Comparison between Conventional and Islamic bank

KOLEJ PROFESIONAL MARA BANDAR MELAKA

COURSE: BANKING OPERATION AND PRACTICES

COURSE CODE: MGT 3663

TITLE: COMPARISON ON BANKING OPERATIONS BETWEEN ISLAMIC BANK VS
CONVENTIONAL BANK

PREPARED BY:

NAME CLASS ID NUMBER PHONE NUMBER
NURHIDAYAH BINTI ROSLAN DBF6A BMF19-01-004 018-6627019
NUR ANAQIAH IQTIFFA BINTI ZULKIFLI DBF6A BMF19-01-006 014-8138744
FATHIN NUR IZZATI BINTI MOHAMAD TAJUDDIN DBF6A BMF19-01-008 012-4875072
SITI NURFAEEZAH BINTI MUHAMAD ARIF DBF6A BMF19-01-018 018-4064720
NUR AMALINA BINTI AZHARUDDIN DBF6A BMF19-01-023 017-5208207

PREPARED FOR:
MADAM NOOR AISYAH BINTI OTHMAN

SEMESTER DECEMBER 2020

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TABLE OF CONTENT

NO. ITEMS PAGES
1. Introduction of group members 3
2. Acknowledgment 4
3. Introduction of the assignment
4. Sources of fund: Unrestricted Investment (CIMB Bank) 5-6
5. Sources of fund: Unrestricted Investment (CIMB Islamic Bank) 7-8
6. Uses of fund: Working Capital Financing (CIMB Islamic Bank) 8-9
7. Uses of fund: Working Capital Financing (CIMB Bank) 10 - 11
8. References 12 - 16

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INTRODUCTION OF GROUP MEMBERS

NUR AMALINA BINTI NURHIDAYAH BINTI ROSLAN
AZHARUDDIN BMF19-01-004

BMF19-01-023

FATHIN NUR IZZATI BINTI SITI NURFAEEZAH BINTI
MOHAMAD TAJUDDIN MUHAMAD ARIF
BMF19-01-018
BMF19-01-008
NUR ANAQIAH IQTIFFA BINTI
ZULKIFLI

BMF19-01-006

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ACKNOWLEDGEMENT
‫بسم الله الرحمن الرحيم‬

In the name of Allah, the Most Gracious and the Most Merciful.
Alhamdulillah, all praises to Allah for the strengths and His blessing in completing our

assignment Comparison on Banking Operations between Islamic Bank vs Conventional Bank of
Kolej Professional MARA Bandar Melaka that given by our BOP’S lecture to us. Even we are facing
lot of difficulties when completing this assignment, but we still manage to complete those things
together with patience and great determination. We are giving our best among the best to
complete and fulfill this assignment together.

Besides that, special appreciation goes to our lecture, Madam Noor Aisyah Binti Othman
for giving us a good guideline in completing this assignment throughout numerous consultations.
Without her helps and guidelines, our assignment cannot be done smoothly. She always,
encourage, support and help us to without feeling tired in order want us to achieve our vision
and mission of the project.

Additionally, we would like to thanks all the group members and all friends for their hard
work, cooperation and commitment in succeeding this assignment. Without all of them, we cannot
perform it well. They also contribute many idea and comment in order to improve our assignment
in many ways. Not forgotten to our family members where they also support and pray for our
best in their prayers. Next, we also like to thank those who helps us directly or indirectly to
complete this assignment.

Last but not least, all of us hope that our assignment will give a huge and good impact to
the society as well as the students who will join and take part in Diploma in Islamic Banking and
Finance. We hope that with all the effort and energy given can be rewarded and give lots of
benefit to the society in the future.

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INTRODUCTION

First thing we perform this assignment is to fulfill the subject of Banking Operation and
Practices (MGT 3663) itself. In this assignment we are going to focus and doing some research
on sources of funds (chapter 3) and uses of fund (chapter 4). We need to choose one banking
institution from conventional bank and one for Islamic bank. After that, we also need to do some
comparison on banking operation between conventional bank and Islamic bank. For sources of
funds, we choose unrestricted investment and for uses of fund we choose corporate financing
under equity based which is working capital financing.

First, Islamic banking sources of fund is coming from deposit fund and investment fund.
Deposit fund can be divided into three, which are current deposit, saving deposit and term
deposit. While for investments fund can be divided into two which are unrestricted investment
account and restricted investment account. But here we are going to focus more on the
investment fund which is unrestricted investment account or also known as Mudarabah Mutlaqah.
Before that, deposits and investments are the main sources of funds especially for Islamic
commercial banks.

The underlying contract used by unrestricted investment account (Mudarabah Mutlaqah)
is Mudarabah. Mudarabah is a partnership where there is one partner who will provide capital or
give money to another partner for investing in any commercial enterprise. The capital provider is
also known as rab al mal while the partner who receive the money and will take responsibility to
manage the money is known as mudarib. In this case, rab al mal is the surplus side while mudarib
is the deficit side. The profit generated from the investment activities will be divided for both
partners according to the pre-agreed profit-sharing ratio. In line with Mudarabah principles, if
there are any losses happen, it will be borne by the rab al mal, the surplus side.

In the case of unrestricted mudarabah investment account, according to AAOIFI, is where
rab al mal will gives full freedom or fully authorizes mudarib to do anything which is to invest the
funds without any restrictions as to where, how and what purpose the funds should be invested
for as long as the mudarib think that it is appropriate. Besides that, mudarib cannot do certain
things without express permission from rab al mal. For examples, mudarib cannot keep or higher
another mudarib or partner, cannot mix his or her own investment in that particular Mudarabah
without consent of ral al mal.

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Second, for uses of fund, which is corporate financing under equity based is working
capital financing. First thing first, corporate financing is where focusing in the specific needs of
the business community. Which is the target business being not for individuals but more n
business or company. Corporate financing is divided into three which are sale-based financing,
leased based financing and equity-based financing. So, here we are going to focus on equity-
based financing which is working capital financing.

Before that, equity based corporate financing is focusing on the strategy of raising capital
using debt and equity modes. As we can see, equity is the contract where we buy and sale shares.
So, we use bank as an entity that can help in term of documentation to raise funds. Because of
that, once all the documentation is completed so that it will make bank easy to list their company
in Bursa Malaysia. There are two contract that we apply under equity based corporate financing
which are include Mudharabah and Musharakah.

Working capital financing is where we as entrepreneur or company doing some business
but we did not have enough funds, so we went to the bank and asked for covering our shall fall
that we earn from the working capital funds. Where working capital is usually expenses that
involving the operational expenses. Usually, it is short term debts. However, the working capital
is to make sure that we can ran our business using the capital that we have as usual. The
frequently contract use are Bay’ Al-Inah and Tawarruq.

Under working capital, we have two types of working capital which are cash line-I facility
and revolving credit. Cash line-I facility is also known as overdraft. Overdraft is one product that
usually involve current account. For example, you want to use RM 50,000 for your business but
in your current account there is only RM 30,000 not enough RM 20,000. So, the company will
apply to bank using the cash line-I facility for cover them shall fall. And then bank will provide
the shortage as loans to the company. For examples, banks that provide cash line-I facility
services are Ambank Group, Maybank Islamic and Affin Islamic. Furthermore, for revolving credit,
it is quite similar to cash line but cash line is upon request. But revolving credit bank will
automatically renew the debt to the company.

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Sources of fund: Unrestricted Investment (CIMB Bank)

Banks have many ways in order to get funds in ensuring they last longer and stronger.
One of the ways on how banks get their funds is investment from customers. However,
conventional bank and Islamic bank gets funds in different ways. This is because there is some
restricted term for Islamic bank because they are following the shariah guidelines and being
conducted by Shariah Advisory Council. For example, they cannot apply riba, gharar and maysir
in any of their business and investment activities. It means that Islamic bank needs to invest in
halal investment, no riba or gharar or maysir applied. In a meanwhile, conventional bank has no
restriction on riba nor gharar nor maysir. Conventional bank can invest the fund from customers
in any of investment as long as the investment gives high return or profit.

For conventional bank, like CIMB Berhad, one of their funds sources is from the
investment. The example of investment in CIMB Berhad is bonds. What is bond? Bonds is an
agreement between an investor and a company that issue the bond. When investors buy a bond,
they are loaning money to the issuer in exchange for interest and the return of principal at
maturity. Because, bonds traditionally pay the investors a fixed interest rate periodically, they are
also called as fixed income securities. In a simple word, bond is actually a debt. Bond use loan
contact. In this product that CIMB Berhad offers to customers named bonds, the benefit is
customer can enjoy direct access to the global bond market without the need for an asset
management company. Customers will also enjoy earning steady income from the bonds the
invested. Other than that, the specialty of investing in this bond from CIMB Berhad is customers
can enjoy the wide range of local and foreign currency bonds. This means customers are not only
limited enjoying the Ringgit Malaysia (RM) currency but customers also can enjoy foreign currency
such as Australian Dollar (AUD). From this investment, CIMB Berhad already get the fund from
customers as customers give the fund to invest in the bonds as their investment.

Issuer 1. Issuer issue the bonds Investor
2. Investor invest the money

3. Issuer pay principal plus
interest

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Based on the modus operandi above, CIMB Berhad also do the same thing in their bond
investment. They will first issue bond to customers. When customers get interested with the bond
and its benefits, they will subscribe the bond or invest in the bond. CIMB Berhad then will pay
back to customer the principal plus with the interest.

Sources of fund: Unrestricted Investment (CIMB Islamic Bank)

Islamic banking is the institution that also need sources of fund. The Islamic bank will
make sure they follow the shariah guidelines. One of their ways to get sources of fund that follow
the shariah-compliant is by introduce the unrestricted investment account product. Unrestricted
investment account (URIA) is where the account holder gives the authorized to the bank to make
decision on the investment. The account for the unrestricted investment is structured under
Mudharabah and Wakalah contracts. These types of product have low risk investment portfolio
to aim at capital preservation. It is to build a general pool of funds for investment. The investment
activities are based on a portfolio because the customer will get return based on the portfolio
performance. The contract used for this investment is follow the shariah principles and it is
different from conventional bank.

One of the examples bank that offering product with unrestricted investment accounts is
CIMB Islamic Bank Berhad. The product name from CIMB Islamic is Special Mudharabah
Investment Account-i (SMIA-i). The investment is for the customer enjoy the savings on Flexi
Home Financing-i and Flexi Business Premises Financing-i profit charged. The minimum deposit
for this product is RM 50. The SMIA-i investment account is comply with the Islamic Financial
Services Act 2013 (IFSA) 2013 provision where the deposit account is guided under the
Investment Account Policy by Bank Negara Malaysia. There are various types of properties in the
portfolio of assets. The asset was not conducting in the non-permisible activities and follow the
guidelines made by the Shariah Advisory Council. The example of asset is condominium and shop
houses. Compared with the conventional bank the investment that based on the portfolio of asset
such as bond do not follow the shariah guidelines. The portfolio of asset can be whether it is
conducting permissible or non-permissible activities. There will be element of riba, gharar and
maysir in the investment account. The contract used also do not follow the shariah guidelines
because bonds is sale of debt instrument.

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The others product offered by CIMB Islamic Bank Berhad that are Unrestricted Investment
Account is Term Investment Account-i (TIA-i). Term Investment Account is a shariah compliant
investment account that declares actual returns monthly, based on the performance of the
investments. The minimum placement of the investment is RM 1000 and there is no placement
fee but there are fees and charges for Reproduction/Reprint the statement. The profit base is
also used the concept of mudharabah. It is offering the high return of profit. The return of the
investment according to the performance of underlying assets. The risk that the investment will
be faced is low. The profit generated from the capital is shared using pre-agreed profit-sharing
ratio (PSR) between the account holder and the Bank but losses will be borne by the account
holder.

The flow of process in Unrestricted Investment

Customer Invest Portfolio Liquid Blended Return Distribute
need to Cash of Asset Redemption by whether the based on
fulfil the the bank to get
requirement fees and charges investment gain Profit
from customer profit or face Sharing
losses Ratio

The key difference in investment between CIMB Bank and CIMB Islamic Bank
Berhad

• Investment is to gain Investment Purpose • Investment is to gain
the highest profit profit but based on the
shariah guidelines and
the income is halal

• Sale of debt Contract • Murabahah

• The asset can be from Portfolio of asset • The asset should
non-permissible Return conduct the business
activities or only in permissible
permissible activities activities and follow the
shariah guideline
• Fixed income
investment • The return based on
the investment in
portfolio of asset
performance

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Uses of fund: Working Capital Financing (CIMB Islamic Bank)
Working capital is the difference between a company current asset such as cash, inventories and
account receivable. Current liabilities such as salaries, taxes and account payables. Working
capital difference between operating current asset and current liabilities. Working capital is
measure of a company liquidity, operational, efficiency and short-term financing.

Features of working capital:
• Term loan/financing-i
• Revolving credit-i
• Trade facilities-i

1) Terms financing-i

Term financing-I in CIMB Islamic secured by Amanah Saham Bumiputera (ASB) and the
name is TF-I ASB. TF-I ASB based on the concept of commodity murabahah-tawarruq
which is secured by ASB Certificate and the function is to help you to grow wealth and
achieve financial goals. In term financing-I there is three features and benefit such as
competitive rate, flexible financing and financing protection.

In competitive rate, profit rate of base rate must + 1.55% p.a. Then, in flexible financing,
financing tenure is from 5 years up to a maximum of 40years or 70 years of age. The
minimum of financing amount is RM10,000 and maximum is RM200,000. High margin of
financing (MOF) is up to 100% add 5% takaful coverage.

The eligibility for term financing is only for Malaysian Bumiputera only. Next, individuals
aged 18 years and above with evidence income only. Then, joint application is limited to
parents/spouse/siblings/ adult or children only. The requirement needs photocopy of NRIC
and evidence income.

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2. Revolving credit facility-i

Our shariah compliant revolving credit-I facility based on Commodity Murabahah structure
provides you with ready funds when needed with certainty. The features of the revolving
credit facility use shariah compliant method based on the commodity murabahah. This
product uses a flexible financing. The optimise of our revolving credit facility is eligible
financing, it means the working capital and the collateral item value that we need it
depend on ourself. It’s simple and convenient for everyone and the important thing that
follow shariah compliant. Next, revolving credit facility-I also get additional funds for
business. This fund is disburse as needed when you need it and manage your cash flow
to satisfy for upcoming operation through our working capital solutions. In revolving credit
facility, we can choose the option whether need pledging security or without security.

3. Trade Facilities-i

Trade facilities for international trade risk with help from our comprehensive range of
trade finance solutions. Our in-depth understanding of local markets lets us anticipate
your needs and maximise opportunities using effective solutions.

Under trade facilities there are 6 products. The documentary credit-I (DC-i) and inward
bills for collection-I (IBC-i), this document eligible for buyers of both domestic purchase
and imports. Then, shipping guarantee-I (SG-i) applicable for importers. Accepted Bills-I
(AB-i) applicable for domestic and foreign buyers and seller. Next, trust receipt-I (TR-i)
applicable for buyers dealing domestic purchases and imports. Last, multi-currency trade
financing-I (MCTF-i) applicable for domestic and foreign buyers and sellers.

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Uses of fund: Working Capital Financing (CIMB Bank)
According to Investopedia, working capital is “A working capital loan is a loan that is taken
to finance a company's everyday operations. These loans are not used to buy long-term assets
or investments and are, instead, used to provide the working capital that covers a company's
short-term operational needs. Those needs can include costs such as payroll, rent, and debt
payments. In this way, working capital loans are simply corporate debt borrowings that are used
by a company to finance its daily operations.”

There are currently 4 working capital loan offered by CIMB which is
• Term Loan
• Overdraft
• Revolving Credit
• Trade Facilities

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i) Term loan is a financing for purchasing fixed assets, capital expenditure, working
capital, bridging loan and more. Customer can choose a tenure and pricing structure
that matches their business financing requirements.
The modus Operandi for term loan is a normal loan where customer lend a sum of
money for a period of time and pay deferred payment with interest according to the
tenure agreed. For example, Ah Chong lend RM 500 thousand from bank A to finance
his new purchase of machine. They agreed on 5 years of tenure with 30% interest of
the price. Ah Chong then will have to pay back RM 650 thousand for 60 months.

ii) Overdraft is for business needs with an approved borrowing limit from the bank’s
Overdraft Current Account. Enjoy the flexibility to draw cheques in excess of the funds
you have in your account, with no fixed repayment schedule.
The modus operandi is a bank let a company continue using money from an account
that has already have zero money in it. The customer will ask the bank to let the use
the account even for a limit that the bank will determine usually according to the
amount of collateral given. The customer will then have to leave a collateral to the
bank. When the customer fails to repay the debt, the collateral will be sold by the
bank. For example, Ah Chong asks for an overdraft loan from Bank A using his
company’s account. He gives his company’s land asset worth RM500 thousand as
collateral. The bank will then assess his ability to repay the debt and give him an
overdraft loan of RM250 thousand which is half of the amount of collateral bank was
given. Ah Chong then can continue using RM250 thousand from his account.
Companies usually use this loan to continue using cheques to pay for daily expenses
and operations. Only money use is required to be repaid. For example, if bank give Ah
Chong an overdraft loan of RM500 thousand to be used but Ah Chong only use RM100
thousand, then Ah Chong only need to repay RM100 thousand.

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iii) Revolving credit is a short-term revolving credit facility that let customer withdraw,
repay and redraw repeatedly until the arrangement matures. Once the facility
matures, customer can choose to pay back the principal amount in full, make a partial
payment or renew it for another short-term tenure.
Revolving credit is when a bank allows customer to use money in an account to pay
for daily expenses. Unlike overdraft, revolving credit usually are smaller in amount and
are similar to credit card. The difference with credit cards is a secured asset needed
to apply for the loan. The secured asses usually are the account receivables or
inventories of the company. The customer is then allowed to use the money given to
a maximum limit usually 80% of the amount of secured asset given. For example, if
the secure asset worth is RM5 thousand, then the amount that the customer will get
is RM4 thousand. After the customer pays of the debt, they can use the same amount
of RM4 thousand again when the companies account hit zero. In case of default in
payment, the secured asset will be sold by the bank.

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iv) Trade facilities is for growing international trade ventures and to mitigate risk with
help from the bank’s comprehensive range of trade finance solutions. The in-depth
understanding of local markets makes it easier to anticipate customer needs and
maximise their opportunities using effective solutions. Trade facilities are divided into
two which is import and export. Trade facilities are usually used to purchase or sell
commodities internationally.

When applying for these loans, bank will usually ask for
a. Financial statement of the bank up to 3 years
b. Director’s account and profile (CCRISS)
c. Collateral (for overdraft loan)
d. Secured asset (for revolving credit loan)
e. Bank’s Cash flow statement
f. And any other items that deemed necessary to the bank

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Some key differences between conventional working capital and Islamic working capital

No Conventional Islamic

1 Loan base contract, customer will lend Uses Islamic contracts which is

money, and repay back with interest commodity murabahah. Bank will use a

third party to sell and buy a commodity

as a bridge to make the transaction

transparent.

2 Offer Offer

• Term Loan • Term loan/financing-i

• Overdraft • Revolving credit-i
• Revolving Credit • Trade facilities-i
• Trade Facilities

Mostly the procedure and services offered are the same with each other, but Islamic working
capital gives emphasis to shariah compliant activities. From the contract used to the source of
money that bank will give as a financing to customers.

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REFERENCES
CIMB main websites. Retrieved from https://www.cimb.com.my/en/business/solutions-products/

financing/general-working-capital-financing/working-capital.html
CIMB Islamic Berhad, (2017) Term Investment Account-i Retrieved from:

https://www.cimb.com.my/content/dam/cimb/personal/documents/investment/tiai/ti a
i-performancereport-q12020-final.pdf
CIMB Islamic Berhad, (2015) Special Mudharabah Investment Retrieved from:
https://www.cimb.com.my/content/dam/cimb/personal/documents/investment/fundper
ormance-smia-i/smia-i-performancereport-q12020-final.pdf
Islamic Banking Resources Centre, (August 2017). Islamic Investment Products
Retrieved from:https://islamicbankers.files.wordpress.com/2015/08/investment-account
august-2017-ibrc.pdf
Islamic Markets Website. Unrestricted Investment Account Retrieved from:
https://islamicmarkets.com/dictionary/u/unrestricted-investment-account
Kagan, J. (2020). Working Capital Loan – Definition. Retrieved from https://www.investopedia
.com/terms/w/workingcapitalloan.asp
Tuovila, A. (2020). Revolving Credit. Retrieved from https://www.investopedia.com/terms/r/
revolvingcredit.asp

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