1. Islamic Treasury Products: An Update
Prof Dato’ Dr. Mohd Azmi Omar
Seminar on Islamic Banking & Capital Market: Products & Instruments, May 2007, Kuala Lumpur, CERT

2. 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

3. 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
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4. 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
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5. 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
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6. List of Islamic Treasury Products and Instruments in Malaysia
General Investment Account-i (GIA-i)
Mudharabah
Special Investment Account-i (SIA-i)
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
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7. 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
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8. Outstanding Amount of Financial Instruments As At 22 May 2007
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
SANADAT MUDHARABAH CAGAMAS
230
SUKUK BANK NEGARA MALAYSIA IJARAH
400
TOTAL OUTSTANDING AMOUNT
166,001
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9. Outstanding Amount of Financial Instruments As At 22 May 2007
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10. ISLAMIC INTERBANK MONEY MARKET MONTHLY VOLUME BY TENOR BETWEEN JANUARY-2001 TO MAY-2007 (RM mil)
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11. NEGOTIABLE ISLAMIC DEBT INSTRUMENTS MONTHLY VOLUME TRANSACTED THROUGH MONEY BROKERS BETWEEN JANUARY-2003 TO MAY-2007
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12. ISLAMIC ACCEPTED BILLS (IAB) MONTHLY VOLUME TRANSACTED THROUGH MONEY BROKERS BETWEEN JANUARY-2001 TO MAY-2007
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13. 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)
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14. 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
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15. Minimum Amount Tenor Rate of Return Minimum of 1 day to 5 years
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
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16. 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
Price
Mark-up price by investor according to profit rate approved by the Bank.
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17. Commodity Murabahah Programme (CMP-i)
Corporate Client 2
Deferred $
ABC, acting as agent
Client then sells the commodity to ABC via deferred payment. The Sale Price represents the return from deposit for the Client.
Commodity 1 $
Commodity
ABC, as principal
Corporate Client appoints ABC as its agent to buy commodity from Commodity Exchange. ABC buys the commodity by cash via Trader 1.
Trader 1
Commodity $ 3
Trader 2
ABC sells the commodity at Commodity Exchange via Trader 2 for cash.. 17

18. 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
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19. 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.
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20. Shariah Principle Minimum Amount
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.
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21. Tenor Profit Margin Minimum 6 months. No maximum tenor
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.
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22. 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
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23. Islamic Profit Rate Swap2.
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 portfolio assuming at 6.0%p.a.
6.0% Fixed
FINANCING PORTFOLIO (RM) 23 23

24. Islamic Profit Rate Swap -Combination of Commodity Murabahah Sale & Purchase
TRADER 2
TRADER 1 4 3 1 6
Commodity B $ $
Commodity A
Commodity A $ $
Commodity 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 24

25. 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
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26. 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.
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27. 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
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28. THANK YOU & WASSALAM