6/10/2015. Trust & confidence. Convenience. Quality services. Excellent brand. Interest pay-out WHY NEEDED? HOW DOES IT MOBILISE DEPOSITS?

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1 GE20803 DEPOSIT & FINANCING OPERATION OF ISLAMIC BANKING MOBILIZATIONS BY CONVENTIONAL BANKS WHY NEEDED? 1. Deposit mobilization is one of the crucial functions of conventional banks it is a requirement that banks need to satisfy to tap the term business 2. The need of BANKING BUSINESS Must be maintained to secure the sustainability of the bank business of lending and investing forprofits in the future The ability of bank to fulfil its duties is an important measure of the bank s acceptance by consumersatlarge BY DR. HANUDIN AMIN LABUAN FACULTY OF INTERNATIONAL FINANCE UNIVERSITI MALAYSIA SABAH HOW DOES IT MOBILISE? Trust & confidence Convenience Quality services Excellent brand Interest pay-out THE IMPORTANCE OF Source of fund Expansion & growth Lending volume Measure of bank performance Primary source of funds for a bank to grant loans and make investments The higher the deposit amount, the bigger the lending and investments portfolio that can be maintained by the banks to sustain their expansion and future growth The banks must have adequate deposits to meet the lending volume required by the public and at the same time maintain extra cash withdrawals by depositors The level of deposits growth indicates the bank s performance in relation to customer satisfaction on interest payout and services rendered IN WHAT WAYS, SERVE AS A KEY LIQUIDITY INDICATORS? Transaction (payment) Deposit CATEGORIES OF Demand or current account Transaction deposits are maintained with the banks in effect to make payments to a 3 rd party The customer nominates the recipient and the bank honour the withdrawal as per instructions Modes of payments: (1) cheque (2) electronic Non-interest bearing deposit. Does it Islamic? Non Transaction Deposit Non-transaction deposits are maintained with banks for several purposes, i.e. for savings, investments and as trusts Savings deposits future consumption and financial emergencies Investment deposits investment purposes Trust accounts for the benefit of a third party 1

2 TYPES OF LECTURETTE #1 Current account handle outgoing payments and to accept payments from a 3 rd party an introducer needed - recipients should e nominated on the checks a monthly statement is given overdraft facility Savings account thrift depositors amounts are small both deposits and withdrawal passbook internet statement low rate interest Time deposits investment for higher interest interest based on period Multiple choice questions: 1. Continuous and adequate deposit mobilization would ensure the bank is a. Able to sustain its business of lending b. Able to sustain its investment and incurring profits c. Both a and b 2. Deposit X is used for future consumption or for financial emergencies. Deposit X is a. Savings deposit b. Fixed deposit c. Transaction deposit TYPE OF ACCOUNT VS TYPE OF ACCOUNT HOLDERS Type of Account Type of Account Holders Savings account Individuals Minor Club, societiesand associations Current account Individuals Partnership Sole partnership Club, societies and associations Trustee Fixed deposit Individuals Minor Partnership Sole partnership Club, societies and associations Trustee CALCULATION OF INTEREST ON FIXED DEPOSIT ACCOUNTS Interest (I) = Principal (P) x Time (T) x Rate quoted Where P = Principal or amount of fixed deposit T = Period from the deposit date to maturity (number of days) Sample: Ali places RM 10,000 in a one-month deposit account from 24 January to 24 February, The interest is fixed at 3.30 % per annum. Thus, the interest is calculated as: Interest = Principal x Time x Rate quoted= 10K x % = RM WITHHOLDING TAX CASE 1 NOT TAXED In Malaysia, interest received from fixed deposits account is subjected to a 5% withholding tax. Following the 1996 budget, exemption was given on the following 1. Investment amount up to RM100K for a maturity period of less than 12 months 2. Fixed deposits whose tenure is 12 months or more A resident individual deposited RM 90,000 on 1/3/2015 in a fixed deposit account for 9 months. The gains or profits will be paid on 1/12/2015. The withholding tax of 5% will not be applicable *RM90K were less than RM100K (that is any investment amount up to RM100K will be exempted, any figure beyond is taxed) 2

3 CASE 2 - TAXED CASE 3 NOT TAXED A resident individual deposited RM150,000* on 1/2/2015 in a fixed deposit account for 3 months^. The interest will be paid on 1/5/2015. The person is subjected to withholding tax. How much is that? The rate of interest applicable is 6% Interest paid = (Proceed) x month x interest x tax rate =xx.xx Interest paid = (150, ,000) x 3/12 x 0.06 x 0.05 =RM37.50 Amount of deposit = RM200K Period of maturity = 15 months* Interest rate = 7.25% *The above deposit will not be subject to the withholding tax of 5% since it is for a period of more than 12 months * Taxed because RM150K were greater than the exempted figure (i.e. RM100K) ^ Maturity is less than 12 months. This means 3 months are subjected to tax CASE 4 - TAXED RELATED BANKING SERVICES Amount of deposit = RM150K Period of maturity = 12 months Interest rate = 8% Assuming the above deposit is prematurely uplifted at 9 months* and interest is paid at the rate of 4%, the interest paid will be: Interest paid= (Proceed) x monthx interest x tax rate =xx.xx Interest paid= (150, ,000) x 9/12 x 0.04 x 0.05 =RM75 *Tenure is less than 12 months or more Earliest form of electronic Extended to include cross transactions between banks using MEPS Located at petrol stations, universities, airports etcetera ATM Provision of several machines that are selfmanaged 24 hours Cash deposit machines, check deposit machine etcetera Electronic Using smart phone for a socalled smart people Various services although limited compared with internet Suitable for moving people, e.g. LRT, bus etcetera Mobile Techno savvy youngsters and middle-aged professionals Various services offered like bill transfers Internet To corporate customers only Fund transfer, balance enquiry, FD placement, bill payment, loan payment and cheque book request Corporate desktop Deposits as a main source of funds for banks Deposits as liquidity components Deposits as investment products to customers Deposits as payment transaction accounts ROLES OF Cheapest mode of funding Contributions to bank s capital Cash basis Bank s health Low risk investment But, with the bank s expertise, the depositors have indirect access to high level investments To manage payments efficiently via current account More secure compared with cash BANK S RIGHTS AND DUTIES TO DEPOSITORS 1. To charge fees and commissions 2. To receive money fro the customer s account 3. To honour the customer s check and payment instructions 4. To maintainconfidentialityand customer s information 5. To render a statement of account 6. To abide by any mandate given by customers HOW TO REMEMBER THOSE RIGHTS & DUTIES? FRH-CSM 3

4 DEPOSITORS RIGHTS AND DUTIES TO THE BANK COST OF 1. ATM is one of the e- facilities The provisions of e- include ATM, cash 2. Deposits determine a bank s health T/F 1. ATM is one of the e- facilities The provisions of e- include ATM, cash 2. Deposits determine a bank s health T/F 1. ATM is one of the e- facilities The provisions of e- include ATM, cash 1. Deposits determine a bank s health T/F 1. Deposit contracts The deposits received under conventional banks are based on borrowing contract Banks borrow the money from depositors for a stipulated period of time, payable upon maturity with the promised interest Islamic banks, however, deposits are managed using wadiah and mudarabah contract, generally Find happiness in attending my lectures and tutorials 4

5 Wadiah is meant safeguarding of assets, where banks received the depositors money for safekeeping until a withdrawal request is made Mudarabah is made for investment with the bank based on an agreed profit sharing percentage. The bank serves as an investment manager and shares the profit (if any) with the depositors based on the ratio agreed 2. Return on deposits Under conventional regime, the return or interest on deposits is fixed and guaranteed regardless of the actual outcome of investment Under Islamic, the return or profit to depositors is subject to the actual investment outcomes Universiti Malaysia Sabah is the CORRECT TERM whilst the term University Malaysia Sabah is WRONG Malaysia is ranked 1 in terms of Islamic finance education both globally and internationally 2. Risk-sharing Under Islamic, the parties to mudarabah contracts are entitled to risk sharing. The risk higher for depositors under Islamic compared with conventional and yet Islamic provides opportunities for higher rewards should the investment yield higher profits END OF DAY #5 ALLAH (S.W.T) KNOWS BEST The first dean of the Labuan Faculty of International Finance was Assoc. Prof. Dr. Zainal Abidin Said, the father of the school and the great contributor to the establishment of the modern lecturer halls 5