Islamic Treasury Products: An Update

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Islamic Treasury Products An Update

• Prof Dato Dr. Mohd Azmi Omar
• azmiomar_at_iiu.edu.my

Seminar on Islamic Banking Capital Market
Products Instruments, 23-24 May 2007, Kuala
Lumpur, CERT
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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

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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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• 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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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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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

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• 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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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
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Outstanding Amount of Financial Instruments As At
22 May 2007
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ISLAMIC INTERBANK MONEY MARKET MONTHLY VOLUME BY
TENOR BETWEENJANUARY-2001 TO MAY-2007 (RM mil)
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NEGOTIABLE ISLAMIC DEBT INSTRUMENTS MONTHLY
VOLUME TRANSACTED THROUGH MONEY BROKERS BETWEEN
JANUARY-2003 TO MAY-2007
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ISLAMIC ACCEPTED BILLS (IAB) MONTHLY VOLUME
TRANSACTED THROUGH MONEY BROKERS
BETWEENJANUARY-2001 TO MAY-2007
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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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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 markup basis) of
  Shariahapproved commodities
• Shariah Principle
• The Shariah principle applied to this transaction
  is Murabahah (deferred costplus sale) where
  commodities are sold at a price comprising its
  cost plus a known profit margin, and the
  settlement is based on a lumpsum payment at an
  agreed future date

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• 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

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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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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

ABC, as principal
Commodity
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

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Trader 2
ABC sells the commodity at Commodity Exchange via
Trader 2 for cash..
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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
  Shariahcompliant assets or commodities

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• 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
  Shariahcompliant commodities or assets and with
  deferred profit payment term.

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• Shariah Principle
• Murabahah principle. The contract involves
  underlying sale and purchase transactions of
  Syariahapproved assets or commodities consisting
  of its cost price plus a determined profit margin
  markup 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 (noninterbank)
  transaction.

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• 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.

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Features of IPRS
Buyer A party wishing to protect against rising rates (pay fixedrate against receipt of floatingrate)
Seller A party wishing to protect against declining rates (pay floatingrate against receipt of fixedrate)
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 profitrate for fixed rate settlement or floating rate indices
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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 portfolio
assuming at 6.0p.a.
6.0 Fixed
FINANCING PORTFOLIO (RM)
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Islamic Profit Rate Swap
-Combination of Commodity Murabahah Sale
Purchase
TRADER 2
TRADER 1
1
3
4
6
Commodity A
Commodity B


Commodity A
Commodity B


ABC as Agent
2
Commodity A
Sale Price equivalent to 4.5 fixed
ABC
CLIENT
5
Purchase Price equivalent to 3-Month KLIBOR
Commodity B
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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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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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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

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THANK YOU WASSALAM