1. Prepared by: Mohammad Salleh Bin Abd Saha
CHAPTER 7 :TREASURY
ISLAMIC INTER-BANK MONEY MARKET
FOREIGN EXCHANGE TRADING
Prepared by: Mohammad Salleh Bin Abd Saha
Razizi bin Tarmuji
razizi.uitm.edu.my

2. What is Islamic Inter-Bank Money Market ?
Introduced : BNM on 3 January 1994.
Short-term intermediary : Provide ready source of short-term investment outlets based on the principles of shariah.
Aim : Facilitating the bank with shortage of liquidity and with excess of liquidity.
Match the funding requirement.
Participating banks : Commercial banks, Merchant Banks, eligible Finance companies and eligible discount houses (bill broker).
razizi.uitm.edu.my

3. Types of Instruments of IIMM
1. Mudharabah Inter-Bank Investment
Wadiah Inter-Bank Acceptance
Government Investment Issue
Bank Negara Negotiable Notes
Sell and Buy Back Agreement
Cagamas Mudharabah Bonds
When Issue
Islamic Accepted Bills
Sukuk BNM Ijarah
razizi.uitm.edu.my

4. razizi.uitm.edu.my

5. 1.Mudharabah Inter-Bank Investment
Based on Mudharabah (profit-sharing) contract.
Period : Overnight to 12 months.
Min : RM 50,000
Rate of return : Agreed up-front
Actual return : End of the investment period
Upon maturity : Principal + Profit
BNM introduced the minimum benchmark rate.
Invest its surplus funds
Surplus IB (INVESTOR BANK)
Deficit IB
(INVESTEE BANK)
razizi.uitm.edu.my

6. 2. Wadiah Acceptance
IB institutions placed their surplus fund with BNM.
Acceptor of funds(Custodian/Trustee) : Take care of the funds without to pay any return on the account.
Hibah(Gift) : Any dividend paid by bank.
Facilitate liquidity management : BNM use this to absorb excess liquidity from the IIMM.
BNM
Islamic Banks

7. 3. Government Investment Issues (GII)
Government raise funds : Issuance of non-interest bearing.
Primary Reason : IB want to hold liquid papers meet statutory liquidity requirements and investment (To park idle fund).
:Introduced in July1983 under the concept of Qard al-Hasan
On 15 June 2001, the Government of Malaysia with the advice by Bank Negara Malaysia, issued a 3 -year GII of RM2.0 billion under a new concept of of Bai’ al-Inah. The move therefore had added depth to the IIMM as the GII is now tradable in the secondary market via the concept of Bay’ al-dayn (debt trading).
razizi.uitm.edu.my

8. 4. Bank Negara Monetary Notes-i (BNMN-i)
Islamic securities issued by BNM.
Maturity : Lengthened from 1 year to 3 years.
Can be issued depends on investor’s demand
(i) Discounted Basis
(ii) Coupon-Bearing Basis
razizi.uitm.edu.my

9. 5. Sell and Buy Back Agreement (SBBA)
Entered by : 2 parties.
Bilateral Agreement.
Two separate agreement :
(1) First Agreement : Seller (owner) sells & Buyer (investor) buys at a specified price agreed by both.
(2) Forward Purchase Agreement : Buyer promises to sell back to the original owner who should buy it back at a specified price and future date.
razizi.uitm.edu.my

10. 6. Cagamas Mudharabah Bonds
introduced on 1 March 1994 by Cagamas Berhad
Main OBJECTIVE : Finance the purchase of Islamic housing debts from FI.
Cagamas purchase the pooled debt on the basis of Bai’ al-Dayn.
For securitization of the debts : They created certificates (sukuk/bond) on the basis of Mudharabah.
Bondholder
Share the earned profits according to the ratios agreed earlier by both parties.
Cagamas
razizi.uitm.edu.my

11. 7. When Issues (WI)
Definition : A Transaction of sale and purchase of debt securities before the securities is being issued.
The National Shariah Advisory Council viewed that the WI transaction is allowed based on the permissibility to promise for sale and purchase transactions.
razizi.uitm.edu.my

12. 8. Islamic Accepted Bills (IAB)
Objective : Encourage and promote domestic and foreign trade.
Types of IAB :
Imports and Local Purchases
Exports and Local Sales
Under concept :
Al-Murabahah
Bai ad-Dayn
razizi.uitm.edu.my

13. (i) Imports & Local Purchases
Financing under : Al-Murabahah
Customer allowed: A deferred payment
term up to 200 days.
Securitized by : Bill of Exhange
Bai al-Dayn : if bank decides to sell IAB
To the 3rd party.
BANK appoints CUSTOMER
CUSTOMER purchases the goods from SELLER and pay on behalf of BANK
Resell goods to the CUSTOMER at a price + profit margin
razizi.uitm.edu.my

14. (ii) Export & Local Sales
EXPORTER prepare export documentation
Sent to the IMPORTER’s BANK
EXPORTER shall draw from CB a new bill of exchange as a substitution bill, this will be the IAB.
BANK purchases the IAB
Proceeds credited to EXPORTER’s account
Traded under : Bai al-Dayn
razizi.uitm.edu.my

15. 9. Islamic Negotiable Instruments (INI)
The INI covers two instruments such as:-
i) Islamic Negotiable Instruments of Deposit (INID) The applicable concept is Al-Mudharabah. It refers to a sum of money deposited with the Islamic banking institutions and repayable to the bearer on a specified future date at the nominal value of INID plus declared dividend.
ii) Negotiable Islamic Debt Certificate (NIDC) The transaction involves the sale of banking institution's assets to the customer at an agreed price on cash basis. Subsequently the assets is purchased back from the customer at principal value plus profit and to be settled at an agreed future date.
razizi.uitm.edu.my

16. 10. Islamic Private Debt Securities
Islamic Private Debt Securities (IPDS) has been introduced in Malaysia since At the moment, the IPDS which are outstanding in the market were issued based on the Shariah compliant concept of Bai Bithaman Ajil, Murabahah and al Mudharabah.
razizi.uitm.edu.my

17. 11. Ar Rahnu Agreement-I (RA-i)
Under RA-I, the Lender will provide a loan to the borrower based on the concept of Qard al- Hasan. The borrower will pledge its securities as collateral for the loan granted. However, in the event where the borrower fails to repay the loan on maturity date, the lender has the right to sell the pledged securities and use the proceeds from the sale of the securities to settle the loan. If there is surplus money, the lender will return the balance to the borrower.
BNM will use RA-I as a liquidity management tool for its money market operations. Return from the RA-I will be in the form of gift (hibah) and is determined based on the average inter bank money market rates.
razizi.uitm.edu.my

18. 12. Sukuk Bank Negara Malaysia Ijarah (SBNMI)
This sukuk based on the Al-Ijarah or ‘sale and lease back’ concept, a structure that is widely used in the Middle East. A special purpose vehicle, BNM Sukuk Berhad has been established to issue the sukuk Ijarah. The proceeds from the issuance will be used to purchase Bank Negara Malaysia’s assets.
razizi.uitm.edu.my

19. Cont… Based on : sale and lease back.
Proceeds from the issuance : Used to purchase BNM’s assets.
Assets then be leased to BNM : For rental payment (distributed to investors as a return on semi-annual basis)
Maturity : End of the lease tenure (then sell the assets back to BNM)
BNM Sukuk BHD : Issue the Sukuk Ijarah.
razizi.uitm.edu.my

20. What is Foreign Exchange?
Investors worldwide can open an account.
Buy other currencies.
Sell if the currency moves in the right direction.
razizi.uitm.edu.my

21. FOREX in Islamic Under Islamic Law :
Permissible : When one currency is trading on the spot
Prohibited : Forward trading
Aqd Ceremony : The same amount and the same type of goods.
If the exchange is different in its type : exchange its according to your wishes but must on the spot.
Refers to hadith of the holy prophet (peace be upon him)
“ sell gold for gold, silver for silver….in same quantities on the spot; and when the commodities are different, sell as it suits you, but on the spot”
razizi.uitm.edu.my

22. Parties Involved in FOREX
Commercial Banks on behalf of clients.
BNM
Individual
Money brokers as middlemen.
razizi.uitm.edu.my

23. Types of FOREX razizi.uitm.edu.my Types of FOREX Spot Market
Forward Market
razizi.uitm.edu.my

24. Characteristics of Islamic FOREX
1. Freedom from pricing control and manipulation.
2. Entitlement to transact at fair prices.
3. Freedom to contract.
4. Freedom from Gharar.
5. Freedom from Riba.
6. Freedom from Maysir.
razizi.uitm.edu.my