Post on 20-Jan-2016
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2014
UNIVERSITI KUALA LUMPUR
UNIVERSITI KUALA LUMPUR BUSINESS SCHOOL
BBA (HONS) IN ISLAMIC FINANCE
ISLAMIC INTERNATIONAL TRADE FINANCING
GROUP ASSIGNMENT
(EBB 30603)
PREPARED BY:
NAME ID NUMBER
MUHAMMAD HAFIZI B. MUHAMMAD SUKI 62289112131
NURUL HIDAYAH BINTI ISMAIL 62289112147
NOR FADZILAH BT ABU 62289112046
NUR SYAHIDAH HANIS BT MEOR RITHUAN 62289113436
PREPARED FOR:
MR. TIMUR RUSTEMOV
SUBMISSION DATE:
15HB APRIL 2014
2014
THE BANK’S BACKGROUND
Public Islamic Bank Berhad (PIBB) is a wholly-owned subsidiary of Public Bank,
commenced its full-fledged Islamic banking business in 2008. Its focus is on Islamic
consumer financing and retail commercial financing to business enterprises. The fast
pace development and growing acceptance by Malaysians regardless of race and
religion calls for banking products and services that are not only Shariah compliant
but also competitive.
Public Islamic Bank’s competitive deposit and financing products are those that meet
the call. Public Islamic Bank has the added advantage in reaching out and meeting
the needs of its customers as we leverage on Public Bank's solid branding and its
large network of 259 Public Bank branches across the nation, in addition to its full-
fledged Islamic branches at Kg Baru, Kuala Lumpur and Putrajaya.
Based on our visit to the Public Islamic Bank Branch in Kg. Baru we found that PIBB
only have about five (5) products for import and export. The full information about the
products offered by gone through this report.
PRODUCTS OFFERED BY PUBLIC ISLAMIC BANK BERHAD (PIBB)
IMPORT
Documentary Credit – i/ letter of credit – i
Shipping Guarantee – i
Trust Receipt – i
Acceptance Bills – i
BANK GUARANTEE
1
2
83
7
9
5
6
4
2014
i. DOCUMENTARY CREDIT – i / LETTER OF CREDIT – i
Definition
Letter of Credit-i is a written undertaking given by the bank on behalf
of the customer to the seller (normally known as beneficiary), to the
effect that the bank will pay the seller a certain amount, as stipulated in
the Letter of Credit-i, provided that the seller complies with the terms
and conditions of the Letter of Credit-i. This facility is based on wakalah
concept where the bank acts as an agent on behalf of a company or
individual.
Flowchart and explanation
Figure 1
2014
Flows of the figure 1:
1. Importer had identify the product that exporter have.
2. Importer issued letter of credit with public Islamic bank. They entered contract
of wakalah. Public Islamic bank acts as agent for the importer.
3. As issuing bank, public Islamic bank issued the letter of credit to Ar Rajhi bank
that is act as advising bank to exporter.
4. Ar rajhi bank give the letter of credit to the exporter.
5. Exporter delivers the goods.
6. The proved that goods are already being delivering had been documentation.
The documentation of credit been given to the advising bang which is ar raji
bank.
7. Forward the document and claim payment at per document credit term.
8. Public Islamic bank does payment to Ar Rajhi bank.
9. Public Islamic bank releases the document to the importer. Importer will collect
the goods by their own.
Tenets
1) Principal
2) Agent
3) Object to be transacted
4) Offer and Acceptance
Conditions
1) Undertaking by the Bank to pay.
2) Customer MAY require to place a deposit for the full value of the DC
where the bank accepts under the concept of Wadiah Yad
Dhamanah.
3) Does not involve bank’s financing.
4) Bank charges commission under the principle of Al-Ujr(fee).
5) Subject to UCP 600.
2014
Advantages and Disadvantages
- To importer
Advantages Disadvantages
Importer can secure their future
business plan when exporter
guarantees to meet the terms and
condition of letter of credit with
documentary proof.
Protects importer and minimize
time as bank acts on behalf of
importer. It’s start by opening bank
remits amount after satisfaction of
all terms and condition of letter of
credit with documentary proof.
Reducing the risk of non
performance exporter. Its because
exporter also been protects with
confident of bank approved to act
as agent to the importer. Exporter
will have commitment of making
shipments.
LC-i is operate based on
documentation which is cant make
the importer or the issuing bank
verify on physical of the goods on
quality,quantity or other
parameters.
Price of the goods change
because of currency fluctuation in
period of order. The payment will
be differ. It also effect the goods
price in the importer market.
- To exporter
Advantages Disadvantages
Minimizing credit risk because of
the geographical distance
between importer and exporter is
far away.
Importer can’t deny any payment
increasing by raising dispute on
qualities of the goods as the credit
Certain charges and cost need to
pay by exporter. Either to the bank
or importer insists to pay such
costs. It will be extra expenses to
the exporter.
Some of the LC-i been issued is
not from prime bank. So the bank
2014
term are based on documentation.
Exporter can replan their futher
business activities because of
security provides by LC-i.
In documentation every thing have
been mention well in advance of
shipment and there are no
confusion to the importer and it
can save minimize time used.
Exporter can make financing with
any bank for pre-shipment
because letter of credit is ‘safe
export order’.
Money can be received from the
importer on time because advising
bank will pay first to the exporter.
is not proper to follow the guidlines
of documentary credit.
Policy of the country may give
hardship to the exporter to make
shipping to the importer country.
The expensess for opening,
negotiating and other procedures
of letter of credit is high compare
to other payment methods.
Currency fluctuation that change
in period of shipping good may
create lose to the exporter. The
price of the good may
decrease.also the payment.
Comparison between DC- i / LC-i with the conventional
Letter of credit – i Letter of credit
Reimbursement upon receipt of
complied documents at the
counter of the Issuing Bank.
Not subject to 2 tier interest rate.
Cost: only the opening
commission.
Reimbursement from the
nominated reimbursing bank.
Subject to 2 tier interest rate.
Cost: Opening commission plus
the 2 tier interest rate.
Calculation (Apply of Letter of Credit-i )
2014
Trade Bills-i - Letter of Credit-i (Payable on demand)
Amount Limit: RM__________________
Commission Letter of Credit-i : ______________% per month
Charge and fees
Fees and charges Amount (RM)
Commission
Issuance of Letter of Credit
(LC-i)
Amendment of LC-i
(Extension of LC-i validity/
increase of amount)
Stamp duty
Letter of Offer
Other Security Document
Letter of Set-Off
Letter of Pledge
Original LC-i
Application of LC-i
Handling Fee
Other amendments of LC-i
LC-i Discrepancy Fee:
Foreign
Local
0.1% per month Min. RM20-00
0.1% per month Min. RM20-00
Nominal
Ad valorem
Al valorem
Waived
RM10-00
RM20-00 flat
RM100-00 equivalent
RM50-00
2014
ii. SHIPPING GUARANTEE – i
Definition/ about the product
Shipping Guarantee - i (SG-i) is to assist importers in securing
delivery goods immediately before receipt of the shipping documents.
SG-i is an indemnity given by the customer (Consignee), countersigned
by the Bank, to a shipping company or its agents to allow the shipping
company to release the goods to the customer(consignee named in the
Bill of Lading) without the presentation of the original Bill of Lading.
This facility is based on kafalah concept which refers to a contract of
guarantee or a surety given by the Bank who agrees to guarantee a
liability of a customer/ applicant in case of defaults in fulfilling his
obligation.
Flowchart and explanation
2014
Flowchart + explanation
Tenets
1. Guarantor
2. Principal
3. Beneficiary
4. Article in the Guarantee
5. Offer and acceptance
Conditions
1. SG be issued to customers whose documents drawn on the bank’s
LC (depending on the bank’s policy)
2. Customer must has SG facility or combined limit of LC/TR-i facility
(depending on the bank’s policy)
3. Must submit a copy of commercial invoice and non negotiable bill of
lading.
4. Letter of indemnity in favour of the bank signed by authorized
signatory.
Exporter’s Bank
Importer
Bank of Japan(issuing bank)
ExporterShipping company
(or other carrier)
4. Submit application
8.Return trust receipt
5. Present shipping guarantee
2. Deliver the documents
1. Deliver goods
3. Deliver Bills posterior to the arriving date of goods
6. Take cut of bond
7. Exchange shipping guarantee with the original Bills of Lading
2014
Advantages Disadvantages
Customer can take delivery of
goods immediately.
Customer will not have to incur
port storage/ demurrage charges.
Enables the customer to sell the
goods without delay.
If the original SG-i is not return to
the Bank within three months,
additional commission of 0.5%
p.a., minimum RM50.00 will be
charged upfront every three
months until the original SG-i is
returned for cancellation.
Advantages & Disadvantages
Comparison between SG- i with the conventional
Shipping Guarantee- i Conventional
Is based on the principle of khafalah
or dhamanah which can be defined
as surety given by one party who
agrees to discharge a liability of a
third party in case of the third party
defaults in fulfilling his obligation.
Is an indemnity given by the
consignee, countersigned by the
bank to a shipping company or its
agent so that the shipping company
may release the merchandise to the
consignee named in the SG without
the presentation of the original Bill
of lading.
Is an indemnity given by the
consignee, countersigned by the
bank to a shipping company or
its agent so that the shipping
company may release the
merchandise to the consignee
named in the SG without the
presentation of the original Bill
of lading.
Calculation
Kafalah concept:
2014
FV= Face value T = Period of guarantee (days)
C = Bank commission (1% p.a)
iii. MURABAHAH TRUST RECEIPT –i
Definition
Trust receipt-i (TR-i) facility is a form of advance or credit facility made
available by the Bank to the customers. It is a financing facility whereby the
Customer appoints the Bank to purchase the goods from the seller on behalf
of the Customer. The Customer then purchases the goods from the Bank at
Bank’s Sales Price which includes the profit margin.
The Bank retains the legal title to the goods but relinquishes physical
possession to the buyer/ importer of the goods who acts as trustee or agent of
the Bank. The Customer will pay the Bank (outstanding amount plus profit
margin) on or before maturity of the TR-i.
TR-i is strictly for financing of working capital requirement and must not
be used to finance purchase of fixed assets i.e. plant and machinery. There
is no minimum period of financing and the maximum period must not exceed
the approved financing tenure generally subject to a maximum period of 180
days.
Compensation = FV x C x T
36500
Example:
Compensation = RM3,000,000 x 1 x 90
36500
= RM 7397.26
2. Supplies goods to customer
2. Purchase goods on behalf of the bank
5. Pays selling price (SP) 4. Sells the goods on maturity date on cost plus profit margin (SP) & settlement on deferred payment term
3. Settlement the purchase price on cash basis as per the invoice
2. Supplies goods to customer
1. Purchase goods on behalf of the bank
5. Pays selling price (SP) 4. Sells the goods on maturity date on cost plus profit margin (SP) & settlement on deferred payment term
3. Settlement the purchase price on cash basis as per the invoice
2. Supplies goods to customer
1. Purchase goods on behalf of the bank
5. Pays selling price (SP) 4. Sells the goods on maturity date on cost plus profit margin (SP) & settlement on deferred payment term
3. Settlement the purchase price on cash basis as per the invoice
2014
The Shariah concept applied for this facility is Murabahah (cost plus or mark
up sales) concept. This is a contract where the goods will be delivered
immediately and the price is paid in lump sum at a later date. The Customer
will get from this product is the limited amount to pay with the profit rate of
effective and contracted profit rate plus the base financing rate (BFR). On the
other hand, the Trust Receipt-i is payable on demand and the total amount
must pay back is inclusive of the charges by the bank.
Flowchart and explanation
Flowchart
Flows of the diagram:
1. Customer is appointed as purchasing agent for the bank to purchased
the goods.
2. Supplier will supplies the goods to the customer.
3. Then, the Bank will settles the purchased price on the cash basis as per
invoice the Bank received from the supplier.
4. Bank subsequently sells the goods to the customer at a price which
includes the Bank’s profit and customer can pay on deferred payment.
SUPPLIER
BANK (SELLER)
CUSTOMER (BUYER)
2014
5. Customer will pay the selling price on maturity to the bank.
Conditions
1. The cost of the goods must be revealed/ disclosed to the customer
2. The price and tenor of the lump sum deferred payment must be agreed
by upon by bank and the customer.
3. Customer is appointed as the purchasing agent for the bank to
purchase the merchandise.
4. Bank will effect payment using its own funds to the supplier directly or
through its correspondence agent.
5. Bank subsequently sells the merchandise to the buyer at a price which
includes in the bank’s profit
6. Customer is allowed to pay on deferred term depending on the trade
cycle of the business concern.
7. Application for financing imports/ domestic purchases.
8. Related supported documents; invoice, transport documents and
others.
9.
Advantages & Disadvantages
Advantages and disadvantages TR-i
ADVANTAGES DISADVANTAGES
The bank purchases the goods from the
seller at the Bank’s purchase price and
sells the goods to customer at the
Bank’s selling price. (Bank’s purchase
price plus Bank’s profit).
The Bank need to suffer the loss if the
Customer can not make payment and
do not want to bear the loss.
ADVANTAGES (continued) DISADVANTAGES(continued)
The customer pays the Bank’s selling price
to the Bank on maturity date of financing.
The Customer will face the risk of
undelivered goods from the
2014
supplier/partner.
The transaction is transparent without any
hidden charges since all the amounts are
disclosed by the bank. Help the customer
to do trading by provided the financing at
first.
Further utilization of trade facilities shall
not be allowed.
Provide Customer with short term
financing in both Malaysia Ringgit(RM)
and foreign currency.
For trust receipt-i not paid amount on
maturity date “ta’widh” (compensation)
will be imposed at the Islamic Interbank
Money Market(IIMM) rate calculated
from the maturity date until the date of
payment.
Comparison between TR- i with the conventional
Murabahah Trust Receipt - i VS Conventional Trust Receipt
MURABAHAH TRUST RECEIPT-i CONVENTIONAL TRUST RECEIPT
Based on the concept of buy and sell on
deferred payment thus creating a debt
Base on lending concept
Financing is for full invoice value Financing is for full invoice value
The bank buys the goods and sells it at
bank’s selling price(SP) comprising the
cost and the bank’s profit margin
Interest is charged on current rate at a
fixed margin above the current base
lending rate
The profit rate is fixed throughout the
financing period
Base lending rate fluctuates. The rate
may change during the financing tenor.
Rebate is given for early settlement
Calculation
Calculation from the PIBB
2014
TR- i Financing
Selling Price = C (r X t) + 1
(36500)
SP= Selling price r = Profit rate
C = Cost of the merchandise T = tenor of financing
Example:
SP = ? r = 4%
C = RM 2,000,000 T = 120 days
Selling price = RM 2,000,000 (4% x 120days) + 1
(36500)
= RM 2, 026,301. 37
(cost plus mark up)
2014
Formula for computing ibra’ (rebate)
Rebate = FV x R x (T- U)
36500
Example :
Rebate = RM 300,000 x 10 x (90days – 75days)
36500
= RM 1232.88 @ RM 1233.00
FV = Face value or maturity value T = Number of days remaining to maturity
R = Annual rate of profit U = Due date after rebate
(% per annum)
Additional information
Fees and charges
- Stamp duty
- Other security document (at a nominal price)
i. Letter of offer
ii. Charge Annexure (with title, if applicable)
iii. Deed of Assignment (without title, if applicable)
iv. Letter of Guarantee/ Letter of set off (if applicable)
2014
Major risks
Instead of obtaining the benefits there are also risks that the Customer should bear
which are all amount outstanding of expired facility shall be levied with compensation
rate or any other rate determined by Bank Negara Malaysia (BNM).
Then, the collateral of the Customer may be foreclosed if the Customer do not keep
up payments on the facility.
iv. ACCEPTANCE BILLS – i
Definition
AB-i is a bill of exchange, which is drawn on or drawn by the Bank,
payable at a specific date in the future, accepted by the
purchaser/buyer, thus creating a debt (securitization) owing to the
Bank.
The bank in turn may sell the IAB in the secondary market at a discount
value under the Bay’ al-Dayn concept.MurabahahTrust Receipt, hence,
can be securitized in the Form of AB-i.
ACCEPTED BILLS-i by PUBLIC ISLAMIC BANK
A facility granted to customer to finance purchases sales of trading goods or
as working capital. AB-i is a usance bill of exchange drawn by the customer
and accepted by the Bank to finance business- related purchases or sales of
goods to another person who may be a resident (any party within Malaysia) or
non-resident (any party outside Malaysia), evidenced by proper and adequate
documentation.
AB-i facilities are used only for genuine working capital requirements and must
not be used to finance purchase of fixed assets or services. Maximum period
must not exceed the approved financing tenure subject to a maximum period
of 180 days. The minimum financing amount is set at RM50,000 and should
be in multiples of RM1,000.
2014
At the maturity date of the AB-i, the bank must pay the holder of the AB-i and
on the same day the customer must reimburse the bank for settling the AB-i.
AB-i is governed by BNM’s Guidelines on Accepted Bills-i.
Shariah concept applicable
For AB-i Purchase - Murabahah (cost plus or mark up sales) is used where the
goods is delivered immediately and the price is paid in lum sum at a later date.
For AB-i Sales the concept is Bai’ Al Dayn which means Sale of Debt.
Flowchart + explanation
Conditions
1) It must exist in corporeal form
2) It must be owned by the seller
3) It must not be a haram material or an asset used for a haram purpose
BANK CLIENT3. Sale of Debt
4. Payment via cash
SUPPLIER
2. Supplier will pay on end credit term
1. Client sells goods
5. On maturity, client collects debt and pay to Bank
2014
4) It must be free from encumbrances
5) It must be specified
6) It must not be a ribawi material, i.e. gold, silver or currency (because an
AB-i, as all Islamic Negotiable Instruments, involves deferred payment.
Payment in a sale of ribawi material cannot be deferred)
Advantages & Disadvantages
ADVANTAGES DISADVANTAGES
Alternative mode of financing
Competitive financing rate at the
prevailing RM Islamic Inter-bank
Money Market rate
Competitive financing rate at the
prevailing RM Islamic Inter-bank
Money Market rate
Provide short term working capital
financing.
Some importers may not be able
to open Letters of Credit due to
the lack of credit facilities with their
bank which consequently inhibits
export growth.
Comparison between AB- i with the conventional
ISLAMIC ACCEPTANCE BILLS CONVENTIONAL ACCEPTANCE BILLS
Based on bay al dayn principle or
sale of debt
Payment at tail-end
The Islamic Bank is the acceptor
and the customer is the drawer
Based on discounting
The customer pays the interest
plus accepts commission upfront
either by the bank lending
customer current account or
utilizing overdraft facility
Finances only up the nearest
thousand. The customer has to top
2014
up the differences upfront
The bank is always the acceptor
and the customer is drawer.
AMOUNT OF FINANCING
An IAB may be drawn equal to but not exceeding the financial value of the trade
transaction as indicated in the supporting documents.
The financial value of a trade transaction shall be determined as follows:
a) In the case of IAB purchases, that amount of money payable by the acceptor of
the IAB for the full amount of the bank‘s selling price (calculated as per below), which
includes payment to supplier, plus other separate payments to relevant parties (e.g.
import duties and insurance premium etc.), if applicable, and the bank‘s profit margin.
Calculation
FOR FINANCING PURCHASES / IMPORT
Example:
IV= RM 30,000 r = 4% t = 90 days
FV = 30,000 x [1+ 4(90)]
36500
= RM 30,295.90
2014
FOR FINANCING SALES / EXPORT
Example:
COMISSION FOR ACCEPTANCE BILLS-i
Additional information
IV= RM 50,000 r = 3% t = 120 days
FV = 50,000 x [1- 3(120)]
36500
= RM 49,506.85
2014
Islamic Acceptance Bills:
A bill that could be accepted by the bank (IAB / Export) or customer (IAB/
import) A bill that is only accepted by the bank
IAB-import /purchase has an underlying Murabahah (mark-up contract)
IAB-export/sales is created from Bai‘al-Dayn (sale of debt contract) BA is
based on lending
Penalty charged for late payment. Interest penalty is imposed
Only halal goods may be transacted No such restriction
The original creditor who is the bank in the case of IAB import / domestic
purchase will draw the bill and customer will accept the bill.
v. BANK GUARANTEE- i
Definition
“Bank Guarantee (BG) is a contract made between one party and
another whereby the first party agrees to discharge the liability of a
third party in case of a default by the third party”
According to the above statement, Bank Guarantee is the commitment of
bank to liable the responsibility of the customer in case of a default.
Meaning that, the responsible of the buyer have been transferred to the
bank in terms of the payment that should be done to the seller if the buyer
is unable to settle those payments. It usually deals between businessman
and Bank.
“The letter of guarantee constitutes an undertaking to pay an agreed
sum if the customer fails or defaults in fulfilling his obligations under
the terms of the guarantee”
While, base on this statement, it is like the Bank itself take the
responsibility to act as guarantor to liable to the obligation. This will follow
under the terms of the guarantee. As we already know, in any kind of
transaction or economic activity that we deal with the Bank, we should
2014
know some condition that we should fulfils in order to issue the financing or
let say the Bank Guarantee itself.
CHARACTERISTIC OF BANK GUARANTEE-i
In the contract of Bank Guarantee-I, they are several parties who involve in the
contract. They are guarantor, who is the Bank itself, the debtor or the customer of the
Bank who issue the Bank Guarantee-i and the creditor or we can say, the seller.
Tenets
Figure 1.1 : The party who involve in Bank Guarantee-i
SHARIAH CONCEPT
The Shariahconcept that have been applied in the Bank Guarantee-i for Public
Islamic Bank is the Kafalah.
Guarantor or Obligator ( Bank )
Debtor and Beneficiary ( Client )
Creditor
2014
“Kafalah is a contract of guarantee or a surety given by the Bank who agrees to
guarantee a liability of a customer or applicant in case of the latter defaults in
fulfilling his obligation”
As from this , we can see that Kafalah is a guarantee or obligation undertaken
by the guarantor to fulfill the obligations of another party towards a third person,
which is the debtor itself. In this concept of kafalah, a creditor have the alternative to
settle their problem in case of the Government liable to the case of default and the
construction company just leave the construction activity.
It shows that Islam always give us guidance to help us to find solution in any
problem that we have to face in this life. I always remember with the words by Imam
Ghazali. He said that, we need to give a person some space or maybe sometime to
settle their debt. So, we should not force people if they cannot pay their debt. But,
give them space and time. Then, life become more calm. Like in this case, the
Government do not have to find so much steps in getting back the loss done by the
construction company but they have the alternative in solving the problem and they
will get the money from Bank.
Flowchart and explanation
Figure 1.2 : Flowchart of Bank Guarantee-i
BUYER(IMPORTER)
COLLECTING BANK
SELLER(EXPORTER)
2014
Flows of the Figure 1.2:
1) As we can refer to the Figure 1.2 above, they are three parties involve in the
Bank Guarantee-I , which are buyer, seller, and the guarantor or collecting
Bank. First of all , we cannot see the numbering because there are some
error occurred, but I try to explain in detail.
2) So, the activity start with the agreement between buyer and the seller. They
both agree that the buyer’s bank are going to guarantee the payment if
default. Second, the buyer will issue Bank Guarantee –I to the bank , let say
Public Islamic Bank , in order for a payment guarantee.
3) The Public Islamic Bank will gives the seller of a payment guarantee, which is
either through mail or any mode of payment.
4) The seller will provide the commodity or any goods that have been requested
by buyer, and they are going to attach or issue the invoice to the buyer itself.
5) The buyer will pays for the commodity or goods that have been requested
according to the due date and they can refer to the invoice stated all the
information. Sixth, the buyer performs the payment and the seller does not
make any complaint regarding the payment.
6) Thus, it shows that the guarantee expires without being used. Now, if the
buyer cannot make payment on the due date, the seller will request the Public
Islamic Bank to give them all the portion that have been placed by the buyer
based on their early agreement and according to the condition, in which the
seller will show the written demand to the bank with the unpaid invoice.
7) Then, Public Islamic Bank will examine the document , if there is complies with
the guarantee, bank will pay immediately to the seller. At last, Public Islamic
Bank will notify to buyer regarding guarantee and write off the paid amount
with buyer when making payment.
Advantages & Disadvantages
ADVANTAGE DISADVANTAGE
Bank guarantees are quite
cost saving as compared
with bank loan
Banks take security over
assets and call upon them
if they need to recover
2014
BANK GUARANTEE-I
costs
Gives you an option if you
have equity and cash isn’t
available
Full credit application
required
Reduction of risk inherent
in transaction
In terms of the advantages,first, the Bank guarantee are quite cost saving as
compared with bank loan. As we can refer in Figure 1.2, let say we take the
commission for Tender Guarantee, so the amount is 0.60 % per year of 3 million .
Meaning that, Public Islamic Bank will get the commission of RM 18 000 in every
single year. But, if we deal with bank loan, the amount is around 5% per year of 3
million. So, the bank will receive commission of 150, 000. From this , it shows that
Bank guarantee is much cost saving.
Second, it gives an option if the company has equity and cash isn’t available .
So, here it will be one of the alternatives if the cash are not available at the company
or let say the company of construction cannot proceed the construction because of
many problem.
Fees and Charges
Commission
Tender guarantee 0.60% p.a Min RM50.00
Performance guarantee 1.00% p.a Min RM50.00
Financial guarantee (government) 1.00% p.a Min RM50.00
Financial Guarantee (Non-government) 1.25% p.a Min RM50.00
2014
So, this bank guarantee will give the solution and let the Government settle or
proceed engaging with other construction business. The government will not liable to
the loss but the construction company itself will liable the loss base on their own
weakness.
Third, the last advantage is that ,reduction of risk inherent in transaction. As we
can take from the same analogy above, when government and construction company
appoint bank guarantee, they have reduce all the risk that they should liable.
In the context of government, they feel safe as their risk had been reduced, they can
take all the money that construction company place at the bank base on certain
condition if in case default.
Then, in context of the construction company, they will try to provide the best service
or good work to the building as they know, the money that they put at the bank under
Bank guarantee will be taken if they involve in default. So, this activity reduce the
risk.
Now, we would like to explain on the disadvantages of the Bank guarantee-I . First,
Bank take security over assets and call upon them if they need to recover
costs. So, this is the disadvantage towards the debtor as the money that they place
at the bank under Bank Guarantee-I is the power of the bank to take security over
the money. So, if the debtor face the default or anything, bank will easily call upon
the creditor if they need to recover costs.
Second, the disadvantage is that ,the full credit application is required. So, this is
also the disadvantage towards the debtor or the construction company. After they
both party agree with their agreement, the construction company need to place full
credit, let say if the government decide 3million need to place at the bank under bank
guarantee. So, the construction company needs to make full credit application to the
bank appointed by the government.
Calculation
The calculations for Bank guarantee-i is just the same with the Shipping Guarantee-i
which is:
Bank Guarantee-i
FV x C x T (days)
36500
2014
Formula for Ta’widh on overdue instalmentt(s) :
Overdue Instalment(s) X Ta’widh Rate X No. Of Overdue day (s)
365
Figure 1.3 : Overdue Instalment
Now, we would like to explain on the calculation in Bank guarantee-I for
Public Islamic Bank. First, as we can refer on above figure 1.3, it is
regarding on overdue instalment. So, this payment should be done if
they fail to pay any instalment of the facilities from date of the first
disbursement until the date of the maturity of facilities. Here, the
compensation rate is 1 % per year on any overdue amount or any rate
approved by our central bank, Bank Negara Malaysia.
Late payment charge on the remaining outstanding balance:
Outstanding balance X 1% p.a X No. of Overdue day(s)
365
Figure 1.4 : Late payment charge outstanding balance:
Bank Guarantee-i
FV x C x T (days)
36500
2014
Next, we proceed with the late payment charge on the remaining
outstanding balance. This charge need to be done if the account
remains in arrears and upon recall of the facility or brought to court for
let say a judgment as it is before the date of maturity. So , the late
payment will charge the debtor with a 1 % per year on the remaining
outstanding balance that are going to be imposed.
Late payment charge after maturity
Outstanding balance X AFR X No. of Overdue day(s)
365
Figure 1.5:Late payment charge after maturity
Finally, the last calculation is regarding on late payment charge after
maturity. So, this charge is when the debtor fail to pay any installment,
and they also are continue more than date of maturity of the facilities,
so the compensation rate will be set to Bank’s Average Finnancing
Rate (AFR) on the outstanding balance or any rate that have been set
by Bank Negara Malaysia.