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DIFFERENCES BETWEEN ISLAMIC AND
CONVENTIONAL MONEY MARKET
Islamic Conventional
Issuance process Must be approved by the relevant
financial regulator as well as by the
relevant shariah authority
Must be approved by the
relevant financial regulator
Type of structure Structured based on assets, equity
and debt. Utilities shariah
compliant contact
Eg; murabahah, mudarabah,
wakalah
Structured based on loan
contract only
Investors Both islamic and conventional
investors
conventional investors only
COMPONENTS OF ISLAMIC MONEY
MARKET
Islamic Interbank Market
 Mudarabah Interbank Investment
 Commodity Murabahah Liquidity Facility
 Wakalah Interbank Investment
Trading of Islamic Money Market Instrument
 Government Investment Issue
 Islamic Treasury Bill
 Musharakah Investment Certificates
 Islamic Negotiable Instrument
 Islamic Accepted Bill
 Sell And Buy Back Agreement
 Collateralized Murabahah
 Islamic Corporate Security
Mudarabah Interbank Investmet
• A bank with surplus funds invests ts excess
funds as rabb-al-mal in a bank with deficit
funds(mudarib).
• Profit will be shared according to the re-
agreed PSR
Profit calculation for MII
• The agreed PSR
• The declared gross profit rate of the receiving
bank
Commodity Murabahah Programme
(1) Bank A that faces excess liquidity can manage their liquidity by purchasing
commodities from Broker A on cash basis. For example, RM 1 million.
(2) Thereafter, the bank sells the commodities to Central Bank of Malaysia on
deferred price (cost price plus profit margin). For example, RM 1 million (cost) plus
7.5 profit margin for a duration of six months (7.5% x 6/12 x RM1 million = RM
1,037,500).
(3) Central Bank of Malaysia sells the commodity to Broker B in on spot at the
original price to net off the commodity position that it holds when it purchased
from Bank A. The Central Bank of Malaysia may appoint the bank as his agent to
sell the commodities in the commodity market.
 On maturity date, Bank A will be receiving the amount equivalent to the principal
plus the net yield as agreed beforehand. In the final analysis, CMP provides avenue
for Islamic banks that face excess liquidity to manage their funds productively,
while the Central Bank of Malaysia can obtain funds immediately enabling an
efficient and effective cash liquidity management.
Wakalah Interbank Investment
• The muwakkil(investing bank) appoints wakil(investee
bank) as its agent to invest in general or specific
Shariah compliant transaction on behalf of muwakkil
• The wakil will notify the muwakkil of the profit
expected to be generated upon placement of funds
• Any profit exceeding the quoted expected profit will be
retained as an incentive by the wakil.
• The muwakkil as the principal shall bear all the risks
associated with the transaction except for those risks
resulting from wakil wilful act or negligence
Goverment Investment Issue
• GII stands for Government Investment Issue and is another form of
marketable government debt securities issued by the Government
of Malaysia to raise funds from the domestic capital market to
finance the Government’s development expenditure.
• GII is Islamic securities issued in compliance with Shariah
requirements and is an alternative debt instrument for the
Government.
• Under the issuance principle, the succesful bidders will appoint
BNM as their agent to purchase the commodity such as CPO.
• BNM on behalf of successful bidders will sell the commodity to gov
at markup price that will be settled on a deferred payment date.
• On the other hand, after securing ownership of the commodity, the
gov will appoint BNM as their agent to sell the commodity at cost.
• GII issuance size ranges from MYR2 Bil to MYR5 Bil with maturity of
3,5,7,10,15 or 20 years.
Islamic Treasury Bill (T-Bills)
• Short term gov securities which are traded on
a yield basis
• The maturity of t-bills are issued at a discount
from their par value
• Investor derive their yield from the increase in
the value between the time of purchase and
the time of maturity
Musharakah Investment Certificates
• Islamic bank arranges Musharakah on the basis of a written
agreement with the client for a specific transaction or project for a
fixed period of time that can be renewed. It could be used to
finance industry, trade, real estate, contracting and almost all legal
enterprises through partnership.
• A Musharakah business or its assets can also be securitised by
selling Musharakah Certificates in the market.
• Musharakah Certificate represents the ownership of the holder in a
proportion of the assets of the project. It could be sold in the
marker only if it represents non-liquid assets.
• If the certificate only represents a proportion of liquid assets of the
project; it could not be sold in the market except, as it could be
assimilated to a trade of money and thus would be similar to Riba.
Islamic Negotiable Instrument
Negotiable Islamic Debt Certificate(NICD)
o Documents issued by IFI to evidence that a sum of money has been
deposited with he issuer for a specific period
o NICD stipulates that the issuer has the obligation to pay the bearer,
the amount deposited together with profit at a specified future
date
o The issuing bank will identify the asset whose value is based on the
amount to be deposited, and sells this asset to the investor at an
agreed cash price
o The investors agrees to resell the same asset back to the issuing
bank at the original sale price plus markup which is payable on a
deferred basis
o NICD are bearer instruments and are initially issued to the investee
bank
o They can resold at a discount price prior to maturity
Islamic Negotiable Instrument of Deposit(INID)
o The INID is a certificate representing a sum of
money deposited by an investor with an
issuing bank which is repayable to the bearer
on a specified future date, at the nominal
value of the instrument plus profit.
o Traded on the price basis – the principal value
is quoted in term of price per MYR100
nominal value
Islamic Accepted Bill(IAB)
• IAB is a bill of exchange drawn on or drawn by a bank,
payable at a specific date in the future, to evidence the
debt that arises out of a trade transaction
• May be used as part of the trade finance facilities by
importers to finance their imports/purchases, or by
exporters to finance their exports/sales
• Condition of the issuance of IABs
1) The facility must be for genuine trade
2) The good involved must be tangible and shariah
compliant
3) It must involve the selling or purchasing of services
4) The parties involved must not be single entity
• Import and Local Purchases
Islamic bank will first appoint the customer as its
agent to purchase the required asset from the
exporter or seller on behalf of the bank
The asset is consequently resold to the customer on a
murabahah basis and repay on deferred payment
Upon maturity, the customer pay the bank the cost of
the good and the bank’s profit margin
The sale of good by the bank to its customer on
deferred basis represent debt securities in the form of
the bill of exchange
Can hold IAB until maturity
Can sell IAB prior to its maturity at a discount
Sell and Buy Back Agreement(SBBA)
• It is an Islamic Repurchase Agreement between 2 parties (seller and
buyer) with a promise to sell and buy back pledged securities on a
specific future date at an agreed price
• Difference between the repurchase price and the original sale price
is the interest earned by the buyer who is also a lender
• Under SBBA, the transacting parties enter into two separate
agreements
• 1st agreement, seller securities and buyer(investors)who buys the
securities at a specified price agreed by both parties in a standard
sale agreement(bay)
• 2nd agreement, buyer promise to sell back the securities to original
owner, and the latter promises to buy them back at a specified price
on a specified future date
• The tenor must not exceed 1 year
Collateralized Murabahah
• Collateralized murabahah is a low credit-risk financial instrument
that enables collateralized interbank transactions in the Islamic
Money Market. It is designed to add diversity to the existing
liquidity management tool and enhance liquidity levels in the
Islamic financial market.
• It provides an alternative for unsecured commodity murabahah in
inter-bank lending markets.
• In other words, collateralized murabahah is an Islamic monetary
instrument that provides a shari’a-compatible financing backed by
assets whereby the financier has the right to sell the assets should
the client fail to repay its dues.
• Collateralized Murabahah can be used by Islamic financial
institutions to obtain liquidity from an Islamic bank under the
standing facility. It can also be expanded to facilitate daily Islamic
money market operations in the interbank market.
Islamic Corporate Security
Cagamas
• Cagamas Berhad issues five types of debt securities to fund its portfolio of loans and debts
purchased under the facilities for housing loans, industrial property loans, hire purchase and
leasing debts, Islamic home financing debts, and Islamic hire purchase debts. Cagamas bonds
adhere to the following Islamic rules:
• Cagamas notes are short-term instruments, with maturities of 1 to 12 months, issued at a
discount from the face value. The other features of these notes are similar to those of
Malaysian treasury bills. They are redeemable at their nominal value upon maturity.
• Sanadat Mudharabah Cagamas are Islamic bonds issued under the Islamic principle of
mudharabah (profit-sharing) to finance the purchase of Islamic home financing debts, which
were granted on the basis of bai bithaman aji; and the purchase of Islamic hire purchase
debts, which were granted under the principle of ijarah thumma al-bai. A dividend based on a
pre-determined profit sharing ratio is payable semi-annually. They are redeemable at par on
the maturity date unless there has been principal diminution. These instruments may have
tenures of up to 10 years.
• Sanadat Cagamas are Islamic bonds issued under the Islamic principle of bai bithaman ajil to
finance the purchase of Islamic home financing debts and Islamic hire purchase debts.
Dividends on these bonds are payable semi-annually. The bonds are redeemable at par
together with the dividend due on maturity date. These instruments may have tenures of up
to 10 years.
MAF663

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MAF663

  • 1. DIFFERENCES BETWEEN ISLAMIC AND CONVENTIONAL MONEY MARKET Islamic Conventional Issuance process Must be approved by the relevant financial regulator as well as by the relevant shariah authority Must be approved by the relevant financial regulator Type of structure Structured based on assets, equity and debt. Utilities shariah compliant contact Eg; murabahah, mudarabah, wakalah Structured based on loan contract only Investors Both islamic and conventional investors conventional investors only
  • 2. COMPONENTS OF ISLAMIC MONEY MARKET Islamic Interbank Market  Mudarabah Interbank Investment  Commodity Murabahah Liquidity Facility  Wakalah Interbank Investment Trading of Islamic Money Market Instrument  Government Investment Issue  Islamic Treasury Bill  Musharakah Investment Certificates  Islamic Negotiable Instrument  Islamic Accepted Bill  Sell And Buy Back Agreement  Collateralized Murabahah  Islamic Corporate Security
  • 3. Mudarabah Interbank Investmet • A bank with surplus funds invests ts excess funds as rabb-al-mal in a bank with deficit funds(mudarib). • Profit will be shared according to the re- agreed PSR Profit calculation for MII • The agreed PSR • The declared gross profit rate of the receiving bank
  • 5. (1) Bank A that faces excess liquidity can manage their liquidity by purchasing commodities from Broker A on cash basis. For example, RM 1 million. (2) Thereafter, the bank sells the commodities to Central Bank of Malaysia on deferred price (cost price plus profit margin). For example, RM 1 million (cost) plus 7.5 profit margin for a duration of six months (7.5% x 6/12 x RM1 million = RM 1,037,500). (3) Central Bank of Malaysia sells the commodity to Broker B in on spot at the original price to net off the commodity position that it holds when it purchased from Bank A. The Central Bank of Malaysia may appoint the bank as his agent to sell the commodities in the commodity market.  On maturity date, Bank A will be receiving the amount equivalent to the principal plus the net yield as agreed beforehand. In the final analysis, CMP provides avenue for Islamic banks that face excess liquidity to manage their funds productively, while the Central Bank of Malaysia can obtain funds immediately enabling an efficient and effective cash liquidity management.
  • 6. Wakalah Interbank Investment • The muwakkil(investing bank) appoints wakil(investee bank) as its agent to invest in general or specific Shariah compliant transaction on behalf of muwakkil • The wakil will notify the muwakkil of the profit expected to be generated upon placement of funds • Any profit exceeding the quoted expected profit will be retained as an incentive by the wakil. • The muwakkil as the principal shall bear all the risks associated with the transaction except for those risks resulting from wakil wilful act or negligence
  • 7. Goverment Investment Issue • GII stands for Government Investment Issue and is another form of marketable government debt securities issued by the Government of Malaysia to raise funds from the domestic capital market to finance the Government’s development expenditure. • GII is Islamic securities issued in compliance with Shariah requirements and is an alternative debt instrument for the Government. • Under the issuance principle, the succesful bidders will appoint BNM as their agent to purchase the commodity such as CPO. • BNM on behalf of successful bidders will sell the commodity to gov at markup price that will be settled on a deferred payment date. • On the other hand, after securing ownership of the commodity, the gov will appoint BNM as their agent to sell the commodity at cost. • GII issuance size ranges from MYR2 Bil to MYR5 Bil with maturity of 3,5,7,10,15 or 20 years.
  • 8. Islamic Treasury Bill (T-Bills) • Short term gov securities which are traded on a yield basis • The maturity of t-bills are issued at a discount from their par value • Investor derive their yield from the increase in the value between the time of purchase and the time of maturity
  • 9. Musharakah Investment Certificates • Islamic bank arranges Musharakah on the basis of a written agreement with the client for a specific transaction or project for a fixed period of time that can be renewed. It could be used to finance industry, trade, real estate, contracting and almost all legal enterprises through partnership. • A Musharakah business or its assets can also be securitised by selling Musharakah Certificates in the market. • Musharakah Certificate represents the ownership of the holder in a proportion of the assets of the project. It could be sold in the marker only if it represents non-liquid assets. • If the certificate only represents a proportion of liquid assets of the project; it could not be sold in the market except, as it could be assimilated to a trade of money and thus would be similar to Riba.
  • 10. Islamic Negotiable Instrument Negotiable Islamic Debt Certificate(NICD) o Documents issued by IFI to evidence that a sum of money has been deposited with he issuer for a specific period o NICD stipulates that the issuer has the obligation to pay the bearer, the amount deposited together with profit at a specified future date o The issuing bank will identify the asset whose value is based on the amount to be deposited, and sells this asset to the investor at an agreed cash price o The investors agrees to resell the same asset back to the issuing bank at the original sale price plus markup which is payable on a deferred basis o NICD are bearer instruments and are initially issued to the investee bank o They can resold at a discount price prior to maturity
  • 11. Islamic Negotiable Instrument of Deposit(INID) o The INID is a certificate representing a sum of money deposited by an investor with an issuing bank which is repayable to the bearer on a specified future date, at the nominal value of the instrument plus profit. o Traded on the price basis – the principal value is quoted in term of price per MYR100 nominal value
  • 12. Islamic Accepted Bill(IAB) • IAB is a bill of exchange drawn on or drawn by a bank, payable at a specific date in the future, to evidence the debt that arises out of a trade transaction • May be used as part of the trade finance facilities by importers to finance their imports/purchases, or by exporters to finance their exports/sales • Condition of the issuance of IABs 1) The facility must be for genuine trade 2) The good involved must be tangible and shariah compliant 3) It must involve the selling or purchasing of services 4) The parties involved must not be single entity
  • 13. • Import and Local Purchases Islamic bank will first appoint the customer as its agent to purchase the required asset from the exporter or seller on behalf of the bank The asset is consequently resold to the customer on a murabahah basis and repay on deferred payment Upon maturity, the customer pay the bank the cost of the good and the bank’s profit margin The sale of good by the bank to its customer on deferred basis represent debt securities in the form of the bill of exchange Can hold IAB until maturity Can sell IAB prior to its maturity at a discount
  • 14. Sell and Buy Back Agreement(SBBA) • It is an Islamic Repurchase Agreement between 2 parties (seller and buyer) with a promise to sell and buy back pledged securities on a specific future date at an agreed price • Difference between the repurchase price and the original sale price is the interest earned by the buyer who is also a lender • Under SBBA, the transacting parties enter into two separate agreements • 1st agreement, seller securities and buyer(investors)who buys the securities at a specified price agreed by both parties in a standard sale agreement(bay) • 2nd agreement, buyer promise to sell back the securities to original owner, and the latter promises to buy them back at a specified price on a specified future date • The tenor must not exceed 1 year
  • 15. Collateralized Murabahah • Collateralized murabahah is a low credit-risk financial instrument that enables collateralized interbank transactions in the Islamic Money Market. It is designed to add diversity to the existing liquidity management tool and enhance liquidity levels in the Islamic financial market. • It provides an alternative for unsecured commodity murabahah in inter-bank lending markets. • In other words, collateralized murabahah is an Islamic monetary instrument that provides a shari’a-compatible financing backed by assets whereby the financier has the right to sell the assets should the client fail to repay its dues. • Collateralized Murabahah can be used by Islamic financial institutions to obtain liquidity from an Islamic bank under the standing facility. It can also be expanded to facilitate daily Islamic money market operations in the interbank market.
  • 16. Islamic Corporate Security Cagamas • Cagamas Berhad issues five types of debt securities to fund its portfolio of loans and debts purchased under the facilities for housing loans, industrial property loans, hire purchase and leasing debts, Islamic home financing debts, and Islamic hire purchase debts. Cagamas bonds adhere to the following Islamic rules: • Cagamas notes are short-term instruments, with maturities of 1 to 12 months, issued at a discount from the face value. The other features of these notes are similar to those of Malaysian treasury bills. They are redeemable at their nominal value upon maturity. • Sanadat Mudharabah Cagamas are Islamic bonds issued under the Islamic principle of mudharabah (profit-sharing) to finance the purchase of Islamic home financing debts, which were granted on the basis of bai bithaman aji; and the purchase of Islamic hire purchase debts, which were granted under the principle of ijarah thumma al-bai. A dividend based on a pre-determined profit sharing ratio is payable semi-annually. They are redeemable at par on the maturity date unless there has been principal diminution. These instruments may have tenures of up to 10 years. • Sanadat Cagamas are Islamic bonds issued under the Islamic principle of bai bithaman ajil to finance the purchase of Islamic home financing debts and Islamic hire purchase debts. Dividends on these bonds are payable semi-annually. The bonds are redeemable at par together with the dividend due on maturity date. These instruments may have tenures of up to 10 years.