COMPARISON ON BANKING OPERATIONS BETWEEN ISLAMIC BANK AND CONVENTIONAL BANK (MGT3663)

KOLEJ PROFESIONAL MARA BANDAR MELAKA

COMPARISON ON BANKING OPERATIONS BETWEEN ISLAMIC BANK AND
CONVENTIONAL BANK (MGT3663)

SEMESTER: JAN 2021

CLASS: DBF6E

PREPARED BY:
Nur Ezlyana Najwa Binti Mohd Ezanee (BMF19-06-114)

Amira Nurrisa Binti Suhaimi (BMF19-06-115)
Mohamad Hakimi Bin Haini (BMF19-06-119)
Muhammad Ezzat Akmal Bin Abdul Rahman (BMF19-06-107)

PREPARED FOR:
Madam Aisyah Othman

TABLE OF CONTENT Page
3
No. Subject 4
1 Acknowledgement 5-6
2 Introduction of the assignment
3 Sources of fund “Unrestricted Investment Account for 7
Bank Islam
4 Sources of fund “Unrestricted Investment Account for 8
RHB Bank
5 Comparison Sources of Fund of Unrestricted 9-10
Investment Account for Bank Islam & RHB Bank 11-12
6 Uses of Fund “Personal Financing Bank Islam 13-15
7 Uses of Fund “Personal Financing RHB Bank
8 Comparison Uses of Fund on Personal Financing for 16
Bank Islam & RHB Bank 17-18
9 References
10 Appendices

ACKNOWLEDGEMENT

We are really blessed and grateful because we managed to completed our comparison
on banking operations between Islamic Bank and Conventional Bank assignment for the
subject Banking Operation and Practices within the time given by our lecturer which is Madam
Aisyah Othman. This assignment cannot be done and completed without the great teamwork
and co-operation from our group members that consist of four member starting with Nur
Ezlyana Najwa Binti Mohd Ezanee , Amira Nurrisa Binti Suhaimi, Mohamad Hakimi Bin Haini
and Muhammad Ezzat Akmal Bin Abdul Rahman. We also want to sincerely thank our lecturer
of MGT3663, Madam Aisyah Othman for the clear instruction and continuously support and
encouragement in finishing this assignment and teaching us in this course.Last but not least,
we wanted to express our gratitude to our lecturer, Madam Aisyah Othman and may you will
give the best marks regarding our assignment.

INTRODUCTION OF THE ASSIGNMENT

The topic that we choose for sources of fund is on the investment funds under the
Unrestricted Investment Account. Investment account is usually known as a profit-sharing
account or the investment account. The main point of departure between the investment
deposit and both savings and current deposit is that the former is normally structured based
on either mudarabah and wakalah contract that does not provide guarantee of neither the
return nor profit on investment. In an investment account, the bank will serve as a fund
manager on behalf of the investment placement, earning money from the fund management
services, while the account holder will have a better chance of earning a higher return due to
the possibility of capital loss. Investment accounts are classified into two categories based on
the limits imposed on the management of funds by investment account holders which are
Unrestricted Investment Accounts and Restricted Investment Account. The first classification
is Unrestricted Investment Account, in which the bank has complete discretion in investing
the funds and limited investment accounts and the second classification is where the customer
will specifies certain restrictions on when, where, and how the bank will invest the funds in a
Restricted Investment Account.

Furthermore,the topic we choose for uses of fund is based on personal financing on
Tawarruq. Tawarruq, also known as commodity murabahah, is an agreement that includes
the purchasing of an asset based on musawamah, under which the supplier does not reveal
its cost or markup, or murabahah, in which the supplier sells at a markup and discloses it, and
then selling the same asset to a third party to raise cash. Then, the customer will receives
cash as a result of this purchase, which he can use for his company or personal needs.

We decided to choose Bank Islam as the Islamic banking and RHB Bank as the
conventional bank to make comparison towards sources of funds and uses of funds regarding
this assignment.

SOURCES OF FUNDS: UNRESTRICTED INVESTMENT ACCOUNT FOR BANK ISLAM

Mudarabah is a form of contract between the capital provider (rabbul mal) and an
entrepreneur (mudarib) under which the rabbul mal provides capital to be managed by the
mudarib and any profit generated from the capital is shared between the rabbul mal and
mudarib according to mutually agreed profit sharing ratio whilst financial losses are borned by
the rabbul mal provided that such losses are not due to the mudarib’s misconduct, negligence,
or breach of specific terms. Under this iGain, the Investment Account Holder (IAH) as the
capital provider (rabbul mal) shall provide capital to be managed by the Bank acting as the
entreprenuer (mudarib) with a view of sharing profits arising from the investment activities
managed by the Bank.

Unrestricted Investment Account refers to a type of investment account where the
Investment Account Holder (IAH) provides the Bank with the mandate to make the ultimate
decision without specifying any particular restrictions or conditions. “Investment Account” as
defined under the Islamic Financial Services Act 2013 (“IFSA”) means an account under which
money is paid and accepted for the purposes of investment, including for the provision of
finance, in accordance with Shariah on terms that there is no express or implied obligation to
repay the money in full and either only the profits, or both the profits or losses, there on shall
be shared between the person paying the money and the person accepting the money or with
or without any return. For the purpose of this iGain and based on the Shariah contract of
Mudarabah, the Investment Account Holder (IAH) and the Bank will share any profits deriving
from the investment activities managed by the Bank whilst financial losses will be borne by
the IAH solely except for losses which are due to or arising from any act of misconduct,
negligence or breach of specific terms by the Bank.

This product are suitable for Corporate Customers, Government Accounts,
Government Agencies, Universities, Companies & Partnerships, SMEs, and Other Business
& Non-Business Entities. The return objectives of Unrestricted Investment Account is to able
to generate moderate returns over an agreed period of the investment. There is a risk on
investment principal which is the principal amount of investment is not guaranteed. The period
to hold the investment are negotiable maturity date and it has no investment limit.

The investment objective is to provide regular income over retail financial asset while
the strategy is to ensure investment is within the investment objective of the Fund with its
asset allocation safeguarding the investment portfolio. They also have a policy in which to
manage the portfolio yield over the term in a manner that is consistent with the Bank’s liquidity
needs, asset strategy and safety of IAH’s investment principal. There is also a risk assessment
on the performance of the investment assets. Proactive management of the retail financial

asset and periodical performance reports of the investment portfolio can be viewed via Bank
Islam website. RM500,000.00 or its equivalent amount if the investment is denominated in
foreign currency is the minimum amount of Investment. For the investment Tenure, the
minimum is 1 day and up to a maximum of 1 year. Profit Sharing Ratio (PSR) is to be
determined upfront. The Profit Sharing Ratio may vary from time to time according to the
market. The formula for profit computation for Mudarabah based investment is Principal x PSR
x Gross rate of return x Tenure/365.

The Profit payment method is at maturity.The possible outcomes of your investment is
the Investment Account Holder(IAH) may gain from the positive performance of the retail
financial asset portfolio as a result of the increase in the accrual profit earned. However, the
IAH may lose any part of or all of his/her investment in case of failure of the underlying
investment portfolio to perform as expected. There are also key risks associated with this
product. The Bank will apply risk management controls over portfolio, legal and operational
activities; including asset allocation, liquidity adherence to investment objective and
parameters, valuation, monitoring performance and others as per guided in the BNM’s
Investment Account Policy. Notwithstanding the above, in times of adversity in the markets
the Bank may manage its asset allocation to safeguard the investment portfolio provided that
such investment is within the investment objectives of the Fund. As such, You are advised to
carefully consider all risk factors before making an investment decision. There are market risk,
credit risk, liquidity risk, operational risk, legal risk and currency risk.

SOURCES OF FUNDS: UNRESTRICTED INVESTMENT ACCOUNT FOR RHB BANK

The One-touch Structure Investment is a principal protected investment that includes
an embedded reference derivative. The interest payable on the investment will be determine
by the performance of the embedded derivative where the investor will agrees on the
underlying currency bare for the One-touch and the Trigger Rate at the start of investment.
The trigger rate is the exchange rate of the currency bare that determine whether the investor
receive the minimum or maximum interest on the maturity date. The investor will receive the
maximum interest rate if the sport rate of the currency bare is equal to the trigger rate at any
point during the observation period. However, the investor will receive the minimum interest
rate. The observation period for the One-touch begin on the Trade Date and plus 24 hours
per day until the expiry date at 2p.m. KL time.

This One-touch structure investment is suitable for customer that have high net worth
individual, high net work cooperation or an a accredited investor to invest in this investment.
In addition, it is also suitable for investor that have a view on foreign exchange movement
with risk appetite and are looking for potentially higher returns on the their investor. The key
product features in the One-touch Structure Investment, firstly the minimum investment
amount is RM100 000 and the investment tenure is from 2 years up to 5 years. References
derivative as mention above is based on the One-touch currency option where a currency
option will give the investor a payout if the Spot Rate of the chosen currency bare touch or
equal to the pre-determined Trigger Rate at any point time during the observation period. The
underlying asset is based on the currency bare which any currency that are offered by the
RHB Bank for example USD/MYR, AUD/USD or USD/CNH.

The interest calculation for investor that receive the minimum interest rate is
Investment Amount x Minimum Interest Rate (Y%) x Investment Tenure/Day Count
Convention. On the contrary, for investor that receive the maximum interest rate is Investment
Amount x Maximum Interest Rate (X%) x Investment Tenure/Day Count Convention. The Day
Count Convention represent the number of days in the interest period expressed as a fraction
of the number of days in a year using the applicable convention for the investment currency.

COMPARISON SOURCES OF FUND ON UNRESTRICTED INVESTMENT
ACCOUNT FOR BANK ISLAM AND RHB BANK

BANK ISLAM SUBJECT RHB BANK

Based on the Shariah Concept Based on One-Structure
contract of Mudarabah, the Investment where a
investment account holder principal - protected
and the bank will share any investment with act
embedded reference
profit outcome from the derivative that the
investment activities
manage by the bank. performance will determine
the interest payable for the

investment.

Cooperate customer, Product Suitability People that have a high net
government account, worth individual, high net
government agencies, worth cooperation/entities
Universities, Companies and or an accredited investor.
partnership, SMEs and other
business and none business

entities.

RM500 000 Minimum Investment RM100 000
Amount

Minimum is 1 day and up to Investment Tenure From 2 years up to 5 years
a maximum of 1 year

USES OF FUNDS: PERSONAL FINANCING BANK ISLAM

Bank Islam Personal Financing-i facility is an unsecured/secured term financing to
meet personal financial needs which is calculated based on floating rate. The Shariah concept
used is Tawarruq. Tawarruq concept consists of two sales contract. The first contract refers
to the purchase of commodities by the customer from Bank Islam based on the concept of
Murabahah (cost plus profit) at the Bank’s deferred Sale Price. In the process, purchases will
be made by Bank Islam as the Purchasing Agent on behalf of the customer. The Customer is
responsible for paying the amount due from the Murabahah transaction in accordance with
the terms agreed upon. For the second contract, Bank Islam as a Sales Agent on behalf of
the Customer is responsible to sell the Commodities to the other Commodity Buyers at the
cost price of which is refers to the Financing Amount.Bank Islam does charge other fees to
their customer which are stamp duty on 0.5% that is required for every bank in Malaysia that
the stamp duty will be deducted from the total loan authorised prior to disbursement, as per
the Stamp Duty Act 1949 (Revised in 1989) and charges on Wakalah fee for RM50 to act as
a customer's agent when selling a product to a broker. If any of the customer fail to fulfill
their obligation in a timely manner the bank will impose ta’widh which is a compensation for
late payment charges with a some equivalent to 1% per annum on overdue instalment until
date of full payment. Meanwhile, in the event of default payment which the customer did not
paid any instalment the bank will return notice or reminder to the customer in which demand
for immediate payment and if the customer fail to response toward the reminder notices the
bank will take legal action such as any security pledged to the bank may be foreclose and the
customer will be responsible to bare all the cost that are incurred to the disposal of the asset
and to settle any short fall after the asset be sold.

Commodity means any commodity acceptable to the Bank for example palm oil, plastic
resin, rubber, cocoa beans, soy beans, timber and metal excluding gold and silver traded at
any commodity platform approved by the Bank. The purchase and sale of the commodity are
performed based on the mandate of the customer, where the Bank as Purchase Agent and
Sale Agent trades the commodity as made available and provided by commodity providers
subject to the Bank prevailing policies.

There are a few package offered by Islamic Bank. The first one is Personal Financing-
i Package that is eligible to customer with minimum income of RM2,000 per month and the
applicant must be employed in the Government Sector,selected Public Listed
Companies,Subsidiaries of Government or Selected Public Listed Companies or other
Prominent Private Limited Companies as categorized under package companies listed by Bank

Islam. The Features of Financing Quantum is based on eligibility limit and subject to minimum
amount of RM10,000 and maximum amount of RM300,000. For the payment period, the
maximum amount of years is 10 years which is within 120 months or up to the retirement
age, whichever is earlier. For the Financing Rate that are offered with Takaful Coverage,
Floating Rate is 1 until 3 years with Base Rate of 1.90% which profit is calculated on a daily
basis based on Monthly Rest or 4 until 10 years with Base Rate of 2.00% which profit is
calculated on a daily basis based on Monthly Rest. On the contrary, the Financing Rate that
are offered without Takaful Coverage is the Floating Rate for 1 until 3 years with Base Rate
on 3.38% while for 4 until 10 years the Base Rate is 5.28%.

The second package is Personal Financing For Professional Program which the
requirements is fixed income earner with a minimum gross income of RM3,500 or fixed
minimum gross income of RM5,000 both is exception for Accountant and Engineer.In
addition,this package is also eligible towards Malaysian citizen that is working as a professional
in Medical Doctor, Dentist, Accountant, Engineer, Lecturer, Architect, Safety Officer, Pharmacist,
Veterinary, Optometrist or Optician, Quantity Surveyor and Actuary. The features of Personal
Financing For Professional Program is based on eligibility limit and subject to maximum payment
period of 10 years 120 months within or up to the age of retirement, whichever comes
first.Regarding financing rates with Takaful Coverage, the Floating Rate is 1 until 3 years with
a Base Rate of 1.90%, or 4 until 10 years with a Base Rate of 5.28%. On the other
hand,regarding financing rates upon without Takaful Coverage, the Floating Rate for 1 until 3
years with Base Rate of 3.38% while for 4 until 10 years the of 5.28%.

As conclusion, the Islamic personal finance have a notable difference with conventional
loans. In conventional loan, banks tend to make their profit by charging interest on the loan
amount, also known as the principal amount. The monthly repayments made by the borrower
goes to servicing the interest, but also to pay down the principal amount. However, Islamic
financing is prohibited from structuring their product with interest rates (riba). Instead, the
Islamic banking principles revolved around the buying of a commodity on the borrower’s behalf,
and selling it back to the borrower at profit. This profit rate replaces the interest rate that
conventional loans charge.

USES OF FUND: PERSONAL FINANCING RHB BANK

RHB Personal Loan is an unsecured conventional personal loan available to employees
in the private and public sectors, as well as self-employed people. RHB personal loan provides
financing amount from RM2,000 to RM150,000 with a financing tenure 1 year to 7 years. As
with other conventional personal loans, RHB Personal Financing offers variable interest rate
based on the loan amount. RHB also offers a variable profit rate from 8.18% to 14.52% p.a
for this personal loan plan. There are two personal loans offered by RHB bank which are RHB
Personal Financing and RHB Easy-Pinjaman Ekspres.

The first one is RHB Easy-Pinjaman Ekspres. The RHB Easy-Pinjaman Ekspres is a fast
approval conventional unsecured personal loan. For the eligibility, employment type for this
personal loan is salaried/commission earner which are the Private Sector & GLC and self-
employed. Next, for the interest rate, RHB Easy-Pinjaman Ekspres is a fixed-rate personal loan
with fixed monthly payments for the duration of the loan. Throughout the loan tenure, the
interest rate ranges from 8.31% to 13.45% per annum or per year. In conventional personal
loan, interest rates can be a fixed rate or based on a floating rate. Meanwhile in the Bank
Islam Personal Financing ,the financing rate is depended on the Takaful Coverage that is being
applied by their customer.For example, the financing rate for customer that applied Takaful
Coverage is 1.9% for 1 until 2 years meanwhile for customer that are not applied on Takaful
Coverage is 3.38% for 1 until 3 years. The maximum loan tenure for RHB Easy-Pinjaman
Ekspres is 7 years while the minimum is 1 year unlike Bank Islam that their tenure is restricted
to the minimum of 1 years until 10 years. In the conventional loan, the longer loan tenure
then the lower monthly instalment will be. Payment is made over a set tenure by instalments.
A portion of each instalment paid goes towards servicing the interest, while the remainder
goes towards paying down the principal. Next, since the deal is not based on an absolute
value, such as the selling price, the earlier the creditor will pay off the balance, the less interest
would be charged. There is a lock-in period of 6 months from the date of the letter of offer.
Early settlement fee during the lock-in period is RM100 or 1% of total loan approved,
whichever is higher meanwhile in Islamic financing, there is no early settlement fees. Only on
a late repayment case the customer will be charged 1% on the outstanding balance.Unlike
Bank Islam, they did not charges any early settlement fee during the lock-in period except for
stamp duty on 0.5% and Wakalah Fee for RM50.However,Bank Islam will charge on late
repayment based on ta'widh, which is a reward for late payment payments of up to 1% per
year on outstanding instalments before full payment is received.

The second one is RHB Personal Financing. RHB Personal Financing is a personal loan
which interest is pre computed and charged upfront on the loan amount approved for the
entire tenure. This personal loan is applicable for salaried earner in Private Sector and self-
employed. This loan repayment tenure can be up to 7 years which means that the borrower
can option for the tenure according to their preference. The RHB Personal Financing offers a
rate starting from 8.81% to 13.45% per annum, with minimum financing amount RM2,000
and up to maximum financing amount which is RM150,000. The interest rate may be higher
if the repayment is irregular. As we know, a conventional personal loan is one in which a bank
loans money to borrowers and charges interest on the amount lent. This is how banks make
money on loans. The prescribed rate based on a margin above the bank's base lending rate
(BLR) as well as the interest rate over a fixed tenure are included in the borrower's monthly
loan repayment by instalment. Next, if the customer settled the loan before its maturity, there
is a lock-in period of 6 months from the date of the letter of offer and total fee charged is
RM100 or one percent (1%) of total loan approved, whichever is higher. RHB personal
financing also give a rebate which is the interest rate or rebates will be recalculated using a
flat interest rate and charged upfront based on the approved facility amount. In Islamic
personal loan, no lock-in period imposed and no partial principal payment is allowed. RHB
Islamic shall grant rebate which is Ibra’ on any amount payable by customers.

As conclusion, there is a differences between conventional personal loan and Islamic
personal financing which is the risks of early settlements, late payments, and defaults are
more transparent in the contract. Conventional personal loan has no difficulty in restructuring
or refinancing in the event of failure.

COMPARISON USES OF FUND ON PERSONAL FINANCING FOR BANK ISLAM &
RHB BANK

BANK ISLAM COMPARISON RHB BANK

Islamic bank will purchase Concept of Financing Concept of lender and
asset on behalf of the borrower where money with
borrower and sell it at
act as a commodity
higher price for financing

RM 10 000 until RM 150 000 Financing amount for RM2 000 until RM150 000

personal financing package

1 years o 10 years Tenure 1 years to 7 years

6% to 8% Profit Rate 8.18% to 14.52%

Ta’widh with 1% per annum Charges for Late 1% on the outstanding
on the overdue instalment Repayment balance
until date of full payment

The bank will undertake to Settlement of the financing The interest rate or rebate
grant to the customer and before it’s maturity will be recalculated using
ibra’ which is equivalent to
the deferred at the point of flat interest rate and
charges upfront based the
settlement approve facility amount.

There is a lock-in period of 6
months from the date of the
letter of offer and total fee

charged is RM100 or one
percent (1%) of total loan

approved, whichever is
higher.

0.5% on Stamp Duty and Other charges Stamp Duty on 0.5%
RM50 for Wakalah fee

Employed in the Eligibility for the First Employment type for this
Government Sector,selected Financing Package personal loan is

Public Listed salaried/commission earner
Companies,Subsidiaries of which are the Private Sector
Government or Selected
Public Listed Companies or & GLC and self-employed

other Prominent Private
Limited Companies as
categorized under package
companies listed by Bank

Islam

1 years until 3 years Tenure of Financing 1 years to 7 years
Financing Rate
& 8.31% to 13.45% per
Eligibility for the Second annum
4 years to 10 years Package
This personal loan is
With Takaful Coverage, applicable for salaried
1.9% for 1-3 years or 2% of earner in Private Sector and

4-10 years self-employed

Without Takaful Coverage,
3.38% for 1-3 years or
5.28% for 4-10 years

Eligible towards Malaysian
citizen that is working as a

professional in Medical
Doctor, Dentist, Accountant,

Engineer, Lecturer,
Architect, Safety Officer,
Pharmacist, Veterinary,
Optometrist or Optician,
Quantity Surveyor and

Actuary.

1 until 10 years or up to the Tenure of Financing 1 until 7 years
retirement age
Financing amount RM2000 to RM150 000
RM10 000 to RM300 000 Financing Rate 8.81% to 13.45% per

With Takaful Coverage, annum
1.90% for 1-3 years or
2.11% for 4-10 years

Without Takaful Coverage,
3.38% for 1-3 years or
5.28% for 4-10 years

REFERENCES

:https://www.rhbgroup.com/files/personal/investment/structured-product-
investment/one-touch-phs-from-2-to-5-years.pdf

:https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.com
parehero.my/personal-
loan/partners/rhb&ved=2ahUKEwj7j6SalYfwAhVhyDgGHcMuDG0QFjAOegQIDxA
C&usg=AOvVaw2JqcvKNJF7QmemtVDcyDDj

:https://www.rhbgroup.com/files/personal/loans/personal-financing/pf-
pds.pdf

:https://personalloaninmalaysia.com/loan-feature/conventional/

:https://personalloaninmalaysia.com/personal-loan/rhb-personal-financing/

:https://www.comparehero.my/personal-loan/partners/bank-islam

:http://www.bankislam.com.my/home/assets/uploads/Updated-Final-BI-PDS-
Personal-Financing-Sales-01-08-19-2.pdf

APPENDICES

Discussion on Whatsapp Group.
- Call for further
information about
Assignment

References for further information about the official bank website.