1.

To raise the required financing, BNM will identify the Shariah­compliant asset;

2. The BNM will sell its Shariah­compliant assets to principal dealers on a tender basis at a
discount from par value.

3. The BNM will subsequently buy the assets back at par value which to be paid on maturity date;

4. Once the debt created, the Bank Negara Monetary Notes­i will be issued;

5. The BNM allots BNMN­I to successful banks via the Real­time Transfer of Funds and Securities
System (RENTAS).

BNMN­I is issued to the principal bidder via a tender process and the information on the issuance will be
disseminated through FAST. The successful buyer or bidder is the market participant that tendered the
highest price for the asset that is offered. This issuance, which is created at the primary market using a
bay al­inah contract, is also tradable at the secondary market based on a bay al­dayn contract.

5.5.2.1. Pricing of Bank Negara Monetary Notes­i

r ∗ t
P = F V ∗ (1 − )
36500

Where:

P Price of instrument

FV Face value or redeemable amount at maturity

r Required profit/return (discount factor)

 t Number of days left to maturity

5.5.3. Cagamas Mudharabah Bonds (CMB)

Cagamas Mudharabah Bonds were introduced on 1 March 1994. They involve the purchase of Islamic
housing debts and Islamic hire purchase from Islamic financial institutions which provide Islamic
18
housing finance and Islamic hire purchase. The underlying concept is al­mudharabah. The purchase of
housing debt on Islamic principles by Cagamas is based on the bay al­bayn concept whereas the issue of
Cagamas Mudharabah bonds is based on the al­mudharabah concept (Billah, 2009). Under this concept
the bondholder and Cagamas will share profits according to ratios agreed together earlier. The
agreements pertaining to the purchase of housing debt based on Islamic principles will be sealed between
Cagamas Berhad and Bank Islam Malaysia Berhad. Cagamas will purchase housing debts amounting
RM30 billion from Bank Islam. As a result of this agreement, a total of RM30 billion of Cagamas
Mudharabah Bonds is created. The government has distributed RM30 billion worth of bonds to financial
institutions that offer Islamic banking. The structure is shown in Fig. 5.6 .

Fig. 5.6
The process of Cagamas Mudharabah Bond

1. The approved seller (let’s say, Islamic Bank) provides financing to customers;

2. Customers will pay the financing amount with instalments;

3. The Islamic Bank sells the Islamic housing debt to Cagamas;

4. Cagamas pays cash to the Islamic Bank;

 5.
Cagamas issues Cagamas Mudharabah Bonds to sukuk holders;

6. Sukuk holders invest in the Cagamas Mudharabah Bonds;

7. During the post­sale period, Cagamas appoints the Islamic Bank as the servicer;

8. Cagamas remits the instalments from the Islamic Bank;

9. The investors receive the coupons.

AQ31

5.5.3.1. Pricing of Cagamas Mudharabah Bonds (CMB):

There are two steps in pricing of Cagamas Mudharabah Bonds (CMB). As the first step, the pricing of
CMB bonds are done on a RM100 face­value basis (Bacha and Mirakhor 2013 ).
C ∗E
⎡ 100(100 + ( )⎤
365 C ∗ t
P = ⎢ ⎥ − FV ( )
r∗T
100 + ( ) 36500
⎣ 365
⎦

Where

P Price per RM100 face value

C Indicative coupon for current coupon period

E Number of days in current coupon period

T Number of days from transaction date to next coupon payment day

r Yield to maturity

t Number of days from last coupon payment date to the value date

FV Face value of SMC transaction (RM100)

Since the pricing is based on RM100, the transaction value or proceeds can be determined as shown next.
NV ∗ P C ∗ t
Proceeds = + NV ∗
100 36, 500

As far as the Shariah issue is concerned, the debate about bay al­bayn, as has been discussed, is also
pertinent here.

5.5.4. Islamic Accepted Bills (IAB)

An Islamic Accepted Bill, also known as Interest­Free Accepted Bill (IAB) is a bill of exchange which
was introduced in 1991. The objectives of introducing IABs are to encourage and promote both domestic
and foreign trade, by providing Malaysian traders with an attractive Islamic financing product. The IAB
is formulated on the Islamic principles of al­murabahah (deferred lump­sum sale or cost­plus) and bay
19
al­dayn (debt­trading).
AQ32

Al­murabahah refers to the selling of merchandise at a price based on cost­plus profit margin agreed to
by both parties. Bay al­dayn refers to the sale of a debt arising from a trade transaction in the form of a
deferred payment sale. There are two types of financing under the IAB facility, as follows.

5.5.4.1. Imports and Local Purchases

The financing takes place under an al­murabahah working capital financing mechanism. Under this
concept, the commercial bank appoints the customer as the purchasing agent for the bank. The customer
then purchases the required goods from the seller on behalf of the bank, which then pays the seller and
resells the goods to the customer at a price, inclusive of a profit margin. The customer is allowed a
deferred payment term of up to 200 days. Upon maturity of al­murabahah financing, the customer pays
the bank the cost of goods plus a profit margin.

5.5.4.2. Exports and Local Sales

The bills created are traded under the concept of bay al­dayn. An exporter who had been approved for an
IAB facility prepares the export documentation as required under the sale contract or letter of credit. The
export documents are sent to the importer’s bank. The exporter draws on the commercial bank a new bill
of exchange as a substitution bill and this is the IAB. The bank purchases the IAB at a mutually agreed
price using the concept of bay al­dayn and the proceeds are credited to the exporter's account. Domestic
sales are treated in a similar manner.
AQ33

Similarly to the previous instrument, this instrument will suffer Shariah disagreement in the trading of
the instrument via bay al­dayn concept.
AQ34
AQ35

5.5.5. Islamic Negotiable Instruments (INI)

INI cover two instruments, that is:

5.5.5.1. Islamic Negotiable Instruments of Deposit (INID)

The applicable concept is al­mudharabah. The INIDrefers to a sum of money deposited with the Islamic
banking institution and repayable to the bearer on a specified future date at the nominal value of INID
20
plus a declared dividend.

Bank Negara Malaysia has introduced floating INID with the following mechanisms 21 :
(a) a customer deposits money into a bank;

(b) the bank accepts the customer’s deposit and issues an INID to the customer as an evidence of
receiving the deposit;
 (c) the INID is tradable in the secondary market;

(d) on maturity, the customer or holder of INID returns it to the bank and receives the principal
value of the INID and the declared dividend; and

(e) the declared dividend is from the profit derived from the investment of the deposit.

The term ‘floating’ refers to the characteristic of the product that it changes in value based on the
dividend declared by the bank from time to time. The question is whether the investment mechanism
mentioned above is in line with mudharabah principle.

The Council in its third meeting held on 28 October 1997, resolved that INID using the mudharabah
concept is permissible and can be tradable in the secondary market. The computation of INID is shown in
Table 5.5 .

Table 5.5
The computation of INID

Formula Example

Profit sharing ratio in favour of customer PSR 70:30

Deposit placement D 1,000,000

Declared dividend rate R 10 %

Tenor (months) T 6

Or, days to maturity 182.5

r∗t∗k
Proceeds D ∗ (1 +
365
) 1,035,000

Customer’s profit Profit (π) 35,000

AQ36

5.5.5.2. Negotiable Islamic Debt Certificate (NIDC)

The transaction involves the contract of bay al­inah, in which the bank’s assets are sold to the customer
at an agreed price on a cash basis. Subsequently the assets are purchased back from the customer at
22
principal value plus profit,to be settled at an agreed future date. Table 5.6 illustrates the computation
of NIDC.

Table 5.6
The computation of NIDC

Formula Example

Bank sells an asset to its customer SP (selling price) 1,000,000

 Profit margin R 7.5 %

Tenor (months) T 6

Or, days to maturity 182.5

r∗t
Bank buys back the asset from the customer SP ∗ (1 +
365
) 1,037,500

Customer’s profit Profit (π) 37,500

5.5.5.2.1. Computation of Proceeds and Trading of NIDC

An NIDC is traded on price basis, whereby its principal value is quoted in terms of ‘price per RM100
nominal value’ specified to four (4) decimal places.

The proceeds to be paid by the buyer is equal to the principal value:

Price
Proceeds = Nominal value ∗
100

Example: an NIDC with a nominal value of RM1,000,000 is purchased at a price of RM98.2222. The
proceeds will be:
98.2222
Proceeds = 1, 000, 000 ∗ = RM 982, 222
100

The pricing of an NIDC can be computed as follows (Table 5.7 ):

Table 5.7
The pricing of an NIDC

Maturity is less than 1 year Maturity is more than 1 year

RV
Price =
DSC
n−1+
r
DCC
RV (1+ )
Price = 2

1+
t∗r

365
Where:
Where: RV = redemption value per RM100 nominal value;
RV = redemption value per RM100 DSC = number of days from settlement date (counted) to next quasi
nominal value coupon date (not counted), (as if to the instrument pays semi­
t = number of days from the settlement date annual profit);
(counted) to the maturity date (not counted) DCC = number of days in quasi coupon profit period (start date
r = yield p.a counted and end date not counted);
r = yield p.a.
n = number of remaining quasi­coupon profit periods

Example: the price of an NIDC with six
months to maturity and trading at the yield
of 3.15 %
Example: an NIDC with the following features was sold for value
25 September 2014;
Issue date: 15/05/2014
Maturity date: 15/05/2016
Yield: 3.05 %
Settlement date: 25/09/2014
Coupon dates: 15 May and 15 November each year