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ISLAMIC TREASURY OPERATIONS
Table of Contents
1. Overview 2. Objectives of Treasury 3. Development of Malaysia Financial Markets 4. Islamic Money Market 5. Islamic Financial Instruments 6. Islamic Derivatives Instruments 7. Islamic Foreign Currency 8. FOREX Trading 9. FOREX Transactions in Islamic Banking Operations
• Islamic Treasury involves activities that are carried out in ways that do not conflict with the conscience of Muslims and the religion of Islam. • It represents an assertion on religious law that prohibits the following transactions: • Usury (riba) • Gambling (maisir) • Ambiguity (gharar)
2 Objectives of Treasury .
• Maximize return on investment portfolio managed. • Ensure bank is funded in the most appropriate and cost efficient manner. . • Identify and mitigate financial risk that could erode bank’s financial standing.Objectives of Treasury • Ensure liquidity is available to meet all current and future obligations.
• Shareholders Fund (SHF) and any other sources approved by the bank . . This fund comprises of: • Customers Deposits (CD). .Sources & Uses of Funds • Primarily responsible to manage a pool of bank’s excess fund. financing and investment. • Inter-bank Deposits (ID). • after being utilized on statutory requirements. .Objectives of Treasury .
General Special Negotiable Islamic Debt Certificate Money Markets Mudharabah Inter-bank Deposit Shareholders Funds Paid up capital Share Premium Share Reserves Retail Markets USES Statutory Reserve Liquidity Requirement Financing Trade Finance Investment in quoted/ unquoted share Pool of Fund Managed by Treasury Investment in Bank Investment in Subsidiary Investment in quoted/ unquoted share Investment /Financing Liquidity Requirement Statutory Reserves Investment in Islamic Financial Instruments Specific Investment Account .Sources & Uses of Funds SOURCES Customer Deposits Retail Markets Current Account Saving Account Investment Account .Objectives of Treasury .
3 Development of Malaysian Financial Markets .
Primary market Focus Product : Bank – Clients Characteristics : Broader Market Needs: 1. Murabahah CP Example of Product : GIC-Qardul Hassan. Accepted Bills-I. Liquidity 3. Securitisation of financial assets.Development of Islamic Financial Market Characteristics : Global market Needs: 1. BBA & Musharakah IPDS.Clients Bank . Secondary market Focus Product : Bank . Hedging Tools Focus Product : Bank . Alternative to conventional bond Products 2. Inter-bank instruments 3.Bank Example of Product : Zero Coupon Islamic Bond. Variable needs of Client 2.Clients Bank – Bank Bank – Govt Example of Product: Soveriegn Sukuk. . International acceptance 2. Istisna’ bond. Islamic Derivatives Characteristics : Small Niche Needs: 1. BBA fixed rate.
Development of Islamic Financial Market Early Stage (1983-1992) Small Niche After 11 years (1992-2000) Broader Market After 18 years (2000 and beyond) Global Market .
Islamic • Shell Malaysia issued BBA Fixed rate bond • Sarawak Shell issued Musharakah bond • Primary markets only .Development of Islamic Financial Market Early Stage (1983-1992) Small niche • Malaysian Government issuance of GIC • Bank Islam issued Accepted Bills .
2 billion BBA Fixed Rate bond • Moccis issued Murabahah Islamic Commercial Paper • Khazanah issued Benchmark bond • Evolution of Secondary market .Development of Islamic Financial Market After 11 years (1992-2000) Broader Markets • Islamic Money Market in Malaysia • Petronas issued Zero Coupon bond • Cagamas issued Sanadat Mudharabah bond • KLIA issued 2.
Cross Currency Swap & Forward Global Recognition of Islamic Financial Instruments .Development of Islamic Financial Market After 18 years (2000 and beyond) Global Markets • Guthrie issued USD150 milion Sukuk Al Ijarah • Malaysian Govt issued USD500 million Sukuk • Issuance of IPDS by Supranational Institutions • Bank Islam introduced FX Forward & Swap • Introduction of Commodity Murabahah Products • Standard Chartered introduced Islamic Profit Rate Swap.
4 Islamic Money Market .
1994 • Defined as: • • • • Activities guided by Syariah principle Wholesale transactions Liquid and low risk instruments Less than 1 year • Market players are Islamic banks and commercial and investment banks with Islamic window.Islamic Money Market • Introduced by BNM in January 3. • The activities include: • Inter-bank Mudharabah • BNM Wadiah Tender • Trading of Islamic Financial Instrument .
tenor of investment and profit sharing ratio. • Mudharabah is a joint venture between two parties i. Any loss must be borne by the investor. • Both parties will then negotiate and agree on the amount. as opposed to interest on borrowing / lending activities in the conventional money market.Islamic Money Market • Inter-bank Mudharabah (IBM) • A system where a Islamic bank obtains investment from another Islamic bank on the basis of Mudharabah to source.e one party with fund and the other party who is the entrepreneur. the activities are based on profit sharing principle. . invest and square their short term fund. • IBM is an alternative to the conventional money market.
00 • The rate of return shall be based on the gross profit before distribution for investment of 1 year of the receiving bank.000. • The profit of IBM is calculated based on the following formula : Profit = prt(k) 36500 where : p = Principal investment r = Gross Profit Rate of the Receiving FI t = Number of Day Invested k = Profit Sharing Ratio of the Investing FI .Islamic Money Market • The period of investment ranges from over night to 12 months. • The minimum amount of investment is RM50.
125%.e.5%. 5..5% p. Upon maturity of the investment.a .698.000 x 6% x 30 x 0. IRHB is expected to receive net profit of 4. profit payable to provider of fund = 1. Therefore. a return of 4.e. BIMB’ s effective gross profit rate has increases to 6%. Profit sharing ratio is negotiated at 75:25.63 i.Islamic Money Market Example : IRHB invest RM1.000 with BIMB for 30 days.000. Based on the prevailing gross profit rate during transaction i.000.75 365 = 3.
Islamic Money Market • BNM Wadiah Placement • BNM accept placement of fund from the money market under the concept of Wadiah. . • The period of placement range for overnight only. BNM undertake to safeguard the fund placed with them and will refund the same amount on maturity date. • Islamic banks will place excess fund with BNM for safe keeping. • Profit (if any) is paid based on discretion of BNM. • Under Wadiah contract.
Islamic Money Market • BNM Wadiah Tender • Similar approach with Wadiah placement. • The period of placement ranges from 1 week to 3 months. . • The amount tendered will be prorated with issuance size and successful tender is based on their bid size. • Profit (if any) is paid based on discretion of BNM. • The information of tender is being disseminated early morning of the Wadiah issuance through FAST.
Islamic Money Market • Trading of Islamic Financial Instruments • IMM creates a secondary market where participants trade all the available Islamic financial instruments. marketability and liquidity. yield. tenor. • The market allows: • Easy access to Islamic Instruments • Provide liquidity in the market for the financial instruments • Trading and Arbitraging • between instruments with same tenor • between tenor of the same class of instruments • Each instrument is different from one another in terms of risk profile. .
more volatile high return) Financial Institutions (less risky. reasonable return Sovereign Papers (risk free.Islamic Money Market Risk Spectrum Increased risk and volatility Corporate Papers (riskier. less volatile. less volatile low return) Reduced yield on investment .
Islamic Money Market Calculation of Effective Yield/Yield to Maturity are as follows:
EY/YTM = (SP-PP) x 36500 t X PP
SP = Selling Price /Maturity Price PP = Purchase Price/Principal Price t = Number of days held
Islamic Financial Instruments
Islamic Financial Instruments Bank Negara Monetary Notes - i (BNMN-i)
BNMN-i is a liquidity management tool issued by BNM to manage liquidity in the Islamic Money Market. BNMN-i was introduced by BNM on December 8, 2006 to replace Bank Negara Monetary Notes. Issued under the Islamic principle of Bai al Enah, the transaction involved a for forward sale (principal plus profit) of assets owned by BNM and the corresponding spot purchase (immediate delivery) of the said assets. Minimum standard amount is RM5 million.
Islamic Financial Instruments
• Bank Negara Monetary Notes-i (BNMN-i) • The issuance of BNMN-i is on tender basis to principal bidder with information of the issuance being published through FAST a few days before the issue date. • The bidding proceed is based on the following formula :
Proceed = Face Value of Tender x 1 – ((r x t)/36500) where r = discounting rate t = tenor of issue
• The successful bidder is the market participant who tendered for the highest price for the asset offered by BNM. • Debt created from the Bai al Enah contract is traded in the secondary market under Bai Al Dayn concept.
BNM buy back the certificate of BNM assets at par value (100. Through the sale and purchase transaction.00) to be paid on the maturity date 5. Identify Assets 3.Islamic Financial Instruments Issuance process of BNMN-i BNM 4. BNM to allot BNMN-i to successful banks via Rentas BNMN-i Certificate of BNM Assets 2. Sell assets on a tender basis at a discount from par value Principal Dealers . This debt is securitized through the issuance of BNNN 1. a debt has been created.
BNM will purchase back the asset from SPV and the sukuk will be redeemed. Tenor of BNMSI ranges from 1 year to 3 years with quarterly rental payment.Islamic Financial Instruments Bank Negara Malaysia Sukuk Ijarah (BNMSI) BNMSI is another short term money market instrument issued by BNM under the Islamic principle of Ijarah. The tender is based on the rental rate and the successful bidder is the one who tendered for the lowest rental rate for the BNMSI. On the expiry of lease. Under Ijarah contract. SPV will lease back the asset to BNM with agreed rental which will be further paid to BNMSI holders. . BNM undertake to sell an asset to an SPV who will issue BNMSI to finance the purchase price.
4. BNM shall pay periodic rental to SPV BNM (Lessee) . SPV to issue BNMSI to finance the purchase asset Sukuk Holder 6. SPV shall make periodic distribution of rental proceeds. On expiry of lease.Islamic Financial Instruments Issuance process of BNMSI 1. SPV shall use the proceed to pay BNM for the purchase of Ijarah asset from BNM 5. SPV purchase asset from BNM 2. SPV shall lease the asset back to BNM Original Issuer BNM SPV (Lessor) 3. BNM shall purchase the asset back and sukuk will be redeemed.
. Under Bai al Enah contract. issuance process and trading in the secondary market is similar to BNMN-i.Islamic Financial Instruments Malaysia Islamic Treasury Bills (MITB) MITB is a short term money market instrument issued by the Government under the Islamic principle of Bai al Enah. MITB’s tenor. the Government will undertake to sell identified asset to successful FI’s on cash basis at a discount and subsequently buy back the same asset at par on deferred payment.
GOM buy back the certificate of GOM assets at par value (100. GOM thru BNM to allot MITB to successful banks via Rentas 1. Through the sale and purchase transaction. Identify Assets Certificate of GOM Assets 2.00) to be paid on the maturity date 5. a debt has been created. Sell assets on a tender basis at a discount from par value Principal Dealers .Islamic Financial Instruments Issuance process of MITB Government of Malaysia MITB 4. This debt is securitized through the issuance of MITB 3.
Under Bai al Enah contract. . the Government undertake to sell identified asset to successful FI’s on cash basis and subsequently buy back the same asset plus profit on deferred payment.Islamic Financial Instruments Government Investment Issues (GII) Issued by law under the Government Investment Act 1982 (amended 1990) Investment in GII constitutes an investment to the government based on the principle of Bai Al Inah.
Tendering procedure for GII is similar to instruments issued by Government or BNM. Pricing of GII in the secondary market is based on the normal bond market pricing convention.Islamic Financial Instruments Government Investment Issues (GII) Tenor ranges from 3 years to 10 years. Issuance of GII is on tender basis to principal bidder with information of the issuance being published through FAST a few days before the issue date. .
Identify Assets Certificate of GOM Assets 2.Islamic Financial Instruments Issuance process of GII Government of Malaysia GII 4. GOM buy back the certificate of GOM assets (principal plus profit) to be paid on the maturity date 5. Sell assets on a tender basis either on discount or par value Principal Dealers . GOM thru BNM to allot MITB to successful banks via Rentas 1. Through the sale and purchase transaction. a debt has been created. This debt is securitized through the issuance of GII 3.
Islamic Financial Instruments • Accepted Bills – Islamic (AB-i) • AB-i is a bill of exchange which is either: • drawn by the Bank and accepted by the importer/purchaser – underlying syariah concept is Murabahah • drawn by the exporter/seller and accepted by the Bank – underlying syariah concept is Dayn • The bill constitutes a debt owed to the Bank. thus eligible for trading in the secondary market. • The underlying Shariah transaction for trading in the secondary market is known as Bai Al-Dayn (debt trading) • The rate of discounting of AB-i shall reflect the current market standing .
Islamic Financial Instruments • Accepted Bill .Islamic (AB-i) • Calculation of proceeds of AB-i is derived at as follows: Proceed = FV ( 1- rxt 365 ) Where FV = Face Value r t = Discounting rate (in %) = Number of remaining days to maturity .
• Prior to issuance of ICP the rated by rating agency. • It is issued under the concept of Murabahah.Islamic Financial Instruments • Islamic Commercial Papers • ICP are debts issued by corporation to fund their capital requirement on short term. roll over basis. • Corporation must obtain approval from Securities Commission (SC) • Types of ICP: • Murabahah Notes Issuance Facility (MUNIF) • Islamic Revolving Underwritten Facility (IRUF) • Guaranteed Revolving MUNIF (GRUNIF) .
This debt is securitized through the issuance of ICP 1. Sell assets on a tender basis either on discount or at par value Tender Panel Members . Through the sale and purchase transaction. Lead arranger to allot ICP to successful banks ICP Assets 2. Identify Assets 3. a debt has been created.Islamic Financial Instruments Issuance process of ICP Corporation 4. Corporation buy the assets (principal plus profit) to be paid on the maturity date 5.
Islamic Financial Instruments • Islamic Commercial Papers • Calculation of proceeds of Islamic Commercial Papers is derived at as follows: Proceed = FV ( 1- rxt 365 ) Where FV = Face Value r t = Discounting rate (in %) = Number of remaining days to maturity .
• NIDC is issued to the customer as an evidence of the Bank’s debt to the customer. • The debt is tradable in the secondary market under the concept of Bai Al-Dayn. • The underlying Shariah transaction for the creation of NIDC is Bai Bithaman Ajil – BBA (Deferred payment sale).Islamic Financial Instruments • Negotiable Islamic Debt Certificate (NIDC) • NIDC is the Shariah-compliant alternative to the Negotiable Instrument of Deposit (NID) currently offered by the conventional banks. . • NIDC certificate is a security items that must be kept by the customer’s authorized custodian which is usually the issuing bank.
Islamic Financial Instruments Formula to calculate price of NIDC. with maturity less than 1 year: RV Price = 1+ ( TxY 36500 ) [Price are rounded up to 4 nearest decimal point] Where RV = Redemption value per RM100 nominal value T Y = No. of days from settlement date to maturity date = Yield / Profit rate .
of days from settlement date next quasi coupon date (as if the instrument pay semi annual profit) DCC = No.a. DSC = No. of dividend payment per year . with maturity exceeding 1 year: Price RV = ( 1+ Yld m ) n-1+DSC/DCC Where RV = Redemption value per RM100 nominal value Yld = Yield in % p. of days in quasi coupon period n= m= No.Islamic Financial Instruments Formula to calculate price of NIDC. of remaining quasi coupon profit period No.
Principal x Rate x Tenor . • There are three types of CMP: • Commodity Murabahah Deposit • Commodity Murabahah Investment • BNM Commodity Murabahah Tender • Profit on CMP is calculated based on the simple interest formula i.e.Islamic Financial Instruments • Commodity Murabahah Program (CMP) • CMP is a universally accepted trade transaction structured as a money market instruments under the contract of Murabahah. • The trade involve a spot purchase of Syariah approved commodities for immediate delivery and a forward sale on deferred payment term.
as Principal Commodity C/party then sells the commodity to BIMB via deferred payment. The Sale Price represents the return from deposit for BIMB. . Trader 1 $ Trader 2 3 BIMB sells the commodity at LME via Trader 2 for cash. BIMB buys the commodity by cash via Trader 1. Acting as Agent Commodity Deferred $ C/party appoints BIMB as its agent to buy commodity from London Metal Exchange (LME).Islamic Financial Instruments Commodity Murabahah Deposit Counter Party 2 1 BIMB. $ Commodity BIMB.
$ Commodity 3 Trader 2 . representing investment proceeds. Sale Price represents BIMB’s expected return from investment and will be paid by C/party via deferred payment. 1 $ Commodity $ Commodity 2 BIMB buys a Commodity at LME by cash via Trader 1 Trader 1 Counter Party BIMB as Agent C/party then appoints BIMB as agent to sell the Commodity at LME by cash via Trader 2.Islamic Financial Instruments Commodity Murabahah Investment BIMB Deferred BIMB then sells the commodity to C/party. The cash belongs to C/party.
Cagamas Islamic Residential Mortgage Backed Securities . Cagamas has expanded it business to include outright purchases of financial assets There are 3 types of Cagamas Islamic Bond: 1. Sanadat Murabahah Cagamas 2.Islamic Financial Instruments Cagamas Islamic Bond (CIB) CIB are bonds issued by Cagamas Berhad under the Islamic principle to raise funds for their operations. Cagamas business includes purchase of Islamic mortgage. hire purchase and other asset classes from financial institutions Bond issuance range between 1 to 7 years with profit payable semi annual basis From purchases of asset with recourse. Cagamas Bai Bithaman Ajil Islamic Securities (BAIS) 3.
Islamic Financial Instruments Overview of Cagamas Structure Customers Principal Dealers/ Investors 5 Issue CIB 6 Receive cash 9 Pay coupon 2 Pay monthly instalment 1 Grant Islamic financing 8 Remit Cagamas instalment 4 Receive cash Approved Sellers 3 Sell Islamic debts 7 Appoint Approved Sellers as servicer Cagamas Pre-sale During sale Post-sale .
The bondholder will bear any loss of diminution in the principal amount of the bond .Islamic Financial Instruments 1. Both parties agree to share the profit derived from the venture based on an agreed profit sharing ratio. Cagamas Mudharabah Bond (CMB) Based on the concept of Al Mudharabah CMB allows the bondholders and Cagamas to share profit generated from the issuer operation in purchasing financial assets from Islamic financial institutions.
Calculation of proceed is similar with coupon bearing bonds calculation. . The profit rate is fixed and paid twice a year.Islamic Financial Instruments 2. Cagamas undertake to sell identified asset to successful investors on cash basis and subsequently buy back the same asset at par on deferred payment basis. Cagamas Bai Bithaman Ajil Islamic Securities (BAIS) Introduced to replace SMC with its first issuance in August 2004. Issued based on the principle of Bai al Inah. Under Bai al Enah contract.
Cagamas Islamic Residential Mortgage Backed Securities (RMBS-i) First issued on August 8.Islamic Financial Instruments 3. 2005. Issued based on the principle of Musyarakah. Profit is shared by both Cagamas and bondholders based on an agreed profit sharing ratio. Cagamas and bondholders enter into a joint venture to fund the issuer operation in purchasing financial assets from Islamic financial institutions. Both Cagamas and bondholder will bear any loss arising from the bond issuance according to the ratio agreed by both parties. .
infrastructures and utilities. • • Islamic Bond (IB)/ Islamic Debt Securities (IDS) IB’s are debts issued by the multinational or big corporation to raise funds for their operations. There are two types of IB: 1.Islamic Financial Instruments • •.Zero Coupon Islamic Bond 2. SC approval is required prior to any bond issuance and must be rated (except for quasi government issuance) . The tenor of issuance of IB’s ranges between minimum period of 3 years and maximum of 20 years. Typically issued for long term capital expenditure requirements and project financing for concessionaires.Fixed Rate Islamic Bond • • • .
Islamic Financial Instruments 1. • This bond does not have any inward cash flow in term of profit payable every semi annual and bond holder only received the face value upon maturity of the bond.Khazanah Bond b.Petronas Dagangan & Petronas Gas . Qardh Al Hassan . • The few Syariah contracts used as underlying transaction include: a. Murabahah . Zero Coupon Islamic Bond • Issued at a discount from the face value. Bai Bithaman Ajil – SILK & Encorp b.
Islamic Financial Instruments Price of Bond is calculated based on the following formula: P = FV 1+i mn-1+D/E m Proceed = P FV i m n D E NV = Price of Bond NV x PB 100 = Face value per RM100 nominal value = Yield to maturity = Number of coupon payment per year = Number of years to maturity = Number of days from value date to next coupon date (as if the bond pays semi annual coupon) = Number of day in coupon period = Nominal Value of bond .
TNB b. SAJ. Ijarah . Mudharabah and Musyarakah. • The underlying Syariah concept is Bai Bithaman Ajil Ijarah. Silterra. Mudharabah – PG Municipal Council. Rantau Abang . Mukah Power.Segari Energy Venture. • The few Syariah contracts used as underlying transaction for Coupon Islamic Bond include : a. Musyarakah – KL Sentral.Islamic Financial Instruments 2. Coupon Islamic Bond • Issued at nominal value which is equivalent to the face value (amount payable upon maturity). PLUS. Bai Bithaman Ajil – KLIA Bond. KL Kepong c. • A series of coupon (annual or semi annual ) is paid based on fix agreed rate. OCBC Sub Debt b.
Islamic Financial Instruments P = mn Σ t=1 c/m x 100 (1 + i/m) 100 x + t-1+D/E FV (1 + i/m ) mn-1+D/E c x m A E + NV c 2 x A E Proceed = NV x PB 100 Where P FV I m n c A D E NV = = = = = = = = = = Price of Bond per RM100 nominal value Face Value per RM100 nominal value Yield to maturity Number of coupon payment per year Number of years to maturity Coupon rate per annum Number of days from last coupon payment to value date Number of days from value date to next coupon date Number of days in current dividend period Nominal value of bond transacted .
6 Islamic Derivatives Instruments .
Islamic Derivatives Instruments • Starting from middle of 2005. • Basic building blocks of derivatives: • Swap • Forward • Options • Futures • National Syariah Council has approved FX Forward/Swap and Islamic Profit Rate Swap and with more research undertaken by the market there will be more derivatives instruments endorsed by the council thus opening up the development of Islamic structured products in the near future. the Islamic financial market has started to explore application of derivatives in Islamic finance. .
Islamic Profit Rate Swaps (IPRS) 3 IPRS Main objective of IPRS is to assist banks and corporate in the management of profit rate risk. .Islamic Derivatives Instruments 1. Implementation is by the execution of a series of underlying Murabahah contracts on commodities. An agreement to exchange a series of profit/return/ coupon rates between two counterparties (normally consist of a Fixed Rate Party and a Floating Rate Party).
Islamic Derivatives Instruments IPRS (cont’d) Financial Asset Receives Fixed Returns I P R S Pays Fixed Rate BIMB Receives Floating Rate Pays Floating Obligations IPRS Counterparty Financial Liability .
Deferred) Bank Islam 1 CParty buys commodity from broker through Bank Islam as Agent 2 3 Bank Islam sells commodity to broker Commodity Flow Funds Flow .Islamic Derivatives Instruments • IPRS Stage 1: Fixed Profit Rate Leg IPRS (cont’d) Broker 3 Broker 1 Bank Islam as Agent IPRS Counterparty 2 CParty sells commodity to Bank Islam at FIXED price (costPlus .
Islamic Derivatives Instruments IPRS Stage 2: Floating Profit Rate Leg broker IPRS (cont’d) 1 3 Bank Islam as Agent IPRS Counterparty broker 2 2 BIMB 3 CParty sells commodity to broker through Bank Islam as Agent Commodity Flow Funds Flow 1 BIMB buys commodity from broker BIMB sells commodity to CParty at FLOATING price (costPlus .Deferred) .
. Islamic Forward Rate Agreement (IFRA) Main objective of IFRA is to assist banks and corporate in the management of profit rate risk. IFRA can also be structured to hedge a series of amortized cashflow. An agreement to exchange profit/return/ coupon rates between two counterparties at a single specified period Implementation is by the execution of a single Murabahah contracts on commodities.Islamic Derivatives Instruments 2.
Implementation is by the execution of a series of underlying Murabahah contracts on commodities. fixed to floating or floating to floating.Islamic Derivatives Instruments 3. Islamic Cross Currency Swaps (ICCS) ICCS enables counter-party to switch their asset or liability from one currency to another to : Hedge currency risk Profit rate risk The agreement to exchange currency between two counterparties can be between fixed profit rate to fixed profit rate. .
USD Profit Payment 2.USD Profit Payment I C C S Malaysian Corporate 1.MYR Profit Payment 1. MYR Principal 1.Islamic Derivatives Instruments Initial Exchange of Principal and Periodic Profit Payment US Subsidiary 1. USD Principal 2.USD Principal BIMB 2.MYR Profit Payment MYR Financing . MYR Principal 2.
MYR Principal MYR Financing .USD Principal BIMB 3. MYR Principal 3. USD Principal I C C S Malaysian Corporate 3.Islamic Derivatives Instruments Exchange of Principal on Maturity Date US Subsidiary 3.
7 Islamic Foreign Currency .
However such transaction must be under the following conditions • involving two different currencies • delivery of currencies must be done concurrently . The activities include : • Commercial transactions • Inter-bank trading (Proprietary Trading) • Forms of foreign exchange transactions include spot. swap and forward.Islamic Foreign Currency • Treasury operation also involves activities related to foreign exchange which conform to Syariah. • Exchange of one currency against another is permissible in Islam under the concept of Al Sarf.
Investment .No basis / information • • Transaction acceptable is for investment and speculation. Trading is subject to the net open position permissible by BNM and internal approved daylight and overnight exposure of the respective financial institution. . ii. iii.Technical / Short term in nature Gambling .Islamic Foreign Currency • Inter-bank trading which account to more than 90% of the total foreign exchange volume worldwide can be classified as follows: i.Fundamental / Long term in nature Speculation .
Wa’ad is made on the transaction date and the Sarf akad is perform on settlement date. • In other word. .• Prices of the underlying concept for FX Forward and Swap is Waad Mulzim (Unilateral Promise) • This is to facilitate settlement process and satisfy market convention for a forward contract where the delivery of the exchange is done at a specified future date.
8 FOREX Trading .
FOREX TRADING • Front Line Operations • Back Office Operations .
FOREX TRADING Front Line Operations: • Corporate Forex • Proprietary Trading • Funding .
FOREX TRADING Corporate Forex: • Provides quotations to corporate customers • Provides advisory services to corporate customers • Daily branch FX counter rates • Marketing .
FOREX TRADING Proprietary Trading: • Trading on the inter-bank market • Taking position for the bank • Guided by limits imposed by bank • ‘Squaring off’ corporate positions .
FOREX TRADING Funding: Placing of excess foreign currency funds (borrowing of shortage currency funds) in deposits/trading of excess funds .
FOREX TRADING Back Office Operations: • Settlement of transactions • Confirmation of transactions • Limit monitoring .
9 FOREX Transactions in Islamic Banking Operations .
USD) at a price determined by market forces • Operates in Over The Counter (OTC) market • Global foreign exchange (FX) market is the biggest market in the world • Average global daily turnover in foreign exchange transactions is more than USD1.g.5 trillion. MYR) is exchanged with another currency (e. .OVERVIEW • A marketplace where one currency (e.g. • Operates in a 24 hour market.
OVERVIEW Corporations: •Trade •Investment Individuals: •Investments •Personal use Commercial Banks: •Provide services to corporations and individuals •Trading for own accounts Central Bank: •Managing reserves/intervention •Provide direction to other participants Brokers: Middlemen .
Consumer Price Index (CPI). Balance of Payment (BOP). budget deficits/surpluses Current account deficits/surpluses . Money Supply.OVERVIEW Factors Affecting FX Rates: • Economic Factors: Gross Domestic Product (GDP). Capital Flows • Government and Central Bank Policies Fiscal/monetary policies External debt.
year-end factors Market information and rumours .OVERVIEW Factors Affecting FX Rates: Central Bank’s action and policies Speculative position Political Technical Seasonal demand.
Foreign Exchange Trading Policies • Bank Negara Malaysia’s Exchange Control Notices • Exchange Control Act 1953 • Rules on Ringgit Operations Monitoring System (RIMS) .
Foreign Exchange Trading Policies Bank Negara Malaysia’s Exchange Control Notices • • • • • • • ECM 2: Dealings in Gold & Foreign Currency ECM 3: External Accounts ECM 4: General Payments ECM 5 : Export of Goods ECM 6: Credit Facilities to Non-Residents ECM 7: Foreign Currency Accounts ECM 8: Domestic Credit Facilities to Non-Resident Controlled Companies • ECM 9: Investment Abroad • ECM 10: Foreign Currency Credit Facilities & Ringgit .
• ECM 14: Dealings with Specified Persons and In Restricted Currencies • ECM 15: Labuan International Offshore Financial Centre • ECM 16: Approved Operational Headquarters . etc. Assurance Policies. Bills of Exchange.Foreign Exchange Trading Policies Bank Negara Malaysia’s Exchange Control Notices • ECM 12: Securities • ECM 13: Import & Export of Currency Notes.
Types of FX Instruments: •Spot •Forward •Swap •Futures •Non-Deliverable Forward (NDF) •Options •Structured Products/Derivatives .
OVERVIEW Various Types of FX Transactions and Value Dates Immediate Contracts FX Contracts Forward Contracts .
OVERVIEW Various Types of FX Transactions and Value Dates Immediate Contracts Value Today (TOD) Value Tomorrow (TOM) Value Spot .
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