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Mahyuddin Khalid emkay@salam.uitm.edu.

my

ISLAMIC BANKING AND FINANCE TREASURY

CONTENT
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Islamic Inter-Bank Money Market Foreign Exchange Trading

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).

TYPES OF INSTRUMENTS OF IIMM


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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

MUDHARABAH INTER-BANK INVESTMENT


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Surplus IB (INVESTOR BANK)

Invest its surplus funds

Deficit IB (INVESTEE BANK)

MII refers to a mechanism whereby a deficit Islamic banking institution (investee bank) can obtain investment from a surplus Islamic banking institution (investor bank) based on Mudharabah (profit sharing) 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.

WADIAH ACCEPTANCE
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Islamic Banks

BNM

Wadiah Acceptance, is a transaction between BNM and the Islamic banking institutions. It refers to a mechanism whereby the Islamic banking institutions placed their surplus fund with BNM based on the concept of Al-Wadiah. 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.

GOVERNMENT INVESTMENT ISSUES (GII)


Government raise funds : Issuance of noninterest 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. The concept of Qard al-Hasan does not satisfy the GII as tradable instruments in the secondary market. To address this shortfall, BNM opens a window to facilitate the players to sell and purchase the papers with the central bank. The price sold or purchase by the players is determined by BNM, which maintains a system to record any movement in the GII.

BANK NEGARA MONETARY NOTES-i (BNMNiI)


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BNMN-i are Islamic securities issued by Bank Negara Malaysia replacing the existing Bank Negara Negotiable Notes (BNNN) for purposes of managing liquidity in the Islamic financial market. The instruments will be issued using Islamic principles which are deemed acceptable to Shariah requirement. Maturity : Lengthened from 1 year to 3 years. Can be issued depends on investors demand
Discounted

Basis Coupon-Bearing Basis

SELL AND BUY BACK AGREEMENT (SBBA)


Entered by : 2 parties. Bilateral Agreement. Two separate agreement :


First

Agreement : Seller (owner) sells & Buyer (investor) buys at a specified price agreed by both. Forward Purchase Agreement : Buyer promises to sell back to the original owner who should buy it back at a specified price and future date.

CAGAMAS MUDHARABAH BONDS


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Bondholde r Cagamas

Share the earned profits according to the ratios agreed earlier by both parties.

Introduced on 1 March 1994 by Cagamas Berhad Aim to finance the purchase of Islamic housing debts from financial institutions that provides Islamic house financing to the public. Cagamas purchase the pooled debt on the basis of Bai al-Dayn. For securitization of the debts : They created

WHEN ISSUES (WI)


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When Issues is 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.

ISLAMIC ACCEPTED BILLS (AB-i)


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Objective : Encourage and promote domestic and foreign trade. Types of AB-i :
Imports

and Local Purchases Exports and Local Sales

The AB-i is formulated based on the Shariah concepts of:


Al-Murabahah Bai

ad-Dayn

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AB-i IMPORTS & LOCAL PURCHASES

Financing under : AlMurabahah

BANK appoints CUSTOMER

Customer allowed: A deferred payment term up to 200 days. Securitized by : Bill of Exchange
Bai al-Dayn : if bank decides to sell IAB to the 3rd party.

CUSTOMER purchases the goods from SELLER and pay on behalf of BANK

Resell goods to the CUSTOMER at a price + profit margin

AB-i EXPORT & LOCAL SALES


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Traded under : Bai al-Dayn

EXPORTER prepare export documentation

Sent to the IMPORTERs 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 EXPORTERs account

ISLAMIC NEGOTIABLE INSTRUMENTS (INI)


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The INI covers two instruments such as: Islamic


The

Negotiable Instruments of Deposit (INID)

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.

Negotiable
The

Islamic Debt Certificate (NIDC)

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.

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ISLAMIC PRIVATE DEBT SECURITIES

Islamic Private Debt Securities (IPDS) has been introduced in Malaysia since 1990. At the moment, the IPDS which are outstanding in the market were issued based on the Shariah compliant concept of
Bai

Bithaman Ajil Murabahah Mudharabah.

AR-RAHNU AGREEMENT-i (RA-i)


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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.

SUKUK BANK NEGARA MALAYSIA IJARAH (SBNMI)


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This sukuk based on the Ijarah or sale and lease back concept. 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 BNMs 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.

FOREIGN EXCHANGE
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Foreign Exchange is the exchange of one currency for another, or the conversion of one currency into another currency. Foreign exchange transactions encompass everything from the conversion of currencies to billion-dollar payments made by corporate giants and governments for goods and services purchased overseas Increasing globalization has led to a massive increase in the number of foreign exchange transactions. The Foreign Exchange is formulated based on the Shariah concepts of Bai al-Sarf.

FOREIGN EXCHANGE
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Definition of Bai' al-Sarf:

Sale of money for money such as the sale of gold-for-gold or silver-for-silver.

Bai' al-sarf is applicable to modern spot forex which is based on the spot rate which the deal settlement is expected to be completed shortly after the contract has been executed. Majority of scholars opine that different currencies of different countries consist of different intrinsic values and purchasing power. Condition of Bai' al-sarf:

Taking possession before leaving one another Equal for equal transaction Freedom from khiyar syarat (option of condition) Non deferment

FOREIGN EXCHANGE
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Parties involved in Foreign Exchange:


Commercial Banks on behalf of clients. BNM Individual Money brokers as middlemen.

Characteristics of Islamic Foreign Exchange:


Freedom from pricing control and manipulation Entitlement to transact at fair prices Freedom to contract Freedom from Gharar Freedom from Riba Freedom from Maysir

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TYPES OF ISLAMIC FOREIGN EXCHANGE


Spot Market An exchange between items which are the same such as currencies with currencies. Islamic jurists on the view that currencies of different countries can be exchanged on a spot basis at a rate different from unity. Forward Market In general, majority of scholars on the view that currency exchange on a forward basis is not permissible, that is, when the rights and obligations of both parties relate to a future date. However, recently the IFI practice Bai al-sarf based on waad (promise) or murabahah commodity

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END OF CHAPTEFR