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 Noor Aisyah Binti Othman

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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

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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 Noor Aisyah Binti 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 Noor Aisyah Binti 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 Noor Aisyah Binti Othman and may you will give the best marks regarding
our assignment.

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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.

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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

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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.

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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.

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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 principal
investment account holder - protected investment with
and the bank will share any
act embedded reference
profit outcome from the derivative that the
investment activities manage
performance will determine
by the bank. 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 or
Universities, Companies and
partnership, SMEs and other an accredited investor.
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

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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. The
minimum amount of financing for the Personal Financing-I Non Package is RM10 000 until
RM150 000 with the tenure 1 until 10 years on profit rate of 6% to 8%. 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

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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 which is
exception for Accountant and Engineer meanwhile for both Accountant and Engineer must
obtain the fixed minimum gross income of RM5,000. 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.

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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.

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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.

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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 higher act as a commodity
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 Payment 1% on the outstanding
on the overdue instalment 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 flat
ibra’ which is equivalent to
the deferred at the point of interest rate and charges
upfront based the approve
settlement
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

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

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retirement age Financing amount RM2000 to RM150 000
Financing Rate 8.81% to 13.45% per annum
RM10 000 to RM300 000

With Takaful Coverage,
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

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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

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APPENDICES

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

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H

References for further information about the official bank website.
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