Discuss what is the Shariah Advisory Council of Bank Negara Malaysia’s stands on

trading of debt instruments, for example, Negotiable Islamic Debt Certificate (NIDC)
and what is the basis of its decision.

Negotiable Islamic Debt Certificate (NIDC) is a sum of money deposited with a

banking institution and repayable to the bearer on a specified future date at the nominal value
of the instrument. NIDC also debt certificate that is structured based on the concept of bai`
`inah. Shariah Advisory Council was referred to on the following issues:

i. Whether the Islamic financial institution may repurchase the NIDC which it has

issued before the maturity period; and

ii. The suitable method of pricing for the repurchase of the NIDC by the Islamic

financial institution

Under the NIDC mechanism, the Islamic financial institution will sell its asset to the
customer on a cash basis . In general, the NIDC is a debt certificate (syahadah al-dayn) which
is a valuable and tradable asset in the market according to the needs of and agreement
between the certificate holder and the buyer. Debt trading is allowed with the condition that
the debt is clearly in existence. In the context of NIDC, the sale of debt is permissible
because it is conducted between the Islamic financial institution and the certificate holder. In
this regard, many fiqh schools have granted flexibility in debt trading between the creditor
and the debtor.

Majority of scholars among the Hanafi, Maliki, Syafii and Hanbali schools allow debt
trading to the debtor because there is no issue of non-delivery of object of the contract as the
sold debt is already in the possession of the creditor. In addition, the determination of price in
a sale is based on the agreement and mutual consent of the seller and the buyer. Since NIDC
is a debt certificate which is negotiable according to Shariah, the price of the certificate
depends on what has been agreed by the contracting parties.
With an example, describe the mechanics how Mudharabah Interbank Investment
(MII) is used as a liquidity management tool in the Malaysian Islamic money markets.

MII refers to a process through which a deficit Islamic banking institution (investee
bank) may receive investment from a Mudharabah-based Islamic banking institution (investor
bank) (profit-sharing). The investment period is from overnight to 12 months, while the
return rate is based on the investment bank's gross profit rate prior to delivery for 1-year
investment. The profit-sharing arrangement is negotiable between the two parties. By the
time of negotiation, the investor bank does not know what the return will be, because the real
return would crystallize at the end of the investment period. At the end of the term, the
principal invested shall be repaid along with a share of the income deriving from the
investment bank's use of the fund.

Bank a provides funds to tbe invested in bank b and agreed on profit sharing ratio
(PSR). On maturity profit gained from the use of the fund by bank b will be shared according
to the agreed PSR + principal.