Comparison of Banking Operation between Islamic Bank and Conventional

MGT 3663

KOLEJ PROFESIONAL MARA BANDAR MELAKA

BANKING OPERATION AND PRACTICES (MGT3663)

WRITTEN REPORT (FLIP) (15%)

TITLE: COMPARISON ON BANKING OPERATION BETWEEN CONVENTIONAL AND
ISLAMIC BANKS

SOURCES OF FUNDS (INVESTMENT)

USES OF FUNDS (PERSONAL FINANCING)

GROUP 2

CLASS: DBF 6B

PREPARED BY :

NAME ID NUMBER
1 NUR AZWA AMIRA BINTI MUHAMADAN BMF19-06-059
2 NAYLE EVANNA BINTI MUHAMMAD FARIQ BMF19-06-057
3 NUR FARAHANIS BINTI SURAIMI BMF19-06-063
4 MUHAMMAD ZAKIUDDIN BIN ISMAIL BMF19-06-095
5 AHMAD RAZIEMAN BIN KHAIRUL EMRAN BMF19-06-023

PREPARED FOR:

MADAM NOOR AISYAH BINTI OTHMAN

SUBMISSION DATE:
26 APRIL 2021

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GROUP MEMBERS

MUHAMMAD ZAKIUDDIN AHMAD RAZIEMAN
BMF19-06-095 BMF19-06-023

NAYLE EVANNA
BMF19-06-057

NUR FARAHANIS NUR AZWA AMIRA
BMF19-06-063 BMF19-06-059

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TABLE OF CONTENT MGT 3663
CONTENT
PAGE
Acknowledgement 4
5-6
Introduction of The Assignment 7-8

Sources of Fund Investment (Alliance Bank) 9-11
12-15
Sources of Fund Investment (RHB Islamic Bank)
Sources of Fund (Comparison on Banking Operation between 16
Conventional and Islamic) 17-18
Modus Operandi 19-21
Uses of Fund Personal Loan (Alliance Bank) 22-24
25-26
Uses of Fund Personal Financing (RHB Islamic Bank)
27
Uses of Fund (Comparison on Banking Operation between
Conventional and Islamic)
References
Appendix

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ACKNOWLEDGMENT
Alhamdulillah, first of all we would like to thank Allah as finally we were able to finish
our Banking Operation and Practices assignment. This task had been done with all afford by
each group members even though we are not able to do together because of pandemic Covid-
19. Luckily, all the problems can settle and we able to adapt properly and wisely.
Besides that, big thank we address 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.
On the other hand, 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.
Last but not least, we all hope that our assignment will have a significant and positive
effect on society as well as the students who will enter and participate in the Diploma in
Islamic Banking and Finance. We hope that all of our efforts and energy will get a good result
for our assignment.

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Introduction to the Assignment

First thing we perform this assignment is to fulfill the subject of Banking Operation and
Practices (MGT 3663). In this assignment we are going to do some research and focus on
sources of funds which is in chapter 3 and uses of fund in chapter 4. We must choose one
conventional banking institution and one Islamic banking institution. Following that, we must
compare the banking operations of Islamic banks and conventional banks. We choose
investment fund as a source of funds, and corporate financing under equity-based financing,
which is personal financing, as a use of funds.

First, Islamic banking funds are derived from deposit and investment funds. Deposit
funds are classified into three types: current deposits, savings deposits, and term deposits.
When it comes to investment funds, there are two types: unrestricted investment accounts
and restricted investment accounts. However, in this report, we will concentrate on the
investment fund, also known as a restricted investment account or Wakalah bi al-Istihmar.
Previously, deposits and investments were the primary sources of funds for Islamic banks.

Next is uses of funds. Our group choose personal loan or in islamic terms is personal
financing. Personal financing is one of the uses of fund that can generate income to the banks.
The customer will apply to the bank to get the financing from the bank. So, for the
conventional the bank will charge the interest to the customer while the islamic bank will
charge with the profit rate. The customer does the financing for various reasons and purposes
such as educations, medical, marriage pilgrimage, payment of debt and others.

In conventional bank, they provide two types of loan which are personal loan that loan
is defined as a sum of money that customers can lend for multiple uses and business loan is
when a business and a financial institution, such as a bank, enter into a debt-based financing
agreement. While for the islamic bank they provide 3 types which are personal financing-i for
civil sector, private sector and pensioners. Each of the types ae same concept which is
commodity murabahah or tawarruq. Commodity murabahah is a financing transaction based
on purchase and sale, whereby the Bank purchases a commodity from a broker and sells it to
the customer through the murabahah agreement with a set markup either in the form of a
lump sum or percentage.

In this assignment we will learn there are a lot of differences between conventional
and islamic. Both have their benefit. As a Muslim we must take the product of islamic banking
because there are prohibit with riba’, maysir and gharar. In Al-Quran already said that “Those
who benefit from interest shall be raised like those who have been driven to madness by the

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touch of the Devil; this is because they say: "Trade is like interest" while God has permitted
trade and forbidden interest. Hence those who have received the admonition from their Lord
and desist, may keep their previous gains, their case being entrusted to God; but those who
revert shall be the inhabitants of the fire and abide therein forever.”

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Sources of fund: Investment (Alliance Bank Berhad)

An investment, according to Investopedia, is an item purchased or asset with the intention of
earning money. When someone purchases something as an investment, the goal is not to
consume it but to use it to generate future wealth.

One type of investment offered by Alliance Bank is

• Wealth

The process of building wealth entails investing in various asset classes with the goal
of meeting specific needs. These investments should also be self-contained, generating a
consistent stream of income and assisting the investor in achieving their objectives. They'll be
most effective if start them early. Beginning the investments early in life will give an advantage
in achieving objectives. They will be most effective if begun early. Starting investments early
in life will give a leg up on achieving goals. It also contributes to long-term growth.
Compounding's power is the reason for this. Compounding power is a concept that will help
you build a sizable portfolio in the future. Compounding is the process of reinvesting profits
back into a fund to increase its growth. As a result, the longer one invests, the greater the
wealth gain.

There are four types of investment in Wealth:

i. Unit Trust
One can begin investing in Unit Trusts with as little as RM100. The low entry cost
provides a convenient and low-cost way for first-time unit trust investors to invest in
markets that are traditionally more difficult to access. Alliance Bank has a wide
selection of funds to meet the investment needs. Unit Trusts are appropriate for
investors with a medium to long-term investment horizon who want a medium-term
investment with higher potential returns than a normal deposit.

ii. Structured Investment
A structured investment is one in which the payout is contingent on the performance
of the underlying asset. This provides the opportunity to increase the return while
also protecting the capital at maturity. Diversifying portfolio risk can be achieved by
investing in a different underlying asset. Structured Investments are appropriate for
those looking for a medium-term investment with potentially higher returns than a
normal deposit while also gaining exposure to a specific asset class. Those who invest

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in this type of investment can earn a potential coupon while preserving their capital if
they hold the investment to maturity.
iii. Dual Currency Investment (DCI)
DCI is a non-principal protected short-term currency linked structured investment that
allows investors to earn higher returns than a normal deposit. Investors will receive
the principal and returns in either the base or alternate currency at a pre-determined
conversion rate when the investment matures. Positions with the DCI can last as little
as 1 week.
iv. Retail Bond
A retail bond is a type of debt security in which the issuer need to pay the bondholder
interest or coupons at pre-determined intervals and return the principal on the maturity
date, depending on the terms of the bond. Retail Bonds are appropriate for investors
with a medium to long-term investment horizon who want to diversify their portfolio
with Fixed Income instruments. Bonds also provide investors with a consistent stream
of cash flow payments.

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Sources of fund: Investment (RHB Islamic Bank)
Name of Product: Dual Currency Investment-i (DCI-i)

1. What is Dual Currency Investment-I (DCI-i)?
Dual Currency Investment-I (DCI-i) is an Islamic structured investment product linked to the
output of two currencies through the Wakalah bi al-Istithmar contract (agency contract for
investment). The Investor, as Principal, appoints RHB Islamic Bank Berhad (the Bank) as its
agent (the Wakil) to invest the investment sum in order to receive the expected returns under
the Wakalah bi al-Istithmar contract. Wakil must invest in Shariah-compliant instruments
available to the DCI-I, such as Islamic currency options and Islamic money market
instruments. If the actual return or profit exceeds the expected return, the lender gives the
bank a Tanazul in order to waive the excess sum. Prior to Wakil’s investment in the DCI-I
instrument, the Investor must decide on the currency pair that will be the Base (investment)
Currency and the Alternate Currency, the duration of the investment, and the Conversion
Rate.

2. Who is this product suitable for?
The investor must be a high net worth individual, high net worth entity or an accredited
investor to invest in this product.
This product may be suitable for investors: -
a) who have a view on short term foreign exchange movements
b) with risk appetite and are looking for higher returns than traditional deposit products
c) who are indifferent to and comfortable with receiving the redemption of the investment
in either he Base Currency or the Alternate Currency.
d) who are able to hold the investment to maturity
e) who are seeking to invest in a Shariah-compliant yield-enhancing investment.

3. Investment Objectives
• To provide a Shariah-compliant short-term investment instrument with foreign
currency risk that has the potential to provide a higher return than conventional fixed deposits.
• Generate the Expected Profit agreed upon with the Investor in advance.

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4. Investment Strategies

DCI-i is a restricted investment account (RIA) based on the Shariah contract of Wakalah bi al-
istithmar that is related to the performance of the exchange rate for a pair of currencies
(contract of agency for investment). It aims to meet its investment objectives by purchasing
a Shariah-compliant money market instrument and participating in an Islamic Currency Option
transaction. The Islamic Currency Option transaction costs a premium, which increases the
DCI-yield. i's Due to the Islamic Currency Option transaction, investing in DCI-i introduces
investors to foreign currency risks.

5. What is the Shariah contract applicable?
The applicable Shariah contract for DCI-i is Wakalah bi al-Istithmar (agency contract for
investment).
This refers to an agreement between the Investor as the principal and the Bank as Wakil.
Under the Wakalah, the Bank will perform the role of agent for the Investor and will invest
the investment amount to meet the objectives of the investment in a manner compliant with
Shariah principles. This will involve the use of Islamic instruments which are based on the
Shariah principles of Wa’ad, Commodity Murabahah, Bai’ Al-Sarf and Tanazul. The Bank will
invest in Islamic money market instruments and enter into a Currency Option-i transaction
with a counterparty based on the application of these Shariah contracts as follows:

Wa’ad: The unilateral promise (wa’ad min tarfwahid) given by the Bank to enter a currency
exchange on a future date with the counterparty at the Strike Rate if certain conditions are
met under the structure of the Currency Option-i.

Commodity Murabahah: The Bank will purchase commodities from an approved commodity
broker. The Bank will subsequently sell the commodities to the counterparty for a mark-up
which is equivalent to the Currency Option-i premium.

Bai’ al-Sarf: If the Wa’ad under the Currency Option-i is exercised by the counterparty an
exchange of currencies shall take place under the Shariah contract of Bai’ al Sarf. If the
counterparty does not exercise the Wa’ad under the Currency Option-i, there will be no Bai’
al-Sarf between the Bank and counterparty and hence no exchange of currencies will take
place between the Bank and the counterparty.

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Tanazul: Under this concept, the investor waives his rights and allows the Bank to keep any
differences from the Actual Profit on the investment and the Expected Profit quoted upfront
to the Investor.
Under the same concept, any agency fee for services as Wakil is also waived by the Bank.
(RHB Islamic Bank,2020)

Trade Date The date the DCI-i transaction is concluded between the
Start Date Investor and the Bank
a) Two business days after the Trade Date; and
Expiry Date b) The date the Investment Amount is debited from the
Maturity Date
Investment Amount Investor’s Islamic Current Account (CA-i) or Islamic Multi
Profit/Return Calculation Currency Account (MCA-i). If there are insufficient funds
in the account to be debited by 2:00 p.m. on the Start
Date, the investment will be terminated and the Investor
shall be liable for any unwinding cost.
Two business days before the Maturity Date. On this date,
the Bank will determine the Spot Rate at 2:00 pm Kuala
Lumpur time for purposes of ascertaining the currency of
payment of the initial Investment Amount and Return.
a) The last day of the DCI-i Tenor as pre-determined on the
Trade Date.
b) The date when the Base Currency or Alternate Currency
plusProfit is paid out to the Investor.
Minimum MYR50,000 (or equivalent in foreign currency
(“FC”)).

Investment Amount in Base Currency x Profit Rate x
InvestmentTenor ÷ Number of days in a Year*

*Number of days in a Year may be 365 days or 360 days
based on the applicable day count convention of the base
currency.
Sources:
https://www.rhbgroup.com/~/media/files/malaysia/productandservices/bussiness/shariah-
products/product-disclosure-sheet/phs-dci-i.ashx?la=en

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COMPARISON BETWEEN CONVENTIONAL AND ISLAMIC BANK

(SOURCES OF FUNDS)

Deposit funds and investment funds are used to provide financing to customers in
modern Islamic banking operations. The deposit funds are for saving or safekeeping and come
with a guarantee of repayment, whereas the investment funds are to be invested with no
guarantee of profit or return of principal. In this case, we choose investment fund as our
source of fund.

Firstly, the banking products refer to the bank services provided for customers. Both
Islamic and conventional banks offer products with different characteristics. In Islamic banks,
general investment accounts are used, whereas fixed deposit accounts are used in
conventional banks. For example, in RHB Islamic Bank Berhad, they are restricted investment.
The product offered by the bank is Dual Currency Investment. A foreign exchange linked
structured product investment is known as a Dual Currency Investment. A Dual Currency
Investment is a structured product with an embedded derivative linked to the performance of
two currencies, allowing investors to potentially earn higher returns than normal deposits. In
conventional bank which is Alliance Bank Malaysia Berhad, they used fixed deposit. A fixed
deposit is the bank will pay a rate of interest to the investor after they invest to the bank. In
exchange, the investor agrees to refrain from withdrawing or gaining access to their funds for
a set period of time. At the end of the investment period, only the interest was paid and
Alliance Bank Malaysia Berhad used a fixed rate of 1.8 percent.

Secondly, investors can earn a variety of returns after making investments, and Islamic
banks earn returns in a different way than conventional banks. Profit sharing is done in RHB
Islamic Bank Berhad according to an agreed-upon percentage based on profit and loss. Before
the deal is confirmed on the Trade Date, the Investor and the bank agree on a rate of return.
The amount of profit or return that will be paid. Depending on the performance of the Dual
Currency Investment and the terms and conditions of the Dual Currency Investment, the profit
or return to be paid to the Investor may be either Actual Profit or Return or Expected Profit
or Return. In Alliance Bank Malaysia Berhad, interest or dividends are based on interest
bearing, with no profit or loss sharing.

Thirdly, for the contract used in RHB Islamic Bank Berhad for Islamic banking, as well
as the investment product Dual Currency Investment-I (DCI-i). Dual Currency Investment-I

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(DCI-i) is a type of Islamic structured investment product that is linked to the output of two
currencies under the Wakalah bi al-Istithmar contract (agency contract for investment). The
Investor as Principal appoints RHB Islamic Bank Berhad (the Bank) as its agent (the Wakil) to
invest the investment sum in order to receive the expected return under the Wakalah bi al-
Istithmar contract. The Wakil’s investment must be in Shariah-compliant instruments available
to the DCI-I, such as Islamic currency options and Islamic money market instruments. If the
real return or benefit exceeds the estimated return, the investor gives the bank a Tanazul to
waive the excess sum. Prior to Wakil’s investment in the DCI-I instrument, the Investor must
decide on the currency pair that will be the Base (investment) Currency and the Alternate
Currency, the duration of the investment, and the Conversion Rate. On maturity, the investor
will collect the initial investment sum as well as any returns in either the Base Currency or the
Alternate Currency, depending on where the currency pair’s prevailing exchange rate settles
against the Conversion Rate on the Expiry Date. The Base Currency is the currency in which
the initial investment is made, and the Alternate Currency is the second currency of the
selected currency pair that will be combined with the Base Currency for the DCI-i. However,
since no contract was relevant for the conventional investment product, Alliance Bank Malaysia
Berhad’s investment product would not use any contract to run the investment.

Next, for the elements of Islamic banking that we chose which is RHB Islamic Bank
Berhad, the investment product called Dual Currency Investment-i (DCI-i). The investment
product for RHB Islamic Bank Berhad was free from the elements of gharar, riba’ and
gambling, and various other things that are forbidden in Islam. It is because Dual Currency
Investment-i (DCI-i) uses the contract of Wakalah bi al-Istithmar. This contract was free from
the elements of gharar, riba’ and gambling, and various other things that are forbidden in
Islam. While for a conventional bank, Alliance Bank Malaysia Berhad, the investment product
was non-Shariah compliant. The services are based on riba’ and gambling and not approved
by shariah. We also do not know from where the profit comes and we do not know at what
business that the bank invests the money to gain profit. That is why investment at the
conventional bank has the element of riba’ and gharar and the product was non Shariah
compliant.

Moreover, RHB Islamic Bank Berhad is based on the Islamic faith's tenets as they apply
to commercial transactions. RHB Islamic Bank Berhad’s concept are drawn from the Qur'an,
Islam's basic religious text. All transactions in Islamic banking must adhere to shariah, Islam's
legal code (based on the Qur'an's teachings). Fiqh al-muamalat refers to the laws that regulate
commercial transactions in Islamic banking. Furthermore, all investments involving products

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or substances prohibited by the Qur'an, such as alcohol, gambling, or pork, are forbidden.
Islamic banking can thus be thought of as a culturally distinct type of ethical investing. While
in conventional banking which is Alliance Bank Malaysia Berhad, conventional banks accept
deposits for all forms of deposit accounts, including Term Deposits, Savings Accounts, and
Current Accounts, on the basis of a loan. For the interest-bearing accounts, interest-bearing
returns are issued. Current Accounts and Term Deposits, whereas Savings Accounts and Term
Deposits. Free banking services may be available for some accounts. Furthermore, a
conventional bank invests deposits in non-shariah compliant avenues and receives non-
shariah compliant returns as a result. Alliance Bank Malaysia Berhad provide their customers
with credit facilities to meet their cash needs through loan contracts, in which the bank and
the client serve as lender and borrower, respectively. Trade finance operations are offered by
conventional banks under the principles of facilities, guarantee, and lending.

Lastly, for RHB Islamic Bank Berhad, the bond market and the equity or stock market
are the two major markets. A stock market is a place where investors can buy and sell equity
securities (such as shares) issued by companies. Investors go to the bond market to purchase
and sell debt securities issued by companies and governments. Stocks are usually traded on
a variety of exchanges, while bonds are typically offered over the counter rather than in a
single location. While in Alliance Bank Malaysia Berhad, the bond market (also known as the
debt market or credit market) is a financial market where participants can buy and sell debt
securities in the secondary market or issue new debt in the primary market. This is generally
in the form of bonds, but it may also be in the form of notes, bills, and other financial
instruments for both public and private expenses. The security market is a subset of the larger
stock market in which securities can be bought and sold between economic subjects based
on supply and demand. The derivatives market is a financial market for derivatives, which are
financial instruments derived from other assets such as futures contracts or options. There
are two types of derivatives markets which are exchange-traded derivatives and over-the-
counter derivatives.

As a conclusion, there are two contracts used in the investment fund either Mudarabah
or Wakalah contract. For our bank which is RHB Islamic Bank Berhad, they use Wakalah
contract in which became an agency contract for investment. Other than that, based on the
restrictions applied by the investment account holders, the investment accounts used in RHB
Islamic Bank Berhad is restricted investment account (RIA) which the customer stipulates
certain restrictions on when, where or how the bank can invest the funds.

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Summary of Comparison between Islamic Bank and Conventional

Islamic Aspect Conventional
Not relevance
Wakalah bi al-Istithmar Contract Based to company
country regulations
Guided by sharia and Islamic Basic and

law

General investment accounts Deposit product Fixed Deposit
Profit sharing according to Returned Interest / Dividend is based
the agreed percentage on (Interest bearing) and no
based on profit and loss profit and loss sharing.
(profit-sharing)

The 2 main markets are the Market On Bursa Malaysia, there are
bond market and the equity bond markets, securities
or stock market. markets, and derivatives
markets.
Free from the elements of Involvement
gharar, riba’ and gambling Services based on riba' and
and various other things that gambling and not approved
are forbidden in Islam. by shariah.

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Modus Operandi

i. Islamic Bank

ii. Conventional Bank
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Uses of fund: Personal Loan (Alliance Bank Berhad)
According to Investopedia, the term loan refers to a form of credit vehicle in which an
amount of money is lent to another party in return for the value or principal amount being
repaid in the future. In certain situations, the lender will also apply interest and finance costs
to the principal value, which the borrower will be responsible for repaying in addition to the
principal balance. Loans may be for a fixed, one-time sum or an open-ended line of credit
with a set cap. Secured, unsecured, industrial, and personal loans are only some of the types
of loans available.
There are currently two types of loan offered by Alliance Bank Berhad which are
• Personal Loan
• Business Loan

I. PERSONAL LOAN
Personal loan is defined as a sum of money that customers can lend for multiple uses. For
illustration, a personal loan may be used to consolidate debt, pay for home repairs, or plan a
big wedding. Financial institutions, credit unions, and lending agencies all provide personal
loans. Customers must repay the money that is borrowed over time, usually included with
interest. Certain lenders can charge fees for personal loans.
The modus operandi for personal loan is in most cases, the customers will start by filling out
an application. Then it is reviewed by the investor, who then decides whether to accept or
reject it. If they are accepted, they will be given loan terms to accept or reject. Afterwards,
the lender will proceed the loan, which ensures the customers will receive the funds. This can
be achieved by a direct deposit into the customers' bank account or a check, depending on
the lender. After the loan has been approved, the customers are free to use the funds as they
see fit. After that, the customers must begin repaying the loan according to the conditions of
the loan agreement. For example, Customer A lend to the bank a total of RM10,000 with an
interest rate of 7.5% and a repayment term of 24 months. Using those terms, the monthly
repayment will be RM450 and the total interest paid over the life of the loan would be
RM799.90.

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II. BUSINESS LOAN
Business loan is when a business and a financial institution, such as a bank, enter into a debt-
based financing agreement. It's mostly used to cover large capital expenses or maintenance
costs that the organisation would not be able to cover otherwise. This means that, Smaller
businesses, including individuals, must rely on alternative lending products such as lines of
credit, unsecured loans, and term loans.
These loans also require a business to submit a collateral, which is often in the form of land,
plant, or equipment that the bank will seize if the borrower defaults or files for bankruptcy.
Cash flows produced from future accounts receivables are often used as collateral for loans.
Commercial real estate mortgages are one form of commercial loan.

Customer will apply the personal loan to the bank follow the eligibility that wrote to the
agreement.
1. Alliance Bank will give the cash to the customer
2. the customer will pay back on deferred payment follow the tenure that already agree with
the bank with the cost plus with interest.

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Uses of Funds: Personal Financing (RHB Islamic Bank)

Uses of funds is the way to generate income for the banks. There are many types of
uses of funds such as islamic retail financing, automobile financing, personal financing and
corporate financing. Personal financing is financing that provide by the bank and will give to
the customer who require to get the cash or liquidity for various reasons and purposes such
as educations, medical, marriage pilgrimage, payment of debt and others. RHB Islamic Bank
provide three types of financing which are:

• Personal Financing-i for Civil Sector
• Personal Financing-i for Private Sector
• Personal Financing-i for Pensioner

I. Personal Financing-i for Civil Sector
Personal financing-i for civil sector is offered to federal or state civil servants who are still
serving, or who have retired. This loan is a 100% Shariah compliant Islamic personal loan
with the concept of Commodity Murabahah through Tawarruq rules. This RHB personal
financing is also an unsecured financing. Therefore, you don’t need a guarantor or submit any
collateral to apply. RHB offers a relatively high amount of financing, which is up to RM200,000.
The minimum funding amount is RM2,000. The period of financing allowed is up to 120
months, or 10 years. Eligibility requirements to apply are also not burdensome. You only need
to be 18 years old and above with a gross salary income of not less than RM2,000 per month.
Since this personal financing is an Islamic personal financing, you will not be charged interest.
RHB will only charge a fixed profit rate starting from 4.5% p.a. This profit rate depends on
the amount of financing or the period of financing applied for.

II. Personal Financing-i for Private Sector
Personal financing-i for private sector is an unsecured personal financing and it is a short-term
financing facility that provides lump sum cash to customer. This facility is to cater for
customer’s personal consumption such as house renovation, settling outstanding financings
or education as well as other benevolent purpose as long as it does not contrary to the Shariah
principles. This personal financing also uses the same concept with civil sector. The minimum
financing that offers for RHB Islamic Bank is RM5000 until RM150,000. The financing period
that already state is 2 to 7 years. The profit rate for this financing is 14%. This profit rate is
depending based on amount from the financing. The customer must 21 and above to apply
the financing private sector with minimum income RM3000.

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III. Personal Financing-i for Pensioner
Last type is personal financing-i for pensioner. For this financing they have two differences of
rate which is fixed rate and variable rate. This product is an unsecured financing facility that
provides lump sum cash to customers, targeted to government pensioners regardless whether
they are pensioners from the army service or other government ministries or departments or
agencies. This facility is to cater for customer’s personal consumption as long as it does not
contrary to the Shariah principles. RHB offer the higher amount financing which is RM100,000
and the minimum is RM5000. The period of financing is start with 3 to 10 years. There is no
guarantor or collateral is required. The eligibility for taking the financing from RHB Islamic
Bank must government pensioners and minimum age is 40 years old. The flat rate is 4.02%
to 4.28% and for variable rate is 7.55%.
MODUS OPERANDI FOR RHB ISLAMIC BANK
The Personal Financing-i adopts the Shariah concept of Commodity Murabahah via Tawarruq
arrangement. Commodity Murabahah consists of two sale and purchase contracts. The first
involves the sale of an asset by a seller to a purchaser at a marked-up price and on deferred
payment basis. Subsequently, the purchaser of the first sale will sell the same asset to a third
party at cost price and on spot basis.

The Customer and RHB Islamic Bank (RHBIB) enter into an agreement where the Customer
promises to buy a specified commodity or asset from RHBIB and the Customer then authorize
and appoints RHBIB as his sole and exclusive agent (Wakil) and authorize RHBIB to delegate
its rights and duties as such agent herein to any third party under Agency (Wakalah) contract
to act on his behalf for the commodity trading transactions.

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a) RHBIB will purchase a commodity from Broker A at purchase price (financing amount)
b) Ownership of the commodity will be transferred to RHBIB
c) RHBIB will sell the commodity to the Customer at a ‘mark-up’ price (purchase price plus
profit margin). RHBIB (acting as the Customer’s agent) will accept the purchase of the
commodity
d) Customer will appoint RHBIB as agent to sell-off the commodity
e) RHBIB (acting as the Customer’s agent) will sell the commodity to Broker B
f) Broker B will purchase the commodity from RHBIB (acting as the Customer’s agent) at the
purchase price and credit RHBIB account to reflect the sales transaction
g) RHBIB will make the funds available to the Customer in the form of Personal Financing-i
(disbursement amount).

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COMPARISON BETWEEN CONVENTIONAL AND ISLAMIC BANK (USES OF FUNDS)

We prefer personal financing as a use of funds. Personal finance is a concept that
encompasses all aspects of money management, including saving and investing. Banking,
insurance, budgeting, investing, mortgages, retirement plans, tax, and estate planning are all
included. The phrase is often used to describe the entire industry that provides financial
services to individuals and families, as well as provides financial and investment advice. This
article will look at the most basic and crucial component of personal financial management.
There are several distinctions between a conventional bank and an Islamic bank.

In conventional which is Alliance Bank, they use the concept of personal loan. Personal
loan is amount money that customer will apply to borrow for variety of purposes. The money
that the customer borrow must repaid the amount that already plus with interest. While the
Islamic which is RHB Islamic Bank, they use the concept of tawarruq or commodity murabahah
that is an arrangement that involves the purchase of asset based on murabahah meaning that
sells with cost plus mark-up price and sell the asset to a third party to increase cash. In Islamic
concept, they prohibit use interest in Islamic bank because it will make usury on it.

Next is the relationship terms in Alliance Bank is between bank and customer. The
bank will give the loan cash to the customer. Then the customer will payback with deferred
payment which is cost plus interest. For RHB Islamic Bank there will involves customer, bank,
broker A and broker B. RHBIB will purchase a commodity from Broker A at purchase price so
the ownership of the commodity will be transferred to bank. Next RHB Islamic Bank will sell
the commodity to the customer at a ‘mark-up’ price meaning is cost price plus with profit and
bank will accept the purchase of the commodity. RHB Islamic Bank acting as the customer’s
agent will sell the commodity to broker B. Broker B will purchase the commodity from RHB
Islamic Bank at the purchase price and credit bank account to reflect the sales transaction.

Moreover, the differences between and islamic product and conventional product is
minimum loan amount. For the Alliance Bank, they provide the loan is RM5000 to RM150,000.
While RHB Islamic Bank provide the minimum of financing amount start with RM2000 to
RM20,000. From here we can see that the RHB Islamic Bank provide the lowest financing.
The customer able to do the financing and they can payback with earlier to the bank. RHB
Islamic Bank also provides early financing settlement before the expiry of financing tenure will
get a rebate or we call as Ibra’.

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Apart from that, the difference between an Islamic product and conventional product
is the types of profit earned from the loan. For Islamic product, the profit is earned by profit
rate. For example, RHB Islamic Bank Berhad imposed a 4.5% profit rate per annum, on their
loan. The reason behind avoiding using interest is because interest is a prime example of riba.
Riba is defined as growth, increasing or exceeding. The concept of riba is much prohibited in
the teachings of Islam as it is to ensure that the trade is fair. Its aim is to ensure that people's
wealth is protected by rendering unfair and unequal exchanges illegal. Islam encourages
charitable giving and acts of kindness against others. While for conventional product, the profit
earned is by using interest rate. For example, the Alliance Bank Berhad’s interest rate can be
between 8.38% to 14.78% per annum, which is very high compared to the Islamic products’
profit rate. The high interest rate will only benefit the lenders as it can gives a much higher
return. In contrast, the customers will be burdened by it. They don't see any restrictions like
this in conventional banks. Short selling, debt sales, and speculative transactions are all
popular in this scheme, which is based on interest. Whereas, Islamic banks follow socio-
religious rules that forbid charging and paying interest, as well as avoiding all prohibited
transactions such as gambling, speculation, short selling, and debt and receivables sales.

Other than that, the difference between an Islamic product and conventional product
is the tenure of the payment. For Islamic product, it is usually is to finance a long-term project.
To illustrate, RHB Islamic Bank Berhad have the payment tenure up to 10 years. The longer
the tenure, it will benefit the customers as it gives more time to the customers to collect funds
for repayment. For conventional product which is personal loan, it can be short-term and long-
term loan. For example, Alliance Bank Berhad’s payment tenure is up to 7 years. Not only the
tenure is shorter than Islamic personal financing, the interest rate is also much higher. This
will result to the customers’ default.

Lastly, another difference is the fees and charges that is charged upon making the
contract. In Islamic product which is personal financing, the fees and charges is fixed. For
illustration, in RHB Islamic Bank Berhad, they set the fees beforehand which are stamp duty
RM10.00, Brokerage RM30.00 and collection fee 2.0%. The information given can be interpret
as the Islamic bank avoiding gharar by stating any additional charges. In contrast, for
conventional product which is personal loan, the fees and charges is set using percentages
which if the customers borrow higher amount of money, they have to pay higher fees and
charges. For example, for Alliance Bank Berhad, the customers have to pay stamp duty 0.5%
of total approved loan amount and if any taxes that is may be imposed, the bank shall be

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entitled to recover such taxes from the customers. So, if a new start-up business wants to
borrow money from the bank, they will be burdened by a high fee.

Summary of Comparison between Islamic Bank and Conventional

RHB Islamic Bank Alliance Bank

Concept Commodity Murabahah via Personal Loan
Tawarruq

Relationship Customer, Bank, Broker A and Customer and Bank
Broker B

Amount of Financing/ Minimum Financing Amount - Minimum Loan Amount-

Loan RM2000 to RM 200000 RM5000 to RM150,000

Tenure Payment Tenure Up to 10 Years Payment Tenure Up to 7
Years

Rate 4.50% 8.38%

Stamp Duty RM10.00, Stamp Duty 0.5% and Taxes

Fee and Charges Brokerage RM30.00, Collection (If Any)

Fee 2.0%

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REFERENCES

Bank, R. (2021). Personal Financing. Retrieved from RHB Bank:
https://www.rhbgroup.com/overview/business/index.html

Bank, R. (2021). Personal FInancing. Retrieved from RHB bank:
https://www.rhbgroup.com/personalfinancing-i_tacticalEng/index.html

Blackstone, V. L. (2018, November 21). Advantages & Disadvantages of Interest Rates.
Retrieved from PocketSense Web site: https://pocketsense.com/advantages-
disadvantages-interest-rates-7841708.html

CompareHero.my. (2021, March 12). Personal Loan. Retrieved from CompareHero.my Web
site: https://www.comparehero.my/personal-loan/articles/difference-between-profit-
rate-and-interest-
rate#:~:text=Islamic%20personal%20financing%20is%20structured,way%20a%20
personal%20loan%20is.&text=The%20profits%20you%20earned%20(according,sho
ws%20the%20percen

Gazi, F. (2019, April 11). What Exactly Is Shariah Compliant Personal Financing? Retrieved
from imoney centre: https://www.imoney.my/articles/what-is-shariah-personal-
financing

Hayes, A. (2020, November 25). Riba. Retrieved from Investopedia Web site:
https://www.investopedia.com/terms/r/riba.asp#:~:text=Riba%20is%20a%20conce
pt%20in,Islamic%20law%2C%20akin%20to%20usury.

Kagan, J. (2021, April 19). Loan. Retrieved from Investopedia Web site:
https://www.investopedia.com/terms/l/loan.asp

Kenton, W. (2020, November 14). Commercial Loan. Retrieved from Investopedia Web site:
https://www.investopedia.com/terms/c/commercial-loan.asp

Lake, R. (2021, April 1). Personal Loan. Retrieved from Invetopedia Web site:
https://www.investopedia.com/personal-loan-5076027

Langemeier, M. (2020, August 26). Sources And Uses Of Funds Statement. Retrieved from

Purdue University: https://ag.purdue.edu/commercialag/home/sub-

articles/2020/08/sources-and-uses-of-funds-statement-

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2/#:~:text=Uses%20of%20funds%20include%20farm,income%20and%20self%2D
employment%20taxes.

Market, I. (2021). Riba in qur'an . Retrieved from islamic market:
https://islamicmarkets.com/education/riba-in-the-qur-an

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APPENDIX

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