BANKING OPERATIONS AND DOCUMENTATIOS (FIN426)

APRIL 2009

PART A

QUESTION 1

a) Discuss four (4) functions of Bank Negara Malaysia

Banker for currency issue

Any central bank in the world is known as the bank the bank of issue. By this the BNM can help the country to attain effective supervision over legal tender money and control over credit expansion in the banking system. The BNM started to issue its own currency on June 12, 1967. With this it replaced the Board of Commissioners of Currency, Malaya and British Borneo as the sole currency issuing authority. The Malaysian currency was renamed “ringgit” and the “sen” from “dollar” and “cents” under the Malayan Currency (Ringgit) Act 1975.

Keeper of international reserves and safeguarding the value of the ringgit

International reserves are gold, foreign exchange, reserve position with International Monetary Fund (IMF) and Special Drawing Rights (SDRs). The BNM’s function of holding the nation’s international reserves was automatically derived from its function as the bank of issue. Gold and foreign exchange has been the major component of external reserves held by BNM.

To safeguard the external value of the ringgit

The CBO 1958 provides for the maintenance of a minimum external reserves backing of 80.59% against the currency issue, but in practice the ringgit is fully backed by external reserves. On June 21, 1973 due to the international monetary turbulence that happened until early 1970s had prompted the government to allow the ringgit has been determined in terms of a composite basket comprising the currencies of the major trading partners of Malaysia and the principal currencies used in external settlements.

Banker and financial adviser to the government

BNM acts as banker, fiscal agent and financial adviser to the government and to a number of statutory authorities and State governments. For example is Johor, Kedah, Perak, Pahang, Penang, Sabah, Sarawak, Kelantan, Selangor, Melaka, Terengganu and latest Negeri Sembilan.

BNM has close co-operation with the government with the centralization of government deposits with BNM starting 1989. With this all government receipts for example new issue of government securities, tax and dividend payments are placed and managed by BNM.

Function of BNM as the banker and financial adviser to the government can be explained further by dividing this function into management of government accounts, sources of fund to government and management of the national debt.

Agency responsible for monetary policy and management of the financial system

INDIVIDUAL ASSIGNMENT Page 1


To promote monetary stability and a sound financial structure, to influence credit situation in order to achieve the country’s overall economic objectives will be the responsibility of the BNM to the government. Both the supply of money and volume of credit should be elastic to the demands.

BNM required the approval of the Minister of Finance on certain areas related to monetary and banking issues even though it is empowered autonomously in implementation of monetary policy measures. BNM is empowered under the CBO 1958 to regulate the supply of money and credit creation through qualitative and quantitative measure.

b) Explain two (2) functions on each of the following institutions:

Commercial bank

The first function of commercial bank is mobilization of savings through current, savings and fixed deposits account. Commercial banks offer their customer for them to open their own account. For examples saving account, current account and fixed deposit account. Commercial bank gave customer to choose the best account and suitable for them. The opening of the account might be individual, joint venture and so on.

The second function is provision of facilities for its customers to make payments and receive money. For example customer can receive their money through using checks. Not only that, customer can makes payment and withdraws their money by ATM machine. ATM machine offer all facilities such as customer can top-up and make payment for their bills. Not like before, customer have to queue up to make payment or receive payment.

Discount house

Discount houses are financial intermediaries dealing specifically in short term funds for short term investors and short term borrowers. They specialize in short term money market operations and mobilize deposits from financial institutions and corporations.

Discount houses involve in money at call, overnight money and deposits of 3 month maturity or less. 75% out of deposits accepted by DH must be invested in MTBs, MGS and Cagamas bonds.

Insurance company

The purpose of insurance companies is to spread risks out among all the policy holders. To accomplish this, and stay economically viable, they have to do several things correctly. Not only that, create proper policy language, and most insurance policies must be approved by the Insurance Commissioner. They also typically follow either an ISO or AAIS standard. Next, they need to know how to rate the risks so they know how much premium to charge. They use actuarial studies for this. Or, some companies simply buy their rates from a rating bureau.



QUESTION 2

a) Explain the sources and uses of fund for merchant bank

Sources of fund:

Deposit, largest portion will come from fixed deposit Capital and reserves Amount due to financial institutions

Uses of funds:

Loan, majority loans are in the form of revolving credit and term loans Investments including in marketable securities such as Treasury Bills and Cagamas bond Amount due from financial institutions

b) Explain briefly the Shariah principles as practiced by Islamic banks in Malaysia.

Bai’Al-Dayn

Bai’Al-Dayn referring to debt financing where the fund needed is used for production, commerce and services of sale or purchase of trade documents and papers. Only documents evidencing debts arising from bona fide commercial transactions can be traded. It is short-term in nature.

Al-Ijarah

This is the concept of leasing where a lessor leases an asset to a lessee. The lessee will make a series of payments to the lessors for using the asset. Under leasing there is a principle of Al-Takjiri, where the owner of the assets (lessor) agrees to sell the assets to the lessee after an agreed time period and at an agreed price.

Al-Murabahah

Al-Murabahah is a concept that refer to sale of good at a price which includes a profit margin which have been agreed by both parties. In this case the bank will purchase the goods wanted by the borrower and the bank/lender will mark-up the price. The mark-up is the profit margin mentioned.

Al- Musyarakah

Al-Musyarakah means joint venture or partnership. Profits are shared according to what have been agreed by both parties and in the event of losses both will bear the losses.



QUESTION 3

a) Discuss four (4) types of segmentation that can be used by banks in order to serve effectively on a particular segment of consumer market.

Ready-to-Buy CustomersReady-to-buy customers often have a sense of urgency. They have done some preliminary research or at least have an idea of something that they need. Because there is an actual need, the issue for a salesperson or service provider becomes finding out what the requirement is and filling it. Once you demonstrate that you have what the customer needs, they can become a client. If what they need is ongoing, they could become a valuable repeat customer. Therefore, handle the situation in the best way possible for the most lucrative outcome, which is to gain a repeat customer.

Potential Customers

While every person who enters a store or visits a website has the potential of becoming a customer, many of these types of customers are simply gathering information or browsing. This kind of customer is usually in no hurry to make a purchase, given that there is no urgent need to do so. This is when having a sales message strategy in place can be helpful, so that you can present it to them and more easily make a sale or sign someone up for a service.

Repeat CustomerThe most loyal customer is a repeat customer or one who regularly uses a company‘s services and purchases its products. This type of customer is the lifeblood of the business and should be respected as such. Because they were satisfied the first time, they returned for more services or products. Therefore, as long as you continue to satisfy their needs, you have a repeat customer. It has been estimated that it can take up to five times more work to replace a loyal customer as it would to simply continue to service them well enough to keep them.

Sale or Discount CustomersSale or discount customers always shop for the best deals available on the items they want to purchase. They are a regular fixture at stores to find store-only sales and avidly read newspaper ads, store circulars and pay attention to local deals. They may also conduct price comparisons online before heading out to visit a store. Most of their purchasing decisions are based upon how high the markdown in a sale is at any given time.



b) Explain briefly the main components of 5C’s credit analysis.

CharacterThis is associated to the quality in a borrower that makes a borrower want to pay when the loan is due. It is about honesty, integrity, industry, morality and other factors. But characters is a difficult thing to evaluate. To determine the character, a bank may need to arrange for interviews, or to look at relationship of the customer with the bank, or look at his/her business duration or reputation.

Capacity

This is referred to the legal status of a borrower. This can be referred to the legal the company’s incorporation whether legal or not the business.

Collateral

Collateral means assets which the borrower uses to pledge as security against loan. This is needed to reduce the credit risk. Collateral must be adequate and easily marketable.

Capital

This is the financial worth of the borrower or the accumulated wealth of the borrower. The amount of capital that the borrower has reflects his or her commitment. This can be ascertained by referring to the balance sheet of the applicant.

Condition

This is related to the economic condition, political condition and also the global economic condition that may affect the borrower in repaying the loan. Examples of economic condition are whether overheating, slowing down, recession or recovering.

QUESTION 4

a) Explain the following monetary policy instrument, that BNM use in order to achieve its monetary stability objectives.

Moral suasion

Moral suasion has an occasions been relied upon to influence the direction of activities of the banking industry.



Liquidity requirement

Statutory liquid assets are kept in the banks. SLR is immobilized in the banking institution to liquidate its liquid assets to support an expansion of loan. Not only that it also to encourage spending, BNM will reduce the SLR rat so that more people can make a loan and start spends

Selective credit control

These measures are used in regulating the volume and direction of credit. Besides the general guidelines, BNM also use a number of selective measured of credit control that is specific and targeted at certain sectors.

b) Discuss the differences between trust receipt and banker’s acceptance.

Trust receiptNotice of the release merchandise to a buyer from a bank, with the bank retaining the ownership title to the released assets. In an arrangement involving a trust receipt, the bank remains the owner of the merchandise, but the buyer is allowed to hold the merchandise in trust for the bank, for manufacturing or sales purposes.

Banker acceptanceA short-term debt instrument issued by a firm that is guaranteed by a commercial bank. Banker's acceptances are issued by firms as part of a commercial transaction. These instruments are similar to T-Bills and are frequently used in money market funds. Banker's acceptances are traded at a discount from face value on the secondary market, which can be an advantage because the banker's acceptance does not need to be held until maturity. Banker's acceptances are regularly used financial instruments in international trade.

PART B

QUESTION 1

a) Four advantages of Automated Teller Machines (ATMs) to bank’s customers:

24 hours of operation Minimum usage of staff for large routine transactions Cost saving for staff and overheads Easier accessibility and convenient

b) Though internet banking offers many benefits, there are also risks taken.



Strategic riskThis is the current and prospective risk to earnings and capital arising from adverse business decisions or improper implementation of business decisions. Many senior managers do not fully understand the strategic and technical aspects of Internet banking. Spurred by competitive and peer pressures, banks may seek to introduce or expand Internet banking without an adequate cost-benefit analysis. The organization structure and resources may not have the skills to manage Internet banking.

Reputation riskThis is the current and prospective risk to earnings and capital arising from negative public opinion. A bank's reputation can be damaged by Internet banking services that are poorly executed (e.g., limited availability, buggy software, poor response). Customers are less forgiving of any problems and thus there are more stringent performance expectations from the Internet channel. Hypertext links could link a bank's site to other sites and may reflect an implicit endorsement of the other sites.

Information security riskThis is the risk to earnings and capital arising out of lax information security processes, thus exposing the institution to malicious hacker or insider attacks, viruses, denial-of-service attacks, data theft, data destruction and fraud. The speed of change of technology and the fact that the Internet channel is accessible universally makes this risk especially critical.

Foreign exchange riskThis arises when assets in one currency are funded by liabilities in another. Internet banking may encourage residents of other countries to transact in their domestic currencies. Due to the ease and lower cost of transacting, it may also lead customers to take speculative positions in various currencies. Higher holdings and transactions in non-domestic currencies increase foreign exchange risk.

c) Credit cards provide a mean of obtaining goods and services immediately on credit. It has a limit on the amount to be used. For businessperson, there are several advantages.

It provides a mean for credit. Its interest free credit if paid within specified time period. Next is it’s easier to be

used. The cardholder can withdraw cash over the counter or from an ATM.



QUESTION 2

a. In preparing marketing strategies, banks would resort to the principles of marketing mix. These are the strategies adopted by the bank in providing their services to the customers.

ProductThe term “product” refers to any tangible, physical products and as well as services. Before bank come up with new products, there are several decisions to be made such as the product name, the functionality, quality, safety, supports, guarantees and services. For example, Bank Islam has come up with a product named Al-Awfar Saving Account-i using the Mudharabah concept which is profit sharing. As a warranty, Bank Islam states that the profit will be in the following ratio 98:2 (Bank: Customer).

PriceThe price decision to be made by the bank such as minimum deposits, minimum balance. For instance, minimum deposits required to open the Al-Awfar Saving Account-i is RM100 and the same amount needed for minimum balance.

b. These are a few credit facilities to be discussed:

Overdraft is associated with a current account, meaning to say this credit facility operates by using a current account. The current account holder must get the approval from the bank to be able to overdrawn his/her account. The bank will notify the holder on their credit limit he/she is allowed to have. Overdraft is short-term in nature.

Bridging loan is a short-term loan given to a housing developer in order to bridge the gap between immediate cash required that is to start the housing project and anticipated cash to be received in the future. A developer needs funds for housing or property development.

Personal loan is a loan given to an individual. It has the maturity between 6 months to 3 years or more. The loan normally paid based on monthly installments. An individual above 18 can apply for the loans by furnishing the statement of income/salary slips or Income Tax Assessment Form.

Term loan is an intermediate-term loan or it can be sometimes a long-term loan. It is normally used to finance capital expenditure, as for example to purchase fixed assets such as machinery and equipment. The interest depends on the repayment schedule.

QUESTION 3



a) Five responsibilities of board of directors of a bank in Malaysia are as follows.

Selecting Management.While the board of directors does not manage the bank, one of its foremost duties is to pick the people who will. The board must select and appoint the bank's top executive officers. After hiring a chief executive officer, the board must regularly review his performance and replace him if it is unsatisfactory.

The goals and strategiesThe formulation of clear objectives and policies supplies a framework for the chief executive to work within. The board also helps set priorities for the bank.

Managing risk the board of directors not only helps lay out the bank's goals, but acts as a watchdog as well. One of its main duties in this capacity is to limit the bank's exposure to excessive risk of all kinds, including legal, reputational and financial. By judiciously, the board tries to maintain a balance between enterprise and caution.

Protecting the shareholders. A bank's board of directors is the stockholders' proxy, and represents their interests. Many banks require that board members own some company stock to provide them with personal incentives in their decision-making. In overseeing the running of the bank, however, the board must keep the interests of the shareholders paramount.

ComplianceIn its role as company watchdog, the board must also ensure the bank complies with all relevant statutes, both internal and external. The boards of some banks suffer a financial penalty if the bank violates certain legal statutes.

b) Current account is a necessity for business operation because:

We can use cheques either for depositing money or drawing money A cheque can be transferred to another party without prior notice to the bank The cheque is payable on demand Interest is not paid on such account A current account holder also can have an overdraft facility provided that he/she has

prior agreement with the bank.



c) Five (5) principles of good lending that should be practiced by lenders:

Purpose Amount Duration Repayment Security

QUESTION 4

a) Irrevocable Letter of Credit (LC)Letter of credit that can only be amended or cancelled if all parties to the credit agree to the alteration or cancellation. The five (5) classification of irrevocable letter of credit are as follows:

Transferable LCIt gives the beneficiary the right to pass the credit in whole or in part to a third party or another beneficiary. It is used in financing a middleman for the purchase of goods from a supplier.

Back-to-back LCWhich is quite similar to transferable credit. It is used by a middleman with limited financial resources. Seller & buyer do not know each other, thus allow middleman to earn profit. Middleman obtains credit in his favor from the buyer. The middleman arranges for his bank to issue a new credit in favor of the actual supplier with new terms & conditions. It is not governed by the rules specified in the Uniform Customs & Practice for Documentary Credit.

Red Clause LC Contains a special clause, printed in red – advising bank is authorized to give advance to the beneficiary up to the extent of the total value of the credit prior to the shipment of goods. It is a form of overdraft to the exporter & guaranteed by the importer and only for exporter who is reliably known by the importer.

Standby LCRequires certain performance on part of the applicant. Beneficiary is assured of payment only when he performs under the contract. It does not provide guarantee to the beneficiary of payment, acceptance or negotiation of bill. Provide guarantee to beneficiary against default by applicant. It is the issues to cover the non performance situation by the applicant.

Revolving LC Is established when the importer has regular shipments to be made over a period of time. It takes one credit to cover all the shipments. Can be issued & revolved on the basis of time, shipments or value and can be on cumulative or non-cumulative terms. Cumulative means credit that is not utilized for a particular month or shipment will become available for the following month or shipment.



b) Remittance is a transfer of fund done in a banking system. It is a service provided by a bank to its customers. There are several types of remittances.

Cashier’s Order/Banker’s Cheques.It is a form of cheque drawn on a bank, bearing the authorized signature of the bank’s officer. It is issued by a bank and considered to be better than a cheque drawn by an ordinary customer. It can only be issued in Ringgit Malaysia. It is for remitting funds to beneficiaries residing in the same town or area as issuing bank.

Demand Draft (DD)it is a form of cheque. Unlike banker’s cheque, DD is issued for a beneficiary who may residing in another town or another country and must not be payable to bearer. There are two types of DD which is local DD and foreign DD.

Telegraphic Transfer (TT)It is the fastest mode for remitting funds. Messages are sent & received on the same day and sent by telex, fax or SWIFT (Society for Worldwide Interbank Financial Telecommunications). Beneficiary may be residing in another town in the country or overseas. Two types of TT are Outward TT and Inward TT.

Online Transferit is a transfer of funds from one account to another through the system that can be done through several ways such as internet, ATMs, phone banking, or manually where customer personally go to the bank & instruct the bank to transfer the fund.



OCTOBER 2009

PART A

QUESTION 1

a) Explain the following function of Bank Negara Malaysia ( BNM )

Bank for currency issues

Any central bank in the world is known as the bank of issue. Part III of CBO 1958 provides for

the Central Bank as sole currency issuing authority in the country. By this BNM can help the

country to attain effective supervision over legal tender money and control over credit

expansion in the banking system. The BNM commenced started to issue its own currency on

June 12, 1967. With this it replaced the board of Commissioners of Currency, Malaya and

British Borneo as the sole currency issuing authority. The Malaysian currency was renamed

ringgit and sen from dollar and cents under the Malayan Currency (Ringgit) Act 1975.

Banker and financial advisor to the government

The BNM acts as banker, fiscal agent and financial advisor to the government and to a

number of statutory authorities and state governments like Johor, Kedah, Perak, Pahang,

Penang, Sabah, Sarawak, Kelantan, Selangor, Melaka, Terengganu, and latest Negeri

Sembilan. BNM has close co-operation with the government with the centralization of

government deposits with BNM starting April 1989. With this all government receipts for

example new issue of government securities, tax and dividend payments are placed

managed by BNM. The function of BNM as the banker and financial advisor to the

government can be classified by function of management of government accounts, source of

funds to government and management of the national debt.

For management of government accounts, BNM performs the functions of providing check

facilities, accept funds and makes payments on behalf of the government and undertakes

the foreign exchange business of the government. Next is the sources of funds to

government. This is done by granting advances to the government and as the lender of the

last resort. Advances are given to cover any deficit in the budget revenue and must be

repaid as soon as possible. CBO stipulates that the advances should not exceed 12.5% of the

budget revenue. BNM has the direction to determine the interest rate charged for the

advances but government has not taken this advantage. Lastly is the management of the



National Debt. BNM manages the public debt and is responsible for the floatation of

government loans in Malaysia or abroad. BNM advises the government on its loan programs

such as terms and timing of loans and the issue of new types of securities.

b) The central bank of Malaysia had recently granted a license to bank of China to operate its

Malaysian branch in Kuala Lumpur. Identify and explain any five (5) sources of funds and also

another five (5) uses of funds as would be carried by this new bank.

Five sources of funds:

Deposits

Deposits from customer are one of the sources of fund. It includes current account, fixed

deposit account, saving account, NIDs and repos

Amounts borrowed from other financial institutions

This is also one of the sources of fund .this also known inter bank borrowing in Malaysia

as well as abroad

Capital and reserves

Capital refers to the money put up by shareholders to run the business while reserves

refer to undistributed profits and other capital reserves

Debentures and notes

It can be in short term debt borrowing. This is also one of the sources.

Banker acceptances

This is one of the sources of the bank when bank sell their banker acceptance to the

customer and at certain time the customer will give back the banker acceptance to the

bank. It called as liabilities of the bank.



Five uses of fund:

Loan activities

Loans given out are assets because the bank has the right of claims

Amounts due from financial institutions

This also one of uses of fund because the can get back their money from financial

institutions

Marketable securities

This can be assets for banks such as through treasury Bills, Malaysian Government

securities (MGS), NIDs held and Cagamas bonds

Investments

When we invest our money to investment, then we can get return. So this is one of the

bank assets

Cash and reserve with BNM

The can be uses of fund when banks must have statutory reserve requirement to BNM

QUESTION 2

a) In order to achieve its objectives in promoting the development in agricultural, industrial

and international trade, Development Finance Institutions (DFI) are obliged to perform a few

functions. Briefly explain those functions.

The objectives for the establishment of these institutions are to promote development in

the agricultural, industrial and international trade and export sectors, and also to play a

complementary role to the banking institutions.

These objectives are carried out by implementing these functions:

As specialists for capital financing for the projects of medium to long-term financing in

the agriculture, industrial and manufacturing sectors.



Bank Pertanian Malaysia

The main focus is in developing the agricultural sector of the country. It was established

on September 1, 1969 under an Act of Parliament and started operations in 1970.

Malaysian Industrial Development Finance (MIDF)

MIDF was set up in 1960 and is a semi-government institution providing medium and

long-term loans to manufacturing industries in Malaysia.

Becoming intermediary institutions for BNM special funds to finance businesses in the

priority sectors.

Participation in equity capital.

Underwriting and acting as issuing house for public share issues.

Provision of guarantees for loans.

Identify new projects, participate in their promotion and provide financial, technical and

managerial services.

Lately, these institutions also have begun to give short-term financing. The examples of

these institutions are Bank Pertanian Malaysia Berhad, Export-Import Bank of Malaysia,

Malaysian Development Finance Berhad and Sabah Development Bank Berhad.

b) Unit trust has become a popular investment instruments among Malaysian nowadays.

Define unit trust and provide three (3) advantages of unit trust to investors.

Unit trusts are organizations that will pool funds together from investors so that a bigger

investment in securities market can be made. The advantages will be for small investors with

small amount savings can enjoy the benefits:

Professional management

Unit trust investors enjoy the services of professional fund managers normally available to high

net worth or large institutional investors. The funds managers carry out thorough research on

companies, industries and the company and apply their finding through carefully develop

investment strategies to achieve funds objectives. The fund managers sound knowledge and

experience are further reinforced by an investment committee, which provides the investment

direction and monitor their performance.

Diversification



Unit trust invests in a diversified portfolio of securities allowing investors to spread their risks

across different securities, industries and countries. Meaningful diversification is achievable

through investment vehicles with a considerable fund size such as unit trust.

Affordability

For a small initial outlay, a unit trust with its pooled investment feature, will afford exposure to a

large number of investment opportunities, either individually or collectively for the average

investor.

QUESTION 3

a) List five advantages of automated teller machine (ATM) to the bank

Improved customer convenience

Minimum usage of staff for large routine transactions

Cost savings for staff and overheads

Easier accessibility and convenient

Shared resources for research and development costs for ATMs since in 1997

b) List five advantages of Electronic Funds Transfer point of Sales (EFTPOS) to the business.

Speed in transactions

Lower transaction cost charge by bank to retailer

Reduction in administration cost since retailer does not have to process cash and

cheques

Reduction in bad debts

Convenient



c) Before Electronic Transfer Systems For Funds and Securities (SPEEDS) was replaced by Real

Time Electronic Transfer Of Funds and Securities (RENTAS), it was used large value inter –

bank fund transfers

i. List four drawbacks of SPEEDS

SPEEDS could not cater for increasing volumes and values and securities processed

and settle over the years and therefore increased risks to banks.

SPEEDS was not Y2K compliant

SPEEDS lacked of a sound legal basis for multilateral netting

SPEEDS lacked rules to govern defaults by banks

SPEEDS were repudiation of transactions and monies advanced for the settlement

were not secured

ii. List four advantages of RENTAS

RENTAS using real time therefore can control risks

The transfers are settled individually that is without netting debits against credits

Can be used as means of controlling risks associated with large value payments in

developed financial markets

The system provides intra – day finality that is payee banks able to receive funds

with certainty

QUESTION 4

a) Write short note on the following:

Bridging loan

A bridging loan is defined as a short-term loan given to a housing developer in order to

bridge the gap between immediate cash required that is to start the housing project and

anticipated cash to be received in the future (fund to be received from house buyers). A

developer needs funds for housing or property development.



A bank will assess the financial standing and capacity of the developer before granting such

loan. The bank officer needs to conduct a comprehensive study on the feasibility and

viability of the housing project.

The loan is normally disbursed periodically according to the stage of housing development.

This type of loan is normally given by a bank to the same housing developer and at the same

time the bank will provide a long-term loan to the individual house buyer. The proceeds

received from the buyer will be used to settle the loan.

Outstation cheque purchased (OCP)

Outstation or outportcheque purchase means cheque that is drawn outside the clearing area

of a bank at which the cheque is deposited for clearing. For example banks in Kuala Lumpur,

Petaling Jaya and Shah Alam will be grouped under same or one clearing area, cheque drawn

outside this clearing area is called outstation or outportcheque.

Normally, it will take between 3 to 7 days (working days) to clear such cheque depending on

the locality of the bank. The proceeds of such cheque will be credited to the depositors

account only after the drawee banks get the confirmation for payment from the drawer

bank. For such cheques commission will be charged, that is by charging the commission

when a depositor wants to deposit the outstation cheque.

Term loan

Term loan is an intermediate-term loan or sometimes it can be a long-term loan. The loan is

normally used to finance capital expenditure e.g. to purchase fixed assets such as machinery

and equipment.

The interest on term loan is dependent on the repayment schedule. The interest is charged

once or a monthly rest if it is based on monthly repayment i.e. interest is charged on

outstanding loan amount at the beginning of month.



b) Marketing mix is important in implementing a marketing strategy. Explain the 4Ps in

marketing mix by giving an example of your chosen product.

The marketing mix model also known as the 4Ps can be used by marketers as a tool to assist

implementing the marketing strategy. There are:

Product

Historically, the thinking was a good product will sell itself. However there are no bad

products anymore in today highly competitive markets. Plus there are many laws giving

customers the right to return products that he perceives as bad. Therefore the question on

product has become, does the organization create what its intended customers want?

Define the characteristics of your product or service that meets the needs of your

customers. Example is brand, packaging or service of the product.

Price

How much are the intended customers willing to pay? Here we decide on a pricing strategy.

Do not let it just happen. Even if you decide not to charge for a service, you must realize that

this is a conscious decision and forms part of the pricing strategy. Although competing on

price is old as mankind, the consumer is often still sensitive for price discounts and special

offers. Price has also an irrational side; something that is expensive must be good.

Permanently competing on price is for many companies not a very sensible approach.

Examples are list price, discounts or leasing options.

Place

Available at the right place, at the right time, in the right quantities? Some of the revolutions

in business have come about by changing place. Think of the internet and mobile

telephones. Examples is locations, market coverage or service level.

Promotion

How are the chosen target groups informed or educated about the organization and its

products? This includes all the weapons in the marketing armory like advertising, selling,

sales promotions, public relations and others. While the other three P’s have lost much of

their meaning in today markets, promotion has become the most important P to focus on.

Example is direct sales, sales or budget.



PART B

QUESTION 1

a) Describe the differences between saving account and current account

Saving account

A saving account is an interest bearing deposits account. Before this, an account holder for a

savings account will be given a passbook. Nowadays, commercial banks will issue statements

rather than passbooks. With the availability of the internet service, a depositor also can get

on – line statements. Besides passbooks, an account holder can also have an Automated

Teller Machine (ATM) card for easier and convenient withdrawal of funds from his or her

account. Not only that, an account holder can deposit money through an ATM. Savings

account can be divided into three types which are Individual savings account, Joint saving

account and Saving account for associations, societies and clubs.

Current account

The difference between a savings account and current account is that, if we have a current

account we can use cheques either for depositing money or drawing money. Not only that, a

cheque can be transferred to another party without prior notice to the bank. A cheque is

payable on demand. Other characteristic of a current account is that interest is not paid on

such account.

Only commercial banks can offer current account. A current account holder also can have an

overdraft facility provided that he/she has prior agreement with the bank. Current accounts

can be individual account, joint account, sole proprietors account, partnership account,

companies account and trustee account.

To open an account, a customer is requested to have an identity card ( or passport ) or

Memorandum and Articles of Association for a company. To open a new current account

normally need an introducer known to the bank and a minimum initial deposit.



b) List four characteristics of Negotiable Instrument of Deposits (NIDs)

NID has a nominal value of denominated in multiples of RM 50 000 from a minimum

amount up to maximum amount of RM 10 million per certificate.

Tenor is in a multiple of three months with minimum tenor of three month and

maximum tenor of five years.

A short term NID is for a period not earlier than 90 days and not later than 364 days

from the date of issue. A long term NID is for a period of not earlier than 12 months and

later than 60 months from the date of issue.

The deposits is payable to whoever is the holder at maturity date.

c) What are the four types of NIDs available in Malaysia?

Short term Negotiable Certificate of Deposits (SNCDs) with maturity between 90 to

364 days.

Long term Negotiable Certificate of Deposits (LNCDs) with maturity between 1 to 5

years.

Zero coupon Negotiable Certificate of Deposits (ZNCDs) with maturity of 3 month

and without interest and sold at discount

Floating rate Negotiable Certificate of Deposits (FRNCDs) with maturity of 1 year and

interest is not fixed and interest is dependent on Kuala Lumpur Inter – bank Offered

Rate (KLIBOR)

QUESTION 2

a) Identify the differences between demand draft and cashier’s order

Demand Draft (DD)

DD is use to remit fund to beneficiary who is at different area like in another town or area or

country. This is to say that the bank being addressed is required to pay on DD to the person

or beneficiary specified on the draft.

DD is drawn in Malaysia Ringgit and payable in Malaysia. The applicant will indicate where

he wants DD to be payable. The bank officer in return will locate the branch of the bank in

that town and if there is no branch of the bank available, the DD can be drawn at its



correspondence bank and if no correspondence bank available, the bank officer will try to

find other bank available. Drawing bank or issuer has to inform the drawee bank that it has

issued the DD and also to make arrangements to transfer fund to the drawee bank. The

maturity of DD is 6 months.

Under local DD can be divided into 2 types:

Outward DD – is DD drawn by an issuing bank or drawing bank.

Inward DD – is DD issued by other bank and received by a drawee bank.

Foreign DD can be divided into 2 types:

Outward foreign DD – it is necessary to mention the amount and currency involved and

also the selling rate.

Inward foreign DD – DD issued by other bank and received by a drawee bank.

Cashier’s order

A cashier’s order is also known as Banker’s Cheque. It is in a form of a cheque drawn on a

bank. It has the authorized signature of bank’s officers. The difference between a cashier’s

orders as compared to a cheque is that the cashier’s order is a cheque issued by a bank and

therefore it’s normally does not have default in payment.

It is used normally when payment by personal cheque is not accepted or payment in cash is

not advisable. It is drawn and payable at the issuing Bank (branch) itself. A customer needs

to furnish the following information in order for a cashier’s order to be issued by a bank:

Name and address of customer or applicant. An identification card also required to be

produced to the bank officer.

Name and address of beneficiary (who to receive the money or fund).

Application date.

Amount involved.

To mention whether the transfer is by cash or cheque or debiting the applicant’s

account.



b) Aside from having demand draft, cashier’s order and mail transfer as mode of remitting

fund, telegraphic transfer is considered is fastest mode.

i) Explain the procedure of the Telegraphic transfer (TT) as adopted by banks

TT is a mode to transfer of fund electronically by using cable, telex, fax, telephone

transmission and through Society for Worldwide Interbank Financial

Telecommunication (SWIFT). Since the transfer is not using any signature, therefore

Test Key (authentication system) is needed. TT can be used domestically or

internationally.

ii) Differentiate inward and outward TT

Outward TT

Outward TT can be for in or out a country. Please refer Specimen 8 for applying an

outward TT. Local outward TT can be made in Malaysian Ringgit but for overseas

transfers can be done in Malaysian Ringgit or foreign currencies. The cost involved

will include the amount to be remitted, cost of inland exchange for local TT and

transmission charges. If the TT is done in foreign currency, the Malaysian Ringgit

equivalent will be calculated at prevailing selling rate.

Inward TT

Inward TT can be form in or out the country, either from other local branches, local

agents or from overseas branches or overseas agents. To remit the fund, the bank

has to contact the beneficiary. If the inward TT is in foreign currency, the Malaysian

Ringgit equivalent is calculated at the buying rate.



QUESTION 3

a) Before a loan officer can approve a loan application, he has to observe a few principles.

Explain five (5) principles of good lending

Purpose

An applicant for the loan should mention why he / she need the loan. The purpose of

taking the loan must be for something good not for gambling, speculation, and

smuggling or for any other illegal activities. The purpose should be consistent to the

government policy and should be able to serve the business activities. A loan officer

should be concerned with the purpose because purpose is being correlated with risks.

Amount

The amount of loan that an applicant is trying to get is enough or sufficient for him/her

to implement his/her business project. If an applicant underestimates his/her

requirement, he/she may have to seek for additional amount.

Duration

Duration or maturity of the loan should compensate the purpose and amount. We

should know either short term loan or long term loan. The longer the duration there is

an element of risk associated.

Repayments

When we talk about repayments, we are concerned about the source of making

repayments. Source of repayments can come from present income likes salary to pay

housing loan, future income (can be determined by having the projection of income

statements or Pro forma Income statements). Normally for those applicants whose

source of income is irregular, the banks will be quite reluctant to give out loan.

Security

Security is also referred as collateral. Since lending involves risk, a bank will require its

borrower to provide collateral. Banks also will arrange for obtaining control over the

assets used as security. Meaning to say, a bank may want to sell the assets if a borrower

fails to make repayments in order to compensate for the loan amount. Several factors

need to be considered related to collateral such as value of assets, it is stable, does the

assets has marketability or is the assets easily ascertainable.



b) Elaborate three (3) credit facilities made available by commercial banks

Overdraft

This facility is associated with a current account, meaning to say this credit facility

operates by using a current account. The current account holder must get the approval

from the bank in order to be able to overdrawn his/her account. The bank will notify the

account holder the credit limit this he/she is allowed to have. If the account is

overdrawn, daily interest will be charged on the outstanding balance at the end of each

day but it is only debited once a month (at the end of month) to the account. If he/she

fails to utilize fully the amount allowed to be overdrawn, he/she will be charged a

commitment fee on the unused amount. Overdraft is short term in nature.

Outstation / outportcheque purchase

Outstation / outportcheque purchase means cheque that is drawn outside a clearing

area of a bank at which the cheque is deposited for clearing. For example banks in Kuala

Lumpur, Petaling Jaya and Shah Alam will be grouped under some/one clearing area,

cheque drawn outside this clearing area is called outstation or output cheque. Normally

it will take between 3 to 7 working days to clear such cheques depending on the locality

of the bank. The proceeds of such cheque will be credited to the depositor’s account

only after the drawee bank gets the confirmation for payment from the drawer bank.

For such cheques commission will be charged that is by charging the commission when a

depositor wants to deposit the outstation cheque.

Term loan

Term loan is an intermediate term loan or sometimes it can be a long term loan. The

loan is normally used to finance capital expenditure. For example, to purchase fixed

assets such as machinery and equipment. The interest on term loan is dependent on the

repayment schedule. The interest is charged once or a monthly rest if it is based on

monthly repayment. For example interest is charged on outstanding loan amount at the

beginning of the month.



QUESTION 4

a) During recent annual general meeting of Junebank Malaysia Berhad, Dato’ Farid Ahmad was

appointed as one of the directors in its Board of Director (BOD). Explain to Dato’ Farid

Ahmad five (5) functions of board of directors.

A board's activities are determined by the powers, duties, and responsibilities delegated

to it or conferred on it by an authority outside itself. These matters are typically detailed

in the organizations by laws. The bylaws commonly also specify the number of members

of the board, how they are to be chosen, and when they are to meet.

Typical duties of boards of directors include:

Governing the organization by establishing broad policies and objectives.

Selecting, appointing, supporting and reviewing the performance of the chief

executive.

Ensuring the availability of adequate financial resources and approving annual

budgets.

Accounting to the stakeholders for the organization's performance.

Setting the salaries and compensation of company management.

The legal responsibilities of boards and board members vary with the nature of the

organization, and with the jurisdiction within which it operates. For public corporations,

these responsibilities are typically much more rigorous and complex than for those of

other types.


http://en.wikipedia.org/wiki/Chief_executive

http://en.wikipedia.org/wiki/Chief_executive

http://en.wikipedia.org/wiki/Bylaws


b) There is a provision under Section 56 BAFIA 1989 where a director can be disqualified from

his position. What are the factors discussed in this section that can terminate a director?

Disqualification of directors. No person shall be appointed or shall remain as Governor,

deputy Governor or other director of the bank who:

Becomes a member of the senate or House of Representatives or any legislative

assembly.

Becomes an “officer” or, subject to subsection 9(3), a “director” (as those words are

defined in the banking and financial institutions act 1989) of any banking institution

or other financial institution.

Becomes a public officer.

Yang Di-Pertuan Agong may terminate the appointment of the Governor, or any other

director if he:

Resigns his office.

Becomes of unsound mind or incapable of carrying out his duties.

Becomes bankrupt or suspends payment or compounds with his creditors.

is convicted by a court of law in Malaysia of an offence and sentenced to

imprisonment for a term of not less than two years, or of any offence involving

dishonesty, and has not received a free pardon.

Guilty of serious misconduct in relation to his duties.

Absent, except on leave granted by the minister, from all meetings of the board held

during two consecutive months or during any three months in any period of twelve

months.

Fails to comply with his obligations under section 14.

The minister may terminate the appointment of any deputy Governor on the grounds

specified in subsection (2).



APRIL 2010

PART A

QUESTION 1

a) One of the functions of Bank Negara Malaysia (BNM) is to act as a banker to all financial institutions, and there are several activities that lie under this function.

Licensing Of Banks and Non-Banks.

In order to get the licenses, licensed institutions need to get approval from BNM. The licenses are issued by Minister of Finance on BNM’s recommendations. Banks should fulfill minimum criteria in order to get the licenses, such as bank’s shareholding structure should be in accordance with the economic policy, maintain minimum assets just so it is adequate to safeguard depositor’s interest and some more.

Maintaining the Banking Relationships by Having Two Types of Deposits Accounts with BNM. As for example, Statutory Reserve Requirements (SRR) and current account. The current account comprises normal current account and clearing account.

Currency distribution. BNM will provide the cash required by the commercial banks and also for the acceptance of cash from commercial banks.Banks have to order the currency from BNM to replenish their cash supply. BNM will then charge this to the current account of concerned bank. Extra cash from the banks can be handed in to BNM.

BNM will do some inspection and investigation of banks and non-banks. BNM has the authority to inspect licensed banks and do investigations to ensure the banks are running smoothly. Inspections are done in the areas of investment, lending policies, assets, quality of management and compliance with SRR and guidelines and directives given by BNM.

QUESTION 2

a. Functions of commercial banks as outlined in the Banking and Financial Institutions Act (BAFIA) 1989 can be divided into five (5).

Mobilization of savings through current, savings and fixed deposits accounts. Secondly is provision of facilities for its customers to make payments and receive money by using checks, savings book and ATM facilities.

Granting loans and advances to business enterprises and private individuals for working capital, investment and consumption.



Financing of the government through purchase of government securities and treasury bills.

Provision of various banking facilities and services as authorized by the BNM for example trade financing facilities, treasury services, cross border payment services and to deal with foreign exchanges.

b. The differences between money market and capital market are as follow :

Money Market Capital Market

Maturity periodDeals in the lending and borrowing of short-term finance which is for one year or less.

Deals in the lending and borrowing of long-term finance which is for more than one year.

Credit instruments

Main instruments of money market comprise call money, collateral loans, acceptances, and bills of exchange.

Main instruments of capital market are stocks, shares, debentures, bonds, and securities of Government.

Purpose of loansMeets the short-term credit needs of business, it provides working capital to the industrialist.

Caters the long-term credit needs of industrialist and provide fixed working capital for buying lands, machineries and more.

Relations with central bank

Closely and directly linked to the central bank of the country.

Still linked with the central bank but indirectly and through the money market.

RisksLower risks because the maturity of one year or less gives a little time for default to occur.

Greater risks because the maturity is much longer than the money market and anything can happen during the period.

QUESTION 3

a. Roles played by DFI in contributing to the development of Malaysian economy as a whole.

The specialists for capital financing for medium to long-term financing in the agriculture, industrial, and manufacturing sectors.

Becoming the intermediary institutions for BNM special funds to finance businesses in the priority sectors.

Participating in equity capital and followed by provision of guarantees for loans. Identifying new projects participate in their promotion and provide financial,

technical and managerial services.



b. Commercial banks have to maintain strong CAMEL framework. Criteria of the CAMEL framework are as follows :

Capital adequacy Asset quality Management capability Earnings performance Liquidity position

c. Investment banks were formerly known as merchant banks. Fund-based activities carried out by investment banks, for example is to conduct lending activities to complement the fee based activities.

Number two is to assist corporations involved in mergers and acquisitions through Corporate Financial Advisory Services.

Thirdly is to accept wholesale deposits where investment banks are allowed to mobilize deposits with the minimum amount of RM500, 000. It is excluding the repurchase agreements with the cost of RM50, 000.

Fourth, to provide ancillary services such as market making and the trading of derivatives, fixed income instruments, foreign exchange, commodity, and equity securities.

Fifth would be advising and assist clients with specialized industry expertise such as technology and real estate.

QUESTION 4

a. Short notes on the following money market financial instruments :

Treasury Bills are issued by the federal government. It is a short-term paper which has the maturity of 3, 6, and 12 months.

Cagamas Bond is issued by Cagamas Berhad. It acts as the intermediary between primary lenders of housing loans and investors of long-term funds. It is issued on an auction basis through a system of principal dealers.

Bankers Acceptanceis a bill of exchange drawn on and accepted by either the commercial bank or a merchant bank. It is a short-term trade financing which is limited to 21-365 days. It is either drawn by importer, exporter, buyer or supplier who requires financing.

Negotiable Certificate of Deposits (NCDs)



is a receipt for a time deposit in Ringgit placed with a commercial bank. It is called negotiable because the name of depositor is not stated. It is issued for multiples of 3 months to 5 years.

b. There are several principles of Islamic Banking

Al-Wadi’ah Yad Dhamanah. It referred to safekeeping with guarantee, for example is deposits. Wadiah is a trust and depository becomes a guarantor that guarantees to pay all the deposits on demand. The depositors may receive a gift (Al-Hibah) for the money being deposited.

Al-Mudharabah which refers to profit sharing concept for an agreement made between two parties. One party will provide capital and another party will act as entrepreneurs who carry-out business and both will share profits according to the agreed ratios. If any losses occur, the bank will bear it.

Al-Musyarakah, it means joint venture or partnership. Profits are shared as agreed by both parties and in case of losses, both will bear it.

Al-Murabahah, it is a concept of sale of goods at a price which includes a profit margin agreed by both parties. In this case, the bank will purchase the goods wanted and they will mark-up the price. The mark-up is the profit margin mentioned.

Al-Qardhul Hasan which refers to benevolent or charity loan. It is a loan without interest given by the bank for welfare purpose. The borrower only has to pay the amount borrowed and if they want to pay more, it is considered as a gift to the bank.

PART B

QUESTION 1

a. As a credit officer, it is crucial to define the factors in determining the ability and willingness of a potential borrower. The factors are as follows :

CharacterThis is associated with the quality of the borrower on paying the loans when it is due. It is about being honest, integrity, the morality of the borrower, and other factors. Character is one difficult thing to evaluate. It takes an arrangement for interview, look at the customers’ relationship with the bank and his/her previous business duration or reputation.



CapacityReferred to the legal status of the borrower as such their legal age, the company’s incorporation to know whether it is legal or not, and the businesses.

CollateralIt means the assets which the borrower uses to pledge as security against loan. This is needed to reduce the credit risk. Collateral must be adequate and easily marketable.

ConditionWhich related to economic, political, and also the global economic condition which may affect the borrower in repaying the loan. Example of economic condition are whether overheating, slowing down, recession, or recovering.

CapabilityRefers to the ability of the borrower to pay or to look at the income of the borrower. It is done through examining the customers’ financial statement, salary, wealth, academic qualifications and business.

b. There are five (5) principles of good lending commonly practiced by credit officers when preparing their credit proposals.

PurposeThe applicants must mention why he/she needs the loan. Their purpose should be for something good and not for gambling, speculation, and smuggling or for any illegal activities. We must concern on the purpose because it is correlated with risks.

AmountWhether the amount needed by the applicant is enough or sufficient for him/her to implement their business project. If they understate the requirement, he/she might need an additional amount.

DurationWhich must compensate with the purpose and amount. To define whether the loan should be in short-term or long-term. The longer the duration, the greater the risk will be.

RepaymentsWhen it comes to repayment, we are concerned about the source of making repayments. The source can come from present income (e.g. salary to pay housing loan), future income (having the projection of income statements or Pro-forma Income Statements). Those applicants with irregular income will have the reluctance by the bank to give out the loan.

Security,



Which is referred as collateral. Since lending involves risk, a bank will require its borrower to provide something for security. The bank will sell the collateral in case the borrower fails to pay for the loan. Factors to consider upon the collateral are the value, stability, marketability and whether the asset is easily ascertainable.

QUESTION 2

a. There are several factors that can cause the loans to become non-performing.

Credit Culture. Most nonperforming loans are caused by borrower decisions. Sometimes borrowers decide to qualify for loans without thinking enough about the future and what else they need to buy with their income. When this occurs, a credit culture can develop where borrowers take out large loans not because it is financially wise but because they see others doing it. That can easily result in defaulted loans.

Sudden Market Changes. Any sudden market change can change the loan market by affecting how much money people have to take out loans and make payments. If the market suddenly changes and the prices of objects increase due to shortages or greater demands, borrowers will have less money to pay off their loans, which can lead to greater overall nonperformance.

Real Estate ChangesThe real estate industry and home loans--one of the staples of the loan industry--are closely connected. If prices in the real estate market fall--if houses sell for less and less--then lenders recoup less and less money from seizing properties in response to defaulted loans. This results in more loans becoming nonperforming, losing the lender money instead of making it.

Bank PerformanceBank performance also acts as a key cause of nonperforming loans. An efficient and well-run bank should be able to adjust loan rates and terms to the current market in order to decrease the chance of nonperforming loans. Banks should also be selective as to which borrowers they accept. Banks that do poorly in these areas will create more non-performing loans.

b. The areas of marketing mix or also be known as 4P’s can be divided into four which are Product, Price, Place, and Promotion. This is how it can relates to the banking industry :

ProductThe term “product” refers to any tangible, physical products and as well as services. Before bank come up with new products, there are several decisions to be made such as the product name, the functionality, quality, safety, supports, guarantees and services. For



example, Bank Islam has come up with a product named Al-Awfar Saving Account-i using the Mudharabah concept which is profit sharing. As a warranty, Bank Islam states that the profit will be in the following ratio 98:2 (Bank: Customer).

PriceThe price decision to be made by the bank such as minimum deposits, minimum balance. For instance, minimum deposits required to open the Al-Awfar Saving Account-i is RM100 and the same amount needed for minimum balance.

Place (distribution)It is about getting the product to the customer. Bank must decide who can open the Al-Awfar Saving Account-i, whether individuals, associations, universities, clubs/societies, religious groups or all that stated.

PromotionIt represents various aspects of marketing communication in order to reach the goals and achieving positive response from customers. Promotion decisions comprise the promotional strategy, advertising, public relations and publicity, marketing promotional budget. Bank Islam must decide on how to advertise Al-Awfar products with minimum budget and still able to fascinate the customer.

QUESTION 3

a. Five services available at an Automated Teller Machine (ATM) are: Check your balances and statements online Submit applications for new accounts, credit cards or loans online Place fixed deposits Transfer funds between accounts (own and third party) Pay bills, credit cards, loans and insurance premiums

QUESTION 4

a. Services that a bank can offer to an individual customer who wishes to spend a vacation in Switzerland are demand draft, telegraphic transfer, and mail transfer.

Demand draftIn the form of cheque. Unlike banker’s cheque, DD is issued for a beneficiary who may reside in another town or another country. Must not be payable to bearer. There are two types of Demand Draft (DD) which is local DD and foreign DD. Thus, the customer who wants to spend his/her vacation in Switzerland must use the foreign DD. Foreign DD is denominated in foreign currencies and also can be divided into two which are outwards and inwards. Outward foreign DD is necessary to mention the amount and currency involved and also the selling rate. Inward foreign DD is issued by other bank and received by a drawee bank.



Telegraphic transfer(TT) is the fastest mode for remitting funds where messages are sent & received on the same day and messages will be sent by telex, fax or SWIFT (Society for Worldwide Interbank Financial Telecommunications). Beneficiary may be residing in another town in the country or overseas. Two types of TT are outward TT and inward TT. Outward TT is to other banks/bank’s branch or agents; may it be local or overseas. It may be in RM or foreign currencies and method of application is the same as DD. Inward TT come from other banks/bank’s branch or agents; may it be local or overseas. It may be in RM or foreign currencies, if in foreign currencies, we have to convert into RM before effecting payment

Mail transfer is the same as TT. The difference is the message is sent through mail rather than electronically.

b. Five services under electronic banking services.

Automated Teller Machine (ATM)is an electronic banking outlet which allows customer to complete basic transactions without the aid of a branch representative or teller. The functions of ATM are account balance inquiry, cash withdrawals, requesting for statement of accounts, and depositing cash and cheques.

Electronic Funds Transfer Point of Sales (EFTPOS)is used at retail outlets or supermarkets where Point of Sales Terminals is located. The buyer uses a plastic card, including ATM cards and credit cards in order to make payments.

Phone Bankingby using telephone banking, a customer can have account inquiry, can perform payment of utility bills, can transfer funds from one account to another and also can enquire banking information.

Internet Bankingallow customer to conduct financial transactions on a secure website operated by their credit union or bank.

Home/Office Bankingit can be done by using a personal computer with software installed in the computer, a customer is able to enjoy the benefits of banking at home or office.



OCTOBER 2010

PART A

QUESTION 1

a) List five (5) operational guidelines on investment banks (formerly known as merchant

banks) and on finance companies are required by Bank Negara Malaysia.

Operational guidelines on investment bank are:

Paid-up capital not less RM 10 million

Maintain SRR and MLR

Cannot operate current and saving account

Cannot receive fixed deposits less than one month

Are allowed to give loans in foreign currencies

Operational guidelines on finance companies are:

Must maintain SRR with BNM

Observed minimum liquidity requirement (MLR)

Paid up capital minimum RM 5.0 million

Restricted from giving loans to directors, staff and their relatives

Individuals can acquire maximum 5% share equity, company or co-operate society

not more than 20%.

b) Briefly explain the functions of the capital market in the economic development.

To Assist The Process The Development By Mobilizing Medium And Long Term

Funds From A Wide Cross Section Of The Population To Finance Development

Programs And To Fund Private Investment

To Help Banking System In Securitizing Their Assets

Providing Intermediary Services Via Promoting Private Enterprises By Providing

Intermediary Services To Raise Funds For Corporate Investment And Expansion And

Also Changing The Ownership Structure O Companies.



QUESTION 2

a) Discuss how BNM would implement this policy on the banking system using four (4)

monetary instruments.

Statutory Reserve Requirement

A Reduction In The Ratio Would Increase The Level Of Deposits And Loans

Liquidity Requirement / SLR

Statutory Liquid Assets Are Kept In The Banks. SLR Is Immobilized In The

Banking Institution To Liquidate Its Liquid Assets To Support An Expansion

Of Loan. To Encourage Spending, BNM Will Reduce The SLR Rat So That

More People Can Make A Loan And Start Spends.

Open Market Operation

Direct Intervention Of BNM In The Open Market Through The Sale And

Purchases Of Government Papers In The Money Market.To Encourage

Spending, Government Will Buy Back The Securities From Public And Cash

Will Automatically Inject To The Economy.

Direct Borrowing And Lending

Short Term Borrowings Were Used On A Large Scale To Sterilize The Large

Inflows Of Fund

Moral Suasion

Moral Suasion Has An Occasions Been Relied Upon To Influence The

Direction Of Activities Of The Banking Industry.



b) Discuss how commercial banks help in the country’s economic development?

Commercial banks in Malaysia have experience in two economic turbulences. First in

economic downturn in 1985 to 1986 and second on financial crisis on 1997 to

1998.From 1989 to 1998, various measures have been implemented to strengthen

commercial banks.

In 1988 to 1989 in order to overcome the downturn, net non-performing loans

(NPLs) were at 17.8% of total loans. The net NPLs were large because of an over-

concentration of lending in property sector. BNM had to inject capital into three ailing

commercial banks after changing the top management. BNM also implemented the

Bank of International Settlements (BIS) capital adequacy framework in 1989 to

replace the minimum “free” capital adequacy ratio requirement. By doing this, it

increases the risk sensitivity of the commercial banks are also asked to diversify their

credit concentration from the property sector to manufacturing and general

commerce sectors. In 1989, BAFIA was introduced in order to provide an integrated

supervision of Malaysian financial institutions.

In 1990 to 1996 due to strong economic growth, corporate and individual

earnings had increased. Because of this, net NPLs in commercial banks had reduced

from 8.8% to 1.9% in 1996. During the period, BNM introduced measures to liberalise

the commercial banking sector and also BNM exerted its influence in shaping the

banking industry and building a core of domestic banking institutions. During this

period Base Lending Rate (BLR) was freed from the control of BNM. But in 1989, the

ceiling rate was pegged to BNM’s intervention rate in the money market, this rate is

also used by banks when to borrow from two-tier regulatory system with the objective

of accelerating the pace of liberization.



QUESTION 3

a) Explain three (3) benefits of bank mergers in Malaysia

Economies of Scale

In economics, the term economies of scale refers to the financial advantage that a

business gains when it expands, including the growth that occurs in a merger. Banks

that merge pool their assets and streamline their processes. This means that

whereas two separate banks would need to invest in two different projects to deliver

similar results, the single bank that exists after a merger only needs to invest in the

program once and apply its results to the entire company. This reduces the cost of

providing services and basic operations, which results in higher profits or lower costs

passed along to bank customers.

Debt Consolidation

Banks provide loans to many of their customers, but to do so they must often incur

high levels of debt themselves. Banks borrow money to expand, meet payroll

obligations, invest in marketing and make loans to individual and business

customers. When banks merge they can consolidate their debt, which reduces the

amount of interest they pay compared to the total debt two separate banks carry on

their own. Consolidating debt is especially important when a bank spends money

arranging a merger, which leaves less money to pay down existing debt.

More Branches

One of the primary reasons banks merge is to acquire new branches and expand

geographically. Merging means that a bank takes on new locations, including local

branches in states, cities and neighborhoods it might not currently serve. This is far

more cost-effective than opening the same number of new branches. It also provides

a benefit for customers who will find more places to make deposits, get cash and

perform other banking tasks conveniently.



b) Discuss the functions of any two (2) institutions under the savings institution

category.

Bank Simpanan Nasional (BSN)

BSN was formed as a reorganization of the Post Office Savings Bank. BSN has

number of branches all over Malaysia. By end of 1998, BSN had 435 branches. BSN

also diversified its products and services to fulfill the need of its customers. BSN also

introduced Islamic Banking facilities in 1994 for example Al-Wadiah saving account

and Al-Mudharabah investment account. The bank also introduced GIRO system,

credit card services, and loan schemes such as hire purchase in the early 1990s.

Since 1994 BSN had prepared itself for corporatization and privatization. BSN

commercial has been established in 1994 to promote commercial banking. All

savings deposited in BSN are guaranteed by the government.

Cooperative societies

These societies are comprised of urban credit cooperative, rural cooperatives,

housing cooperatives and Farmer’s Organization Authority. To complement the

operations of these cooperatives, Bank Rakyat was established in 1995 to channel

funds made available by the government as loans to farmers and to promote thrift

and savings among the rural population. Nowadays, Bank Rakyat also offer a wide

range of financing facilities including personal and property loans as well as hire

purchase, leasing, bridging finance and mortgage facilities. Bank Rakyat launched its

Islamic Banking facilities in 1993 with no conventional banking facilities being offered

to customers.

QUESTION 4

a) Explain the differences between Al-Mudharabah Investment Deposit and Al-

Mudharabah Project Financing

Al-Mudharabah Investment Deposit



An investment partnership, whereby the investor provides capital to another party or

entrepreneur in order to undertake a business or investment activity. All profit was

shared on a pre-agreed ratio while the loss of investment is born by the investor only.

Al-Mudharabah Project Financing

Means that all profit and loss bearded by investor and entrepreneur.

b) Explain two (2) sources and uses of funds for Bank Negara Malaysia.

SOURCES

- Major sources come from deposit

- Shareholder

- Capital, reserves, and profit

- Borrowing

- Insurance, provident and pension funds

USES

- Deposits with other financial institution

- Land and advances

- Investment, trade financing, treasury products

PART B

QUESTION 1

a) What is credit card? State four (4) common charges of credit card that may occur

Credit card is used to get goods and services on credit. It has a limit on the amount

to be used. The retailer is given commission by the bank for such transaction carried

out. Transaction will be carried out by using a special machine placed together with a

sales voucher. The card will be placed on the machine by the retailer and the details

and amount of sales are entered on the voucher and signed by the purchaser.

The four common charges of credit card are:

1. Finance charge (interest charge)

Fees and other costs billed to you on your statement for using the credit cards

(i.e., balance transfer fees, cash advance fees, late fees, over limit fees, etc.).



2. Balance Transfer Fee

A fee charged by a credit card company to transfer a balance from one account

to another.

3. Cash advance

A cash loan from a credit card using an ATM or bank withdrawal.

4. Annual Percentage Rate (APR)

The yearly percentage rate charged when a balance is held on a credit card. This

rate is applied each month that an outstanding balance is present.

b) Explain with example a co-branded credit card

Co-branded credit card means any credit card that is offered by a credit card

company that is jointly sponsored by both a bank and a retail merchant. This type of

card can generally be issued more cheaply than private label retail cards. This type

of card is designed to give the issuing bank access to the retailer's customer base.

Example of co-branded credit card is dell computers with Intel processors.

c) Describe the factors that are being considered in the 5’C analysis

Character

This is associated to the quality in a borrower that makes a borrower want to pay

when the loan is due. It is about honesty, integrity, industry, morality and other

factors. But character is a difficult-thing to evaluate. To determine the character, a

bank may need to arrange for interviews, or to look at relationship of the customer

with the bank, or look at his or her business duration or reputation.

Capacity

This is referred to the legal status of a borrower. This can be referred to the legal the

company’s incorporation whether legal or not the business.

Collateral


http://en.wikipedia.org/wiki/Intel

http://en.wikipedia.org/wiki/Dell


Collateral means assets which the borrower uses to pledge as security against loan.

This is needed to reduce the credit risk. Collateral must be adequate and easily

marketable

Capital

This is the financial worth of the borrower or the accumulated wealth of the borrower.

The amount of capital that the borrower has reflects his or her commitment. This can

be ascertained by referring to the balance sheet of the applicant.

Condition

This is related to the economic condition, political condition and also the global

economic condition that may affect the borrower in repaying the loan. Examples of

economic condition are whether overheating, slowing down, recession or recovering.

QUESTION 2

a) Discuss five (5) main functions of a bank’s Board of Directors

There are five main functions of a bank’s Board of Directors which is goals and

strategies, allocating resources, managing risk, protecting stockholders and

compliance.

Goals and strategies

In conjunction with the bank's top officers, the board is responsible for formulating

broad goals and strategies for the bank. The formulation of clear objectives and

policies supplies a framework for the chief executive to work within. The board also

helps set priorities for the bank.

Managing Risk

The board of directors not only helps lay out the bank's goals, but acts as a watchdog

as well. One of its main duties in this capacity is to limit the bank's exposure to

excessive risk of all kinds, including legal, reputational and financial. By managing

risk judiciously, the board tries to maintain a balance between enterprise and caution.

Allocating Resources

The primary function of banks is to take money from people who want to save and

lend it to people who want to borrow. Deciding, in a general way, to whom it lends is



one of the board's most important duties. Banks that chose not to invest in sub-prime

mortgages in the late 2000s, for instance, were more likely to stay afloat than banks

that invested in them heavily.

Protecting Stockholders

A bank's board of directors is the stockholders' proxy, and represents their interests.

Many banks require that board members own some company stock to provide them

with personal incentives in their decision-making. In overseeing the running of the

bank, however, the board must keep the interests of the shareholders paramount.

Compliance

In its role as company watchdog, the board must also ensure the bank complies with

all relevant statutes, both internal and external. The boards of some banks suffer a

financial penalty if the bank violates certain legal statutes.

a) Explain why current account is required in business.

Current account is required in business because it make all business transaction

easier. Among of that is with current account business can use cheques either for

depositing money or drawing money. Not only that, a cheque can be transferred

to another party or business without prior notice to the bank. Business that holder

a current account also can have an overdraft facility provided that he or she has

prior agreement with the bank. Current account can also be divided into individual

account, joint account, sole proprietors account partnership and so on.

b) Name any four (4) identification documents that are accepted by the commercial

banks for the opening of an individual current account.

o Identity card or passport

o Photocopies of documents are taken for record purposes

o Stamp “original sighted” & initial of the OIC

o Filed together with Application for Opening of Account Forms

o For non-residents, should stamp “external” on copies of the documents



QUESTION 3

a) Explain four (4) conditions when the director of a bank can be disqualified

1. If he is bankrupt , has suspended payments, or has compounded with his

creditors, whether within or outside Malaysia

2. Without prejudice to paragraph, if a charge for a criminal offence relating to

dishonesty, fraud, or violence under any written law punishable with

imprisonment for one year or more, whether by itself, or in lieu of, or in addition to

a fine, has been proved against him in any court within or outside Malaysia.

3. If a charge for any offence under this Act has been proved against him

4. If there has been against him any order of detention , supervision , restricted

resident, banishment or deportation, or if there has been imposed on him any

form of restriction or supervision by bond or otherwise, under any law relating to

prevention of crime or drug trafficking or to restricted residence, or banishment or

immigration

b) List five (5) advantage of electronic banking

o Minimum usage of staff for large routine transactions

o Cost savings for staff and overheads

o Easier accessibility and convenient

o 24 hours operation

o Shared resources for research and development costs for ATM

c) Puan Saflina Azis brought her 5 year old son, Adam Affandi to a bank and to open a

saving account for him. As an officer of a bank, how would you open a saving

account for Adam?

Firstly bank officer sit down with Puan Saflina Azis and her son Adam, and fill out the

necessary forms required to open a bank account. Puan Saflina Azis have to provide

personal information for her child, including their date of birth and Social Security

Number. The bank officer may request to see the Adam Social Security card as a

form of identification.



Then, Puan Saflina Azis and Adam will both sign the application form for an account

her signature will be required because all bank accounts must be attributed to an

adult, even if they are a children's savings account. This holds her responsible for

whatever happens in association with the account.

Fill out a deposit slip provided by the bank officer. It will ask for the amount of the

opening deposit Puan Saflina Azis are making. Return the deposit slip and the

money to the banker to be credited to her child account.

Bank officer give pamphlets or handout to Puan Saflina Azis to review and take

home. These materials can help answer questions as they arise and further help your

child understand the new savings account.

QUESTION 4

a) You are bank teller attached at remittance and currency exchange department. How

do you handle the following situation?

i) Situation A: A foreign worker came to you and he wanted to transfer money to

his mother in Indonesia. Explain to him how foreign demand draft could be

used to remit the money.

Demand draft is used to remit fund to beneficiary who is at different area, in another

town or area or country. This is to say that the bank being addressed is required to

pay on DD to the person or beneficiary specified on the draft.

i) On the situation A, it’s a foreign DD, because the foreign want transfer the

currency. It call outward foreign DD which is necessary to foreign mention the

amount and currency involved and also the selling rate. And his mother will

receive the DD by a drawer bank.

ii) Situation B: Mr. Kenny Tan wanted to remit NZD1,500 to her daughter who is

studying in New Zealand. Which type of remittance that he could use if he

wanted the daughter to receive the proceeds in two days’ time?

Mr. Kenny Tan can use telegraphic transfer (TT) to remit money to her daughter who

is studying in New Zealand. Telegraphic transfer is the fastest mode for remitting

funds. Telegraphic transfer is a mode to transfer of fund electronically by using cable,

telex, fax, telephone transmission and through Society for Worldwide Interbank

Financial Telecommunication (SWIFT). Telegraphic transfer can be divide into to

which is outward and inward telegraphic transfer.



b) Encik Afiq Affandi, who recently joined MKSA Berhad (produced of batik sarongs for

export purposes), has come to seek your advice on documentary credits. Explain to

Encik Afiq:

i) Two (2) advantages of the documentary credits to the exporter.

For exporters

Guaranteed payment upon presentation of the documents specified in the terms of

the letter of credit.

Reducing the production risk, first of all, for the situations when the buyer cancels or

changes his order.

The ability to structure the delivery schedule according to the exporter's interests.

The chance to obtain financing for production or purchase of goods (pre-export

finance).

The chance to get financing in the period between the shipment of the goods and

receipt of payment (especially, in case of delayed payment).

The buyer cannot refuse to pay due to a complaint about the goods.

iii) Two (2) advantages of the documentary credits to the importer.

For importers

The possibility to structure the payment plan in the contract according to the

importer's interests.

Certainty that the payment will be made only upon presentation of the documents

confirming shipment of the goods.

The use of a letter of credit allows the importer to avoid or reduce pre-payment.

The seller must fulfill all terms of the contract, as indicated in the letter of credit

(shipment of the goods, meeting delivery terms on stock, amount, and deadlines) in

order to receive the payment.

Having opened a letter of credit, the importer proves his ability to pay and can count

on more favorable payment terms in the future.



APRIL 2011

PART A

QUESTION 1

a) The details of the Malaysian financial structure

The Malaysian Financial System is similar with those in other countries. It is consist of two which is financial institution and financial market.

Malaysia financial institution is divided into banking system and non-bank financial intermediaries. Banking system can be divided further into two categories. It is monetary and non-monetary institutions. Banking system comprising commercial bank, investment bank and Islamic bank, is the primary mobilize of fund and main source of financing which support economic activities in Malaysia. It is under control and supervision of BNM.

First category of banking system is monetary institution whose principal liabilities are generally accepted as money. For example, BNM is the sole currency issuing authorities in country and commercial bank including Islamic bank as the only institution allowed to cooperate current account. Second, non-monetary are institution that are linked closely to the monetary and whose liabilities are generally accepted as near-money.

Non-bank financial intermediaries are institutions that are supervised by various government department and agencies. These institutions involved saving institution, provident and pension fund, insurance companies, unit trust, property trust and etc.

b) Explain the meaning of SRR and describe how changes in it can affect banks in providing their credit service to the customers

SRR is defined in term of a bank’s eligible liabilities (EL) which comprises of deposit (including negotiable certificates of deposit) NCD, repurchase agreement (REPOS) and net interbank borrowings.



SRR is an instrument that available to BNM because it affects the level of deposits and loans. Higher ratio would therefore reduce amount of loans and deposits or vice versa. Such reverses do not earn interest: therefore the cost will be passed on to the customer by increasing interest on loans.

The variation in SRR in necessary to either reduces or inject large amount of liquidity.

QUESTION 2

a) How commercial banks do contribute in the country economic development

Commercial bank in Malaysia is the largest and main players in banking system. The main characteristic is provision of current account facilities where payment can be made through issuing cheques. Commercial bank serves all types of surplus and deficit units. Its offer deposit account with the size and maturity characteristic desired by surplus units. For example, Affin Bank Berhad.

Merchant bank as a wholesale banking is to accept wholesale deposits where investment bank is allowed to mobilize deposits with minimum amount of RM500,000. It is excluding repurchase agreement where the minimum transaction amount is RM50,000. It is also to conduct lending activities to complement the fee based activities.

b) The differences between conventional and Islamic banking are :

The functions and operating modes of conventional banks are based on fully

manmade principles. While the functions and operating modes of Islamic banks are

based on the principles of Islamic Shariah.

Conventional aims at maximizing profit without any restriction. An Islamic bank aims

at maximizing profit but subject to Shariah restrictions.

Conventional banks not deal with Zakat. Islamic banking system, it has become one

of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre

and they also pay out their Zakat.

Conventional banks interest-based commercial banks, borrowing from the money

market is relatively easier. For the Islamic banks, it must be based on a Shariah

approved underlying transaction.

Conventional no akad but Islamic required you have akad.



c) Meant by merchant bank as a wholesale banking and commercial bank as retail banking and

example

Merchant bank can be defined as receiving deposits on deposits account, providing

consultancy and advisory services relating to corporate and investments matters. The

functions of merchant bank focused on wholesale banking areas, focusing their expertise in

the provision of tailored financial services including financial advisory and consultancy

services, prevented from competing with commercial banks and finance companies by their

inability to operate current accounts and savings accounts, and merchant bank do not allow

to accept fixed deposits from individuals, sole proprietors and partnership. The examples of

merchant banks are Arab-Malaysian Merchant Bank Berhad and Bumiputera Merchant Bank

Berhad.

Commercial bank as retail banking services such as the acceptance of deposits, granting of

loan and advances and financial guarantees. The first function of commercial bank is

granting of loan and advances through business enterprise and private individual for working

capital, investment or consumption. Commercial banks provide loan in the form of

overdrafts, revolving credit, term loans and advances, bridging finance, trade bills, banker’s

acceptance for working capital, trade finance and capital expenditure. The second function is

provision of facilities for its customers to make payments and receive money by using

cheques, saving book and ATM facilities. For example commercial bank are Affin bank

Berhad and RHB bank Berhad.

QUESTION 3

a) Explain the main sources and uses of the bank

There are many source of fund of national saving bank. The first source is saving. Savings is money that is deposited to the bank from saver or depositor. The saver may come from middle or lower income group.

The second source of fund of national saving bank is fixed deposit. It is a definite sum of money is placed with a bank for a fixed period of time or to earn interest at a fixed rate. It can be 1, 2, 3, or 6 month.



While the uses of fund of national saving bank is for investment in MGS, shares, stock, and fixed assets.Secondly, the uses of fund are also to provide loan and advances to members and non-members in term of properties and consumption loan.

b) Distinguish features of money market and capital market

Money Market Capital Market

it is a place where money can be borrowed or deposited

it is a financial market dealing in short-term fund and instruments.

The examples such as treasury bills, banker acceptance, and etc.

It has no physical market place.

It is consists of two which is inter-bank market and short-term funds market.

In Malaysia, it is consists of two which is primary securities markets and secondary markets.

Primary securities markets are new issues of government and corporate securities are offered.

Secondary market are existing government and corporate securities are transacted

Capital market refers to the market of long-term securities instrument which comprises both public and private debt instruments.

QUESTION 4

Write short notes on the following

Al-Musyarakah

It defined as the business that involved the joint venture or partnership between two or more parties. It is one of the Islamic banking principles and it is apply by the Islamic banking sector in Malaysia.

The concept use in Al-Musyarakah is the situation where the profit and loss are shared among the parties. But the profit and loss sharing are based on amount of their contribution and agreed by both parties.

Provident and pension fund

Are institutions that provide members and their dependent with social security in the form of retirement, medical, death, or disability benefits. Source of funds comes from contribution from members and their employees.

Examples of this institution are Employees Provident Funds (EPF), the Social Security Organization (SOCSO), Tabung Amanah Tentera.



Foreign exchange market

is a wholesale inter-bank market for sale and purchase of foreign currencies including purchase by importers to pay for their imports and sale of ringgits by exporters arising from receipt of export proceed.

For examples the institution that involves in the foreign exchanges is commercial bank, bank Islam Malaysia, investment bank and the money charges.

Credit Guarantee Corporation (CGC)

It was establishing with the objective to enable small-scale enterprise to have ready access to bank credit at reasonable price. CGC has a single scheme known as Principle Guarantee Scheme (PGS). It is introduced to assists small-scale enterprises without collateral or inadequate collateral to obtain local and foreign institution.

CGC took initiatives to expend it range of product and services. At the same time, CGC wider its distribution channel, developed alliances with strategic local and foreign institution.

Money market

Is a place where money can be borrowed or deposited. It is also a short term fund and instrument for examples such as treasury bills, government securities, banker acceptance, Cagamas Berhad, and others.

Money market in Malaysia constitutes the inter-bank market and short-term fund market. Inter-bank market involves short-term funds such as overnight money, 7-day money, and funds for period of 1, 2, 3 or 6 months.

PART BQUESTION 1

a) Describe three types of depository facilities offered by commercial banks

Saving account.It is an interest bearing deposits account. An account holder will be given a passbook. A depositor also can get online statement. Commercial bank will issue statement rather than passbook. Besides, an account holder also has an ATM cards for easier and convenient. Withdrawal of fund from his or her account. Saving account can be divided by five types which is individual, joint, societies, trustee and minors.

Current account.We can use cheque either for depositing or drawing money. Not only that, a cheque can be transferred into another party without prior notice to the bank. A cheque is payable on demand. Others characteristic is that interest not paid on such account. Only commercial



bank can offer current account. Current account can be individual, sole proprietors, partnership, companies and trustee account.Fixed deposit account.It is the most conventional form of deposit being offered by commercial bank and finance companies. Fixed deposited is defined as an investment or deposits account where fund can be placed with a bank for a fixed period of time to earn interest. This type of investment has better return than a saving account. It can be 1, 2, 3,…or 60 months.

b) Discuss two benefits of using debit cards and credits cards

The first benefit of debit cards is it can be used by the customer who does not want credit. Secondly, it is also can be used for a single transaction debit that is debiting of a current account in real-time or monthly debit that is giving the cardholder the benefit of deferred payment. While the first benefit of credit cards is it can be used to get a goods and services on credits. It has a limit on amount to be used. Secondly, the retailer is given a commission by bank for such transaction carried out.

c) The two common charges that may occur when using credit cards is:

Must pay an interest if payment make after specific time period. A commission will be given to the retailer.

QUESTION 2

a) The four types of loan facilities that can be applied by a firm doing business in Malaysia.

OverdraftThis facility is associated with a current account, meaning to say that this credit facilities operated by using a current account. The current account holder must get the approval from banks in order to overdrawn his/her account. The bank will notify the account holder the credit limit that she/he is allowed to have.

Term loanIt is an intermediate-firm loan or sometimes it can be a long-term loan. It is normally used to finance capital expenditure. For example, is to purchase fixed assets such as machinery and equipment. There also interest will be charge.

Outstation or OutportCheque Purchased (OCP)Outstation/outportcheque purchase means cheque that is drawn outside a clearing area of a bank at which the cheque is deposited for clearing. For example banks in Kuala Lumpur, Petaling Jaya and Shah Alam will be grouped under same / one clearing area, cheque drawn outside this clearing areas is called outstation or outportcheque.

Housing LoanHousing loan as a name implies is a loan given to a purchaser in order to enable him to meet



the full purchase price of a house for own residence. The loan is secured against a first legal charge on the property purchased. It can be a single storey or a double storey terrace house, a semi detected or a bungalow or even a condominium.

b) Maria Sharapova is a businesswoman who wishes to travel abroad. Briefly explain any four (4) alternatives that the bank can offer her.

i. Demand draft (DD)Cashier order is used for remitting money and fund in the same area but DD is used to remit fund to beneficiary who is at different area i.e. in another town, area and country. This is to say that the bank being addressed is required to pay on DD to the person and beneficiary specified on the draft. Foreign DD will be in foreign currency. It also can be divided into two,

Outward foreign DD- it is necessary to mention the amount and currency involved and also the selling rate.

Inward foreign DD- DD issued by other bank and received by drawer bank

ii. Telegraphic transfer (TT)TT is a mode to transfer of fund electronically by using cable, telex, fax, telephone transmission and through Society for Worldwide Interbank Financial Telecommunication (SWIFT). Since the transfer is not using any signature, therefore Test Key (authentication system) is needed. TT can be used domestically or internationally. Outward TT can be for in and out a country. Local outward TT can be made in Malaysia Ringgit but for overseas transfer can be done in Malaysia Ringgit or foreign currencies. The cost involved will include the amount to be remitted, cost of inland exchange for local TT and transmission charges. If the TT is done in foreign currency, the Malaysia Ringgit equivalent will be calculated at prevailing selling rate.

iii. Credit cardThese cards are used to get goods and service on credit. It has limited on the amount to be used. The retailer is given commission by the bank for such transaction carried out. Transaction will be carried out by using a special machine placed together with a sales voucher. The card will be placed on the machine by the retailer and the detail and amount of sales are entered on the voucher and signed by the purchaser. The signature of purchaser on the invoice than will be compared to the one at the back of the card. Some credit cards can have photograph of the holder. Credit cards also are passed through EFTPOS. Advantages of credit card are, provide a mean for credit, interest free credit if paid within specified time period, easier to use and cardholder can withdraw cash over the counter or from an ATM.



iv. Charge CardCharged card are another mean for payment. They are similar to credit cards but the amount must be paid fully every month. Examples of these cards are American Express and Diners Club.

QUESTION 3

a) Usage of ATM to the customers

Account balance enquirySo, it will be easier to the customers to check their account balance without need to go to the counter.

Cash withdrawalsIt is means that the customers can withdraw their money anytime they want to use it. They can withdraw money at any ATM machine that operates 24 hours.

Requesting for statement accountIf the customers need the statement account for any purpose, they can just go to nearest atm.

Transferring moneyIf the customers want totransfer their money to other bank or the want to make a payment of any transaction, they can do it by using atm.

b) Two types of business loan that suits the firm purpose

Current account is mainly required in business because if they have current account, they

can use cheques either for depositing or drawing money. Current bank account is opened by

businessmen who have a number of regular transactions with the bank, both deposits and

withdrawals. It is also known as Demand Deposit. Current account is mainly required in

business because the certain reasons.

The first is current account enables businessmen to conduct his business transactions

smoothly. The second is the businessmen can withdraw any amount at any time from their

current accounts. It means there are also no restrictions on withdrawals. The third is the

businessmen can make direct payment to their creditors with the help of cheques and the



current account facilitates the industrial progress of the country. Without the help of this

account, businessmen would have difficulties in running their business.

c) Two types of business loan that suits the firm purpose

Bridging the loan

It can be defined as a short-term loan given to a housing developer in order to bridge the

gap between immediate cash required that is to start a housing project and anticipated cash

to be received in future. A developer needs fund for housing or property development. A

bank will assess the financial standing and capacity of the developer before granting such

loan.

End financing

A permanent, long-term loan used to pay off a short-term construction loan or other form of

interim financing. Although an end loan can have interest-only or other features that delay

the repayment of principal, at some point, an end loan begins to amortize. This differs from

construction loans or other forms of interim financing, which are typically interest-only

loans that require full repayment of principal and accrued interest only upon disbursement

of funds from the end loan.



QUESTION 4

a) Five types of services provided by electronic banking.

ATM

ATM can be used for account balance enquiry, cash withdrawal, requesting statement of

account, and etc. The advantage of ATM is it operated 24 hours per day.

Electronic fund transfer point of sales (EFTPOS)

It is used at retail outlets or supermarket. The advantage is it very convenient and greater

speed in transaction. It is also reduced transaction cost.

Phone banking

By using this service, the customers can have an account enquiry, can perform utility bills

payments, can transfer fund from one account to another account and others.

Home banking

By using the personal computer with software installed in the computer, customers can able

to enjoy the benefits of banking at home or office.

Electronic banking for corporate

This is done through financial electronic data interchange (EDI). EDI is an electronic bridge

between banks and customers which carry detailed data and payment information.

b) Five benefits of implementation of electronic banking are:

Technical reliability.

Customers’ relationship management.

Implementation cost.

Management problem.

Security.



JANUARY 2012

PART A

QUESTION 1

a) Bank Negara Malaysia was given several objectives as spelt out in the Central Bank of

Malaya Ordinance (CBO), 1958. Describes four of the objective.

To issue currency and keep reserves safeguarding the value of the currency. Any central

bank in the world is known as the bank issue.

BNM can held the country to attain effective supervision over legal tender money and

control over credit expansion in the banking system. The BNM started to issue its own

currency on June 12, 1967. The Malaysian currency was renamed “ringgit” and “sen” from

“dollar” and “cents” under the Malayan Currency (Ringgit) Act 1975. The international

reserves are gold, foreign exchange, reserve position with international Monetary Fund

(IMF) and Special Drawing Right (SDRs).The BNM function of holding the nation’s

international reserves was automatically derived from its function as the bank of issue. To

safeguard the external value of ringgit, the CBO 1958 provides for maintenance of a

minimum external reserves backing of 80.59% against the currency issue, but in practise the

ringgit is fully backed by external reserves.

To act as a banker and financial adviser / agent to the government.

The BNM act as a banker, fiscal agent and state government. BNM has close cooperation

with the government with the centralization of government deposit with BNM starting April

1989. With this all government receipt for example new issue of government securities, tax

and dividend payment are placed and manages by BNM. Beside that BNM also provide for

management of government accounts, provide sources of fund to government and provide

management of the national debt.

To promote monetary stability and a sound financial structure.

To promote the monetary stability and a sound financial structure, to influences credit

situation in order to achieve the country’s overall economic objective will be the

responsibility of the BNM to the government. Both the supply of money and volume of



credit should be elastic to the demands.BNM requires the approval of the Minister of

Finance on certain areas related to monetary and banking issues even though it is

empowered autonomously in implementation of monetary policy measures. BNM is

empowered under CBO 1958 to regulate the supply of money and credit creation though

qualitative and quantitative measures.

To influences credit situation to the advantage of the country.

This objective is to achieve the country’s overall economic objectives .in other hand the

credit situation will influence our economic growth. When the individual or organisation

were used a credit money to run their business, the demand of the money will be increase

and BNM should increase the amount money to support the demand of credit. By this

situation, it can increase the value of ringgit money.

b) Describe both Statutory Reserves Requirement (SRR) and Minimum Liquidity Requirement

(MLR) under quantitative measures.

BNM is empowered under the CBO 1958 to regulate the supply of money and credit creation

trough qualitative and quantitative measure. The Statutory Reserves Require meant (SRR) is

defined in term of a bank’s eligible liabilities (EL) which comprise of deposit (including

negotiable certificate of deposit (NCDs), repurchase agreements (REPOs) and net interbank

borrowings. SRR is an instrument available to BNM because it affects the level of deposits

and loans. Higher ratio would therefore reduce amount of loan and deposits ore vice-versa.

Such reserves do not earn interest; therefore the cost will be passé on to the customers by

increasing interest on loans. When SRR was first introduce in 1959, the ratio was fixed at

2.5% of total liabilities but in 1989, the first revision was made where the SRR of banking

institution were revised to a uniform ratio of 4.5% of the E.L base. The variation in SRR

necessary to either reduce or inject large amounts of liquidity.

The minimum Liquidity Requirement (MLR) is under the BAFIA 1989, the banking institution

(including Bank Islam) are required to observe a minimum liquidity ratio in order to ensure

liquidity to meet customers’ withdrawals. Liquidity requirement is a percentages out of

deposit liabilities in 1959 when it was first introduced, it was 20% OUT OF DEPSIT

LIABILITIES. But now liquid asset include cash, clearing balances with the central bank ,

money at call, treasury bill, government securities, government investment certificates,



Cagamas bond , bill discounted or purchase, Bank Negara Bills, BNM Certificates and State

government securities.

QUESTION 2

a) Explain three functions of savings institutions

Promote development in the agricultural.

For example in Agro Bank, at Agro bank, we can use our saving money to make development

or make investment in agricultural. Besides that, we also can apply the loan for to expand

our business in agricultural if we in the saving institution.

Promote and mobilize savings among the middle and lower-income groups.

The banking institutions today always find the good ways to promote their bank to make

interested to other people in joining their bank. Most of the banking institution today was

provide the business for saving among the middle and lower group. It is the good ways to

the bank to go widely or expands their business to other people with different level or

group.

Provide a convenient and easily accessible medium to small savers.

Besidesthat, to encourage to other people to join the bank, the banks should provide the

business base on to provide a convenient and be easily accessible medium to small saver. It

is important for the bank to encourage the small saver such as the students, kid and many

more to invest in the bank.Base on that, it can help the bank to be growth quickly in their

business.

b) Labuan International offshore Financial Centre (IOFC) was established in October 1990.

Explain one objective and discuss three functions of this financial centre.

The objective of Labuan (IOFC)

To develop national objective, policies and priorities for the elderly development and

administration of offshore financial services of Labuan IOFC. The good management will

bring the Labuan IOFC to be the best in the world and also will achieve their goal.

The function of Labuan (IOFC)



To be turned into a duty free zone in order to attract foreign companies.

Labuan offers various tax incentives to become an island of tax haven.

Labuan offers the wide range of offshore product such as banking, insurances and

insurance related activities, trust business, fund management, investment holding, Islamic

financing, company management services and capital market activities.

In august 1999, Labuan (IOFC) had 63 offshores banks, 50 insurance and insurance-related

companies, 20 trust offshores leasing companies and six fund managers were available in

Labuan.

To be the regulatory authority of the Labuan (IOFC).

The regulatory authority of Labuan (IOFC) is the Labuan offshore financial services authority

(LOFSA). LOFSA is a regulatory agency to streamline and rationalize the government’s

administrative machinery in supervising the activities and operations of Labuan IOFC.

c) Briefly define any three principle of Islamic banking.

Al- Wadi’ah Yad Dhamanah

The al wadiah yad dhamanah is referred to safekeeping with guarantee. For example is

referring deposit. Wadiah is a trust and depository becomes a guarantor that guarantees to

pay all deposits on demand. The depositors may receive a gift (Al Hibah) for the money being

deposited

Al-Mudharabah

A profit sharing concept for an agreement made between two parties. The two parties mean

one party will provides the capital to run the business and another party will be an

entrepreneur. The entrepreneur will carry out business and both parties will be share a

profits according to the ratios agreed but if their company or business has losses, the owner

of capital will only will be loss

Al-Musyarakah

The joint ventures or partnership concept.Profit are shared according to what have been

agreed by both parties and in the event of losses both will bear the losses.



QUESTION 3

a) Illustrate five important functions of commercial banks as outlined by the BAFIA 1989.

Mobilization of savings through current, saving and fixed deposits accounts.

Provision of facilities for its customers to make payments and receive money. For example

are through using checks, saving book and ATM Facilities.

Granting loans and advances to business enterprises and private individuals for working

capital, investment and consumption.

Financing of the government through purchase of government securities and treasury bills.

Provision for various banking facilities and services as authorized by the BNM for example

trade financing facilities, treasury services, cross border, payment services, custody services

and to deal with foreign exchanges.

b) Recognize five sources and five uses of investment bank.

Sources

Deposit

Lending activities

Capital and reserves

Banker acceptance

Others

Uses

Investment

Loan activities

Amount due from financial institution

Cash and reserves with BNM

Others



QUESTION 4

a) Write short note on each of following:

Life insurance

Life insurance is the insurance of the life of an individual and to include coverage for

disability or illness. There are three types of policies under life insurance for example is

whole life (death or permanent disability), endowment policy (provide death coverage and

also act as a mean for saving for the policy holder. It is used for paying housing loans or

mortgage in the event of death of policy holder) and term assurance (protection against

contingency of death or permanent disability. Besides that, life insurance also provides the

benefits for example are income fund, education fund, burial fund, retirement fund and

mortgage.

Anti-Money laundering

Anti-Money Laundering (AML) is a term mainly used in the financial and legal industries to

describe the legal controls that require financial institutions and other regulated entities to

prevent, detect and report money laundering activities. Anti-money laundering guidelines

came into prominence globally as a result of the formation of the Financial Action Task Force

(FATF) and the promulgation of an international framework of anti-money laundering

standards. An effective anti-money laundering program requires a jurisdiction to have

criminalized money laundering, given the relevant regulators and police the powers and

tools to investigate; be able to share information with other countries as appropriate; and

require financial institutions to identify their customers, establish risk-based controls, keep

records, and report suspicious activities.

Capital market

Capital market is referring to the market of long –term securities investment which comprise

both public and private debt instrument. Long term means maturities of such instrument will

be more than one year or for shares and stocks without maturity. Capital market is

important to assist the process of economic development by mobilizing medium to long–

term funds from the public for financing public and private development programmes. This

also helps the banking system in securitizing their assets.



Development Finance Institution

The development finance institution is the way to build the finance in each organisation. The

objective for the establishment of these institution are to promote development in the

agricultural, industrial and international trade and export sectors, and also to play a

complementary role to the banking institution. The sources of funds of the financial

institution are borrowing (deposit from public, borrowing from related corporation, the

government, BNM and foreign institution) and share holder. The uses of fund that financial

institutions supply are loans and advances and investment.

Employees Provident Funds

Provident is the institution that provides members and their dependents with social security

in the form of retirement, medic, death, or disability benefit Sources of fund come from

contribution from members and their employee’s wages. Provident fund are defined as

funds contributed by members where upon retirement, the total contribution paid by the

members and their employers including the accumulated interest will be given to members.

PART B

QUESTION 1

a) Define the meaning of an electronic banking and list two services provided by electronic

banking.

Electronic banking

The way that the individuals can use the banking services through the electronic.

For example are the individuals can use the electronic banking services for debit cash

withdrawal and many more. The advantage for using this banking services, it provide for 24

hour operation and more than that.

The two services are:

Account balance inquiry

Cash withdrawal


b) Hire purchase and leasing are common credit facilities offered by financial institution. Contrast

the main features between these two modes of financing.

Hire Purchase Leasing

Is a legal term for a contract or an agreement Is contractual agreement between a lessor and

a lessee

is one of the most common ways for people to

buy

Is alternative to purchasing the asset

Specify time period when the period hall start Can run from one to five years

c) Amilia is trying to decide whether to keep her money in a saving account or in a fixed deposit

account. You have been assigned to compare the features between saving and fixed deposit

account.

Saving Account Fixed Deposit Account

Interest bearing deposit account Interest rate free to be quoted by bank

Convenient withdrawal of fund Must withdrawal after the maturity

Individuals Individual (aged 18 years and above)

Joint saving account Joint Individuals

Saving account for association societies and

club

societies

QUESTION 2

a) Discover two types of TT that generally used by bank.

Telegraphic transfer

A mode to transfer of fund electronically by using cable, telex, fax, telephone transmission and

through society for worldwide interbank financial telecommunication. The two types of TT that

generously used by bank are outward and inward.

Outward Telegraphic transfer can be for in or out a country.

Local Outward telegraphic transfer can be made in Malaysian Ringgit but for overseas transfer

can be done in Malaysian Ringgit or foreign currencies. The cost involved will include the

amount to be remitted, cost of inland exchange for local telegraphic transfer and transmission

charges.

Inward telegraphic transfer can be form in or out the country,

Either from the local branches, local agents or from overseas branches or overseas agents. To

remit the fund, the bank has to contract the beneficiary. If the inward telegraphic transfer is in

foreign currency, the Malaysian Ringgit equivalent is calculated at the buying rates.

b) Differentiate between cashier’s orders and demand draft

Cashier’s Order Demand Draft

Also known as banker’s cheque Is used for remitting money

Cheque issued by banks Is used to remit fund to beneficiary who is

different area

Normally does not have default in payment Beneficiary specified on the draft

c) Interpret the following credit facilities:

Term loan

Term loan is an intermediate-term loan or sometimes it can be a long term loan, Theloan is

normally used to finance capital expenditure .for example is to purchase fixed assets such as

machinery and equipment.

Overdraft

This facility is associated with a current account, meaning to say this credit facility operates by

using a current account. If the account is overdrawn, daily interest will be charged on the

outstanding balance at the end of each day but it is only debited once month (at the end of

month) to the account. Overdraft I short- term nature.

Bridging loan

A bridging loan is defined as a short –term loan given to a housing developer in order to bridge

the gap between immediate cash required that is to start the housing project and anticipated

cash to be received in the future (funds to be received from house buyers. A developer needs

funds for housing or property development.

End financing

End financing is the loan that normally disbursed periodically according to the stages of housing

development. This type of loan is normally given by a bank to the same housing developer and

at the same time the bank will provide a long –term loan to the individual house buyer. The

proceeds received from the buyer will be used to settle the loan.

QUESTION 3

a) Amirul is the managing Director of AZB Sdn. Bhd, who already have an establish firm. Currently,

he hold two types of cards: that is American Express and XOX visa credit card. Analyze the basic

features of each type of card.

The American Express / Business ExtrAA Corporate Card

Its provides employees with a flexible and safe method of payment for virtually all their business

expenses, including air travel, hotel stays, restaurants, as well as couriers, office supplies, phone

bills and more. The Card also meets the demanding requirements of the frequent business

traveller, including:

o 24-hour, door-to-door business travel insurance1 of up to $350,000 every time Card

members purchase common carrier tickets with an eligible American Express Corporate

Card.

o Automatic enrolment in our Global Assist® Hotline2 extends 24-hour, worldwide legal and

medical emergency referral coverage when Card members are more than 100 miles from

home.

o Assistance anywhere in the world through one of the world’s largest, most established

travel services networks, where professionals can help you with everything from buying

airline tickets to reserving hotel accommodations, online servicing through Manage Your

Card Account3 site and 24-hour, toll-free assistance by phone.

The XOX visa credit card

The way that the bank try to help us in doing business such as in doing paying the good and

everything else. The visa credit card is also trying to make smart decisions with your money can

feel overwhelming. With a Visa cash-back card from Nationwide Bank, you can enjoy the credit

card benefits that help you make the most out of your money with the convenience and security

that you deserve. While using a visa, u can make any payment at all over that you want, for

example while using a visa credit card, it able to u for pay any good that you buy from overseas.

b) Explain two advantages of e-banking to customers as well as two advantages to the banks.

Advantages to customer are:

Convenient and greater speed in transaction

By using the electronic banking, we can use banking service very fast. For example when

we use this service we are not able to suffer for waiting at the counter to process our

business like our transaction or anything else.

Reduced transaction cost.

Besides that, by using the electronic banking we are able to reduce our transaction cost,

whereby we are not able to go to the bank just for do the transaction. Bye using this

electronic banking, we are able to use the banking service everywhere like at our house

and many more place.

Advantages to bank are:

Increase in transaction

Normally today, the factor that constraint of us today is less time. So, every second each

of us will find the alternative ways to do or manage our daily life become stable. When

most of us were using e-banking, it can increase in transaction for the bank, and it also

can give a lot of advantage of that bank.

Speed in transaction.

When most of users are use e-banking as a medium to doing their business with the

banks, it can help the bank in giving the fast service to their customer. And because of

that, the banks customers do not need wait for a long time in doing a business with that

bank.

c) State the meaning of standing instruction and provides some examples on it usage.

The standing instruction

An instruction given by a customer to a bank to remit regular interval of payment or transfer of

fund to a same person or beneficiary. The amount involved is also the same amount. Examples

of such payments will be payments for loans, insurance premium, monthly gift to the parents or

children pocket money( for children staying in boarding schools or away from parents).

QUESTION 4

a) Write short note on the following:

Negotiable Certificate of Deposit (NCDs)

The negotiable certificate of deposit (NCDs) is a certificate of deposit with a minimum face value

of $100,000. These are guaranteed by the bank and can usually be sold in a highly liquid

secondary market, but they cannot be cashed-in before maturity. For example of this certificate

is bond.

Electronic Data Interchange

Electronic data interchange (EDI) is the structured transmission of data between organizations

by electronic means, which is used to transfer electronic documents or business data from one

computer system to another computer system, i.e. from one trading partner to another trading

partner without human intervention. It is more than mere e-mail; for instance, organizations

might replace bills of lading and even cheques with appropriate EDI messages. It also refers

specifically to a family of standards.

Personal Loan

Personal loan is a loan given to an individual. This personal loan normally will have maturity

between six months to three years or more. The loan is normally paid based on monthly

instalment. Besides that, the individual can apply the loan is the individual that eighteen years

old.

Phone Banking

Most of us today are using phone banking. It is because by using phone banking, a customer can

have account inquiry, can perform payment of utility bills, can transfer funds from one account

to another and also can enquire banking information. A customer has to pay his regular phone

call charge and bank service charge if he is using this facility. The phone banking can be done

through this method voice response, voices recognition and programmable telephones.

b) List four function of Automated Teller Machine (ATM)

Account balance inquiry

Cash withdrawals

Requesting for statement of accounts

Depositing cash and cheque

JUNE 2012

PART A

QUESTION 1

a) Explain the following monetary instruments

Money Market Operations

MMO conducted by BNM to influence the liquidity situation in a system. During tight monetary

policy, the BNM will reduce liquidity by issuing or selling government paper to the market

participants.

This is to say that MMO can be conducted either through borrowing or lending by BNM in the

interbank market and also through open market operations i.e. through selling and buying

government papers in open organized market.

To ensure a smooth functioning of the MMO, BNM intervenes when the money rates are

volatile, it will inject funds into the market through purchasing of paper or outright supply of

funds when the market is tight and when the market is liquid, the reverse will happen.

Interest Rate Ceiling

BNM was involved in the setting of the minimum lending rates for bank loans (best customers’

rate) and ceiling on interest rates may be offered by banks for deposits accounts.

By end of the 1970s, BNM had begun to encourage a market-oriented system of interest rate

determination in order to reflect the true cost of funds and to reduce the distortions in the

market. ON November 1, 1983 the base lending rate (BLR) was introduced and BNM

administered the BLR. But starting from February 1, 1991; the banking institutions were free to

quote their own BLR in order to reflect each institution’s cost of funds.

b) Discuss two functions of BNM as banker and financial adviser to the government

Management of Government Accounts

BNM performs the functions of providing check facilities, accept funs and makes payments on

behalf of the government and undertakes the foreign exchange business of the government.

Sources of Funds To Government

This is done by granting advances to the government and as the lender of the last resort.

Advances are given to cover any deficit in the budget revenue and must be repaid as soon as

possible. BNM has the direction to determine the interest rate charged for the advances. But,

government has not taken this advantage.

QUESTION 2

a) List two acts introduced by BNM

CBO 1958

Islamic Banking Act 1983

b) Compare the Al-Mudharabah and Al-Murabahah principles in accordance to the Islamic

principles and concepts.

Al-Mudharabah

This is a profit sharing concept for an agreement made between two parties. One party will

provide capital and another party will be an entrepreneur. The entrepreneur will carry-out

business and both parties will share the profits according to the ratios agreed but if the

company has losses, it will be borne by bank

Al-Murabahah

This concept refers to sale of goods at a price which includes a profit margin which have agreed

by both parties. In this case the bank will purchase the goods wanted by the borrower and the

bank or lender will mark-up price. The mark-up is the profit margin mentioned.

c) Two objectives of Saving Institution and two objective of Development Finance Institution(FDI)

Saving Institutions

To promote and mobilize savings among the middle and lower-income groups

To provide a convenient and easily accessible medium to small savers

Development FDI

To promote development in the agricultural, industrial and international trade and export

sectors

To play complementary role to the banking institutions

QUESTION 3

a) Four services offered by investment bank under fee based activities

Corporate Financial Advisory Services

Include share-underwriting and issuing, corporate advice on equity restructuring, advise on

merger and take-over, advise on investment and partnership opportunities and undertaking of

feasibility studies.

Investment and Fund Management Services

Management of business investment and portfolios, trustee and management of trust funds and

unit trusts and nominee services.

Banking Intermediation Services

Management of loan syndication, acceptance and guarantee of bills and lock discounting.

b) Identify one similarity and four differences between money market and foreign exchange

market

Similarities

Both are short term market.

Differences

Money Market Foreign Exchange Market

Financial Assets are traded in Domestic currency Foreign currency

Price quoted is In rate of interest In rate of exchange

Payments Payments for the marketable securities

instruments traded are in Malaysian

Ringgit

Traded in both local and foreign

currencies

Participants Participants are citizens of the country Participants can be local and foreigners

Determination of rate Demand for the instruments are

influenced by internal rate offered in

the market

Determination of rate of exchange is

between forces of supply and demand

Financial intermediaries It is a financial intermediary between

those who have temporary excess

funds and others who are in need of

funds for short periods.

It is a financial intermediary between

sellers who possess foreign currencies

and buyers who have local currencies

who wants to acquire foreign currencies.

QUESTION 4

Define on each of the following:

a) Anti-Money Laundering

AMLA is guidelines established and formulated to address the requirement that must be

compiled with financial institution under the AMLA to effectively cambat meney laundering and

financing of terrorism activities.

b) Credit Guarantee Corporation(CGC)

CGC was established in 1972 with the objective to enable small-scale enterprises to have ready

access to bank credit at reasonable cost. Small-scale enterprises are registered businesses with

net assets up to RM500,000. In 1992 CGC launched a new scheme under the New Entrepreneurs

Fund (NEF). Small-scale enterprises also include hawkers and petty traders. Hawkers and petty

traders are businesses with net assets not exceeding RM20,000 to eligible under Loan Fund for

Hawkers and Petty Traders (LFHPT). They must be licensed hawkers and petty traders and

members of recognized trade associations. CGC schemes were also extended to the mining and

quarrying sector during the period of 1989 to 1993.

c) Provident and Pension Funds

Provident and Pension Funds are institutions that provide members and their dependents with

social security in the form of retirement, medical, death or disability benefits. Sources of fund

come from contributions from members and their employers. The contribution is determined by

using pre-determined percentage of the employee’s wage. The funds are used for investments

and at the same time a portfolio of investment are maintained to meet the members; claims.

d) Al-Ijarah

This is concept of leasing where a lessor leases an asset to a lesse. The lessee will make a series

of payments to the lessor for using the asset. Under leasing there is a principle of AL-Takjiri,

where the owner of the asset (lessor) agrees to sell the asset to the lessee after an agreed time

period and at an agreed price.

e) Capital Market

Capital market is made up of primary securities market and secondary market. Capital market

refer to the market of long-term securities investments which comprise both public and private

debt instruments. Capital market is important to assist the process of economic development by

mobilizing medium to long-term fund from the public for financing public and private

development programs.

PART B

QUESTION 1

a) Determine five main features between Current account and Saving account

Current Account

This accounts only issued by Commercial Bank and Bank Islam Malaysia Berhad. It is operated

through the use of cheques. Cheques are used for depositing money or drawing money. Interest is

not paid on such account. It provides an overdraft facility. To open a current account normally need

an introducer (reference). References are very important as they lend to support to the character

and integrity of the individual or officials of firms, companies, clubs, societies or associations and to

the existence and genuineness of their respective institutions.

Saving Account

Saving account as the name implies is a form of deposit account. Upon opening of a Saving Account,

the customer-depositors establishes a banking relationship whereby the customer-depositors places

his savings in the custody of the bank with the understanding that monies deposited may accrue

interest and be withdrawn on demand. With the Rules of the Association of Banks in Malaysia,

interest rates for Saving Account are quoted at the discretion of individual banks. Interest may be

calculated on a minimum monthly balance basis or on a daily basis.

On a minimum monthly basis, credits received up to and including the fifteenth of each month are

for the purpose of calculating interest treated as though received on the first day of the month.

Where interest is calculated on a daily basis, the balance at the end of each day is taken for the

purpose of calculating interest. Interest is payable half yearly i.e. as the end of June and December.

Banks open Saving Accounts only for individuals, societies, associations, and institutions other than

firms, corporations and business enterprises.

b) Describe four services available in transferring the funds

Cashier’s Order

A cashier’s order is also known as Banker’s Cheque. It is in a form of a cheque drawn on a bank.

It has authorized signatures of bank’s officers. It is used normally when payment by personal

cheque is not accepted or payment in cash is not advisable. It is drawn and payable at the

issuing Bank (branch) itself.

Demand draft

DD is used to remit fund to beneficiary who is at different area i.e in another town or country.

This is to say that the bank being addressed is required to pay on DD to the person or

beneficiary specified on the draft. DD can be divided into two types which is local DD and foreign

DD.

Telegraphic Transfer

TT is a mode to transfer of fund electronically by using cable, telex, fax, telephone transmission

and through Society for Worldwide Interbank Financial Telecommunication (SWIFT). TT can be

used domestically o internationally. TT can be divided into two which is outward TT and inward

TT.

Mail Transfer

Mail transfer is the same as the TT. The difference will be the message is sent through mail

rather than electronically. Please refer to Specimen 8 for applying for a mail transfer.

QUESTION 2

a) Illustrate the concept of block discounting and hire purchase of these credit facilities

Block Discounting

Block discounting is simply the purchase of a book debt such as the purchase of a block of hire

purchase agreement (debt) belonging to another bank or a dealer and charging the bank or the

dealer a lower interest rate than that contained in their agreement. Legally, it is the purchase of

100 per cent of the book debt (residue and interest in the hire purchase agreement) under the

block at a discounted rate to the dealer. Upon purchase, the dealer is appointed to handle all

activities in collection including compliance with legal requirements on behalf of the block

discounting loan provider. All block discounting facilities are usually with recourse and are

guaranteed by the dealer and their directors, partners or shareholders.

Hire purchase

The definition of hire purchase agreement is in essence a hire of goods under which the hirer

(debtor) has possession of the goods with an option to purchase and an obligation to make

payments to the owner of the goods (usually the banks) every month for a period of time. The

reality is that the hirer has every intention to purchase and become the owner of the goods. The

transactions in a hire purchase agreement are basically credit arrangements where credit in the

shape of hire purchase is granted by the retailer or more likely, by the banks introduced by the

retailer to the hirer or approached direct by the hirer himself. Thus, in legal terms, the retailer

sells the goods to the banks which then let the goods on hire purchase to the hirer. The banks

are in law both the supplier of goods and the supplier of credit.

b) Explain the features of term loan and overdraft

Term Loan

Term loan is an intermediate-term loan or sometimes it can be a long-term loan. The loan is

normally used to finance cap[ital expenditure e.g to purchase fixed assets such as machinery

and equipment. The interest on term loan is dependent on the repayment schedule. The

interest is charged once or a monthly rest if it is based on monthly repayment i.e interest is

charged on outstanding loan amount at the beginning of the month.

Overdraft

This facility is associated with a current account, meaning to say this credit facility operates by

using a current account. The current account holder must get the approval from the bank in

order to overdrawn his or her account. The bank will notify the account holder the credit limit

that he or she is allowed to have.

If the account is overdrawn, daily interest will be charged on the outstanding balance at the end

of each day but it is only debited once a month (at the end of month) to the account. If he or she

fails to utilize fully the amount allowed to be overdrawn, he or she will be charged a

commitment fee on the unused amount. Overdraft is short-term in nature.

QUESTION 3

a) Difference credit cards and debit cards

Credit Cards

These cards are used to get gods and services on credit. It has a limit on the amount to be used.

The retailer is given commission by the bank for such transaction carried out. Transactions will

be carried out by using a special machine placed together with a sales voucher.

Debit Cards

To be used by customer who does not want credit. It can be used for a single transaction debit

that is debiting of a current account in real-time or monthly debit that is giving the cardholder

the benefits of deferred payments.

b) Four benefits of using electronic banking in business transactions

Increase overall scope and quality of services

Decreases the proportion of routine transactions at branches

Customers can access the bank at their convenience

24 hours a day & speed

c) Four advantages of using ATM

24 hours operation

Minimum usage of staff for large routine transactions

Cost savings for staff and overheads

Easier accessibility and convenient

QUESTION 4

Write short notes on the following

a) Fixed deposit

FD is defined as an investment or deposit account where fund placed with a bank for a fixed

period of time to earn interest. The interest rate is free to be quoted by the bank. The fixed

period can be 1 to 60 months. The interest rate for more than 12 months can be negotiated

between the customers and the banks. For the period of one month, the minimum amount of

deposit is RM5000.

b) Online transfer

Online transfer is about transfer of fund from one account to another through the system. It’s

can be done through several ways which is internet, ATM, phone banking and manually. It is also

known as e-banking or virtual transaction. Widely used because lower cost and banking

transaction can be done at your convenience and at anytime.

c) Housing loan

IT is loan to finance the purchase of a house. A housing loan normally will have maturity

between 10 to 15 years or even 25 years. A bank usually will give a housing loan amounting up

to 95% margin of finance or of the purchased price of the house based on its current market

value.

d) Factoring

Factoring is selling accounts receivables or debtors’ accounts ( in term of invoices) to a factor

(factoring company) in order to finance continued business. Factoring is the sale of receivables

invoices at a discount, but at the same time it is a borrowing where the receivable is used as

collateral.

e) Charge cards

Charge cards are another mean for payment. They are similar to credit cards but the amount

must be paid fully every month. Examples of these cards are American Express and Diners Club.

Documents

Contents