PUBLIC ISLAMIC BANK BERHAD UNIVERSITI KUALA LUMPUR UNIVERSITI KUALA LUMPUR BUSINESS SCHOOL BBA (HONS) IN ISLAMIC

FINANCE

2014

ISLAMIC INTERNATIONAL TRADE FINANCING GROUP ASSIGNMENT (EBB 30603)

PREPARED BY: NAME MUHAMMAD HAFIZI B. MUHAMMAD SUKI NURUL HIDAYAH BINTI ISMAIL NOR FADZILAH BT ABU NUR SYAHIDAH HANIS BT MEOR RITHUAN ID NUMBER 62289112131 62289112147 62289112046 62289113436

PREPARED FOR: MR. TIMUR RUSTEMOV

SUBMISSION DATE: 15HB APRIL 2014

PUBLIC ISLAMIC BANK BERHAD THE BANKS BACKGROUND

2014

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 Banks 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 fullfledged 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

PUBLIC ISLAMIC BANK BERHAD i. DOCUMENTARY CREDIT i / LETTER OF CREDIT i Definition

2014

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

2 4

8 3 7 Figure 1

PUBLIC ISLAMIC BANK BERHAD Flows of the figure 1: 1. Importer had identify the product that exporter have.

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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 banks financing. 4) Bank charges commission under the principle of Al-Ujr(fee). 5) Subject to UCP 600.

PUBLIC ISLAMIC BANK BERHAD Advantages and Disadvantages Advantages Importer can secure their future business plan when exporter To importer Disadvantages LC-i is operate based

2014

on

documentation which is cant make the importer or the issuing bank verify on physical of the goods on quality,quantity parameters. or other

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. Its start by opening bank remits amount after satisfaction of all terms and condition of letter of credit with documentary proof. 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.

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.

To exporter

Advantages Minimizing credit risk because of the geographical distance

Disadvantages 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.

between importer and exporter is far away. Importer cant deny any payment

PUBLIC ISLAMIC BANK BERHAD increasing by raising dispute on qualities of the goods as the credit term are based on documentation. Exporter can replan their futher business activities because of

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Some of the LC-i been issued is not from prime bank. So the bank 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,

security provides by LC-i. In documentation every thing have been mention well in advance of shipment and there are no

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

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.

decrease.also the payment.

Comparison between DC- i / LC-i with the conventional Letter of credit Reimbursement from the

Letter of credit i

Reimbursement upon receipt of complied documents at the

nominated reimbursing bank. Subject to 2 tier interest rate. Cost: Opening commission plus the 2 tier interest rate.

counter of the Issuing Bank. Not subject to 2 tier interest rate. Cost: only the opening

commission.

PUBLIC ISLAMIC BANK BERHAD 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 Amount (RM)

Fees and charges Commission

Issuance of Letter of Credit 0.1% per month Min. RM20-00 (LC-i) Amendment of LC-i 0.1% per month Min. RM20-00

(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 Nominal Ad valorem Al valorem Waived RM10-00

Handling Fee Other amendments of LC-i LC-i Discrepancy Fee: RM20-00 flat

Foreign Local

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.

PUBLIC ISLAMIC BANK BERHAD Flowchart and explanation

2014

Flowchart + explanation Exporters 3. Deliver Bills posterior to the Bank

arriving date of goods 4. Submit application

Bank of Japan (issuing bank)

8.Return trust receipt

5. Present shipping guarantee

2. Deliver the documents

Importer
7. Exchange shipping guarantee with the original Bills of Lading

Take cut of bond

6.

Exporter

1. Deliver goods

Shipping company (or other carrier)

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 banks LC (depending on the banks policy) 2. Customer must has SG facility or combined limit of LC/TR-i facility (depending on the banks policy) 3. Must submit a copy of commercial invoice and non negotiable bill of lading.

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4. Letter of indemnity in favour of the bank signed by authorized signatory.

Advantages

Advantages & Disadvantages Disadvantages 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

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.

months until the original SG-i is returned for cancellation.

Comparison between SG- i with the conventional Conventional Is an indemnity given by the

Shipping Guarantee- i

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.

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.

PUBLIC ISLAMIC BANK BERHAD Calculation

2014

Kafalah concept: FV= Face value C = Bank commission (1% p.a) T = Period of guarantee (days)

Compensation = FV x C x T 36500

Example: Compensation = RM3,000,000 x 1 x 90 36500 = RM 7397.26

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 Banks 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

PUBLIC ISLAMIC BANK BERHAD

2014

the approved financing tenure generally subject to a maximum period of 180 days. 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 2. 2. Supplies Supplies goods goods to to customer customer

2. Purchase goods on 1. behalf of thegoods bank on 1. Purchase behalf of the bank SUPPLIER 5. Pays selling price (SP) on maturity date (SP) 5. Pays selling price on maturity date

CUSTOMER (BUYER) 4. Sells the goods onthe cost plus 4. Sells goods profit margin (SP) on cost plus & settlement on profit margin (SP) deferred payment & settlement on term deferred payment term

3. Settlement Settlement the the purchase purchase price price 3. on on cash cash basis basis as as per per the the invoice invoice

BANK (SELLER)

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.

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4. Bank subsequently sells the goods to the customer at a price which includes the Banks profit and customer can pay on deferred payment. 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 banks 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 The Bank need to suffer the loss if the seller at the Banks purchase price and Customer can not make payment and sells the goods to customer at the Banks do not want to bear the loss. selling price. (Banks purchase price plus Banks profit).

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ADVANTAGES (continued) The customer pays the Banks selling price to the Bank on maturity date of financing.

DISADVANTAGES(continued) The Customer will face the risk of undelivered goods from the supplier/partner.

The transaction is transparent without any Further utilization of trade facilities shall hidden charges since all the amounts are not be allowed. disclosed by the bank. Help the customer to do trading by provided the financing at first. Provide Customer with short term For trust receipt-i not paid amount on financing in both Malaysia Ringgit(RM) maturity date tawidh (compensation) and foreign currency. 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 Base on lending concept deferred payment thus creating a debt Financing is for full invoice value Financing is for full invoice value

The bank buys the goods and sells it at Interest is charged on current rate at a banks selling price(SP) comprising the fixed margin above the current base cost and the banks profit margin lending rate

The profit rate is fixed throughout the Base lending rate fluctuates. The rate financing period Rebate is given for early settlement may change during the financing tenor.

PUBLIC ISLAMIC BANK BERHAD Calculation

2014

Calculation from the PIBB TR- i Financing

Selling Price = C (r X t) + 1 (36500)

SP= Selling price C = Cost of the merchandise

r = Profit rate T = tenor of financing

Example:

SP = ? C = RM 2,000,000

r = 4% T = 120 days

Selling price = RM 2,000,000 (4% x 120days) + 1 (36500)

= RM 2, 026,301. 37 (cost plus mark up)

PUBLIC ISLAMIC BANK BERHAD Formula for computing ibra (rebate)

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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 R = Annual rate of profit (% per annum)

T = Number of days remaining to maturity U = Due date after rebate

Additional information

Fees and charges Stamp duty Other security document (at a nominal price) i. ii. iii. iv. 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). Letter of offer Charge Annexure (with title, if applicable) Deed of Assignment (without title, if applicable) Letter of Guarantee/ Letter of set off (if applicable)

PUBLIC ISLAMIC BANK BERHAD

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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. 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 BNMs Guidelines on Accepted Bills-i.

PUBLIC ISLAMIC BANK BERHAD Shariah concept applicable

2014

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

5. On maturity, client collects debt and pay to Bank

3. Sale of Debt

BANK
4. Payment via cash

CLIENT

2. Supplier will pay on end credit term

1. Client sells goods

SUPPLIER

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 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)

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Advantages & Disadvantages

ADVANTAGES 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.

DISADVANTAGES 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 CONVENTIONAL ACCEPTANCE BILLS Based on discounting The customer pays the interest plus accepts commission upfront either by the current bank lending or

ISLAMIC 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

customer

account

utilizing overdraft facility Finances only up the nearest thousand. The customer has to top up the differences upfront The bank is always the acceptor and the customer is drawer.

PUBLIC ISLAMIC BANK BERHAD AMOUNT OF FINANCING

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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 banks 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 banks profit margin.

Calculation

FOR FINANCING PURCHASES / IMPORT

Example: IV= RM 30,000 r = 4% FV = 30,000 x [1+ 4(90)] 36500 = RM 30,295.90 t = 90 days

PUBLIC ISLAMIC BANK BERHAD FOR FINANCING SALES / EXPORT

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Example: IV= RM 50,000 r = 3% t = 120 days

FV = 50,000 x [1- 3(120)] 36500 = RM 49,506.85

COMISSION FOR ACCEPTANCE BILLS-i

Additional information

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 Baial-Dayn (sale of debt contract) BA is based on lending

PUBLIC ISLAMIC BANK BERHAD Penalty charged for late payment. Interest penalty is imposed Only halal goods may be transacted No such restriction

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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 know some condition that we should fulfils in order to issue the financing or let say the Bank Guarantee itself.

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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

Guarantor or Obligator ( Bank ) Debtor and Beneficiary ( Client ) Creditor

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. 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.

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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

BUYER (IMPORTER)

SELLER (EXPORTER)

COLLECTING BANK

Figure 1.2 : Flowchart of Bank Guarantee-i

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 buyers bank are going to guarantee the payment if

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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 Banks take security over cost saving as compared assets and call upon them with bank loan if they need to recover costs BANK GUARANTEE-I Gives you an option if you Full credit application have equity and cash isnt required available Reduction of risk inherent in transaction

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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.

Fees and Charges Commission Tender guarantee Performance guarantee Financial guarantee (government) Financial Guarantee (Non-government) 0.60% p.a Min RM50.00 1.00% p.a Min RM50.00 1.00% p.a Min RM50.00 1.25% p.a Min RM50.00

Second, it gives an option if the company has equity and cash isnt 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. 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.

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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 = RM 1,000,000 x 1 x 120 (days) 36500 = RM 3287.67

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Formula for Tawidh on overdue instalmentt(s) :

Overdue Instalment(s) X Tawidh 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:

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.

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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 Banks Average Finnancing Rate (AFR) on the outstanding balance or any rate that have been set by Bank Negara Malaysia.