Chapter 1

INTRODUCTION TO
COMMERCIAL BANK

This work is licensed under a

Creative Commons Attribution-
NonCommercial-ShareAlike 4.0
International License.
Learning Outcomes
at the end of this chapter, student would
be able to explain:

The definition of Bank and commercial

banking
The functions of commercial bank
The differences between Islamic and
Conventional Bank
The sources and uses of funds
Banking Law and regulation
• Financial Services Act 2013
• Islamic Financial Service Board (IFSB)
• Anti-money Laundering and Anti- Terrorism Financing and
Proceeds of Unlawful Activities Act 2001 (AMLATFPUAA)
Introduction

The banking sector has a considerable impact

on a country's financial system, economy and
the citizens. In most countries, banking industry
is highly regulated by government.
 Definition of bank and commercial
bank
Legal definition

Banking is defined as jurisdiction by the

legislation created and regulated by the
government. The activities includes:

• Receiving deposit of money from customers

• Making advances or lending to customers
• Paying or collecting of cheques.
Definition of bank and commercial
bank

Definition by the Financial Services Act 2013 (FSA) “a person

which carries on banking business .The said businesses are:
• Accepting deposits on current account, deposits
account, savings account or other similar account.
• Paying or collecting cheques drawn by, or paid in by,
customers
• The provision of finance
• Any other business with the approval by the Minister
of Finance
 Functions of Commercial Bank
The largest and main players in the banking system.
¨Main characteristic: provision of current account facilities where payment can be made through issuing
cheques
4 5
1 3

Financing of
Provision of various government through
Mobilisation of Granting loans banking facilities &
savings through and advances to services as authorised purchase of
current, savings Provision of facilities businesses and by BNM i.e. trade government
and fixed for its customers to individuals for financing services, securities and T-
deposit make payments and WC, investment treasury services, cross Bills.
accounts. receive money i.e using and boarder payment
cheques, savings book consumption. services, custody
and ATM facilities. services and to deal with
foreign exchange.
The importance of banking business
to the economy includes:

Netting and settlement Credit Credit quality

intermediation – Maturing
of payments – bank improvement – bank
provide borrowing transformation –
act as both collection lend money to the
banks borrow more
and paying agents for and accept money corporate and
from the depositor, on demand debt
customers, personal borrowers
act as and short-term
participating in (high quality
intermediaries. debt but provide
interbank clearing and borrowers) in order
more long-term
settlement system to to maintain or
loans.
collect, present, be improve the portfolio
presented with and pay management of the
payment instruments. bank’s assets and
capital.
 ISLAMIC VS
CONVENTIONAL BANK

Any other business that the Bank Negara Malaysia (BNM)

approves, including the dual banking system consisting of
conventional and Islamic banks. The operations of the
conventional banking sector are parallel with the Islamic Banking
sector. An Islamic bank is a bank whose business operations do not
involve anything that is not approved by the religion of Islam,
defined as Shariah Law, and licensed under the Islamic Financial
Services Act 2013. In contrast, BNM licenses Conventional under
FSA.
 The differences
1
Islamic Bank Features Conventional Bank

Follow the principles of shariah as guided Guided by conventional banking rules

under Islamic Law in addition to the Operation and regulation and not necessary
conventional banking rules and regulation based on shariah concept

Islamic banking includes trading and profit-

Based on predetermined rates of
sharing arrangement between the capital
Arrangement interest in its lending and borrowing
provider (investor) and the user of funds
activities
(entrepreneur)

There is a restriction in dealing with shariah

non-compliant activities namely riba (usury), No restriction to deal with shariah non-
Restriction
Gharar (uncertainty), Maysir (Gambling) and compliant activities
Haram (Forbidden)
1 The differences...cont'd

Pay out Zakat (almsgiving) annually based on income Banks do not have to pay zakat but
Alms giving
and the value of wealth or assets must pay the tax on its net income

The penalty charges due to past due payment cannot be Penalty or overdue payment charges
recognizes as income and must be channelled to charity. The are recognized as income. It can be
compensation charges on actual cost are allowed and subject Penalty based on the outstanding amount
to a maximum of 1% per month on the overdue instalment including the overdue instalment and
only. on compounding basis.

The consideration is given to the objective of shariah

(Maqasid al-Shariah) while protecting the interest of the Consideration Shareholders interest is important
shareholders.

Based on profit-sharing basis or profit from trading

Based on interest received from
transactions namely sale-based, lease-based, equity-based, Income
lending and borrowing transactions.
and other fee-based contracts

The status of relationship with clients is buyer-seller, lessor-

In relations to the client's lender-
lessee, partners, principal-agent, depending on shariah Relationship
borrower relationship.
contracts.
Sources and Uses of Funds

a) Major sources come from deposits.

• Savings, Current & Time Deposits

• Negotiable Certificate of Deposits (NCDs)

b) Amount borrowed from other financial institution/inter-bank

borrowing.

• Borrowings from other banks through federal funds purchases and repo
agreements, bank notes, long-term debt, and commercial paper

c) Capital & reserves.

• Capital refers to the money put up by shareholders

• Reserves refers to undistributed profits & other capital reserves

d) Debetures and notes.

e) Bankers acceptances & etc.

Sources and Uses of Funds

a) Loan activities.
• Utilized more than half of bank resources
• Eg: hire-purchase, leasing, personal loans, housing loans,
overdraft, etc.

b) Amount due to financial institutions.

• Cash items in process of collection
• Deposits at other larger banks

c) Cash & reserves with BNM.

d) Investments & etc.

• Include investment in T-bills, Government securities, stock &
private debt securities markets
 Financial Services Act 2013

• This act provides for the regulation and supervision of financial

institutions, payment systems and other relevant entities and the
oversight of money market and foreign exchange markets to
promote financial stability and for related, consequential or
incidental matters.
• FSA governs commercial banks, investment banks and other
financial institutions.
• The provisions of the FSA do not apply to Islamic banks.
Financial Services Act 2013... cont'd...
• The goals of the FSA are to maintain and strengthen financial
stability, namely to:
• Enhance and support inclusive growth in the financial system
and the economy
• Provide adequate consumer protection
• Give BNM more powers, given the increasingly complex and
interconnected environment
• The FSA provides BNM with necessary regulatory and supervisory
oversight powers to fulfil its board mandate within a more complex
and interconnected environment, given the regional and
international nature of financial developments.
 Islamic Financial Services Board
(Islamic Financial services Act 2013)

• To regulate the functioning of Islamic banks and to advise on the Islamic

Finance standards across the globe, there are regulatory bodies such as the
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)
and Islamic Financial Services Board (IFSB).
• In Malaysia, the Islamic Financial Services Act 2013 (IFSA) was set up, the act is
to provide for the regulation and supervision of Islamic financial institutions,
payment systems and other relevant entities as well as the oversight of the
Islamic money market and Islamic foreign exchange market.
• This is to promote financial stability and compliance with Shariah and for
related, consequential or incidental matters.
 Islamic Financial Services Board (Islamic
Financial services Act 2013)...cont'd...

• •In IFSA 2013, there are 18 sections consisting of rules and regulations
of Islamic banks, conventional banks with Islamic windows, and
Takaful companies such as authorization, shariah requirements,
payment systems, business conduct, and consumer protection.
• It provides a comprehensive legal framework consistent with Shariah
in all aspects of regulations and supervision.
• IFSA 2013 enhances the banking business activities and conduct to
ensure the protection of the customer to build public trust and
confidence.
Anti Money Laundering and Anti- Terrorism
Financing and Proceeds of Unlawful
Activities Act 2001 (AMLATFPUAA)
• The AMLATFPUAA provides for the offense of money laundering, the measures to
be taken for the prevention of money laundering and terrorism financing
offenses, investigation powers, and the forfeiture of property involved in or
derived from money laundering and terrorism financing offenses, as well as
terrorist property, proceeds of unlawful activity and instrumentalities of a crime.
• The First Schedule of the AMLATFPUAA contains a list of the reporting institutions
under the AMLATFPUAA, i.e., financial institutions and designated non-financial
businesses and professions which are required to perform certain obligations
which are designed to prevent money laundering and terrorism financing
offenses.
Anti Money Laundering and Anti- Terrorism
Financing and Proceeds of Unlawful
Activities Act 2001 (AMLATFPUAA)...cont'd
• The Second Schedule of the AMLATFPUAA lists serious offenses from various legislation
that, if committed, are likely to result in a person benefiting or deriving proceeds from the
crime.
• The AMLATFPUAA promotes a collaborative and multi-agency approach by setting out the
powers and functions of:
• The competent authority, which is responsible for overseeing the performance of
obligations by the reporting institutions, facilitating the enforcement of the
AMLATFPUAA, and collaborating with the foreign financial intelligence units;
• Enforcement agencies, which are responsible for investigating the offenses under the
AMLATFPUAA; and
• Supervisory and regulatory authorities are responsible for facilitating the
implementation of the AMLATFPUAA.
 What is Money Laundering?
1
The person who:

• Engage directly or indirectly in a transaction that involve proceeds of

any unlawful activity
• Acquires, receive, possesses, disguises, transfers, converts, exchanges,
carries, disposes, uses, removes from or brings into Malaysia proceeds
of any unlawful activity; or
• 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.

(sources: AMLATFPUAA 2001 (Act613)

 What is Money
1 Laundering?...cont'd...

Three stages of money Laundering

• Placement
⚬ The physical disposal of cash proceeds derived from illegal
activity
⚬ Methods:
￭ Using companies with high turnover as a front to mix the
illegally obtained funds with legitimate earnings.
￭ Smuggling the currency to foreign land without currency
control and legislation against money laundering.
￭ Using companies incorporated in tax haven countries
What is Money
Laundering?...cont'd...
Three stages of money Laundering

2. Layering
• Separating illicit proceeds from their source by creating complex layers of
financial transactions designed to disguise the audit trail and provide
anonymity.
• The purpose is to make detection as difficult as possible by attempting to
break the linkage between criminals and the proceeds of crime.
• Methods:
• Illegitimate funds are usually converted into usable monetary
instruments or valuable securities.
• Multiple purchases and resale of assets, particularly between countries
• Electronic Funds Transfer between numerous financial institutions
What is Money
Laundering?...cont'd...
Three stages of money Laundering

3. Integration
⚬ Refers to turning of criminally derived wealth, which has been hidden
under several layers, into the economy as legitimate funds
⚬ Methods:
⚬ Property purchase or involvement in business that allows
repatriation of funds
⚬ Collusion with bank staff and, thus, transactions performed will not
arouse any suspicions and are not subject to investigations
⚬ False invoices can be easily created using trade financing facilities
such as letters of credit, trust receipts, or consignment notes.
Thank You
Prepared by:

DR SARMILA UDIN
Resource Person (RP)
Lecturer UiTM Sabah's Branch
Commercial Banking Operations & Digital Banking | FIN370

This work is licensed under a

Creative Commons Attribution-
NonCommercial-ShareAlike 4.0
International License.