REPORT ASSIGNMENT BOP

KOLEJ PROFESIONAL MARA BANDAR MELAKA
BANKING OPERATION AND PRACTICES
(MGT 3663)

Title: Comparison on Banking Operations between Islamic Bank and
Conventional Bank

Group members:

NAME ID NUMBER
NUR AIDILLA BINTI ABDUL MALIK BMF19-06-015
BMF19-06-009
NURSYUHADA BINTI OTHMAN BMF19-06-020
NURUL NABIHAH BINTI BAKAR BMF19-06-087
NUR SYAFIQAH BINTI SAFUAN BMF19-06-090
MUHAMMAD ARIF IZZAT BIN MOHD ZULKIFLI

Class:
DBF 6B

Submission date:
26 April 2021

Lecturer name:
Madam Noor Aisyah binti Othman

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ACNOWLEDGMENT

Alhamdulillah, first of all we would like to thank Allah as finally we were able to finish
our assignment that has been given by our Banking Operation and Practices lecturer to us.
This task had been done with all afford by group members even though there are a little bit
problem that we need to face while doing this assignment. Luckily, all the problems can be
settle down and we were able to adapt properly and wisely.

We are overwhelmed in all humbleness and gratefulness to acknowledge our depth
to all those who helped us to put these ideas, well above the level of simplicity and into
something concrete. We would like to express our special thanks of gratitude to our lecturer,
Madam Noor Aisyah Binti Othman who gave us the golden opportunity to do this wonderful
project on the topic of sources of fund and uses of fund which also helped us in doing a lot
of research and we came to know about so many things. A big thankful to those who
participated any attempt at any level can’t be satisfactorily completed without the support
and guidance of our lecturer and also our friends.

Finally, thank to our beloved friend that burn the midnight oil and always stick
together and also work hard to produce a good assignment with all afford and responsibility.
Hope that all the afford will give a lot of benefits to us and also to our group assignment.
Million thank also we wish to our entire classmate because they also help us in doing our
assignment. They always give us ideas and comments on our works so that we can improve
our assignment in many ways.

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TABLE OF CONTENT Page
No. Content 3
1. Introduction
2. Sources of fund: Comparison between Islamic Bank 4 - 11

term deposit and Conventional bank term deposit 12 - 21
5. Uses of fund: Comparison between AITAB and
22 - 24
conventional Hire Purchase 25
6. Summary
26 - 27
7. Conclusion 28 - 36
8. References
9. Appendix

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INTRODUCTION

Banks are a financial intermediary, or an institution that acts as a bridge between a
saver, investor, depositor who deposits or invests money in a bank and a borrower who
receives financing from that bank. An "intermediary" is someone who acts as a go-between
for two parties. Financial intermediaries include other financial market entities such as
insurance companies and pension funds which are not called depository institutions, which
are institutions that receive money deposits and then use them to make funding. All
deposited funds are combined into one large pool, which is then financing out. There are
two types of cash flow used in the bank which are sources of fund and uses of fund.

Source of Funds (SOF) refers to the origin of the specific funds or other monetary
instrument that is the focus of the transaction between a Financial Institution and the
consumer. Second important concept of Sources of Fund is the source and mode of transfer
of money approved for the account. Among of examples of Sources of Fund is, Funds are
from a saving account owned by parents and funds are from Singapore bank account owned
by a company.

Besides, uses of fund is the most common feature of any Islamic commercial banks
that involves two main sectors, namely, the personal or retail sector and the corporate or
trade sector. Nevertheless, not all retail financing includes individual clients solely, and
besides, not all corporate financing includes clients with corporate commerce operations.
There are two sorts of uses of funds in Islamic finance, to be specific, Islamic retail financing
and corporate financing.

In this assignment, we need to choose and make a research about one of the
account type under sources of fund and uses of fund from any Islamic bank and
conventional bank in our country and make a comparison between them. We have choose
term deposit as one of the sources of fund and Al-ijarah Thumma Al-Bay’ as one of uses of
fund under automobile financing to be studied and find the differences and similarities
between Shariah compliant product and conventional product.

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SOURCES OF FUND

Have you ever found yourself in a position where you needed to buy a gift for
someone? The budget of the gift and the sources of funds needed to fulfil the budget are
the most important factors to consider. Similarly, when it comes to running a business,
funds are extremely important for any business or banks to success. Any bank or company
cannot operate without capital, and the money needed to make a business function is
referred to as business funds. Money is needed on a continuous basis throughout the life of
a business. Sources of funds are used in activities of the business. There are two main
sources of fund which are deposit funds and investment funds. Besides, there are also two
main types of deposit which are namely transaction deposit and term deposit. Transaction
deposits are commonly referred as CASA accounts which are current account and saving
accounts. In this essay we are going to focus on the comparison of term deposit account
between Islamic banks and conventional banks. A term deposit is a fixed-term investment
that entails depositing money into a financial institution's account. Term deposits typically
have maturities ranging from one month to a few years, with varying amounts of required
minimum deposits. When purchasing a term deposit, the lender must understand that they
will withdraw their funds only when the term ends. In certain cases, the account holder can
allow the investor to terminate or withdraw their account early if they provide several days'
notice. There will also be a penalty for terminating early. Certificates of deposit (CDs) and
time deposits are examples of term deposits. So, what are the differences that we can
identify between Islamic and conventional term deposit account.

First and foremost, the primary difference of Islamic term deposit and conventional
term deposit is in terms of the contract use for each product. Conventional term deposit is
operates based on Country’s banking laws and financial practices while Islamic terms
deposit operates based on Shariah and the Islamic principle . For example, based on
Maybank Islamic, their term deposit account which is Maybank Islamic Fixed Deposit-i used
commodity murabahah (cost-plus-sale) or also known as Tawarruq contract. They state that
commodity murabahah deposit refers to an Islamic deposit which is applicable for MYR and
Foreign Currency that is based on the Shariah concept of. This is an Islamic money market
instrument whereby the profit is determined upfront via a Murabahah trade and payable on
the maturity date, together with the initial principal amount. Is there any difference between
tawarruq and commodity murabahah? Tawarruq terms are more widely used in the Middle
East, while Commodity Murabahah is more prevalent in Malaysia. These terms are now used
interchangeably by scholars and practitioners. But from our research, we subscribe with

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BNM view that Tawarruq is the over-arching arrangement where multiple contract work
together which are Wakalah, Murabahah and Musawamah to complete the Tawarruq
arrangement. It is a purchase and sales financing transaction in which the bank purchases a
product 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 a percentage. Following the execution of
the Murabahah agreement, the customer sells the commodity to a third-party broker
through the bank, which serves as the customer's messenger. In contrast, it is differ from
contract that used in conventional term deposit. For instance, in accordance with term
deposit account that offers by conventional CIMB Bank which is CIMB Fixed Deposit
Account, they use the general investment contract which is Fixed Term Investment contract.
This is a type of bank account in which the investor receives a fixed rate of interest. In
return, the investor agrees to refrain from withdrawing or accessing their funds for a fixed
period of time. Interest on a fixed deposit is only charged at the end of the investment
period. Moreover, depositors of conventional banking benefit from their deposits by
predetermined interest rates, regardless of the bank's performance. This means that for
example, if a conventional bank agrees to pay the customers 3% in interest for an amount
of money for a certain period of time, the bank is bound to pay them the interest at the end
of the tenure, even if the bank loses money on its investments. As a result, a conventional
bank is free to maximise profits without regard to any general restrictions. Thus, obviously,
this types of product is prohibited and not shariah compliant since they have interest in their
transaction. For more understanding, below is an example of modus operandi for
Commodity Murabahah deposit.

Sources: Google image
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Secondly, we found that a Maybank Islamic Term deposit which is Islamic Fixed
Deposit-i get profit from the commodity murabahah which is sale & purchase transaction
between bank and customers. In Islamic Term Deposit account is based on the Islamic
principle of Mudharabah which is a profit-sharing concept with a predetermined profit rate.
The profit rate was agreed upon by both parties at the beginning of the contract.
Furthermore, predetermined profit sharing and Murabahah (cost plus sale) may enable the
customers to benefit from investing in a fixed deposit account without compromising their
financial security. In Maybank Islamic when customer used contract murabahah it can earn
higher profit rates than those who use a regular Islamic savings account. In addition,
personal financing for Muslims must be structured differently. This is due to the fact that
Islamic financial institutions are prohibited from making money through interest rates by
lending money. There are various concepts, but the majority of them include the buying and
selling of approved commodities and services in accordance with Islamic principles in order
to be Shariah-compliant. Islamic personal financing is designed with profit rates that are
higher than the standard interest rate. This is due to the fact that an Islamic loan is not
structured in the same manner as a personal loan. For example, Mudarabah-based Islamic
finance is a type of business relationship in which customers need to provide the money and
the bank conducts business with it. A profit sharing ratio (PSR) is required as part of this
relationship. To put it another way, for example, 95% of profits will go to the bank and 5%
of the profits will go to the customer, this is guaranteed by the bank regardless of how
much profit the bank makes. Profits earned (as determined by the PSR) are divided by the
original amount invested to determine the percentage of profit whereas, in conventional
CIMB Fixed Deposit Investment used interest to gets profit which is the interest charged on
the principal amount. According to the research, we found that CIMB Fixed Deposit
Investment when we invest, we can gain interest to make higher return. Therefore, a lot of
money that we invest, we will get higher return. Moreover, term that conventional used
which interest is forbidden in Islam because in Islamic not allowed to benefit from lending
money or receiving money from someone. In addition, higher interest rates are
advantageous for a variety of reasons, the most obvious and logical being that higher rates
will earn the customers a lot more money over time. The lower the amount of interest paid,
the sooner the borrower can pay down the principal. Next, Interest rate risk is a major issue
that requires the bank's immediate attention. Shown how changes in interest rates can
affect the bank's income as well as its economic value. As previously stated, the constant
increase in interest rates will cause some issues, such as rising bank funding costs, because

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banks will have to pay more to attract new customers and retain existing customers when
compared to other risks such as operational risk and liquidity risk.

Thirdly, in differentiate these two types of bank, there is other major difference
which is the return. A conventional banks views money as an asset and lends it in exchange
for interest as compensation. Contrarily, Islamic banking products are usually asset-backed
and include asset selling, asset rental, and profit-and-loss participation. Firstly, the major
differences are profit rate and interest. From our discussion, we found that Maybank Islamic
uses profit rate monthly, yearly, or upon maturity. While for conventional CIMB Bank, they
are using interest in their contract to gain more profit. As Muslims, we know that interest or
riba is haram in Islam. There is a surah that mentioned the prohibition of riba like surah Al-
Imran verse 130;

Sources: Google
It is stated about the prohibition of double, triple charges. Ibn Jarir said,
"What Allah means in this verse is: O you who believe in Allah and His Messenger, do not
consume usury doubled, as you did in the days of ignorance after you converted to Islam,
when you have been guided by Him." At that time if a person borrows money as agreed
when borrowing, then the person who has the money demands that the debt be repaid
according to the promised time. The debtor (because there is no money to pay yet) asks for
a deferment and promises to pay with the specified surcharge. Each time the payment is
delayed, the interest is added. This is what is called double usury, and Allah forbids the
Muslims to do such a thing. Thus, that is why Islamic term deposit gives return to their
customers in terms of profit rate instead of interest rate. For instance, Amir deposit RM5000
in Maybank Islamic Fixed Deposit-i, the agreement agreed at 50% profit rate within 1 month
and will get the return of RM75 at the end of tenure. Meanwhile, in conventional CIMB Bank

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practices interest on maturity which is can be classified as additional charges. The situation
is similar to the return on profit in Maybank Islamic. For example, Aida deposits her money
of RM1000 into the term deposit product from CIMB Bank which is CIMB Fixed Deposit. Aida
will receive the return from her deposit based on the agreed interest rate and upon the
maturity date. In a conventional deposit, the maturity date is the date from which a loan
becomes due and all principal or interest must be returned to creditors.

Fourthly, we also make a comparison between tenure offer by both Islamic and
conventional term deposit product and its terms and condition of the tenure. Generally, the
term "tenure" refers to the time or duration during which the loan amount is sanctioned.
Personal loans, auto loans, and college loans have shorter terms than home loans. In
contrast with Islamic banks, some conventional banks and financial institutions will extend
the loan term with a fee or a small rise in interest rates. As seen in Maybank Islamic Fixed
Deposit-i, they provide flexibility of tenure from 1 month up to 60 months, which does not
include any interest, whereas, it is differ from conventional CIMB Fixed Deposit Account
where, they offer flexibility of tenure from 1 month up to 60 months and its respective
interest rate. For details explanation, we have attached table of tenure and profit/interest
rate that offer from both Maybank Islamic and conventional CIMB Bank.

TENURE FOR MAYBANK ISLAMIC FIXED DEPOSIT-i

Month Profit Rate (% p.a.)
1 1.50
2 1.65
3 1.70
4 1.70
5 1.70
6 1.80
7 1.80
8 1.80
9 1.80
10 1.80
11 1.85
12 1.85
1.85
13-17 1.85
18-24 1.85
25-35 1.90
36-47 2.00
48-59 2.10

60

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Maybank Islamic Fixed Deposit-i is part of risk-sharing scheme, Islamic banks report their
profits on a monthly basis. Profits are distributed according to a fixed profit sharing ratio
decided upon by the depositors and the bank, whereas damages are distributed evenly
among all participants. This ensures that depositors' profits and losses can range from
month - to - month based on how well the bank operates. For example, if the customer
made a three month deposit, there may be 6 separate profit rates during the time, with the
final profit charged upon maturity. As a result, the "interest rates" customer might have
seen on Islamic bank websites are simply reference rates dependent on the bank's success
in previous times.

TENURE FOR CIMB FIXED DEPOSIT ACCOUNT

Tier 1 and Tier 2 (Effective from 13 July 2020)

Conventional FD* (Tier 1) Conventional FD* (Tier 2)

Month Interest Rate (% p.a.)
1
2 1.50 1.25
3
4 1.65 1.60
5
6 1.70 1.65
7
8 1.70 1.65
9
10 1.70 1.65
11
12 1.80 1.75

13-14 1.80 1.75
15-23
24-35 1.80 1.75
36-47
48-59 1.80 1.75

60 1.80 1.75

1.80 1.75

1.85 1.75

1.85 1.75

1.85 1.75

1.85 1.75

1.90 1.80

2.00 1.90

2.10 2.00

The interest rates on a Conventional Fixed Deposit Account are seen in the table
above. Interest rates have a causal relationship with tenure time. For example, a longer
tenure period means a higher interest rate. This should be noted because banks have been
known to offer tenure periods that is longer than 12 months. Any tenure comes with a
predetermined interest rate. For example, banks often list their fixed deposit interest rates in
a table. In the preceding case, if you open a 12-month fixed deposit, you would be eligible
to an interest rate of 1.75% p.a. (tier 2) at the end of three months. A RM10, 000

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placements with 12-month tenure would net you RM175 at the end of the term. In general,
the longer the term, the higher the rate. Banks also deliver favourable fixed deposit rates to
attract customer. When customers open a fixed deposit account, customers have the option
of selecting a term. When customers choose a tenure, they are committing to not touching
it for a set amount of time. The lengths of these contracts will range from one month to five
years. For example, if a consumer withdraws their funds before the fixed deposit contract
ends, they can lose some or all of the interest. Before placing a substantial amount of
money in a fixed deposit, customers should determine whether they will use these assets in
the near future and schedule their tenures accordingly. Otherwise, a premature withdrawal
may result in a loss of thousands of ringgit in interest earnings.

Last but not least, we also make a comparison between minimum deposits required
by both Islamic and conventional term deposit. Minimum deposit and minimum initial
deposit is the same matter. Minimum deposit is the lowest amount of money customer need
to contribute when open a new account with financial institution or bank. This initial amount
of money will hold by bank at certain period of time until maturity. The return the customer
receive will be vary because depends on money that deposited with the bank and the tenure
of maturity or may also called as term. This is according to the monthly payment because
each bank already fixed the rate for monthly, yearly or upon maturity. It can have started
from short as a one-month and up to 60 months depending on the bank regulation. In
general, the longest the tenure of maturity the highest the rate imposed by the bank to
customer. The significant similarities between the two banks are in term of the initial
amount need to be deposited to the bank, the tenure of maturity and rate. Before,
customers enter the fixed deposits account and make transaction to deposit sum amount
of money. The customer must prepare and well informed to not withdrawn the money
before the end of maturity. Since, mostly the purpose people interested in apply fixed
deposit for foreseeable future hence its necessity for the customer arrange prudently their
tenures of deposit in a good manner. If the customer make decision to withdraw a money
before the end of maturity period. The bank already states the term and condition to
overcome this early withdraw situation. The selected Islamic bank which is Maybank Islamic
Fixed Deposit–I provide availability for in-trust and minor for any term deposit as low as RM
500. Minor can be categories for applicants that have myKad or identity card (IC) starting
from 12 years old but below 18 years old. Besides, in-trust is applicant must be under 18
years of age and parents or guardians must also be under 60 years of age. In easy word
parents or guardian will act on behalf of their child to open the account for the benefit of

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their child in the future. Customer that interested to deposit money for a month have to
spend RM 5,000 this makes RM 5,000 is the highest value need to be deposited. Another
than that, minimum deposit for 2 months and above is only RM 1,000. However, the rate is
difference according to the month or year. Penalty will be charged to the customer that
made early withdrawal before complete the full tenure that already agreed by both parties.
Maybank states the customer would not receive profit if not completed full term on one until
three-months in line with contracted profit. Next, for tenures beyond 3 months also would
not receive profit if customer uplifted the payment before complete the first three-month.
Uplifted here imply for customer transfer the fund in fixed deposit account to saving or
current account before accomplished the first three-month. Besides the two situations
above, customer will only receive 50% of the accrued profit depends genuine number on
placement days.

Sources: Maybank website

The reason profit calculation is zero because the customer withdrawn the money before full
maturity. This situation same like second circumstances. The amount deposited only held by
bank for 20 days only and is still not exceeding the first three-month. Therefore, customer is
not applicable to receive a profit from bank. Besides, according to the CIMB bank website
states premature withdrawn from customer for tenure one until 3 months. The customer will
not receive interest paid for any fully or partially withdrawn by the customer. Next, for
customer that early withdrawn for 4 months and above can be broken down into cases.
First, cases the customer made early withdrawn whether partially or fully amount before
completion of 3 months will not receive any interest. Second cases, the customer that made
premature withdrawn after completion of 3 months either fully or partially, bank will have
counted only for completed month by half the interest of the contracted rate. CIMB bank
also marked the word "partially" by stated only amount left in the bank account will be
counted by the bank.

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USES OF FUND
How bank use their sources of fund? Basically, banks will use their sources of fund
from depositors into financing or loan product to generate income. This means, they will
going to lend the money that they have from sources of fund for deficit side or customers
who are in need of financing to purchase something like house, car and etc. Later on,
customers will payback their financing to bank with principal amount plus profit. There are
two types of uses of fund that we learn in this subject which are Islamic Retail Financing
and Corporate Financing. Under Islamic Retail Financing, there are three types of financing
such as home financing, automobile financing and personal financing. On the other hand,
under Corporate Financing, there are also three types of financing which are Sale-based
Corporate Financing, Lease-based Corporate Financing and Equity-based Corporate
Financing. In this essay, we will make a more in -depth study on one of automobile
financing which is Al- Ijarah Thumma Al-Bay’ (AITAB) and make a comparison with
conventional automobile loan which is hire purchase. The Islamic Concept of Al-Ijarah
Thumma Al Bay’ refers to Lease or Hire or Rent ending with the Purchase. AITAB comprises
two contracts, Ijarah (leasing) contract, to be followed by a bay’ (sale) contract. Parties
enter into a contract that comes into effect serially, to form a complete lease/ buyback
transaction. The first contract is an Ijarah that outlines the terms for leasing or renting over
a fixed period, and the second contract is a Bay’ that triggers a sale or purchase once the
term of the Ijarah is complete. Consequently, two major contracts of Islamic hire purchase
were formed as a new mode of financing namely Al Ijarah Thumma Al Bay’ (a contract of
leasing ending with sale) or Al Ijarah Muntahiya Bittamlik (a contract of leasing ending with
ownership).It is widely adopted as an instrument to be in motor vehicle financing and Bank
Islam was the first bank to launch AITAB in Malaysia. For more understanding, this is the
example of modus operandi for AITAB.

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Sources: Google image

Nonetheless, as mention earlier, one type of automobile financing that provided by
conventional banks is hire purchase. Hire Purchase is defined as an agreement in which the
owner of the assets/ vehicle lets them on hire for regular instalments paid by the hirer. The
hirer has the option to purchase and own the asset once all the agreed payments have been
made. These periodic payments also include an interest component paid towards the use of
the asset apart from the price of the asset. Below is the example of modus operandi for
conventional hire purchase.

Hire Purchase Process

Sources: Google image
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First and foremost, the major difference that we can found between AITAB and hire
purchase is the contract used in each transaction. What is the contract used in AITAB and
what is the contract use in conventional hire purchase? Islamic Hire Purchase financing
follows the Shariah contract as well as the spirit of the Hire Purchase Act 1967. It is based
on the Shariah principle of Al Ijarah Thumma Al Bay’ (AITAB), which literally means leasing
with subsequent purchase. The Islamic concept of Al-Ijarah Thumma Al Bay’ refers to a
lease, hire, or rent that ends with a purchase. AITAB consists of two contracts which are, an
Ijarah (leasing) contract and a bay’ (sale) contract. As a result, two major contracts of
Islamic hire purchase were formed as a new mode of financing, namely Al Ijarah Thumma
Al Bay’ (a contract of leasing ending with sale) or Al Ijarah Muntahiya Bittamlik (a contract
of leasing ending with ownership). It is widely used as a vehicle financing instrument, and
Bank Islam was the first to introduce AITAB in Malaysia. Moreover, Islamic financial
institution from Maybank Islamic explains about the use of AITAB in vehicle financing which
is initially, the Islamic financial institution will enter into an Ijarah agreement with the
customer. The Islamic financial institution will appoint the customer as an agent to purchase
the vehicle identified by the customer under the terms of this agreement. Following that, the
Islamic financial institution will lease the vehicle to the customer for a set period of time.
When the lease period expires, the customer has the option of purchasing the vehicle from
the Islamic financial institution. If the customer decides to buy the vehicle, the Islamic
financial institution and the customer will enter into a sales contract, and ownership of the
vehicle will be transferred from the Islamic financial institution to the customer. In this
regard, the Shariah Advisory Council (SAC) was consulted on whether the use of AITAB in
the aforesaid vehicle financing is permissible under Shariah. Next, Hire Purchase is defined
as an agreement in which the owner of the assets/vehicle lets them on hire for regular
instalments paid by the hirer. After making all agreed-upon payments, the hirer has the
option to purchase and own the asset. In addition to the asset's price, these periodic
payments include an interest component paid toward its use. The purpose of hire purchase
is to protect the interests of the hirer in particular, as well as the interests of other parties
involved, such as the owner and guarantor in general. Surprisingly, most hire purchase
principles are in fact Shariah-compliant, with the exception of a few points that are
highlighted. Because of the close similarity, many financiers appear to refer to both
transactions as one and use the terminology interchangeably. This equivalence creates a
problem in a dual banking system in which Islamic hire purchase coexists with conventional
hire purchase, sometimes under the same roof. In fact, Islamic hire purchase should be
distinguished from conventional hire purchase because both are based on different

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principles, even if they appear to be quite similar in practise. There are some important
differences between from Shariah point of view which is in AITAB (Islamic Hire Purchase)
have two aqad sequence( ijarah and sale) this is because Islamic hire purchase, on the
other hand, is regarded as a type of financing. The former results in a debtor-creditor
relationship between the bank and the customer, whereas the latter transaction involves a
sale and purchase executed between the bank as seller and the customer as buyer. One of
the most important aspects of any Islamic transaction is that it has a legal origin and
purpose. However, in conventional hire purchase use one contract (two aqad in one). In
practise, it also combines two contracts (lease and sale and purchase) into a single
agreement document, allowing the two contracts to enter into force concurrently and jointly.
This is not permissible under Islamic law because rental and sale contracts cannot be carried
out concurrently. To conclude the contract hire purchase, two separate contracts must be
signed between Ijarah and the sale and purchase contracts. Next, Islamic hire purchase
used contract sale and purchase, the tenant (customer) will buy the vehicle at the end of
the rental period or redeem it if an early settlement before maturity is desired whereas in
conventional hire purchase hire have option to purchase at the end of the contract which
the buyer has the option of purchasing the goods at a fixed price (usually a nominal sum) or
returning them to the owner. Then, in Islamic hire purchase facility cannot be obtained by a
customer whose income comes from any prohibited source or who intends to use hire
purchase for illegal activities such as alcohol, gambling, or prostitution in contrast
conventional hire purchase riba’ is allowed because the interest rate is floating based on the
annual rate. In contrast, the purchase price in Islamic hire purchase is calculated by adding
an agreed-upon amount of profit to the cost price based on the Murabahah principle. The
profit is calculated based on the market value at the time of the agreement.

Equally important, the second major difference between these two types of financing
is what types of return that the Islamic banks and conventional banks provide to their
customers and how they calculate the return for AITAB financing and conventional hire
purchase. From our point of view, in AITAB, the return or profit rate is calculated based on
fixed or variable rate over the tenure of the facility. Under this contract, we know that there
is no element of interest involved and the title of the asset remain with the lessor and there
is no option or the lessee to buy the asset during or upon expiry of the contract. For
example calculation for AITAB return based on the information below:-

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Financing Amount : RM78, 000
Rate of Profit : 6%
Tenure : 5 years

1) Total lease rental
= FA+ (FA x Profit x Tenure)
= RM78, 000.00+ (RM78, 000.00 x 6% x 5)
= RM101400

2) Calculate Profit
= Total lease rental - FA
= RM101400-RM78, 000
= RM23, 400

Otherwise, in conventional which is CIMB Bank, Customers' costs and interest on a hire
purchase are measured at a fixed or variable rate. The Bank retains control of the car until
the hire purchase is fully paid off. AITAB and conventional hire purchase may look like the
same but it has differences in term of profit that will get which is interest rate. For instance,
may refer to the calculation below:

Financing Amount : RM92, 000

Interest rate : 6%

Tenure : 5 years

3) Total lease rental
= FA+ (FA x interest rate x Tenure)
= RM92, 000.00+ (RM92, 000.00 x 6% x 5)
= RM119, 600

4) Calculate interest
Total lease rental - FA
=RM119, 600-RM92, 000
=RM27, 600

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Besides, the third comparison that we have made between AITAB and conventional
hire purchase is from their tenure of financing. Tenure is the compulsory in any contract. For
AITAB in Maybank Islamic, the tenure of the facility shall be up to a maximum period of 9
years. In this concept, if any customers settle their payment before the maturity, they will
be entitled to a rebate for any early settlement. The rebate is a partial refund of the term
charges (profit) measured according to the HP Act's formula. For example, if your facility
tenure is for 80 months and you wish to full settle your financing after paying 48 monthly
installments, you will get a rebate on the term charges for the remaining 32 months (80 - 48
months = 32 months). Based on table below show the tenure of contract in Maybank
Islamic.

On the flip side, we may look at the conventional part. In CIMB Bank Hire Purchase, there
are no differences between these two Banks. Based on our research and discussion, CIMB
Hire Purchase tenure also has a maximum of up to 9 years period. We may found that the
difference is only at the profit or interest rate charged by the bank.

Furthermore, the fourth difference between AITAB financing and conventional hire
purchase that offer by Islamic banking and conventional banking in our country is the
ownership of the property. However, Al-Ijarah Thumma Al-Bay' (AITAB) are likely same with
hire purchase contract, the essential feature of Al-Ijarah Thumma Al-Bay' (AITAB) is that
possession is transferred at the conclusion of a lease agreement. But, In order for this
contract to be used, Shariah provisions must be fulfilled during the execution of the sale
contract. In AITAB, ownership is determined using all of three methods which are inductive,

17

deductive, or comparative. It examines Shariah requirements for ownership transfer and
relates them to the Hire Purchase Act of 1967. The analysis also examines the process of
transferring ownership in AITAB transactions in Malaysia. Thus, in AITAB, the bank must
first own the asset before renting it to the client. Ownership is important because it
represents the interests and obligations of the hire-purchase arrangement parties. To
illustrate, as stated by AITAB Maybank Islamic product, under the leasing contract the
customer leases the asset from the Bank at an agreed rental payment over a specific period.
Upon expiry of the leasing period, the customer enters into a sale contract to purchase the
asset from the Bank at an agreed price. On the contrary, Hire purchase contract is leases
where bank own the asset first and the lessee does not yet own the asset. Bank need to buy
the asset first before leases it to the lessee. The lessee usually has the option of extending
the loan, returning the asset, or introducing a bidder for the asset at the end of the lease
contract. Other than that, the seller would not acquire ownership until all payments have
been made. For example, if a lessee intends to take ownership of an asset early, they must
pay the remaining balance to the bank or lessor. For instance, according to CIMB Hire
Purchase product, they claim that the ownership of the vehicle remains with the Bank until
full settlement of the hire purchase. In that way, it is crystal clear that there is a difference
in terms of ownership of the property in the financing between AITAB and conventional hire
purchase.

Moving forward, the fifth comparison that we have made between AITAB financing
and conventional hire purchase is in term of their margin of financing. Margin of financing is
the loan or financing amount granted by the financial institution, expressed as a percentage
of the value of property pledged to secure a loan. This will depend on the value of the
customers’ property, income and repayment capability. Besides, the amount of financing
provided by a financial institution is depends on the market value (for completed properties
only) or purchase price of the house, whichever is lower. The margin of financing could go
as high as 95% of the value of the house. It is assessed on factors such as the type of
property, location of property, age of the borrower and income of the borrower. The higher
the margin, the higher the borrower will have to pay per instalment. Also, at a given rate, a
shorter tenure will require borrower to pay higher instalment. Usually, the minimum deposit
is 10% of purchase price. However, the banking institution may fix a higher amount.
Sometimes, there is a difference between margin of financing in Islamic bank and
conventional bank. For example, according to Maybank Islamic AITAB, the margin of
financing for imported and new vehicle is different with the second hand vehicle where, the

18

margin of financing for imported & new vehicle is a bit high which is maximum of 90% while
for the second-hand vehicle is maximum 85%. On the other hand, it is different with margin
of financing at conventional CIMB hire purchase where, they give up to 90% margin of
financing for both new and used car. One of the reason for this difference is because,
conventional bank want to maximize their profit. As have been mention before, the higher
the margin, the higher the instalment payment. So in this case, conventional bank will get
more profit since the interest rate also will increase.

Not just that, the sixth major difference that we can see and know from Islamic
AITAB financing and conventional hire purchase is from the existence of interest. AITAB
opposes interest-based transactions because it includes riba’ in the transaction and instead,
introducing the practice of purchasing something on behalf of the borrower and selling it
back to the borrower at a profit, like have been mention earlier. In place of interest, the
contract specifies a profit rate. Like Conventional Financing, profit rates can be a fixed rate,
or based on a floating rate. A floating rate is one that goes up and down in tandem with the
price, market or an index. It is also known as a variable profit or interest rate because it can
change over the course of the debt or financing obligation. In comparison with a fixed profit
or interest rate, the interest rate on a debt or financing obligation remains unchanged for
the duration of the loan. Meanwhile, In Conventional Hire Purchase, lenders lend to
borrowers to make a profit from the interest charged on the principal amount. For property
or automobile loans, borrowers pay an interest on the outstanding principal amount.
Interest rates can be a fixed rate or based on a floating rate. We can see this differences
from the product that offer in the bank at our country. For example, AITAB Maybank Islamic
offer profit rate of 3.4% to their customers for financing of local and foreign new cars and a
profit rate of 4.25% for local and foreign used cars. So, it shows that AITAB from Maybank
Islamic offer the fixed profit rate but a different rate for new and used car. In different
circumstances, hire purchase product that offer by conventional CIMB Bank which is CIMB
Hire Purchase, provide interest rate for their customers’ loan. Where, for new cars, the
interest rate is from 2.65% p.a. to 2.85% p.a., depending on car brand, borrowing amount,
and the period of loan. Beside that, from 4% p.a. to 4.45% p.a. of interest rate for used car
depending on car brand, borrowing amount, and period. Thus, it shows that hire purchase
from conventional CIMB Bank used floating interest rates since they do not specify the
amount of interest rate and depends on several condition like car brand, duration of
financing and etc. In addition, in conventional financing, payment is made over a set tenure
by instalments. A portion of each instalment paid goes towards servicing the interest, while

19

the remainder goes towards paying down the principal. Since the contract is not based on
an absolute value which is a sale price, the sooner the borrower can pay down the principal,
the cheaper the amount of interest paid.

In addition, before customers apply for the products provide by the bank, the bank
will evaluate numerous criteria to analyse customer qualifications for product they request.
This qualification is like an indicator for the bank to observe the customer’s ability before
giving consent to the customer to enter the financing product. There are only two
differences to be found between Al Ijarah Thumma Al Bay’ (AITAB) & Hire Purchase in
eligibility section. The first is minimum annual income and the second is maximum age that
set by the banks. Next, minimum annual income set by the bank as references for customer
figure out whether their income level accomplish the expectation that determine by the bank
or not. Based on Maybank official website declares that minimum annual income for
customer that interested to apply Al Ijarah Thumma Al Bay’ (AITAB) is RM 30,000. On the
other hand, the minimum income requirement for applying hire purchase product provide by
CIMB bank is RM 24,000. Minimum annual income for Islamic bank is higher compare to
conventional bank because have relation with profit rate expressed by Maybank Islamic is
higher which is 3.4% compare to CIMB bank interest rate is 2.85%. The maximum age is
important for the bank to set a limit for customers allowed to apply for the products
provided by the bank. This is as a precautionary measure so that the bank is aware that
their customers are able to repay the amount to the bank within a certain period of time.
The crucial part is to ensure that the customer have sufficient money to repay the amount
despite almost reaching retirees age. The maximum age set by the two banks to apply for
the product is different. Maybank states that the maximum age that can enter into Islamic
Hire Purchase (AITAB) is 60 years. On the other hand, the maximum age of CIMB bank is up
to 70 years. The minimum age to use the products provided by both banks is the same,
which is 18 years old. However, CIMB Bank states that if an applicant under 21 years of age
has a higher financial risk CIMB bank will request to provide a guarantor similar to the
condition set by Maybank that for customers under 21 years of age and foreigners must
have a guarantor and better if family members such as guardians or siblings. The guarantor
as security for the bank. Malaysian citizen is welcomed to open both products as long as
meet the requirement that already stated above. Another than that, requirement for sole
proprietorship, partnership, private limited & public limited companies that fall under non
Individual categories enforce by both bank is similar. This group of categories is compulsory
to registered the company under Registrar of Society before apply the product.

20

Last but not least, the different between Islamic automobile financing which is
AITAB and conventional hire purchase is in term of monthly instalment. For example, in
AITAB Maybank Islamic product, the bank state that the monthly instalment are Calculated
based on fixed or variable rate over the tenure of the facility. For facility under Variable Rate
the monthly rental instalments and total payment amount payable will vary if the Base
Financing Rate (BFR) changes. In contrast, for conventional CIMB Hire Purchase financing,
they mentioned that the monthly repayments are calculated using a flat interest rate. By
using flat interest rate the customers’ payments will stay fixed and stiff as a stick throughout
the entire tenure. That is to say, your car loan payments will be the same every month and
never vary. On the other hand, customers can also take up monthly instalments with a
variable rate. That means your interest rate may fluctuate up or down throughout your loan
period. In consequence, it is clear that hire purchase product is prohibited in Islam because
the existence of interest in their monthly instalments.

21

SUMMARY
SOURCES OF FUND

Maybank Islamic Fixed Terms CIMB Fixed Deposit Account
Deposit-i

Commodity Murabahah (cost-plus- Contract Fixed Term Investment contract.
sale) / Tawarruq contract

Higher profit rates Rate Higher interest and returns
Return Interest is paid on maturity
Profits paid either monthly, half
yearly or upon maturity.

Flexibility of tenure from 1 month Tenure Flexibility of tenure from 1 month
up to 60 months. up to 60 months and its respective

interest rate.

• Minimum deposit of RM1,000 Minimum • Minimum initial deposit of
(for 2 months and above) to deposit RM5,000 for 1 month
RM5,000 (for 1 month)
• Minimum initial deposit of
• RM500 (for in-trust and minor RM1,000 for 2 months and
for any tenure) above

22

AITAB Maybank Islamic USES OF FUND CIMB Hire Purchase
Terms

Leasing contract (Ijarah) followed Contract Finance the purchase of a vehicle.
by sale contract (al Bay’). Leasing contract

Profit rate for the AITAB facility is Return Charges and interest that you pay on
calculated based on fixed or the hire purchase are calculated on

variable rate over the tenure of fixed or variable rate
the facility.

Up to a maximum period of 9 Tenure Up to a maximum period of 9 years
years

Under the leasing contract the Ownership The ownership of the vehicle remains
customer leases the asset from the with the Bank until full settlement of
Bank at an agreed rental payment
over a specific period. Upon expiry the hire purchase.
of the leasing period, the customer

enters into a sale contract to
purchase the asset from the Bank

at an agreed price.

 Imported & New Vehicle : Margin of  Up to 90% for new and used
Maximum of 90% financing car

 Second-hand: maximum
85%

 A profit rate for local and Profit/Interest  Interest Rate for New Cars
from 2.65% p.a. to 2.85%
foreign new cars is same rate p.a., depending on car brand,
borrowing amount, and period
3.4%.
 Interest Rate For Used Cars
 A profit rate for local and from 4% p.a. to 4.45% p.a.,
depending on car brand,
foreign used cars is 4.25%. borrowing amount, and period

23 Sources: Maybank and CIMB Bank websites

 Sole proprietorship, Requirement  Minimum annual income :
partnerships or private RM 24,000
limited & public limited
companies.  Minimum age: 18 to 70
years old
 Minimum Annual Income
RM 24,000 Minimum Age  Who can apply :
18 years old Malaysians

 Maximum Age 60 years old
 Guarantor needed if you

are below 21 years old and
if you are a foreigner.
Preferably parents or
siblings.

Calculated based on fixed or Monthly Monthly repayments are calculated
variable rate over the tenure of instalments using a flat interest rate.
the facility. For facility under
Variable Rate the monthly rental
instalments and total payment
amount payable will vary if the
Base Financing Rate (BFR)
changes.

Sources: Maybank and CIMB Bank websites

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CONCLUSION
As a conclusion, there is a lot of new knowledge that we gain after performing this
assignment. Among them are we can identify the main differences between sources of fund
that used in Islamic bank and conventional bank. For example, for term deposit accounts,
Islamic banks use shariah-compliant contracts, namely commodity murabahah or also
known as tawarruq contract. Meanwhile, for conventional banking, they use Fixed Term
Investment contract. Besides, based on our research, we acknowledge that Islamic bank is
more transparent. This is because they set a predetermined profit at the beginning of
contract and no hidden additional fees added by the bank to customer. Furthermore, we can
also know the differences in terms of return where, Islamic banking use profit rates as
return for their customers while conventional bank use interest rate. This is because earning
interest is not allowed in Islamic banking.
In terms of uses of funds, we have chosen to make a comparison between AITAB
and conventional hire purchase. As a result, we find out that the ownership for AITAB is
based on leasing contract where the customer leases the asset from the Bank at an agreed
rental payment over a specific period. Upon expiry of the leasing period, the customer
enters into a sale contract to purchase the asset from the Bank at an agreed price. On the
other hand, for conventional hire purchase ownership of the vehicle remains with the Bank
until full settlement of the hire purchase. On the other hand, we learned on how the islamic
and conventional bank gained their profit for themselves. After a lot of research, we found
that Islamic bank gained profit by using profit rate, while the conventional banks use
interest rate. Islamic bank doesn’t use interest rate because it is prohibited in Islam and
there is prohibition of riba in Al-Quran based on surah Al Imran verse 130.
Last but not least, this assignment also increase our knowledge in more depth about
the tenure, requirements, rate of return and many more that are usually used by banks for
the types of deposit accounts and contracts. This can help us to have a broader knowledge
of the products offered by Islamic banking and conventional banks and their differences.

25

REFERENCES

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APPENDIX
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