The Islamic money market is integral to the functioning of the Islamic banking system, firstly, in providing the Islamic financial institutions with the facility for funding and adjusting portfolios over the short-term, and secondly, serving as a channel for the transmission of monetary policy. Financial instruments and interbank investment would allow surplus banks to channel funds to deficit banks, thereby maintaining the funding and liquidity mechanism necessary to promote stability in the system.
The Islamic Interbank Money Market (IIMM) was introduced on January 3, 1994 as a platform to provide a ready source of short-term investment outlets based on Shariah principles where participants are able to match funding requirements effectively and efficiently. Bank Negara Malaysia (BNM) issued the Guidelines on the IIMM on December 18, 1993 to facilitate proper implementation of the IIMM.
Types of Instruments in Islamic Interbank Money Market
- a) Qard Acceptance
- b) Commodity Murabahah Programme (CMP)
- c) Malaysian Government Investment Issue (MGII)
- d) Bank Negara Monetary Notes-i (BNMN-i)
- e) Sell and Buy Back Agreement (SBBA)
- f) Collateralised Murabahah (CM)
- g) When Issue (WI)
- h) Islamic Accepted Bills (IAB)
- i) Islamic Negotiable Instruments (INI)
- j) Islamic Private Debt Securities
- k) Ar Rahnu Agreement-I (RA-i)
- l) Sukuk BNM Ijarah (SBNMI)
a) Qard Acceptance
Qard Acceptance is a transaction between BNM and the Islamic financial institutions (IFIs). It refers to a mechanism whereby the IFIs lend their surplus fund to BNM based on the concept of Qard. Qard is a contract of lending money by IFIs to BNM where the latter is bound to repay an equivalent replacement amount to the lender. A qard contract is established when ownership of a sum of money belonging to the IFIs is transferred to the BNM and BNM is obliged to repay IFIs in full.
Under the liquidity management operation, BNM uses the Qard Acceptance to absorb excess liquidity from the IIMM by accepting overnight money or term tenure Qard.
b) Commodity Murabahah Programme (CMP)
As a part of Bank Negara Malaysia’s initiative to support Islamic Finance development in Malaysia, Commodity Murabahah Programme (CMP) was introduced to facilitate liquidity management and investment purposes. CMP is a cash deposit product which is based on a globally acceptable Islamic concept. It is an efficient instrument for mobilisation of funds between surplus and deficit units.
CMP is designed to be the first ever commodity-based transaction that utilises the Crude Palm Oil based contracts as the underlying assets. CMP transaction with BNM was first auctioned competitively in the Islamic Interbank Money Market (IIMM) via the Fully Automated System for Issuing/Tendering (FAST) on14 March 2007 and it marked an extensive effort by the country to become a significant player in Islamic Financial Market globally. CMP may also be transacted bilaterally amongst IIMM participants including BNM.
c) Malaysian Government Investment Issue (MGII)
When the first Islamic bank in Malaysia began operations in 1983, the bank could not among other things, purchase or trade in Malaysian Government Securities (MGS), Malaysian Treasury Bills (MTB) or other interest bearing instruments. However, there was a serious need for the Islamic bank to hold such liquid papers to meet the statutory liquidity requirements as well as to park its idle fund. To satisfy both requirements, the Malaysian Parliament passed the Government Investment Act in 1983 to enable the Government of Malaysia to issue non interest bearing certificate known as Government Investment Certificates (GIC) {replaced with Malaysian Government Investment Issues (MGII). MGII was introduced in July 1983 under the concept of Qard al-Hasan.
The concept of Qard al-Hasan did not satisfy MGII as tradable instruments in the secondary market. To address this shortfall, BNM opened a window to facilitate the players to sell and purchase the papers with the central bank. The price sold or purchase by the players was determined by BNM, which maintained a system to record any movement in the MGII.
On 15 June 2001, the Government of Malaysia with the advice of Bank Negara Malaysia, issued a 3-year MGII worth RM2.0 billion under a new concept of Bai al-Inah. The move therefore had added depth to the IIMM as MGII is now tradable in the secondary market via the concept of Bay ad-Dayn (debt trading).
Effective from 22 July 2013, MGII is issued based on Murabahah concept. MGII based on Murabahah contract is essentially a certificate of indebtedness arising from a deferred mark-up sale transaction of an asset, such as commodity (mainly crude palm oil), which complies with Shariah principles. This issuance under Murabahah contract will involve commodity transactions to create indebtedness between the sukuk issuer and the investors.
d) Bank Negara Monetary Notes-i (BNMN-i)
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. The maturity of these issuances has also been lengthened from one year to three years. New issuances of BNMN-i may be issued either on a discounted or a coupon-bearing basis depending on investors' demand. Discount-based BNMN-i will be traded using the same market convention as the existing BNNN and Malaysian Islamic Treasury Bills (MITB) while the profit-based BNMN-i will adopt the market convention of Malaysian Government Investment Issues (MGII).
e) Sell and Buy Back Agreement (SBBA)
Sell and Buy Back Agreement (SBBA) is an Islamic money market transaction entered by two parties in which an SBBA seller sells assets to an SBBA buyer at an agreed price, and subsequently, both parties entered into a separate agreement in which the buyer promises to sell back the said asset to the seller at an agreed price.
f) Collateralised Murabahah (CM)
Collateralised Murabahah (CM) is essentially a Shariah-compliant financing secured by assets in which the financier has the right to sell the asset should the client fail to repay the financing. It combines the widely accepted Murabahah financing transaction with Sukuk that forms as the pledged asset to back the transaction.
Collateralised Murabahah is a low credit-risk financial instrument that enables collateralised interbank transactions in the IIMM in Malaysia. CM adds diversity to the existing liquidity management tool and further promotes greater liquidity in the Islamic financial market.
CM can be used by Islamic financial institutions to obtain liquidity from BNM under the standing facility and to facilitate daily Islamic money market operation in the interbank market.
g) When Issue (WI)
When Issue is a transaction of sale and purchase of debt securities before the securities is being issued. The BNM’s Shariah Advisory Council (SAC) viewed that the WI transaction is allowed based on the permissibility to promise for sale and purchase transactions.
h) Islamic Accepted Bills (IAB)
Islamic Accepted Bill also known as Interest-Free Accepted Bill (IAB), was introduced in 1991. The objective of introducing IAB is to encourage and promote both domestic and foreign trade, by providing Malaysian traders with an attractive Islamic financing product. The IAB is formulated on the Islamic principles of Murabahah (deferred lump-sum sale or cost-plus) and Bai al-Dayn (debt-trading).
Murabahah refers to the selling of merchandise at a price based on cost-plus profit margin agreed to by both parties. Bai al-Dayn refers to the sale of a debt arising from a trade transaction in the form of a deferred payment sale. There are two types of financing under the IAB facility, namely: -
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i) Imports and local purchases
The financing would be financed under Murabahah working capital financing mechanism. Under this concept, the commercial bank appoints the customer as the purchasing agent for the bank. The customer then purchases the required goods from the seller on behalf of the bank, which would then pay the seller and resell the goods to the customer at a price, inclusive of a profit margin. The customer is allowed a deferred payment term of up to 200 days. Upon maturity of Murabahah financing, the customer shall pay the bank the cost of goods plus profit margin.
The sale of goods by the bank to the customer on deferred payment term constitutes the creation of debt. This is securitised in the form of a bill of exchange drawn by the bank and accepted by the customer for the full amount of the bank's selling price payable at maturity. If the bank decides to sell the IAB to a third party, then the concept of Bai al-Dayn will apply whereby the bank will sell the IAB at the agreed price.
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ii) Exports and local sales
The bills created shall be traded under the concept of Bai al-Dayn. An exporter who had been approved for IAB facility will prepare the export documentation as required under the sale contract or letter of credit. The export documentation shall be sent to the importer's bank. The exporter shall draw on the commercial bank a new bill of exchange as a substitution bill and this will be the IAB. The bank shall purchase the IAB at a mutually agreed price using the concept of Bai al-Dayn and the proceeds will be credited to the exporter's account. Domestic sales will be treated in a similar manner.
i) Islamic Negotiable Instruments (INI)
The INI covers two instruments such as:-
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i) Islamic Negotiable Instruments of Deposit (INID)
The applicable concept is 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.
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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 are purchased back from the customer at principal value plus profit and to be settled at an agreed future date.
j) Islamic Private Debt Securities
Islamic Private Debt Securities (IPDS) have been introduced in Malaysia since 1990 which are currently issued based on the Shariah-compliant concept of Ijarah, Istithmar, Bai Bithaman Ajil, Murabahah, Mudharabah, Musharakah etc.
k) 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.
l) Sukuk Bank Negara Malaysia Ijarah (SBNMI)
This sukuk is based on the 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. The assets will then be leased to Bank Negara Malaysia for rental payment consideration, which is distributed to investors as a return on a semi-annual basis. Upon maturity of the sukuk Ijarah, which will coincide with end of the lease tenure, BNM Sukuk Berhad will then sell the assets back to Bank Negara Malaysia at a predetermined price.
The inaugural issuance took place on 16 February 2006 with an issue size of RM400 million.
DEVELOPMENT OF BNM OPERATIONS IN ISLAMIC INTER BANK MONEY MARKET
03 Jan 1994 Islamic Interbank Money Market (IIMM) was introduced.
13 Feb 1996 Mudharabah Interbank Investment (MII) was implemented to ensure mobility of fund in the MII.
05 Aug 1999 Bai al-Inah Funding facility was introduced. The instrument serves as a last resort funding facility by BNM to cover an Islamic banking institution's deficit position.
21 Sep 1999 BNM introduced Mudharabah money market tender. Islamic banking institutions which participate in the tender exercise are required to submit their bids via Fully Automated System for Issuing/Tendering System (FAST).
29 Nov 2000 Bank Negara Negotiable Notes (BNNN) which is based on the concept of Bai al-Inah was introduced.
15 Jun 2001 Government Investment Issue (GII) based on Bai al-Inah was introduced and issued on behalf of the Government of Malaysia.
01 Oct 2001 Circular on When Issue (WI) was issued by BNM to all the Islamic banking institutions.
15 Apr 2002 Wadiah Acceptance which is based on Wadiah concept was introduced.
13 May 2002 Akauntan Negara Malaysia (ANM) opened current account (Islamic) with Bank Negara which is based on Wadiah.
01 Aug 2002 BNM issued Guidance Notes on Sell and Buy Back Agreement (SBBA) to Islamic banking institutions.
21 Dec 2002 Sell and Buy Back Tender via Fully Automated System for Issuing/Tendering System (FAST) was introduced.
09 Jul 2003 Management Committee of Bank Negara approved Ar Rahnu Agreement-i.
17 Sep 2004 Issuance of the first Malaysian Islamic Treasury Bills (MITB).
8 Oct 2004 Launching of Islamic Interbank Money Market Website by the Governor.
17 Jan 2005 Introduced Islamic Overnight Tender through FAST based on Wadiah.
16 Mar 2005 Issued first Profit-Based MGII which pays periodical coupon to the investors.
24 Jun 2005 Islamic Derivatives Seminar to promote new Islamic Instruments; Islamic FX Forward and Islamic Profit Rate Swap (IPRS).
16 Feb 2006 Inaugural issuance of Sukuk Bank Negara Malaysia Ijarah (SBNMI).
08 Feb 2007 Introduced Commodity Murabahah Programme (CMP).
21 Apr 2009 The Association of Islamic Banking Institutions Malaysia (AIBIM), have unanimously adopted two standardized interbank Master agreements for Islamic deposit-taking and placement transactions.
02 Jul 2009 Inaugural issuance of Bank Negara Monetary Notes Murabahah (BNMN-Murabahah).
17 Aug 2009 Bursa Malaysia launched Bursa Suq Al Sila – a world’s first, end-to-end Shariah-compliant commodity trading platform that is able to facilitate commodity-based Islamic financing and investment transactions under the Shariah principles of Murabahah, Tawarruq and Musawwamah using Malaysia's commodity, crude palm oil (CPO).
21 Aug 2009 The Corporate Murabahah Master Agreement (CMMA), a standard document for deposit taking between financial institutions and corporate customers, was launched by Association of Islamic Banking Institutions Malaysia (AIBIM).
17 Sep 2009 Association of Islamic Banking Institutions Malaysia – launched two standardised documents for deposit taking and placement transactions. The move significantly enhanced Islamic interbank activities by improving efficiency, limiting misunderstanding and reducing the cost of Islamic banking transactions.
24 Nov 2009 The Association of Islamic Banking Institutions Malaysia (AIBIM) launched the standard Wakalah Placement Agreement (WPA). The move is aimed at standardising the agreement for deposit placements by corporate customers with Islamic financial institutions (IFIs) and for interbank placements among IFIs under the Wakalah concept.
21 Jun 2011 BNM introduced new Islamic monetary instruments, the Bank Negara Monetary Notes-Istithmar (BNMN-Istithmar) and Bank Negara Monetary Notes-BBA (BNMN-BBA). BNMN-Istithmar is essentially a certificate based on the Istithmar (investment) concept which refers to portfolio investments into a combined structure of sale and lease-back of assets (Ijarah) and commodity mark-up sale transaction (Murabahah). BNMN-BBA is a certificate based on Bai Bithaman Ajil concept which involved sale of commodities based on deferred payment at an agreed price.
30 May 2012 BNM introduced new Islamic monetary instrument, the Collateralised Murabahah. Collateralised Murabahah is essentially a Shariah-compliant financing secured by assets in which the financier has the right to sell the asset should the client fail to repay the financing. It combines the widely accepted Murabahah financing transaction with Sukuk that forms as the pledged asset to back the transaction.
25 Feb 2013 BNM introduced Islamic Range Maturity Auction (iRMA) under Wadiah Acceptance and Murabahah Acceptance via FAST.
15 Jun 2015 BNM introduced Qard principle as the underlying contract for Islamic money market tender to replace the use of Wadiah principle. Implementation of Qard is in line with SAC's decision with regards to custody of money in its 6th special meeting dated 8 May 2008.
30 Jul 2015 BNM introduced Bank Negara Malaysia – Mudarabah Certificate (BNM M-Cert). BNM M-Cert is essentially a certificate structured based on a profit-sharing agreement between BNM and sukuk holders, where BNM undertakes the role of investment manager by investing funds in Shariah-compliant assets and distributing the profits according to the agreed profit-sharing ratio.
5 Feb 2016 Government of Malaysia issued Malaysian Islamic Treasury Bill (MITB) based on Murabahah contract. MITB is essentially a certificate of indebtedness arising from deferred mark-up sale transaction of an asset, such as commodity (mainly crude palm oil), which complies with Shariah principles.
2018
Bank Negara Interbank Bills Islamic (BNIBI) under the Shariah principle of Murabahah was introduced in March 2018. Since the introduction, the ringgit BNIBI issuances have been well-received as their tradability features offer flexibility for banking institutions to manage their short-term liquidity needs efficiently.
Overnight CMP was introduced in October 2018 to replace the then existing instrument which was based on Qard Acceptance. CMP rate is made transparent upfront, thus providing impetus for a competitive and efficient price discovery mechanism in the IIMM.
22 Sep 2020 Sukuk Prihatin, a government initiative under the National Economic Recovery Plan (PENJANA), was introduced to provide an opportunity for the Malaysian citizens to contribute to the nation’s rebuilding efforts due to the Covid-19 pandemic.
2022
BNM has launched Malaysia Islamic Overnight Rate (MYOR-i) on 25 March 2022 to spur Islamic financial product innovation. MYOR-i, the first transaction-based Islamic benchmark rate in the world, is developed in accordance with the Principles for Financial Benchmarks. BNM’s Shariah Advisory Council (SAC) has also confirmed that MYOR-i is Shariah-compliant. The introduction of MYOR-i will spur the development of innovative Shariah-compliant financial products which will further deepen Malaysia’s Islamic financial market. It will also reinforce a holistic Shariah-compliant ecosystem and enhance best market practices and standards.
Leveraging on the successful landmark issuance of the U.S. Dollar Sustainability Sukuk in April 2021, the GOM successfully tapped into the domestic market with an inaugural issuance of Sustainability Malaysian Government Investment Issues (“Sustainability MGII”) of RM4.5 billion on 30 Sep 2022. The issuance proceeds will be utilised to finance or refinance eligible social and green projects, as defined in the Government of Malaysia’s SDG Sukuk Framework, similar to the U.S. Dollar Sustainability Sukuk issued in 2021. The issuance will enable Malaysia to not only meet its commitments as a responsible nation and signatory to the Paris Agreement, but also further its efforts to advance its people’s socio-economic well-being. The issuance is also a testament to the Government’s efforts in advancing climate action as well as accelerating the transition towards achieving a prosperous, inclusive and sustainable nation.