ISLAMIC MONEY MARKET PRODUCTS

Dr Buerhan Saiti
IIiBF
International Islamic University
Malaysia,
buerhan@iium.edu.my
borhanseti@gmail.com

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 Introduction
T-Bills
(Short-term) CD
Money CP
Market BA
Traditional Repos/Reverses
Financial Federal funds
Markets LIBOR market

(Long-term) T-Notes/Bonds
Financial Capital Bonds Municipal bonds
Markets Market Corporate Bonds
ABS/MBS
Stocks

Forward
Futures
Derivatives Option
Swap
Foreign Exchange
Market Whole sales market
Retail market
Introduction
Treasury is the “heart” of any corporate entity
(whether it is business entity or financial institution)
It is importance in order to ensure the healthiness of
the balance sheet and portfolio management of a
corporate entity.
The same is also applied to IFIs

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Main Function of Treasury
To ensure that bank has sufficient and adequate
resources to fund its expansion.
To ensure that the bank is not “flushed” with excess
liquidity which indicates ineffective resource
management: negative carry & effect yield
Risk Management: liquidity risk, credit risk, interest
rate risk, foreign exchange risk, operational risk etc.
To ensure that bank has sufficient liquidity to meet
all current and future obligations

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FUNDING / UTILISATION OF FUND IN IB

IIMM /
Financing Investment
BNM

ISLAMIC
BANK

Shareholders Depositors

Funding Wadiah/ Mudharabah/CM/

Wakalah
Utilisation

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•

Overview of Treasury Products

Deposits Currency
Derivatives
Investments Management
/ SP
& MM (FOREX)

•Deposit based on
mudharabah,
Islamic Repo; To manage
tawarruq, wakalah Islamic Treasury Bills like translation Islamic Profit
etc. Malaysian Islamic Treasury exposures or Rate Swap;
•NIDC Bills (MITB), BNMN;
transaction
•INID Islamic Accepted Bills;
exposures, e.g: Various SPs
Government Investment
•Structured Deposit Spot Currency
Issue;
•Murabahah Private Debt Securities; Exchange;
Interbank Musharakah based Forward Currency
•Wakalah government issuance; Exchange;
Sukuk Ijarah; Forward Foreign
Interbank
Sukuk Salam; Option
•Dealing with Rahn lending Facility;
financial Securitisation
instrument

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Observation
This demarcation /separation is not always obvious
In actual fact, all instruments are interrelated and the
objectives are always overlapping;
E.g: Islamic REPO can be used for risk management,
investment of liquidity, placement etc;
But all these instruments are meant to effectively
manage the ALM, exposures and to profit
maximization;

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Shariah Contracts / Principles in ITP
Mudharabah
Wadiah
Wakalah
Tawarruq
Wa’ad / Wa’adan
Ijarah
Musharakah (in Sudan / Iran)
Salam (in Bahrain).
Sukuk (Islamic Commercial Papers)

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INSTRUMENTS COUNTRIES

Murabahah Commodity (interbank murabahah) Bahrain, Saudi Arabia, Qatar,

Malaysia,Pakistan, Kuwait, UAE,
UK, etc
Interbank Mudharabah Malaysia,Indonesia, Bangladesh
etc.
Qurud Mutabadalah Saudi Arabia, Kuwait etc
Interbank Wakalah Bahrain, Kuwait, Pakistan etc

Issuance of various sukuk, e.g. sukuk ijarah, salam, murabahah Malaysia, Bahrain, UAE, Saudi
(corporate sovereign atau regulator- as monetary policy Arabia, Pakistan, Indonesia, Qatar,
instruments-) Bahrain
Issuance of short term securities, e.g Islamic Treasury Bill, Malaysia, Indonesia, Sudan,
BNNN, GII, Wadiah placement, Central Bank Ijarah Certificate, Brunei, UAE
Rahn Lending Facility, Short term Shariah financing facility
(FPJPS), Islamic Certificate of Deposit (for monetary policy
purposes and holding of required and excess reserves)
Sijil Musharakah (Musharakah Certificates) Sudan
Government Investment Certificates using various contracts like Sudan
ijarah, salam, mudharabah

Government Participation Papers (Musharakah) Iran

Government Islamic Investment Bond (Mudharabah) Bangladesh

Islamic REPO Bahrain, UAE, Malaysia 9

Observation
Non existence or inefficient money market instruments in many
jurisdictions
Limited number of liquidity management instruments 
holding to maturity attitude
 Banks need to hold a lot of liquidity
Differences in Shariah Opinion.
 Mudharabah is not tradable vis-à-vis tradable
 Short term Shariah financing facility (FPJPS): Must be guaranteed

Inability of many of these instruments to provide liquidity

mechanism as in conventional:
 Murabahah: Non tradability
 Wakalah / Mudharabah: Non fixed

Heavy reliance on Commodity Murabahah

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ISLAMIC MONEY MARKET

Introduced by BNM in January 3, 1994

Activities are guided by Syariah principle as
interpreted by SAC of BNM
Wholesale transactions
Liquid and low risk instruments
Less than 1 year

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COMMON FORMS OF ISLAMIC TREASURY
PRODUCTS (AMONG IFIs / Issued by BNM )
 Islamic Deposit Products:
 Mudarabah Account
 Commodity Murabahah
 Short to Medium Term Investments:
 Sell and Buy Back Agreement (SBBA) (Islamic REPO)
 Negotiable Islamic Debt Certificates – NIDC (similar to Negotiable
Instruments of Deposit - NID)
 Islamic Treasury Bills– e.g. Malaysian Islamic Treasury Bills (MITB)
 Negotiable Notes – e.g. Bank Negara Negotiable Notes (BNNN)
 Islamic Accepted Bills
 Islamic Commercial Papers or Medium Term Notes (ICP/MTN)
 Medium to Long Term Investments:
 Sukuk – e.g. Sukuk Bank Negara Malaysia (ijarah)
 Islamic Private Debt Securities (IPDS)
 Government Investment Issues (GII)

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Issued By BNM
BNM Wadiah Placement:
 To Absorb Excess liquidity
 Hibah is discretionary
 Overnight

BNM Wadiah Tender:

• The information of tender is being disseminated early

morning through Fully Automated System for
Issuing/Tendering System (FAST)
• The period of placement ranges for 1 week to 3 months

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Cont’d
BNM Monetary Notes-i:
Issued under the Shariah contract of Bai’ al-’Inah
Introduced by BNM on 6th December 2006 to manage
liquidity in the Islamic Money Market, replacing
BNNN-i.
Minimum standard amount is RM5 million.
Issued on tender basis to principal bidder with
information being published through FAST a few days
before the issue date.
The successful bidder is who tendered for the highest
price.

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Real-time Transfer of Funds and Securities System (RENTAS)

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Cont’d
BNM Sukuk Ijarah:

 To be used especially by IFIs which do not accept other

instruments.

 Short term money market instrument and the tenor ranges from 1
to 3 years with quarterly rental payment.

 The tender is based on rental rate and the successful bidder is the
one who tendered for the lowest rental rate for BNMSI.

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17
Cont’d
Malaysia Islamic Treasury Bill (MITB):

 Issued by Government of Malaysia.

 Behaving like the normal T-Bill
 Issued on a weekly basis with original maturities of 1-year.
 A short term money market instrument issued under the Shariah
contract of Bai’ al-’Inah
 Its tenor, issuance process and trading in secondary market is
similar to BNMN-i.

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19
Cont’d
Government Investment Issue (GII)
A long-term Government securities issuend based on Bay’
al-Inah.
Similar with MGS, GII is issued through competitive
auction by Bank Negara Malaysia on behalf of the
Government.
Issuance size ranging from RM1 billion to RM3.5 billion and
original maturities of 3-year, 7- year, 5-year and 10-year.
Profit rate is based on the weighted average yield of the
successful bids of the auction.
Can be traded in the IIMM.

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Source: Islamic Treasury Operation: Fstep
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IIMM / BNM
SBBA (Islamic Repo)
NIDC
ICP (IPDS)
Accepted Bill-I
CMP
Mudharabah Interbank Placement

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SBBA (Islamic Repo)
Another new introduction to the market
It can be used in Money Market for various purposes.
Its advantages have created a big market for Repo in
conventional finance

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Repo (Definition)
In a repo agreement, the borrower sells securities
outright to the lender and at the same time agrees to
buy equivalent securities from the lender at a
specified price at some later date.

The difference between first selling price and second

selling price is a profit “interest” to the lender

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The Use of Repo
Government: Instrument for monetary policy(open
market operations), when gov intends to inject of
absorb liquidity
Borrower: Lower cost of borrowing
Lender: A much safer lending facility
Create the market
Create liquidity in MM
A driver for more fixed income issuance
Structured Products

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Structure of Conventional Repo

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First Step (1.1.10)
Sells security at x price
Owner of
Security Lender
(borrower) Pays x price on spot
basis

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Second Step(1.1.10)
Agreement to buy back the
security on 15. 1.10 at y price (x
+ return)
Pemilik
Sekuriti Lender
(Borrower) Agreement to sell back the
security on 15. 1.10 at y
price (x + return)

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3rd Step (15.1.10)
Sells securities at price
y
Lender
Pemilik
Sekuriti
(Borrower) Pays cash

 Effectively, there are two contracts

 Selling of securities on cash basis
 Forward contract.
 The transaction allows the borrower to get loan, using the securities as
“collateral”
 It is also called collateralized loan

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Structuring of Islamic Repo

Bilateral wa’ad -Undertaking(Malaysia)

Tripartite arrangement (CBB Bahrain)
Collateralised Murabahah

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1) Sale and Buy Back Agreement
SBBA is an Islamic repurchase agreement (Repo-i)
transaction whereby a party (SBBA Seller) sells
Islamic securities at an agreed price to the other
party (SBBA Buyer) and subsequently the SBBA buyer
and SBBA seller enter into another agreement thereon
whereby the former promises to sell and the latter to
buy back the securities on a specified future date
and at an agreed price.

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Resolution of SAC of BNM
 Sale and buy-back agreement (repo) refers to sale and purchase of an
asset (in the form of Shari’ah-compliant financial instrument), whereby
both contracting parties promise to buy or re-sell the asset in
future. This arrangement is essential for cash line financing in the
inter- bank money market. It raises two Shari’ah issues:
 What is the status and legal effect of a promise in a contract?; and
 Whether it is permissible in the Shari’ah to stipulate a condition to buy
or re-sell the same asset in a contract of sale?

Resolution
 The Council, in its 13th meeting, held on 10th April 2000 / 5th
Muharram 1421, resolved that wa`d in the sale and buy-back agreement
is permissible, provided that wa`d is not stipulated as a condition for
the sale and purchase of the asset

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Possible Shariah Issues
Muwa’adah ( mutual promising or bilateral
promising): Undertaking to buy and sell at certain
agreed price (pre agreed price) and at the same date
Inah issues (to sell and buy back at certain pre agreed
price)
Can this issue be solved if:
Sale and buy back at market price
Unilateral promise
Bilateral promises to sell and buy back at different time
and/or price /or different condition

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 COLLATERALISED MURABAHAH REPO /COLLATERALISED
COMMODITY MURABAHAH

First Step
Broker B
Broker A

Commodity
1 Cost Price
4 Commodity
Cost Price

3 collateral (rahn)

BANK A
2 commodity Bank B

Deferred payment (cost + profit)

 2nd Step

COLLATERAL (RAHN
BANK A BANK B

 The collateral shall be within certain acceptable range

 If the price of the collateral goes down below the prescribed range, Bank B needs to add more collateral.
 If the price of the collateral goes up above the prescribed range, Bank B can withdraw part of the
collateral
 The transfer of legal title on the collateral
 Any dividend or return gained from the collateral will be passed back “pass through” to Bank B”
 3rd Step (Maturity Time)

Full payment of the deferred

sale price

BANK A BANK B
Returning back of the securities

This structure fulfills the guidelines issues in Global Master

Repurchase Agreement  (GMRA) issued by International
Capital Market Association (ICMA);
Total replication of the “effect” of the conventional Repo
Some Possible Shariah Issues

1) Additional or withdrawal of collateral (rahn)

Additional
Withdrawal

2) Use of the collateral.

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Cont’d
Change of title of the securities:
 In actual fact, the securities remain the ownership of Bank B.
The change of title is to fulfill the requirement of certain
jurisdiction and to allow for possible liquidation in case of non
fulfillment of the debt obligation, especially in countries that
do not allow for netting off
 Evidence that ownership remain with Bank B:
 Accounting entry: Still recorded in the book of Bank B
 Bank B shall take all rights and liabilities on the securities (al-

ghurm wa al-gunm)
Most important issues:
 Trust.

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 NEGOTIABLE ISLAMIC DEBT
CERTIFICATES (NIDC)

Sells asset
Investor
Bank
(Depositor)
(e.g. equipments for RM100,00)

Method of payment: cash – “Islamic Deposit”

Buys-back asset
Investor
Bank (Depositor)
(e.g. equipments for RM100,00 + X%)

Method of payment: deferred over a period of: e.g. 5 years.

Bank also issues NIDC to evidence the indebtedness
created by the deferred payment sale

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Accepted Bill-i
AB-i was introduced based on the concept of
Murabahah (cost-plus) and Bai Al Dayn (debt
trading) at creation
It is drawn to finance trade, imports, exports and
domestic
Minimum tenor of financing is 21 days
The minimum amount is RM 30,000.00 in multiples
of RM 1,000.00
ABi is calculated on a discounted basis.

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ICP /IPDS
ICPs are rated an Islamic short term financing paper
issued by corporate bodies;
The tenor of an ICP ranges from 1 month to 1 year
The tenor for short term PDS is between 1 year to 3
years and for longer tenors it is between 5 years to 15
years.
Issued using under various principles of Shariah
Price varies depending on credit worthiness of issuers

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Sukuk Cagamas
Cagamas sukuk are fixed income debt instrument
issued by Cagamas Berhad.
Cagamas Berhad funds its purchases of loans and
debts through the issuanceof Cagamas Sukuk
(bonds).
Cagamas bonds feature are similar to the Private Debt
Securities.

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43
Products Based on Mudharabah
Mudarabah General Investment Account
Mudarabah Special Investment Account
Islamic Instrument of Deposit (INID)
Mudarabah Inter-bank Placement

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Commodity Murabahah Programme (CMP)
Using principles of tawarruq
Using Bursa Suq al-Sila’ platform and others
There are three types of CMP:
Commodity Murabahah Deposit
Commodity Murabahah Investment
BNM Commodity Murabahah Tender

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 Investor buys on a spot basis RM10 million worth of
1
commodities from Seller A
Investor

Investor sells the

commodities to the
Bank at RM10
2 RM10 million million plus a profit
Seller / Broker margin payable on a
A deferred payment
basis

5 RM10 million
Seller/ Broker Bank
B

Bank sells on a spot basis the Commodity

4
to Seller B for USD10 million
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When Financial Institution is the
mutawarriq (e.g. interbank placement)
1. Bank A buys on spot basis RM
5M worth of CPO from Broker A
Bank A

3. Bank A
2. Bank A pays sells CPO to
RM5 M cash Bank B at RM5
M plus profit
Broker A payable on a
deferred
payment basis
5. Broker B pays RM5
M cash
Broker B Bank B
4. Bank B sells on spot basis RM
5M worth of CPO to Broker B

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WALLAHU A’LAM
WASSALAM

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