Islamic Treasury Products: An

Update

Prof Dato’ Dr. Mohd Azmi Omar

azmiomar@iiu.edu.my

Seminar on Islamic Banking & Capital Market: Products & Instruments, 23-24 May 2007, Kuala Lumpur, CERT
1
 Contents
• Issues facing Islamic Financial
Institutions (IFI) with respect to Liquidity
• Efforts taken by IFIs to resolve Liquidity
and Low Return issue
• Current Islamic Treasury Products and
Instruments offered by IFI
• Update on global Islamic Treasury
products
• Conclusion

International Islamic University Malaysia

2
 Issues facing Islamic Financial
Institutions (IFI) with respect to Liquidity
• Too liquid
– Financing deposit ratio (loan deposit ratio) of IFIs tend
to be higher than conventional FIs. As at end of June
2005 it stood at 61.5%
• Low returns
– Returns from short term investments tend to be low
as compared to conventional
• Maturity mismatch
– Liabilities are short term and assets are long term

International Islamic University Malaysia

3
• Limited investment opportunities
– Short term investment products are very
limited especially at the global level
• Liquidity shortage
– At the global level, IFIs have problems of
attracting short-term funds to meet cash flow
requirements
– The absence of lender of last resort –
e.g.,Ihlas Finance in Turkey
International Islamic University Malaysia
4
 Efforts taken by IFIs to resolve
Liquidity and Low Return issue
• Development of New Shariah Compliant
Treasury products
• Enhancement of Liquidity Management
Centre activities (Bahrain) via
– Coordinated cross-border regulation
– Homogenisation of products
– Increased depth and breadth of market
through greater collobration with Islamic
financial centres

International Islamic University Malaysia

5
 List of Islamic Treasury Products and
Instruments in Malaysia
• General Investment Account-i (GIA-i)
– Mudharabah
• Special Investment Account-i (SIA-i)
– Mudharabah
• Negotiable Debt Certificate-i (NDC-i)
– BBA and Bai al-Dayn
• Negotiable Instrument of Deposit-i (NID-i)
Mudharabah
• Government Investment Issue-i (GII-i)
– Qardul Hasan, Bai Al-Inah, BBA, Bai Al-Dayn
International Islamic University Malaysia
6
• Bank Negara Negotiable Notes-i (BNNN-i)
Bai Al-Inah, Bai Al-Dayn
• Private Debt Securities-i (PDS-i)
– Bai Al- Inah, BBA, Murabahah, Ijarah Istisna,
Salam, Bai Al-Dayn
• Sell and Buy Back Agreement-i (SBBA-i)
– BBA and Bai al-Dayn
• Accepted Bills-I
– Murabahah and Bai Al-Dayn
International Islamic University Malaysia
7
 Outstanding Amount of Financial
Instruments As At 22 May 2007
FINANCIAL INSTRUMENT OUTSTANDING AMOUNT (RM
mil)
ABS (ISLAMIC BONDS) 3,558
ABS (ISLAMIC MEDIUM TERM NOTES) 54
CAGAMAS BAIS 4,605
CAGAMAS BAIS (SANADAT) 1,000
CORPORATE BONDS (ISLAMIC) 69,705
GOVERNMENT INVESTMENT ISSUES 23,100
IDB BANK NEGARA MONETARY NOTES 12,600
ISLAMIC COMMERCIAL PAPERS 5,111
ISLAMIC MEDIUM TERM NOTES 36,288
KHAZANAH BONDS 6,350
MALAYSIA ISLAMIC TREASURY BILLS 2,000
PROFIT BASED-BANK NEGARA MONETARY NOTES 1,000
SANADAT MUDHARABAH CAGAMAS 230
SUKUK BANK NEGARA MALAYSIA IJARAH 400
TOTAL OUTSTANDING AMOUNT 166,001
International Islamic University Malaysia
8
Outstanding Amount of Financial
Instruments As At 22 May 2007

International Islamic University Malaysia

9
ISLAMIC INTERBANK MONEY MARKET MONTHLY VOLUME BY
TENOR BETWEEN

JANUARY-2001 TO MAY-2007 (RM mil)

International Islamic University Malaysia

10
NEGOTIABLE ISLAMIC DEBT INSTRUMENTS MONTHLY VOLUME
TRANSACTED THROUGH MONEY BROKERS BETWEEN

JANUARY-2003 TO MAY-2007

International Islamic University Malaysia

11
 ISLAMIC ACCEPTED BILLS (IAB) MONTHLY VOLUME
TRANSACTED THROUGH MONEY BROKERS BETWEEN

JANUARY-2001 TO MAY-2007

International Islamic University Malaysia

12
 Other Treasury Instruments in
Malaysia
• Commodity Murabahah Programme (CMP-i)

• Islamic Profit Rate Swap (IPRS)

• Islamic Cross Currency Swap (ICCS) &

Islamic Forward Rate Agreement (IFRA)

International Islamic University Malaysia

13
 Commodity Murabahah
Programme (CMP-i)
• A trade transaction designed for investment purposes as
well as to mobilize depositors’ fund.
• It is introduced as an alternative innovation to liquidity
management instruments in the broad Islamic Money
Market spectrum
• Carried out based on spot purchase (immediate delivery)
and forward sale on deferred payment term (cost plus
mark–up basis) of Shariah–approved commodities
• Shariah Principle
– The Shariah principle applied to this transaction is Murabahah
(deferred cost–plus sale) where commodities are sold at a price
comprising its cost plus a known profit margin, and the
settlement is based on a lump–sum payment at an agreed future
date

International Islamic University Malaysia

14
• Minimum Amount
• The minimum amount deposited/ invested for
Commodity Murabahah transaction is RM500,000
while no maximum amount is imposed
• Tenor
– Minimum of 1 day to 5 years
• Rate of Return
– Fixed and benchmarked against interbank
money market rates

International Islamic University Malaysia

15
 Features of Commodity Murabaha
Principal A party with surplus fund.
Agent A party which needs/requires fund.
Broker A party which transacts the underlying
commodity (commodity trader)

Commodity Market Approved commodity market such as London

Metal Exchange or local commodity market

Commodity Any commodity that is not a Ribawi item,

approved by Shariah for purpose of deferred
sales. Eg: Mineral, metal, oil, gas etc
Purchase Price Commodity purchase price are based on
current market price of the commodity offered
by chosen Commodity Market.

Deferred Selling Mark-up price by investor according to profit

Price rate approved by the Bank.

International Islamic University Malaysia

16
 Commodity Murabahah Programme
(CMP-i)

Corporate Client
2
Deferred
ABC, acting Client then sells the
Commodity commodity to ABC via
as agent $ deferred payment. The
1 Sale Price represents
$ Commodity ABC, as the return from deposit
Corporate Client for the Client.
appoints ABC as principal
its agent to buy Trader 1
commodity from
Commodity Commodity $
Exchange. ABC 3
buys the
commodity by
cash via Trader 1. Trader 2 ABC sells the commodity at
Commodity Exchange via
Trader 2 for cash..

17
 Islamic Profit Rate Swap (IPRS)

• An agreement to exchange profit/return/coupon

rates between two counterparties (normally
consist of a Fixed Rate Party with a Floating
Rate Party or a Floating Rate Party with another
Floating Rate Party or any other variant);
• Implementation is by the execution of a series
of underlying Murabahah contracts on certain
Shariah–compliant assets or commodities

International Islamic University Malaysia

18
• Motivations for IPRS are:
– Hedging/matching profit rate exposure (existing and
potential exposure)
– Immunizing balance sheet asset & liability exposure
– Restructuring capital market and debt profiles (profit
rate on relevant currency)
– Indirectly enhancing credit risk management through
reduction of credit risk exposure
• IPRS is transacted based on underlying spot
purchase and sale (immediate delivery) of
Shariah–compliant commodities or assets and
with deferred profit payment term.
International Islamic University Malaysia
19
• Shariah Principle
– Murabahah principle. The contract involves
underlying sale and purchase transactions of
Syariah–approved assets or commodities consisting
of its cost price plus a determined profit margin mark–
up to be settled in at an agreed date.
• Minimum Amount
– Transaction is based on notional amount with no
physical exchange of principal cashflow except in
case of cross currency IPRS or in other case as
requested. Minimum amount of MYR5,000,000 shall
be imposed on corporate (non–interbank) transaction.
International Islamic University Malaysia
20
• Tenor
– Minimum 6 months. No maximum tenor
• Profit Margin
– Profit margin or spread premium can be
applied to IPRS rates depending upon
specific market requirement or credit standing
of counterparties. Normally these margins are
quoted above the floating indices or as a
premium built into the quoted IPRS prices.

International Islamic University Malaysia

21
 Features of IPRS
Buyer A party wishing to protect against rising rates
(pay fixed–rate against receipt of floating–
rate)
Seller A party wishing to protect against declining
rates (pay floating–rate against receipt of
fixed–rate)
Agent An intermediary in commodity murabahah
transactions

Broker A party which transact the underlying

commodity (commodity trader)

Commodity Market Approved commodity market

Commodity Any commodity that is not a Ribawi item,

approved by Shariah for purpose of deferred
sales. Eg: Mineral, metal, oil, gas etc
IPRS Price Contracted fixed profit–rate for fixed rate
settlement or floating rate indices

International Islamic University Malaysia

22
 Islamic Profit Rate Swap
2.
Client views interest rate is likely to rise. It then enters into
IPRS deal to pay fixed rate and to receive floating rate on
quarterly basis over 3 years.
Eg. Client pays 4.5% fixed profit payment and receives 3-
month KLIBOR.
3-Month KLIBOR
CLIENT SCBMB
4.5% Fixed

1.
Client has fixed
rate financing
6.0%
portfolio
Fixed
assuming at
6.0%p.a.

FINANCING
PORTFOLIO
(RM)

23
 Islamic Profit Rate Swap
-Combination of Commodity Murabahah Sale & Purchase

TRADER 2 TRADER 1

4 3 1 6
Commodity $ $ Commodity Commodity Commodity
B A A
$ $ B

ABC as
Agent
2
Commodity A

Sale Price equivalent to 4.5% fixed

CLIENT ABC
5
Purchase Price equivalent to 3-Month KLIBOR

Commodity B

24
 Islamic Cross Currency Swap

• An arrangement between 2 parties to

exchange a series of profit (interest) and/or
principal payments denominated in one
currency for another series of profit
(interest) and/or payments denominated in
another currency, based on a notional
principal amount, over agreed period

International Islamic University Malaysia

25
 Islamic Forward Rate Agreement

• An agreement between 2 parties to

exchange one payment of profit
(interest) denominated in a single
currency for another payment of profit
(interest) denominated in the same
currency, based on a notional principal
amount, at a single specified period.

International Islamic University Malaysia

26
 List of Islamic Treasury Products and
Instruments in Other Countries
• Salam Sukuk (BMA)
– Not tradeable in secondary market
• Short Term Ijarah Sukuk (BMA & Liquidity
Management Centre) )
– Can be traded in secondary market
– Maturity 6 months
– More maturities needed
– Carve out/re-parcel existing long term Ijarah sukuk
• Commodity Murabaha & Reverse Commodity
Murabaha
– Not tradeable in secondary market

International Islamic University Malaysia

27
THANK YOU & WASSALAM

28