+

TOPIC 1

INTRODUCTION & OVERVIEW OF FINANCIAL SYSTEM

+
FINANCIAL SYSTEM

 Plays a critical role for INTERMEDIATION PROCESS to function efficiently.

 Enables lenders and borrowers to exchange funds

 Mechanism where funds can flow effectively from surplus units to deficit units.

 Monitored closely by a supervisory authority to ensure rules and regulations are followed.
+ FLOWS OF FUNDS THROUGH THE
FINANCIAL SYSTEM
 4

Financial intermediation

SURPLUS
UNITS/
$
DEPOSITORS AN
$
INTERMEDIARY DEFICIT UNITS/
BORROWERS
 5

Financial intermediation
• The ‘middlemen’ in the exchange of financial assets
• To facilitate the movement of funds among users and demanders
of funds
• Basic function – obtain funds from surplus unit and allocate to
deficit units
 6

Benefits of financial intermediation

• well diversified portfolio of depository or investment
instruments
• more options of borrowing, financing or advances at lowest
possible prices
• reliable information of instruments - such as level of safeties
or liquidity
• act as advisor to participants to utilize the instruments
• offer products/services through virtual banking or internet
banking
• identify the actual provider and users of funds through
effective banking network
+
BENEFITS OF FINANCIAL INTERMEDIARIES

1. Well diversified portfolio of depository or investment instruments

2. More options of borrowing, financing or advances at LOWEST POSSIBLE PRICES

3. Reliable information of instruments – such as level of safeties and liquidity

4. Act as advisor to participants

5. Offer products and services through virtual banking or internet banking

6. Identify actual provider and users of funds through EFFECTIVE BANKING NETWORK
+

Overview of the financial system

+
Introduction

 Why Study Money, Banking, and Financial Markets?

 To examine how financial markets such as bond, stock, and foreign exchange markets work
 To examine how financial institutions such as banks and insurance companies work
 To examine the role of money in the economy
+
Function of Financial Markets

 Perform the essential function of channeling funds

from economic players that have saved surplus
funds to those that have a shortage of funds
 Promotes economic efficiency by producing an
efficient allocation of capital, which increases
production
 Directly
improve the well-being of consumers by
allowing them to time purchases better
+
Structure of the financial system

 Principle objective of a financial system is to facilitate an effective use of funds

 Sources of funds
- savings from public and private sector
- inflow of fund from abroad
 Uses of funds
- private sector investments
- public sector investments
- accumulation of international reserves
- unidentified private sector payment abroad
 Matrix that hold the Financial Market in Malaysia

Minister
of Finance

Labuan Offshore
Bank Securities
Financial Services
Negara Malaysia Commission Registry
Authorities
of
companies
Monetary Options
Labuan International Malaysian
and Private and Financial
Offshore Government Stock Exchange
Foreign exchange Debt Securities Future
Financial Centre Securities
Market Exchanges
+ Overview of Financial Markets

Primary
 Primary Markets
Markets versus
versus Secondary
Secondary
Markets
Markets
Money
 Money Markets
Markets versus
versus Capital
Capital Markets
Markets
Foreign
 Foreign Exchange
Exchange Markets
Markets
+ Primary Markets versus Secondary
Markets
 Primary Markets
Primary Markets
 markets in which users of funds (e.g. corporations, governments) raise funds by
markets in which users of funds (e.g. corporations, governments) raise funds by
issuing
issuingfinancial
financialinstruments
instruments(e.g.
(e.g.stocks
stocksand
andbonds)
bonds)
 Secondary Markets
Secondary Markets
 markets where financial instruments are traded among investors (e.g. BURSA,
markets where financial instruments are traded among investors (e.g. BURSA,
MESDAQ)
MESDAQ)
+ Money Markets versus Capital Markets

 Money Markets
Money Markets
 markets that trade debt securities with maturities of one year or less (e.g. CD’s,
markets that trade debt securities with maturities of one year or less (e.g. CD’s,
Treasury
Treasurybills)
bills)
 Capital Markets
Capital Markets
 markets that trade debt (bonds) and equity (stock) instruments with maturities of
markets that trade debt (bonds) and equity (stock) instruments with maturities of
more
morethan
thanone
oneyear
year
+ Overview of Financial Institutions

Institutions
Institutions that
that perform
perform the
the essential
essential function
function of
of
channeling
channeling funds
funds from
from those
those with
with surplus
surplus funds
funds toto
those
those with
with shortages
shortages of
of funds
funds (e.g.
(e.g. banks,
banks, thrifts,
thrifts,
insurance
insurance companies,
companies, securities
securities firms
firms and
and investment
investment
banks,
banks, finance
finance companies,
companies, mutual
mutual funds,
funds, pension
pension
funds)
funds)
+ Flow of Funds in a World without
FIs: Direct Transfer
Financial Claims
(Equity and debt
instruments)
Users of Funds Suppliers of
(Corporations) Funds
(Households)
Cash

Example: A firm sells shares directly to investors without

going through a financial institution .
+ Flow of Funds in a world with FIs:
Indirect transfer

FI
Users of Funds Suppliers of Funds
(Brokers)

Cash FI
(Asset Cash
transformers)
Financial Claims Financial Claims
(Equity and debt securities) (Deposits and insurance policies)
+
Financial System
+
Types of FIs
Commercial
Commercial banks
banks
 depository institutions whose major assets are loans and major liabilities are
depository institutions whose major assets are loans and major liabilities are
deposits
deposits

Thrifts
Thrifts
 depository institutions in the form of savings and loans, credit unions
depository institutions in the form of savings and loans, credit unions

Insurance
Insurance companies
companies
 financial institutions that protect individuals and corporations from adverse
financial institutions that protect individuals and corporations from adverse
events
events

(continued)
+ Securities firms and investment banks
Securities firms and investment banks
financial institutions that underwrite securities and engage
financial institutions that underwrite securities and engage
in
insecurities
securitiesbrokerage
brokerageand
andtrading
trading
Finance companies
Finance companies
financial institutions that make loans to individuals and
financial institutions that make loans to individuals and
businesses
businesses
Mutual Funds
Mutual Funds
financial institutions that pool financial resources and
financial institutions that pool financial resources and
invest
investin
indiversified
diversifiedportfolios
portfolios
Pension Funds
Pension Funds
financial institutions that offer savings plans for retirement
financial institutions that offer savings plans for retirement
+ Services Performed by Financial
Intermediaries

Monitoring
 Monitoring Costs
Costs
Liquidity
 Liquidity and
and Price
Price Risk
Risk
Transaction
 Transaction Cost
Cost Services
Services
Maturity
 Maturity Intermediation
Intermediation
Denomination
 Denomination Intermediation
Intermediation
+ Services Provided by FIs Benefiting the
Overall Economy

Money
 Money Supply
Supply Transmission
Transmission
Credit
 CreditAllocation
Allocation
Intergenerational
 Intergenerational Wealth
Wealth Transfers
Transfers
Payment
 Payment Services
Services
+
FUNCTIONS OF FINANCIAL SYSTEM
+ STRUCTURE OF
MALAYSIAN
FINANCIAL
SYSTEM

FINANCIAL FINANCIAL
MARKETS
FINANCIAL
INSTITUTIONS

SYSTEM MONEY &

NON-BANK
OFFSHORE DERIVATIVES FOREIGN
CAPITAL MARKET FINANCIAL BANKING SYSTEM
MARKETS MARKET EXCHANGE
INTERMEDIARIES
MARKETS

BANK NEGARA
BOND PROVIDENT FUND
MALAYSIA

MM – Short-term instruments (T-Bills,

MGS) INSURANCE / COMMERCIAL
EQUITY
TAKAFUL BANKS

FOREX – Trade of currency (spot/forward

contract) DEVELOPMENT
FINANCIAL ISLAMIC BANKS
INSTITUTIONS

CM – Long-term instruments (stocks,

INVESTMENT
bonds) UNIT TRUST
BANKS

Derivatives market – Future/option SAVINGS

OFFSHORE BANKS
instruments derive from underlying INSTITUTIONS

securities (e.g. KLIBOR future, KLCI

future) OTHER
SPECIALIZED
REP. OFFICE &
MONEY BROKER,
INSTITUTIONS ETC
+
FINANCIAL STABILITY & ITS IMPORTANCE
+ BANKING SYSTEM
+
BANK NEGARA MALAYSIA: ROLES

Established on Jan 26, 1959 to:

1. Issue currency (issue, re-issue and exchange noted and coins)

2. Keeper of international reserves and safeguarding the value of RM

 Gold
 Reserves position in IMF, SDR
 Diversified portfolio of FOREX assets denominated in foreign
currencies (bank balances, Tbills, long-term securities)
+
+
CONT: BANK NEGARA MALAYSIA: ROLES

3. Act as a banker and financial advisor to the government

 Manage national debt
 Raise government loan through well managed loan programs
 Manage government’s accounts
 Provide temporary advances and finances government’s investments
in Treasury Bills and other government securities
 Represent in government bodies or committees as nation’s policy
maker
+
CONT: BANK NEGARA MALAYSIA: ROLES

4. Banker to other banks

 Distribute currency when receive order from commercial banks and
charge their clearing account.
 Lender of last resort – by extending credit to ensure confidence in
orderly operations of the banking system
 Recommend MOF to issue license to commercial banks, merchant
banks and financial companies.
+
CONT: BANK NEGARA MALAYSIA: ROLES

5. Promote monetary stability and a sound financial structure

 Regulate volume of money and generation of credit through wide range of
monetary instruments
 Ensure price stability / inflation remains at low level

6. Influence credit situation to the advantage of the country

 Ensure flexible and sufficient money supply to sustain economic growth (by
imposing SRR, interest rate regulation)

7. Supervise, regulate and develop insurance industry.

8. Administer the Exchange Control Act 1953
+ BANK NEGARA MALAYSIA:
OBJECTIVES, FUNCTIONS AND
MONETARY INSTRUMENTS
+
BNM: OBJECTIVES
• Promote monetary stability and a sound financial structure
• Why monetary stability is so important?
• If inflation is too high:
• More demand on real assets like houses and properties – but
less demand on other productive investments for the economy.
• Savers are less inclined to hold savings in the financial system
since they expect the value of savings will diminish.
• Fixed income earners experience a reduction in their standard
of living.
• Exports become more expensive – reduce Malaysia’s
competitiveness.
• Reduce potential growth of the economy
+
BNM: OBJECTIVES
• Act as a banker and financial adviser to the government
• Give regular advice on the management of its domestic and external
debts
• BNM as agent for the government in negotiations and concluding loan
agreements.

• Issue currency and keep reserves safeguarding the value of the currency
• Reserves are held in the form of
• Gold
• Reserves position in the International Monetary Fund (IMF),
Special Drawing Rights (SDR)
• Portfolio of foreign exchange assets denominated in major
international currencies in the form of bank balances, treasury bills,
long term securities.

• Influence credit situation to the advantage of the country

• Act as a banker to other banks

+
BNM: FUNCTIONS
• Prudent conduct of monetary policy
• Maintaining low and stable inflation
• Preserving the purchasing power of MYR

• Ensure stability in financial system

• Able to meet sophisticated needs of consumers and businesses

• Develop financial system infrastructure

• Building nation’s efficient and secured payment system
• Building necessary institutions to ensure comprehensive and resilient
financial system (e.g: Bursa Malaysia, CGC)

• Promote financial inclusion

• Improve access to financial services for all economic sectors

• Banker to other banks and government

• Issue currency and safeguarding its value

• Provide advise to the government on macroeconomic policies and public debt

management
+
BNM: MONETARY INSTRUMENTS
• Statutory reserve requirement
• All banks are required to place certain amount of cash reserve with BNM.
• For liquidity management

• Discount rate
• Rate of interest BNM charge on loans to financial institutions.

• Open market operations

• Sales and purchase of government securities
• Affects bank’s reserves, flow of credit and money
• Papers eligible to be traded are Cagamas bonds, BNM bills, etc.

• Interest rate
• Involves setting minimum lending rate to the banks and ceilings interest rate
that can be offered to depositors.
• Help in influencing level of savings

• Moral suasion (qualitative instrument)

• Informally induce a positive voluntary response from the financial system to
BNM policy initiatives.
+
DISCUSSION
Discuss how BNM reduce the impact of inflation?

Try to relate with monetary instruments.

+
ASSETS OF BNM
(AS AT MARCH 2018)
+
LIABILITIES OF BNM
(AS AT MARCH 2018)
+ RESERVES OF BANK NEGARA MALAYSIA
COMPONENTS & ITS CURRENCY
SAFEGUARDING ROLE
+
RESERVES
Roles:

1. Support and maintain confidence in the policies for monetary and exchange rate
management

2. Provide level of confidence to markets that a country is able to meet its external
obligations

3. Demonstrate backing of domestic currency by using external assets

4. Assist the government in meeting its foreign exchange needs and external debt
obligations

5. Maintain a reserve for national disasters or emergencies

+
RESERVES OF BNM

Sufficient to finance 7.3 months of retained imports and is 1.1 times the short-term
external debt.
Source: BNM
+
RESERVES OF BNM
http://www.bnm.gov.my/index.php?ch=statistic&pg=stats_reserves
 BANK NEGARA MALAYSIA: MONETARY INSTRUMENT
+
+
COMMERCIAL BANKS: ROLES

1. Raise funds by collecting deposits thru savings, current and fixed deposit accounts

2. Provide current account facilities where payments / deposits can be made through issuing or
receiving checks

3. Accept deposits for savings account, FD and negotiable instruments.

4. Offer financing and other financial services – remittances and letters of credit.
 47

Banking functions of commercial banks

• Retail banking services

• Trade finance facilities
• Treasury services
• Cross border payment services
• Custody services
+
COMMERCIAL BANKS: FUNCTIONS
1. Mobilize savings

2. Provide facilities to make payments and receive money

3. Extend loans and advances for working capital, investment and consumption

4. Finance government paper – MGS and TBs

5. Provide various banking facilities and services as authorized by BNM

 Execution of standing instructions
 Transfer funds
 Collection of zakat
 Issue letter of credit
 Lockers facility
 Foreign exchange transactions
 Others
 49

Bank’s balance sheet

Assets (uses) Liabilities (sources)

- Cash - Deposits
- Marketable securities - Financial instruments
- Loans/advances - Capital/reserves
+ COMMERCIAL BANKS: SOURCES OF FUNDS

1. DEPOSIT ACCOUNT
1. Capital and reserves
2. Deposits (public and private sectors)
3. Negotiable certificate of deposits (NCSs)
4. Amount due to financial institutions
5. Bankers acceptances (BA)
6. Other liabilities

2. FOREIGN
1. Amounts due to financial institutions
2. Other liabilities
+
COMMERCIAL BANKS: USES OF FUNDS

1. DOMESTIC
1. Cash
2. Statutory reserves
3. Money at call
4. Amounts due from financial institutions
5. Investments (T-Bills, govt and private securities)
6. Loans (overdraft, term loans, trade bills, other loans)
7. Fixed and other assets

2. FOREIGN
1. Amounts due from financial institutions
2. Term loans, trade bills, investments and other assets
+ USES AND SOURCES OF FUND: COMMERCIAL BANKS 52
+
INVESTMENT BANKS: ROLES

1. Provide banking facilities and services to meet financial needs of participants. Example:
 help a company to raise capital.
 Provide services such as advisory and management services, stock broking
services, loan syndication, portfolio management and others.

2. Main contributors of assets in the financial system

 Assist public and private corporations in raising funds in the capital markets
(both equity and debt)
 Provide strategic advisory services for mergers, acquisitions and other types
of financial transactions.
+
INVESTMENT BANKS AS AT YEAR 2023
1. Affin Hwang Investment Bank Berhad 8. AmInvestment Bank Berhad

2. Alliance Investment Bank Berhad 9. KAF Investment Bank Berhad

3. Maybank Investment Bank Berhad 10. Public Investment Bank Berhad

4. RHB Investment Bank Berhad 11. MIDF Amanah Investment Bank Berhad

5. Kenanga Investment Bank Berhad

6. Hong Leong Investment Bank Berhad

7. CIMB Investment Bank Berhad

+
INVESTMENT BANKS:
SOURCES AND USES OF FUNDS
1. Sources of funds
 Deposits from customers
 Borrowing
 Deposits and placement of bank and other financial institutions
 Balance due to clients and brokers

2. Uses of funds
 Loan, advances and finance
 Deposit placement with financial institutions
 Security held for trading and maturity
 Security available for sale
 Statutory deposit with BNM
 Property, plant and equipment
 Investment into subsidiary companies
+
NON-BANK FINANCIAL INSTITUTIONS (NBFI)

1. Movement of funds from surplus to deficit units

2. Their roles are specialized in nature such as:

 Pension fund
 Provide insurance business
 Promote economic activities for economic development
 Credit institutions
 Others

3. Provide capital for industrial, agriculture, commercial or other economic development (specialized
in nature)

4. Support development in strategic and new growth area, to complement the financial service in
meeting the national policies.

5. Provide managerial and technical assistance apart from financing.

+
NBFI: EXAMPLES

1. Development Financial Institutions (DFIs) - SME Bank, Bank Rakyat, Agrobank

2. Savings institutions - Bank Simpanan Nasional

3. Provident and pension funds - EPF

4. Insurance companies - All insurance companies

5. Housing credit institutions

6. Cagamas Berhad - Mortgage Housings

7. Pilgrims Fund Board - Lembaga Tabung Haji

8. Leasing, factoring and venture capital companies

9. Mutual fund companies - All unit trust funds companies

+
NBFI: PROVIDENT AND PENSION FUND
1. Safeguard savings of members and provide future benefits upon retirement, death or
disabilities.

2. Main source of funds: Deductions from employees/employers + return on investment.

3. Main use of funds: investment in securities, withdrawals

4. Examples:
 EPF
 Pension Trust Fund
 Social Security Organization
 Armed Forces Fund
 Malaysian Estates Staff Provident Fund
 Teachers Provident Fund
+
NBFI: INSURANCE COMPANIES

1. Provide financial coverage to policyholders in the event of death / loss of property / etc.

2. Main source of funds: sum of money (premium) paid by policyholders

3. Main use of funds: investment in securities, claims, financing to corporations

+ ISLAMIC BANKING
Defined as banking system which is in
consonance with the spirit, ethos and
value system of Islam and governed Philosophical Foundations:
by the principles laid down by Islamic  Tawhid
Shariah.
 Khilafah

 Amanah

 Al-adalah

 Tazkiyah

 Huriyyah
+
PRINCIPLES OF ISLAMIC BANKING

 Based on Shariah laws

 Prohibition of riba’
 Equity participation – profit and risk sharing in business venture
 Prohibition of gharar – undertake a venture blindly without sufficient
knowledge
 Contractual relationship – depends on nature of transactions (seller-buyer,
lessor-lessee, partnership, etc)
 Money as potential capital
+ OBJECTIVES OF ISLAMIC BANKING
+ OBJECTIVES OF ISLAMIC BANKING
+
ISLAMIC vs CONVENTIONAL BANKS
CHARACTERISTICS ISLAMIC BANKS CONVENTIONAL BANKS
Business framework Based on Shariah laws Based on secular principles, not
any religious law
Shariah supervisory Each bank should have SSB to ensure No SSB
board (SSB) all activities are in line with Shariah
requirements.
Risk sharing Risk sharing based on pre-agreed Predetermined interest rate
proportion
Moral dimension All economic agents have to work Little attention to the moral
within the Islamic moral values. implications of the activities.
Prohibition of riba’ Financing is not interest-oriented. It is Financing is interest-oriented
based on principle of buying and selling (fixed/floating interest)
assets whereby the selling price includes
profit margin.
+
CONT: ISLAMIC vs CONVENTIONAL BANKS

CHARACTERISTIC ISLAMIC BANKS CONVENTIONAL BANKS

S
Restrictions Restricted to participate in economic No such restrictions.
activities which are not shariah-compliant.
Zakat Pay zakat and tax required by the Only pay tax as required by the
government government.
+
DEVELOPMENT OF ISLAMIC BANKING
 The1st Islamic savings institution for special purpose of performing hajj
(Lembaga Urusan dan Tabung Haji) was developed in 1963.
 A resolution was passed calling off the government to allow LUTH to
establish the 1st Islamic bank in Malaysia in order to mobilise and invest
funds of the Muslims.
 BIMB was incorporated and officially launched on July 1, 1983.
 Toensure its compliance with Shariah principles, the bank had to set up a
Shariah Supervisory Council.
 InMarch 1993, BNM introduced Interest-Free Banking scheme to allow
existing conventional banking system to offer Islamic banking services.
+
SOURCES OF FUNDS – SAVING

 Al-Wadiah (saving)
 Safekeeping guards with guarantee
 Bank becomes the guarantor or custodian
 Depositor grants the bank to utilize the money for whatever purpose permitted
by Shariah
 Possibility of earning some profits known as a gift (Hibah) to the depositors as
a token of appreciation
+
CONT: SOURCES OF FUNDS – INVESTMENT

 Al-Mudharabah (investment)
 Contract made between provide of capital (depositor) and an
entrepreneur or fund manager (the Bank) to enable the bank to carry out
business ventures within the Shariah guidelines
 Both parties agree to share the profits from investment according to a
mutually agreed ratio.
 Depositors don’t participate in the management of the investment.
 Profits will be distributed at the agreed pre-determined ratio and paid
when the investment is due (stated in the investment certificate)
+
USES OF FUNDS
 Home / property financing - BBA / Musharakah / Musharakah Mutanaqisah
 Motor vehicle financing - Ijarah / Ijarah Thumma al-Bai’
 Personal financing - Bai’ al-Inah
 Credit cards - al-Wadiah / Bai’ al-Inah / Qard al-Hasan
 Project financing - Mudharabah / Musharakah
 Working capital financing - Murabahah
 Letter of credit - Wakalah / Musharakah / Murabahah
 Islamic accepted bills - Bai al-Dayn
 Bank guarantee - al-Kafalah
+
HOME/PROPERTY FINANCING:
AL-BAI BITHAMAN AJIL (BBA)
 Customer identifies the asset he wants to purchase and approach the bank
for financing.
 Thebank will purchase the asset at cost and sell the same asset to the
customer at cost + profit of deferred payment basis at the duration and price
agreed by both parties payable by fixed instalment.
+
HOME/PROPERTY FINANCING:
MUSHARAKAH
 Partnershipwhereby 2 or more persons combine either capital or labor or
creditworthiness together to carry on a business venture on condition that
they will share profits, enjoying similar rights and liabilities.
 Profitand loss sharing partnership whereby the ratio for the distribution of
profits must be determined and specified in advance.
+
HOME/PROPERTY FINANCING:
MUSHARAKAH MUTANAQISAH
 Partnership – one partners promises to buy the equity share of other partner
gradually until the title of the equity is completely transferred to him.
 The financier and the client participate in a joint commercial enterprise
or property.
 The enterprise is converted into undivided ownership of both parties.
 Over certain period, the equity of financier divided into equal value
units, is purchased by the client.
 Ultimately, client becomes the sole owner of the enterprise.
+
MOTOR VEHICLE FINANCING:
AL-IJARAH
 The bank will buy an asset and lease it to the customer for a fixed period.
 The period, lease rental and other terms are to be agreed upon both parties.
+
MOTOR VEHICLE FINANCING:
AL-IJARAH THUMMA AL-BAI
 The bank will buy an asset and lease it to the customer.
 Atthe end of the lease period, the customer will purchase the asset from the
bank at an agreed price with all the lease rentals previously paid
constituting part of such price.
+
PERSONAL FINANCING:
BAI’ AL-INAH
 Sellingof an asset with a mark up price on deferred payment, with the
intention to sell the same asset to the debtor with lower cash price, which is
meant to settle his debt.
 Bargainingsale and purchase contract – without disclosing or referring to
what the cost price is.
 Saleof an asset, which is later repurchased at a different price, whereby the
deferred price is higher than the cash price.
+ CREDIT CARD: BAI’ AL-INAH
+ CREDIT CARD: BAI’ AL-TAWARRUQ
+
CREDIT CARD: AL-QARDHUL HASAN
(BENEVOLENT LOAN)
 Interest free loan given mainly for welfare purposes
 The borrower is only required to repay the principal amount borrowed.
 He may pay an extra amount as a gift (al-Hibah) at his absolute discretion,
as a token of appreciation.
+
PROJECT FINANCING: MUDHARABAH

 Bank provides 100% of capital

 Entrepreneur will manage the project without bank’s interference. However,
the bank has the right to do follow-up and supervise the project.
 Both parties will negotiate profits and agree on how to distribute it.
 Any losses will be borne by the bank
+
PROJECT FINANCING: MUSYARAKAH
(JOINT VENTURE)
 Bankand project initiators will both provide 100% of capital at an agreed
proportion.
 Both parties have the right to participate and have the option to waive the
right.
 Profits generated will be distributed as agreed.
 All parties will bear the loss in proportion of their share in the financing.
+
WORKING CAPITAL FINANCING:
MURABAHAH
 Bank appoints customer as an agent to purchase on bank’s behalf.
 Customer acts as an agent to purchase the goods
 Bank pays the supplier or reimburse the customer.
 Bank then sells the goods to the customer.
 Theprice (to be paid at agreed later date) will include the cost + agreed
profit.
+
LETTER OF CREDIT: AL-WAKALAH

 The customer request the bank to open a LC

 Bank
requires the customer to place deposits (under al-Wadiah Yad
Dhamanah) – in full or part of the price of goods to be purchased.
 Bank opens the LC. When LC is negotiated, the bank will pay using the
earlier deposits if all terms are complied.
 The trade documents will be released to the customer and the bank chrges a
fee and commission for its service rendered.
+
LETTER OF CREDIT: MUSYARAKAH
 The customer informs of his LC requirements and negotiates with the bank
the terms of Al-Musyarakah financing.
 The customer deposits his share of financing.
 Thebank opens LC. When LC is negotiated, the bank will pay from the
customer’s deposits and bank share of financing.
 The trade documents will be released to the customer to take possession of
the goods. The customer will dispose them in the matter agreed upon.
 Thebank and customer will share the profit from the ventures as stated /
provided in their agreement.
+
LETTER OF CREDIT: MURABAHAH

 The customer informs his LC requirements and request bank to buy goods
indicating he agrees to purchase them upon their arrival.
 Bank opens LC. When LC is negotiated, the bank will pay using its own
funds.
 Bank will then resells the goods to the customer at a price (cost + profit).
 Settlementof the sale to the customer may be in cash or deferral
(instalment) payment.
+
ISLAMIC ACCEPTED BILLS: BAI’ AL-DAYN
(DEBT TRADING)
 Provisionof financial resources required for production, commerce and
services by way of sale / purchase of trade documents and papers.
 Short-term facility (maturity less than a year)
 Only documents evidencing debts carried out in good faith can be traded.
+
BANK GUARANTEE: AL-KAFALAH
 Bank will provide guarantees to its customer for certain purpose.
 Tender guarantee
 Performance guarantee
 Guarantee for sub-contracts
 Guarantee for exemption of custom duties
 Custom binds
 Credit guarantee

 Bank may require the customer to deposit full or certain amount for this
facility
 A fee will be charged.
+
OTHERS: FINANCING BASED ON BAI’ AL-
SALAM
+
OVERVIEW OF FINANCIAL MARKETS
+
FINANCIAL MARKETS

 Market that channel funds from economic players that have saved surplus
funds to those that have a shortage of funds.

4 financial markets:
 MM/FX
 Capital
 Derivatives
 offshore
+
FINANCIAL MARKETS: MM/FX

 MM: Short-term debts are traded (< 1 year maturity).

 Widely traded. More liquid. Examples:
 Treasury bills, NCDs, Commercial paper
 Bankers’ acceptance, repurchase agreements

 FX: Deal with trading one currency for another

 Spot FX transaction – immediate exchange of currencies
 Forward FX transaction – exchange of currencies at a specified date
in future and at a specified exchange rate.
+
FINANCIAL MARKETS: CAPITAL MARKET
 Debts (bonds) and equity instruments are traded.
 Equity– provide means of raising funds by corporations by issuing stocks
and shares (primary and secondary markets)
 Bonds– private and public sectors can raise funds by issuing private and
government debt securities. 2 types:
 Government bonds (MGS, TB, etc)
 Corporate bonds (private debt securities)
+
FINANCIAL MARKETS: DERIVATIVES
 Market in which derivatives securities are traded.
 Instrumentsthat derived its value from the movement of price/rate of some
underlying assets such as interest rate, foreign exchange, commodity and
index.
 Examples:
 Future& forward contract
 Options, swaps

 Investorspurchase or sell derivatives to

 Manage RISK associated with the underlying security
 Protect against fluctuations in value
 Profit from periods of inactivity or decline
+
FINANCIAL MARKETS: OFFSHORES
 Labuan International Offshore Financial Centre (IOFC) – formed on Oct 1,
1990.
 Offerwide range of offshore financial products and services such as
offshore companies, banking, leasing, insurance, fund management,
investment holding, company management services, etc.
 Market:More than 5000 offshore companies originating from more than 70
countries in Labuan.
 Deals in currencies other than MYR.
+ RISKS FACED BY FINANCIAL INSTITUTIONS
+ RISKS FACED BY FINANCIAL INSTITUTIONS