other fee based contracts

Conventional Bank
-based on interest received from lending and borrowing transactions

Sources of Funds
a) Major sources come from deposits
-saving, current, time deposits
-NCDs

b) Amount borrowed from other financial institutions

-borrowing from other banks through federal fund purchases and repo agreement, bank
notes, long term debt, commercial paper

c) Capital and reserves

-capital refers to money put up by shareholders
-reserves refers to undistributed profits and other capital reserves
d) Debentures and notes
e) Bankers Acceptance and others

Uses of Funds
a) Loan activities
-utilized more than half bank resources

b) Amount due to financial institutions

-cash items in process of collection
-deposits of other larger banks

c) Cash and reserves with BNM

d) Investment and etc

-include investment in T Bills, Government securities, stocks and private debt sscurities
market

WHAT IS MONEY LAUNDERING?

- The person who:

-engage directly or indirectly in a transaction that involves proceeds of unlawful activity
-acquiries,receive,possesses,disguises,transfers,converts,exchange,cardies,disposes,us
es,removes from or brings into Malaysia proceeds of any unlawful activity
Chapter 1. INTRODUCTION TO COMMERCIAL BANK

Conceals disguises or impedes the establishment of the nature origin , location

movement, disposition, title of right with respect to, or ownership of, proceeds of any
unlawful activity

STAGE OF MONEY LAUNDERING

1) PLACEMENT
- The physical disposal of cash proceeds derived from illegal activity
- Methods:
a) using companies with high turnover as a front to mix the illegally obtained
funds with legitimate earnings
b) smuggling the currency to foreign land without currency control
c) using companies incorporated in tax haven countries

2) LAYERING
- Separate illicit proceeds from the source by creating complex layer of financial
transactions designed to disguised the audit trail and provide anonymity
- Purpose is to make detection as difficult as possible by attempting to break the linkage
between criminals and the proceeds of crime
- Methods
a) illegitimate funds are usually converted into usable monetary instrument or
valuable securities
b) multiple purchases and resale of assets particularly between countries
c) electronic funds transfer between numerous financial institutions

3) INTEGRATION
- refers to turning of criminally derived wealth which has been hidden under several layers
into the economy as legitimate funds
- Methods
a) property purchase or involvement in business that allows repatriation of funds
b) collusion with bank staff and thus, transaction performed will not arouse any
suspicious and are not subject to investigations
c) falss invoices can be easily created using trade financing facilities such as credit,
trust receipts or consignment notes