identified before the actual selling and buying transactions take place.

Hence, many scholars (for

example, Al­Zuhayli 1989 ; El­Gamal 2006 ) disagree with this arrangement and consider it a legal
device (hilah) to circumvent the prohibition of riba. They argue that this kind of structured arrangement
does not seem natural if compared to another transaction that happens in an open market. However, some
5
other scholars (Yaquby, 2009 ) allow this arrangement on the basis that it fulfills all the required tenets
of sale and purchase contracts. There are ijab (offer) and qabul (acceptance) by the parties to sell and
purchase the commodities. There are real buyers and sellers in each of the sale and purchase transactions
in the CM arrangement. In addition, there are real commodities and prices exchanged in each of the sale
and purchase transactions. This can be certified and verified by BMIS through the trade confirmations
made on the BSAS electronic system. Moreover, physical delivery of the commodities is possible,
6
although parties may choose not to take physical delivery and sell on the commodities to other parties.
AQ17
AQ18
AQ19

Bursa Malaysia launched Bursa Suq Al­Sila’ (BSAS), formally known as Commodity Murabahah
House, on 17 August 2009, an initiative spearheaded by the Malaysia International Islamic Finance
7
Centre (MIFC). To understand more about the CM arrangement on BSAS, see Fig. 5.3 .

Fig. 5.3
CM on Bursa Suq Al­Sila’ (BSAS)

At the opening of trading session, commodities suppliers will supply their commodities to BSAS.
Whenever Bank A intends to purchase commodities, it will key in the amount of commodities required in
a web­based system provided by Bursa. Once the commodities available in BSAS match with what Bank
A wants to purchase, the sale and purchase is done and ownership of the commodities transferred. The
system will then automatically generate an e­Cert to acknowledge the ownership. Next, Bank A has to
credit the money into a Bursa account maintained with its branch (represented as (S) in Fig. 5.3 by Bank
A to BSAS).

After that, Bank A can proceed to sell the commodities to Bank B. Bank A has to create a sub e­Cert in
the system to declare that commodities have been sold to Bank B and the ownership transferred. This
selling transaction will be paid on a deferred basis which allows Bank B to pay Bank A on murabahah:
principal plus profit margin on maturity date. Subsequently, Bank B will sell the commodities to BMIS
who will then sell to the open market at random on BSAS. BSAS will then match the selling activity with
a request to purchasecommodities from the market. Once matched, Bank B may debit the money
transferred to the Bursa account earlier (shown as (S) in Fig. 5.3 by BSAS to Bank B).

If at the end of trading day there are no interbank players to purchase commodities and no match can be
done, BMIS will purchase all of the commodities and sell them all to the commodities buyers outside the
BSAS market. Players have to be more alert towards the end of the trading day as anyunsold
commodities will be physically delivered to them. Bursa will notify players with outstanding
commodities to sell them to the market before it closes or, if players wanted to take delivery of the
commodities, they may inform Bursa and delivery will take place within a week. Players have to make
sure that they have appointed a broker with a Malaysian Palm Oil Board (MPOB) license as normally the
banks are not MPOB licensed.

In the event that Bank B is not a BSAS participant, or it does not want to handle the trading of
commodities on its own, as it does not want so many reconciliations to be done at its end, it may appoint
an agent in these BSAS transactions.

Brokerage fees for BSAS market usage will be paid to Bursa on a monthly basis. Fees are charged
according to trading volume per month, and are comparatively lower than the brokerage fees charged in
other commodity exchanges or platform.

In the Commodity Murabahah (CM) program, overseas brokers have to be appointed in order to back
foreign currencies IIMM through CM and of course the cost is higher. For the settlement of foreign
currencies in the IIMM deal, debiting and crediting of Bursa account will be made in RM equivalent,
using the same exchange rate to eliminate foreign exchange exposure.
AQ20

It seems that the existence of BSAS helps to remove some issues discussed relating to the CM structure.
However, the issue of the fluctuation of CPO prices is still there. Due to the price volatility, the volume
of CPO in each same price transaction may differ. What BSAS do is to fix the daily price of CPO before
the trading session starts. They even come out with a specification of CPO (as shown in Table 5.4 ) that is
tradable in BSAS.

Table 5.4
Specification of CPO

Specification Parameters

Contract code CM­CPO

Price Based on (benchmarked against) previous trading day settlement of the Crude Palm Oil
Futures (FCPO) spot month contract. Price remains the same for the day

Settlement Delivery of CPO (with provision for cash settlement)

Crude palm oil of good merchantable quality, in bulk, unbleached, in the tank located at the
option of the CSP

Contract grade Free Fatty Acid (FFA) of palm oil delivered into the tank must not exceed 4 % and from the
and delivery tank must not exceed 5 %
 and delivery tank must not exceed 5 %
point
Moisture and Impurities (M&I) must not exceed 0.25 %

Deterioration of Bleachability Index (DOBI) value of palm oil delivered into the tank must be
at a minimum of 2.5 and of palm oil delivered from the tank must be at a minimum of 2.31

Source: Rules of Bursa Malaysia Islamic Services SDN. BHD

5.4.4. Wakalah Placement Agreement

Another important instrument is the Wakalah Placement Agreement. This is widely practised by Islamic
banks either to receive a placement from their corporate clients or for their placement with other Islamic
8
banks. In Malaysia, on 24 November 2009, the Association of Islamic Banking Institutions Malaysia
(AIBIM) launched the standard Wakalah Placement Agreement (WPA), with the aim at standardising the
agreement for deposit placements by corporate customers with Islamic financial institutions (IFIs) and
for interbank placements among IFIs under the wakalah concept. IFIs act as a wakil (agent) in investing
the deposits placed by the counterparties or so­called investors. Investors represent as principals of the
funds and shall bear all of the risks associated with the investment except the risk resulting from IFIs
misconduct and negligence. The concept is more or less similar to the mudharabah type of investment as
the profits are not fixed and depend on the performance of the investment and the losses are borne by the
investors. Banks can only indicate the expected return on investments and the payback of the principal
and actual profits can only be determined on the maturity date.

However, in term of profit distributions of this wakalah instrument, the structure might be seen as similar
to that of mudharabah, except for the payment of fees, instead of the sharing of profit as in mudharabah.
In the standard Wakalah Placement Agreement (WPA), there are three dimensions to the distribution of
profits. Firstly , if the actual profit is equal to the expected or anticipated profit, IFI pays investors the
anticipated profit less the wakalah fee. Secondly, if the actual profit generated is more than the
anticipated profit, IFI pays investors the anticipated profit less the wakalah fee and retains the difference.
Thirdly, whenever the actual profit is less than the anticipated profit, investors will get back the principal
with the actual profit less the wakalah fee.

Some of the expected issues that might be raised are on the second and third dimensions of the profit
payout structure. Investors might feel unhappy with the limited profits that they can get even though the
investment portfolios are doing well and gain higher actual profits than the indicative profit rate quoted
to them. It may be seen as an unfair distribution to the investors, however, the second structure is allowed
as the retained profit can be considered as jualah: commission or incentive (hafiz tashji’i) to the IFI in
managing the investment portfolios, and the investors achieve their targeted rate of return. The issue on
the third manner of distribution occurs when the investment portfolio did not produce a return as high as
the anticipated profits. In this event, investors might feel that the offer is less attractive; nevertheless, this
is the nature of wakalah which investors may need to understand. Since the investors here are Islamic
banks, we may assume that the issue of misunderstanding may not arise. To mitigate this, the wakil (IFI)
may give hibah on top of the profit payout on it sole discretion. This hibah shall not be contracted
upfront as it may tantamount to guaranteeing the return on investment.
AQ21
AQ22

Specifically, there are also some issues being discussed in deposit and placement transactions as a whole
beside the issues raised for each products implemented in IIMM. The major question is whether it is
permissible to involve conventional banks or non­halal corporate entities in IIMM or vice versa. The
majority of scholars allow IFI to transact with companies that are involved in mixed halal and non­halal
businesses as long as most of their capital portions come from halal sources. However, As­Syawkani and
Al­Muhasibi totally allow transactions with mixed­type companies regardless of their capital portions. It
is backed by the dalil that Rasulullah s.a.w. transacted with Mecca’s people, both Muslims and non­
Muslims. He never disallowed non­Muslims’businesses even though the non­Muslims’ incomes may
9
have come from non­halal sources.

From the above discussion, we may conclude that non­halal and mixed halal and non­halal companies
may place their funds with IFI. However, the reverse situation is not allowed. IFI cannot place its funds
with conventional banks as the profit to be generated will come from non­halal activities. The main point
here is that Muslims can only make profits from halal businesses and transactions to make sure that the
income generated from the business is halal income.

5.4.5. Ar Rahnu Agreement­I (RA­i) 10

Under Ar Rahnu Agreement ­I, the financing provider will provide finance to another party which needs
financing, based on the concept of qard hasan. The recipient of the finance will pledge its securities as
collateral for the financing granted. However, in the event that the recipient fails to repay the loan on the
maturity date, the financier has the right to sell the collateral and use the proceeds from the sale of the
collateral to settle the financing. If there is any surplus money, the financier will return the balance to the
recipient of the finance.

BNM will use RA­I as a liquidity management tool for its money market operations. Return from the
RA­I will be in the form of a gift (hibah) and is determined based on the average interbank money
market rates. The giving of hibah is purely discretionary and must not be promised in the original rahn or
qard contracts.
AQ24
AQ25
AQ23

5.4.6. Sell and Buy Back Agreement (SBBA)

A Sell and Buy Back Agreement (SBBA) is an Islamic money market transaction entered by two parties
in which an SBBA seller sells assets to an SBBA buyer at an agreed price, and subsequently, both parties
enter into a bilateral promise (muwa’adah) in which the buyer promises to sell back the said asset to the
11
seller at an agreed price.
1. Under the Sell and Buy Back Agreement (SBBA), the transacting parties shall enter into two
separate agreements as follows:

i. first agreement – the seller (owner) of Islamic negotiable instruments (INI) sells and the
buyer (investor) buys the instrument at a specified price agreed by both parties; and

ii. second agreement – a ‘forward purchase agreement’ whereby the buyer (investor)
promises to sell back the INI to the original owner, and the seller promises to buy it back
at a specified price on a specified future date.

2. Ownership of the INI shall be transferred to the buyer (investor) upon conclusion of the first
 agreement of the SBBA.

3. An INI may be sold under SBBA, subject to the following conditions:

i. an Issuer shall not buy its own INI under SBBA; and

ii. the tenor of the SBBA must be within the tenor of the INI used for the transaction.

4. The Sell and Buy Back Agreement (SBBA) includes an INI which does not pay any interim
dividends or coupon as profit (as in the case of NIDC), the seller sells the SBBA on adiscount
basis under the first agreement.

5. Another financial institution shows its willingness to enter into SBBA on a regular basis using a
two­way quotation either by quoting rates or profit­sharing ratio.

6. Once it is released, the Sell and Buy Back Agreement Guidelines shall govern SBBA
transactions which involve INI.

One may argue that the issuance of an SBBA in actual fact follows the Shariah contract of bay al­inah.
This argument can be easily dismissed because in bay al­inah the second leg of the transaction shall take
place immediately after the conclusion of the first leg, whilst in SBBA, the second leg shall be performed
at a later time. It is only the bilateral promise that takes place immediately after the conclusion of the first
leg of the transaction. Similarly, it may be argued that the giving of a bilateral promise is not allowed in
Shariah. Though this argument is valid from certain juristic point of view, the SAC of BNM has resolved
12
that the use of a bilateral promise is allowed as it is not tantamount to a contract. The Resolution reads :

The Shariah Advisory Council of Bank Negara Malaysia (SAC) held its 157th meeting on 31st March
2015. The meeting discussed among others the concept of wa`d (promise) and muwa`adah (bilateral
promise).

Wa`d
The SAC ruled that wa`d is a promise by a person or a party to perform a certain task/action in the future.
Wa'd is unilaterally binding on the promisor if it is attached to a cause or circumstance. The bindingness
(mulzim) of wa`d shall take effect at the time when the wa`d is expressed. In the event that the promisor
fails to fulfil his binding promise (wa`d mulzim), the promisee may claim for compensation based on
actual loss suffered (if any) due to the breach.

Muwa`adah
The SAC is of the view that muwa`adah is a bilateral binding promise between two parties to enter into a
contract in the future. The SAC ruled that muwa`adah is permissible as it is not tantamount to a contract.
Since the contract is yet to be entered into during the muwa'adah period, it does not have the effect of a
contract. The promisor who breaches his promise is liable to pay compensation based on the actual loss
suffered (if any) by the aggrieved promisee due to the breach.

5.4.7. Pricing of Sale­Based Instruments (Debt­Based Instruments)

Most money market instruments are traded at discount to face or nominal value and they are redeemable
at face value on maturity. In a similar way, the difference between the price paid and the redeemed
amount at maturity is ‘the return’ to the investor in the Islamic interbank money market. To determine the
correct price of the instrument we need to know four factors:
i. time left to maturity (in days);

ii. the nominal or face value of the instrument (redeemable amount) or selling price;

iii. the required returns or the yield for the instrument (discount factor);

iv. the coupon/interest payment if any (seldom);

The generalised pricing model of the Islamic money market instruments will be:

r ∗ t
P = SP ∗ (1 + )
365

Here:

P Price of instrument

SP Selling price (Face value or nominal value)

r Required yield (discount factor)

t Number of days left to maturity

5.5. Tradable Instruments

5.5.1. Government Investment Issues
Government Investment Certificates were introduced in 1983, with the establishment of the Islamic bank.
These are a long­term Shariah­compliant security which is issued by Government of Malaysia for the
funding of developmental projects initiated by the government. It is issued through competitive auction
by Bank Negara Malaysia on behalf of the government of Malaysia. 13 The government issued non­
interest bearing Government Investment Certificates for the first time to meet the special needs of the
bank and other corporations who are interested in these securities. The Islamic bank, governed by
Shariah law, is not allowed to hold interest­bearing government securities. However, there was a serious
need for the Islamic bank to hold such liquid papers to meet the statutory liquidity requirements as well
as to park its idle funds. To satisfy both requirements, the Malaysian Parliament passed the Government
Investment Act in 1983 to enable the government of Malaysia to issue non­interest bearing certificates
known as Government Investment Certificates (GIC) (now replaced with Government Investment Issues
14
(GII)). GII were introduced in July 1983 under the concept of qard hasan. GII’s structure is shown in
Fig. 5.4 .

Fig. 5.4
The process of government investment issues

1. To get the required finance, firstly, the government will sell its Shariah­compliant assets, for
example equities, to financial institutions for spot cash payment.
AQ28

2. Once the sale is completed, financial institutions will subsequently sell the assets back to the
government at profit paid on deferred, and GII will be issued by the government as evidence of
the indebtedness.
AQ29

3. Profit from the sale will be paid periodically such as on a semi­annual basis, representing the
coupon on the GII.

4. On maturity (i.e. deferred payment), the government will pay the asset cost, representing the
principal amount, plus profit and the GII will be redeemed.
AQ26
AQ27

5.5.1.1. Pricing of GII

RV N c
Price = { } + {∑ }
N −1+T /E K=1 N −1+T /E
[1 + r] [1 + r]

Note: if profit is paid semi­annually, the r and c need to divided by two (r/2, c/2)
Where:

RV Redemption amount or value at maturity

c Coupon rate

r Market yield for a similar maturity period

N Number of coupon payments between the value date and maturity date

T Number of days from the value date to the next interest payment date

E Number of days in the coupon period in which settlement takes place

AQ30

The issuance of GII is based on bay al­inah and bay al­dayn, whereby the issuance of GII is based on bay
al­inah and the trading of the instrument is based on bay al­dayn. The use of a bay al­inah contract in the
15
structuring of GII may be seen by many scholars as against the principle of Shariah. In fact, the
introduction of certain amendments to the practice of bay al­inah makes the practice of bay al­inah,
including GII, much more difficult, if not impossible. Until now the issuance of GII following this new
guideline, issued by Shariah Advisory Council of the Bank Negara Malaysia, has yet to be seen in the
market. Also the use of bay al­dayn in the secondary trading of the instrument is controversial as the
16
majority of scholars disallow its practice.

5.5.2. Bank Negara Monetary Notes­i (BNMN­i)

BNMN­i is a sovereign instrument of Islamic security issued by Bank Negara Malaysia to replace the
existing Bank Negara Negotiable Notes (BNNN) for purposes of managing liquidity in the Islamic
money market. This instrument was issued using the principle of bay’ al­inah. The maturity of these
issuances have also been lengthened from one year to three years. New issuances of BNMN­i may be
issued either on a discounted or a coupon­bearing basis depending on the demand of investors. Discount­
based BNMN­i will be traded using the same market convention as the existing BNNN and Malaysian
Islamic Treasury Bills (MITB) while the profit­based BNMN­i will adopt the market convention of
17
Government Investment Issues (GII). The process of BNMN­i is shown in Fig. 5.5 .

Fig. 5.5
The process of BNMN­i