islamic international trade financing

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

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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

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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.

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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


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

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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

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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.


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

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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









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

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 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

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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.

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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

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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

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

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“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.


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.


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.

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