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

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

Types of Instruments of IIMM 1. Mudharabah Inter-Bank Investment 2. Wadiah Inter-Bank Acceptance 3. Government Investment Issue 4. Bank Negara Negotiable Notes 5. Sell and Buy Back Agreement 6. Cagamas Mudharabah Bonds 7. When Issue 8. Islamic Accepted Bills 9. Sukuk BNM Ijarah razizi.uitm.edu.my

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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

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

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

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

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

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

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

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

(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

(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

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

10. 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 and al Mudharabah. razizi.uitm.edu.my

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

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

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

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

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

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

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

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