DEPARTMENT OF QUANTITY SURVEYING

FACULTY OF ARCHITECTURE, PLANNING AND SURVEYING

UNIVERSITI TEKNOLOGI MARA SARAWAK

DQS 356

CONSTRUCTION ECONOMICS III

ASSIGNMENT 2 :

DEVELOPMENT FINANCE

PREPARED BY :

1. Muhammad Aliff Haiqal Bin Zulkifli (2019247308)

2. Muhammad Yazid Bin Othman (2019421918)

3. Aliesa Binti Sahdi (2019685096)

4. Muhammad Aiman Nurfirdaus Bin Samsudin (2019685124)

5. Muhammad Ajmal Farhan Bin Muliadi (2019258406)

PREPARED FOR : SR DR AHMAD FAIZ ABD RASHID

CLASS : AP114 6E

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 AKNOWLEDGEMENT

Thankfully , with relentless effort , we are able to successfully complete the assigned tasks
while adding knowledge on the topic which is Assignment 2(Development Finance)

The highest appreciation is especially to Sr. Dr. Ahmad Faiz Abd Rashid our lecturer , for
giving knowledge and encouragement in completing this task . Without his guidance , this
task may not be able to be completed successfully by all of us.

Next, guidance from friends is also one of the motivators for us . The knowledge we gain
during the completion of this assignment , we will practice in daily life.

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 TABLE OF CONTENT

CONTENT PAGE

INTRODUCTION 4

SOURCE OF FINANCE 5-6

METHODS OF FINANCING 7-8

CONDITION OF BORROWING 8-10

TENURE 11

LOAN INSURANCE 11-13

COST OF FINANCING 13-14

CONCLUSION 14

EVIDENCE/ APPENDIX 15

REFERENCES 16

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Introduction

A financial organization that offers risk capital for non-commercial economic

development initiatives is known as a development finance institution, often known as a
development bank or development finance business. The act of contributing to a project or
agreement causes it to materialise in a way that promotes the long-term welfare of society.
Contributing money to community initiatives is a crucial step in fostering prosperity in our
nation for both the community and the nation as a whole. The funding of long-term
infrastructure, industrial projects, and public services using a non-recourse or limited
recourse financial structure is sometimes referred to as project finance. The project's cash
flow is utilised to repay the loans and equity that were used to fund it.

Then, strategies and solutions to the issue facing local enterprises, industries, real
estate, and the environment are needed for development finance. For example, a company
needs extra money to finance large projects because the projects are too expensive to make
and the company’s income cannot pay for and cover the entire cost of the project. Therefore,
this Malaysian development financial institution works as an organisation that meets the
demands of the business. Development financial institutions are able to settle any claims
and issues faced by businesses in Malaysia regarding development.

In Malaysia, Development Financial Institutions (DFI) are specialised financial

institutions that the government set up with the express purpose of developing and
supporting key industries that are thought to be strategically significant to the overall
development goals of the nation as well as for the welfare of society. In order to fill the gap in
the supply of financial goods and services for a firm chosen for the purpose of long-term
economic growth, DFIs work in conjunction with banking institutions and act as a strategic
channel. DFIs have significantly aided in the growth and development of the chosen sectors.

We had to interview any contractor business for our project in order to find out more
about project finance. The main objective is to learn what kind of project finance contractor
businesses often utilise to guarantee the project's success and availability of funding.
Therefore, we have chosen Syarikat Taib Arus. Syarikat Taib Arus is located Kampung
Sungai Arus Melayu, Sebangan in Simunjan, Sarawak and was established in 2014. We
interviewed Mr Abdul Taib bin Ayub which is the director of the company. The director is very
humble and dedicated person during the interview.

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2. SOURCE OF FINANCE

The construction project is financed by contributing resources, which is referred to as

financing. Both short-term and long-term funding are possible to be established. A source of
finance is the place from which a construction company obtains funds to carry out its project.
An organisation can obtain funding from both internal and external sources. Internal sources
of finance are funds that come from a company's own resources. Owner’s capital, retained
earnings, and asset sales are just a few of the internal strategies a company can employ.
Besides that, money that comes from outside a firm is referred to as external sources of
finance. Bank loans and overdrafts, share issuance, trade credit, leasing, hire buy, and
government grants are just a few of the external strategies a construction company can
employ.

For this case study, we have interviewed the contractor, Mr. Abdul Taib bin Ayub from
Syarikat Taib Arus. According to him, his company are usually gaining the finance from
external sources which is the loan agencies from Tekun Nasional (TEKUN) and Majlis
Amanah Rakyat (MARA).

2.1 TEKUN NASIONAL (TEKUN)

Tekun Nasional is an organisation within the Ministry of Entrepreneurial and Cooperative

Development, formerly known as TEKUN Nasional Foundation. It was founded on November
9th, 1998. The purpose of establishing TEKUN Nasional is to offer bumiputeras quick and
easy financing options so they may launch and grow their enterprises. Now, the Ministry of
Entrepreneur Development is responsible for TEKUN Nasional. TEKUN Nasional has
undergone modifications and reforms since 2008 to keep up with the times and transform
from a purely financial organisation to a strategic partner in business entrepreneur growth.
TEKUN Nasional is a current organisation that offers business prospects, opportunities for
income generation, funding for business capital, coaching and support services, as well as a

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networking platform for the company. TEKUN Nasional will be a much more effective and
productive executing agency in support of the government's objective to develop a
Bumiputera Commercial and Industrial Community (BCIC) with the new directions and the
rebranding exercise. Other than that, according to (Nasional, 2018), a Syariah-compliant
financial consultancy, the Syariah Center of Excellence Bank Islam Malaysia Berhad,
recognised TEKUN Nasional as Shariah-compliant in 2017. To date, every financing option
that TEKUN has provided to business owners complies fully with Shariah.

2.2 MAJLIS AMANAH RAKYAT (MARA)

According to (MARA, 2022), as a result of the first Bumiputera Economic Congress

resolution in 1965, Majlis Amanah Rakyat (MARA), or the Council of Trust for the People, an
organisation that falls under the purview of the Ministry of Rural Development, was
established on 1 March 1966 as a statutory body by an Act of Parliament. The main of
objectives of MARA is to develop an effective and innovative entrepreneur as well as
creating an integrity globalised human capital. MARA is also focusing on contributing to
equity ownership along with facilitating the delivery system. Moreover, MARA are giving full
commitment and integrity to achieve their goals and success following the strategies which
consists of i-worker, i-investment, i-entrepreneur and finally, i-organisation. According to
(eCentral, 2020), Until today, MARA has given a lot of convenience in financing purposes to
all bumiputeras entrepreneur up until seventeen thousand numbers of people which the total
cost of finance made by MARA are exceeding RM 288 million in year 2020 through 13 types
of different financial system according to the terms and conditions.

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Methods of Financing

An external source of funding is a method of financing. This alludes to funding that

originates from outside the company. A project may employ a number of external means,
including a term loan, a bank guarantee, an overdraft, a trade credit, a mortgage, a hire-
purchase agreement, a letter of credit, etc. The contracting firms will select the most
appropriate approach based on the scope of the project, the repayment flexibility, the loan
amount, and the cost-effectiveness % under the terms and circumstances. The firm is
required to pay the creditor the exact amount on time in accordance with the terms and
conditions that both the company and the creditor have agreed upon.

For Bina Baru Jeti Nelayan Kpg Sampat, Syarikat Taib Arus used a term loan
strategy. The word loan is a sum of money that a business borrows from a bank, which
serves as the creditor, with repayments occurring in accordance with a predetermined
schedule. The project can be completed on schedule and won't strain the business because
of this. Term loans come in three different forms: short-term, intermediate-term, and long-
term.

SHORT-TERM LOAN

• The loan usually offered to firms who do not qualify for a line of credit, generally runs less
than 12 months, though it can also up to 18 months.

INTERMEDIATE-TERM LOAN

• The loan generally runs more than a year, but it will run less than 3 year and the payment
method used is monthly installment from the company’s cash flow.

LONG-TERM LOAN

• The loan usually runs for 3 to 25 years and use the company assets as collateral. It also
requires monthly or quarterly payments from profits or cash flow as the payment method.
The loan limits other financial commitments the company may take on, including other debts,
dividends, or principals’ salaries, and require an amount of profit set aside for loan
repayment.

A term loan agreement for RM 94828.91 from TEKUN Nasional is obtained by the
company for this project. Because it only lasts for seven months, the term loan employed for
this project is a SHORT-TERM LOAN. The agreed-upon payment schedule, which is every
month since the project began, will govern the amount paid. For small and medium-sized
businesses, TEKUN Nasional offers assistance with finance and growth, fostering the
expansion and success of the company.

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 Syarikat Taib Arus also uses bank guarantees to get performance bonds from the
appropriate bank for the project. The phrase "bank guarantee" refers to a bank guarantee
that assures the client that payment will be paid in the event that the debtor defaults on his
commitments. In these situations, the bank is responsible for making the payment on the
debtor's behalf. The bank will specify a few factors and requirements that the contracting
firm must meet before the deal is executed. The bank will assess the firm based on details
such the goal of the contract, the extent of the obligation, the timeframe for completion of the
project, and the claimant's procedure. In the construction business, a performance bond is a
type of bond that shields the customer against the possibility of a contractor breaching the
contract. Before the beginning date or the day of site possession, the contractor must turn in
the performance bond in order to start the project. Five percent of the overall contract value
is the performance bond's equivalent. Additionally, 50% of the performance bond must be
collateralized by the contracting business.

CONDITIONS OF BORROWING

They are short-term loans, typically only lasting a year. The borrower has two options once
the building is finished: either convert the construction loan into a permanent mortgage or
take out a new loan to pay off the construction loan (also known as the "end loan"). On a
construction loan, the borrower might only be required to pay interest while the project is still
in progress. Some construction loans could demand that the remaining balance be fully
repaid by the time the project is finished.(DiLorenzo, 2006)

Loan terms are the conditions and terms that come with borrowing money. This can include
the length of the loan's payback duration, the interest rate and fees attached to it, any
potential penalty costs owed by borrowers, and any other unique conditions that might be
relevant. It's critical to properly review loan terms in order to comprehend your commitments
when taking out a loan. Whether it's a mortgage loan, a personal loan, or any other sort of
loan, banks make them to borrowers subject to a set of rules and restrictions. They are
short-term loans, typically only lasting a year. The borrower has two options once the
building is finished: either convert the construction loan into a permanent mortgage or take
out a new loan to pay off the construction loan (also known as the "end loan"). On a
construction loan, the borrower might only be required to pay interest while the project is still
in progress. Some construction loans could demand that the remaining balance be fully
repaid by the time the project is finished.

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If a borrower obtains a construction loan in order to construct a building, the lender could
make payment to the contractor instead of the borrower.

The loan conditions, which outline what is expected of both the borrower and the lender,
include these borrowing criteria. Usually, the final loan or credit agreement contains loan
terms. One of the most popular sources of funding for small and medium-sized businesses is
bank loans. For instance, the contractor company that has been interviewed typically applies
for financing at the bank for a significant project they are working on. They will additionally
submit an application for a loan with the Small and Medium Enterprise Development Bank
Malaysia Berhad (SME Bank).(Livingston, 1978)

The bank often has requirements for loan applications based on each bank's perspective.
The banks base their determination of a potential borrower's creditworthiness on a number
of key factors. Character, Capacity, Capital, Collateral, and Cash Flow are the "5 Cs of
Credit," which are also the name of the factors. These are the ideas used to calculate a
borrower's likelihood of default based on specific loan conditions and terms. Lenders
carefully assess the borrower's financial status by examining their entire performance in the
open market and financial accounts, which includes both qualitative and quantitative
analysis.

The Character is one of the basic requirements. Banks are primarily interested in the
borrower's credit history, or how successfully the borrower has historically repaid financial
commitments, as well as the borrower's standing with other lenders. The information is
available in the borrower's credit reports, which also include specifics on how much was
previously borrowed and whether all debts were repaid on time. It should go without saying
that the banks greatly benefit from this information in determining the credit risk of the
borrowers. Importantly, many banks have a minimal standard that a borrower must meet in
order to be approved for a loan. The requirements differ between banks. (Khabirov, 2018)

The capacity is the second. By calculating a borrower's debt-to-income (DTI) ratio a simple
relationship between the borrower's income and the recurrent amount of debt over a specific
time period—we may determine their capacity, or ability to repay a loan on time. The banks

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divide a borrower's total monthly loan payments by their gross monthly income to arrive at
the DTI ratio. A borrower has a higher chance of getting a new loan if their debt to income
ratio is lower. The bank typically prefers to see an applicant's DTI of no more than 35
percent.

The company's capital comes in third. For the banks, it is also very important throughout the
evaluation process to consider how much capital a borrower can provide to a new project
that requires debt financing. The more the amount of capital the borrower is willing to put up,
the lesser the likelihood of default. The size of the down payment has an impact on the
loan's interest rate and conditions. The interest rate will be lower the higher the down
payment. (Khabirov, 2018)

The borrower's collateral is the fourth item. An asset that a borrower can offer as security for
the loan is known as collateral. Even if the firm or individual's credit history doesn't meet the
standards for a bank loan, the borrower may still be able to get financing by putting up
collateral. The bank will match the borrower's desired loan amount with the value of the
collateral.

Banks often look for structural collateral, like a house or an office, for larger loans. Banks
also take inventory and equipment into account when valuing firm collateral. Automobiles,
pricey jewellery, and fine antiques are examples of additional collateral. The estimated
lifespan of the collateral must coincide with the term of the company loan

The borrower's cash flow comes last. Business cash flow is the main financial factor for
banks when deciding whether to accept applications. In other words, can the company
produce enough cash flow to pay back a bank loan on schedule. The borrower must provide
information on the borrower's company's business cash flow to the bank in order for it to
make this determination.

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LOAN TENURE

Loan Tenure refers to the time frame for which the loan amount needs to be paid by the
contractor which the duration does not include the days for which the initial interest charge
will be incurred. Any terms and conditions in the agreement may be amended or revised by
the Lender at any time during the loan term and at its discretion, with or without prior notice
to the borrower.

For MARA, according to the contractor from Syarikat Taib Arus, the tenure duration for the
contract financing is up to seven years based on the terms and condition. It means that the
contractor should complete the repayment of the loan in seven years before the duration of
tenure ends.

Table below shows the maximum tenure for different purposes of loaning:

For loaning of TEKUN Nasional, the loans are categorized in two types which is:

SMALL LOAN SCHEME

This type of scheme is the loan with the amount between RM 10,000 to RM 50,000 which
the tenure has been set up to 5 years following the terms and condition that has been fixed.

MEDIUM LOAN SCHEME

This scheme offers the loan with amount of RM 50,000 to RM 100,000 and the period of
payment is valid for 10 years. The period of the repayment could possibly be 6 until 10
months depending on the amount of the load made by the contractor. The tekun loan
interest rate is set for 4% annually, and the business must save at least 5% of the loan
amount annually in addition to making interest deposits

Loan Insurance
Civil construction projects like homes, offices, hospitals, schools, theatres, highways,
trains, bridges, tunnels, airports, dams, weirs, irrigation and drainage systems, canals, and
ports are all covered by a contractor's all risks insurance. According to (BHD, 2019) it also
includes site preparation work (site facilities, excavation and levelling, temporary structures),

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as well as construction supplies kept on the site. The insurance is based on Bina Baru Jeti
Nelayan Kampung Sampat project. The Contractor's All Risks Insurance is a thorough
insurance plan that protects against a variety of risks that are common in civil construction
projects. Because it provides them with protection against any unexpected events that could
result in financial losses, from the arrival of building supplies at the site to the completion of
the project, this policy is very helpful for contractors, consulting engineers, architects, and
financiers.

Next, according to (BHD, 2019) any abrupt and unexpected physical damage to the
insured civil projects caused by any cause or hazard that is not expressly prohibited by the
policy is covered by the all risk insurance. The issues that are discussed include storm,
flood, tempest, cyclone, fire, earthquake, shock, collapse, and damage from water for wet
risks. The purpose of all risks insurance is to cover contract works against loss or damage to
property during the building phase as well as third party liability for unintentional physical
harm or property damage resulting from the performance of the contract, except excluded
causes. Operational testing and commissioning, delay in start-up, transit and off-site storage,
contractors' plant and equipment, third party liabilities, maintenance coverage, professional
fees, and expediting costs are all subject to customization of coverage. Duration the contract
period specified in the Letter of Award is aligned with the Contractors All Risk insurance
(CAR) of cover.

Besides, according to (BHD, 2019), the premium for specific contract covers will be
based on planned costings and timings and is then adjusted once the work is completed. It
is typical for contracts to ultimately cost much more than was anticipated or recommended to
insurers because the estimation of expected project expenses is not an exact amount. The
premium for open coverage will be determined by the turnover from the insured tasks the
contractor anticipates performing in the upcoming year, as well as a rate that takes into
account the kinds of work, they will be taking on in conjunction with their claims experience.
At year's end, the premium will be adjusted in accordance with the actual turnover attained.
However, insurers typically add a component of escalation insurance for contract price
overshoot to account for unanticipated increases in costs.Escalator provisions from insurers
typically provide for small automatic increases, typically up to 25% of the total amount of the
original contract value. Larger increases must be disclosed to the insurer for rating and
approval.

Next, based on (BHD, 2019) after a loss, insurers will cover the expense of clearing
the site of debris as well as any required dismantling, demolition, or shoring up due to the
insured damage. Professionals like architects, surveyors, and engineers must work on

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creating blueprints to set out how the re-construction can be done if a building sustains
major damage. Without this condition, such expenses, which can be significant, would not be
paid for. It is important to mention that professional expenses required in putting the
insured's claim together are not covered. Only if this is stated in the contract is coverage
available for a maintenance or defects liability period. When the finished project is turned
over and the contractor's insurance policy would otherwise expire, the maintenance term
begins. Although 12 months is also the standard for engineering and erection contracts, the
actual duration can vary, typically falling between 3 and 24 months.

COST OF FINANCING

As for our project “Bina Baru Jeti Nelayan Kpg Sampat”, according to (S.M. Reza
Alavipour, 2018), the contractor’s cash inflows and outflows are not balanced at all times
during the project, owing to retainage, which is money withheld by the owner to ensure that
the project is completed properly by the contractor. As a result the contractor will incur
deficits and may face financial difficulties. If the contractor insists on using only the money
received from the owner, the situation worsens over time and eventually forces the
contractor to stop all work.

Thus, contractors must use their own funds or borrow money to complete the project
(S.M. Reza Alavipour, 2018). Because using capital or borrowing from a third party has a
cost, the likely financing cost should be calculated and considered when preparing the bid or
estimating profit. If the financing cost is not considered, the estimated total cost and profit of
the project may be unrealistic.

According to (Insider, 2021), financing costs may also be paid from any funds
available for the purpose, including, unless otherwise provided in the proceedings, the
proceeds of the securities to which they relate, and, in the case of future financing costs,
from the same sources from which debt charges on the securities are paid, as if debt
charges were paid.

For the loan, we can either use MARA or TEKUN. TEKUN is an agency under the
Ministry of Entrepreneurial and Cooperative Development (NASIONAL, 2018). The objective
of establishing TEKUN Nasional is to provide simple and quick financing to bumiputeras in
order for them to start and expand their businesses. TEKUN Nasional, on the other hand, is
now under the Ministry of Entrepreneur Development. Entrepreneurs must pay the profit rate

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specified in the contract, which is equal to 4% of the principal amount per year. This profit
rate must be paid in addition to the principal amount.

As for MARA, it is an agency under the purview of the Ministry of Rural Development
(RAKYAT, 2022). As a result of the furst Bumiputera Economic Congress resolution in 1965,
it was established as a staturoy body on 1 March 1966 by an Act of Parliament. The council
is in charge of developing, encouraging, facilitating, and fostering the federation’s economic
and social development, particularly in rural areas. MARA has no intretest rate (0%).

In order to minimise the negative impact and maximise the positive outcomes,
incorporate the costs of each investment into your company’s cash flow model (Peper,
2021). When you incorporate debt for growth into your strategy, it becomes an investment in
your success rather than an expensive band-aid solution to a crisis.

CONCLUSION

In conclusion, The process of providing financial resources typically capital, but occasionally
including time, skills, land, knowledge, etc for the goals of a construction project is known as
funding. While finance is the phrase used to describe the external source of money, funding
typically refers to reserves that are held within the organisation (although the terms are
sometimes used as if they are interchangeable).

Allocating the required funds from departmental and/or local budgets can be used to finance
public projects. The project sponsor is often in charge of procuring project funds by
coordinating with various budget holders if the project crosses more than one departmental
budget. Funding may come from reserves that have already been put aside for capital
expenditures (capex), which involve the purchase, construction, or improvement of large
fixed assets, such as land, buildings, and machinery, that will be useful or beneficial for more
than one fiscal year. It can also arise from operational expenditures (opex), which are costs
incurred as a result of a firm' regular daily activities.

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APPENDICES

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 REFERENCES

1.DiLorenzo, F. (2006). The Construction Loan Agreement. RMA Journal, 89(3), 58-60.
2.Khabirov, A. (2018). On the issue of the consensual construction of a loan agreement.
Вісник Національної академії керівних кадрів культури і мистецтв(1).
3.Livingston, C. C. (1978). Current Business Approaches-Commercial Construction Lending.
Real Prop. Prob. & Tr. J., 13, 791.

4.nsider, L. (2021). Retrieved from https://www.lawinsider.com/dictionary/financing-costs

5.NASIONAL, T. (2018, 10 22). Retrieved from TEKUN NASIONAL:

https://www.tekun.gov.my/en/corporate-info/info/introduction/

6.Peper, S. (2021, October 29). Retrieved from LEVELSET:

https://www.levelset.com/blog/calculate-cost-contractor-financing-plan-for-it/

7.RAKYAT, M. A. (2022, JULY 1). MARA INFO PROFILE. Retrieved from MAJLIS AMANAH
RAKYAT: https://www.mara.gov.my/en/index/mara-info/profile/introduction-and-
history/

8.

eCentral. (2020, December 10). 13 Jenis Bantuan Pinjaman MARA Untuk Perniagaan Yang
Boleh Dimohon. Retrieved from https://ecentral.my/cara-mohon-pinjaman-mara-perniagaan/
9.MARA. (2022, June 29). Portal Rasmi Majlis Amanah Rakyat . Retrieved from
https://www.mara.gov.my/en/index/mara-info/profile/introduction-and-history/?
lang=en

10.Nasional, T. (2018, October 22). Laman Web Rasmi Tekun Nasional . Retrieved from
https://www.tekun.gov.my/en/corporate-info/info/introduction/

11.www.acpgconsultant.com: 12.http://www.acpgconsultant.com/main/3143/index.asp?
pageid=122529&t=malaysia-construction-insurance,insurance,-malaysia-contractor-all-risk,-
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bond-insurance,-insurance-gu

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