Islamic money market

Based my reading, I founded that most of the stakeholder are seeking for the pure markets, which eliminate interest and other prohibited products. For this reason, Bank Negara Malaysia has made some effort of making the Islamic Money Market become one of the vital and important markets as compared to conventional money market. In addition, I mentioned that the conventional money market or Islamic money market both them have the same characteristics, purposes, and aims. However, there are some point that can differentiate between them is the instruments allowed in the Islamic money market are restricted to certain circumstances and conditions. The Islamic Money Market is one of the financial markets that all the activities are involved or carried out in a ways that do not conflict with the conscience of Muslims and the religion of Islam even Shari’ah principle. The all Instruments involved in the Islamic money market should be adhered and complied to principles established by the Shari'ah or the Islamic law as revealed in the Qur'an and Sunnah. In Islam, it is required that all products involve in the sale and buying (including the instruments in the financial markets) shall be from the ethical sectors or in other words, the profits gained shall not be in or from the prohibited activities. These prohibited activities include alcohol production, gambling, pornography, interest-base (riba) sector and should be free from the interest-based debt. The Islamic money market started in Malaysia during the introduction of Islamic banking in early 1980s. Due to this establishment, the Islamic banking system is regulated to have these three main components:

(1) Large number of Islamic financial instruments offering Islamic products,

(2) Large number of financial institutions providing Islamic facilities, and,

(3) The Islamic Inter-bank Money Market.

Today, we can mention that the Islamic money market is one of the important and crucial components in the overall of the Islamic Financial Markets in Malaysia. The role of Islamic money market as other market component is essential in order to generate the economic growth of the country. Same as the conventional money market, the Islamic money market functions and plays the role to the Islamic banking system to widen and deepen the Islamic financial markets in Malaysia. The Islamic financial instruments that are currently being traded in the IIMM on the basis of Bai al-Dayn are the Green bankers acceptances, Islamic accepted bills, Islamic mortgage bonds and Islamic private debt securities. Bai al-dayn is a sale of debt. To enable the sale to take place, the debts arising out of contract of exchanges or aqad al-muawadhat, such as trade financing of asset sale (based on the underlying contract of bai muajjal or bai bithaman ajil) are securitized. Other types of Islamic instruments are Government Investment Issue (GII) which lie under the concept of Al-Bai Al-Inah and Islamic Accepted Bills (IAB) which apply Al-Murabahah or cost-plus financing and Al-Bai’ Al-Dayn or debt financing concept. Moreover, Islamic Private Debt Securities (IPDS) and Negotiable Islamic Debt Certificates (NIDC) which both apply the concept of Al-Bai’ Bithaman Ajil or deferred payment sale and Al-Bai’ Al-Dayn or debt financing. Addition to the Islamic Private Debt Securities (IPDS) is the concept of Al-Murabahah or cost-plus financing.

Islamic Money Market Instruments

There are some of the Islamic Money Market Instruments as below:

· Al-Mudaraba Interbank Investment.

· Islamic Inter-bank Cheque Clearing System

· Government Investment Certificate (GIC)

· Cagamas Mudharabah Bonds

· Islamic Accepted Bills (IAB)

· Islamic Treasury Bills

· Repurchase Agreements (REPO)

· Islamic Private Debt Securities

· Islamic Negotiable Certificates of Deposit (INCO)

Purpose of Islamic Money Markets

Based on my reading, I mention that the purpose of Islamic Money Market is further strengthening the institutional structure of Islamic banking operations. The financial performance can be achieved through channeling surplus liquid resources for investment, and to meet short term liquidity needs. In the Islamic Money Market, the trading of short term Islamic Instruments those are liquid but also offering the return on the investment. All instruments are “asset based” and all instrument should followed by shariah principle.

Functions of Islamic Money Market

· Facilitate IfIs to effectively manage their asset liability mismatch.

· Enable IFIs to act as investors and borrowers

· Provide short term, liquid, tradable, asset backed instruments, where IFIs can invest their surpluses.

· Provide short term investment opportunities that are more competitively priced.

· Enable IFIs to assume term risk, securities and liquidate such assets to improve the quality of the portfolio.

· Create secondary market activity with designated market makers, where such instruments can be actively traded.

Malaysia Islamic Treasury Bills (MITB)

I will explain more about the Islamic Treasury Bills as the Islamic Money Market Instruments that are issued by the Government to meet its short term development expenditure. Treasury Bills are one of the safest money market instruments as they are issued by Central Government. These are the most liquid money market instrumentand also most secured short-term investment in the money market. Because the Treasury bills are zero-risk instruments in money market, therefore the returns on that are not that attractive. This risk-free rate of return is used as somewhat of a benchmark for rates on municipal bonds, corporate bonds and bank interest. T-Bills are circulated by both primary as well as the secondary markets. They come with the maturities of 3-month, 6-month and 1-year. The Central Government issues T-Bills at a price less than their face value and the difference between the buy price and the maturity value is the interest earned by the buyer of the instrument. T-Bills are issued at a discount to the maturity value. Rather than paying a coupon rate of interest, the appreciation between issuance price and maturity price provides the investment return. For example, a 26-week T-bill is priced at $9,800 on issuance to pay $10,000 in six months. No interest payments are made. The investment return comes from the difference between the discounted value originally paid and the amount received back at maturity, or $200 ($10,000 - $9,800). In this case, the T-bill pays a 2.04% interest rate ($200 / $9,800 = 2.04%) for the six-month period.

Malaysia Islamic Treasury Bank (MITB) are short-term securities issued by the Government of Malaysia based on Islamic principles. According to our reading, we find that the first Islamic Treasury (ITB) issued by BNM in 17th September 2004. MITB are usually issued on a weekly basis with original maturities of 1-year. MITB auctions are held one day before the issue date. The successful bidders will be determined according to the most competitive yield offered. Both conventional and Islamic institutions can buy and trade MITB.The MITB are structured based on Bai' Al-Inah principle, part of sell and buy back concept. Bank Negara Malaysia on behalf of the Government will sell the identified Government's assets on competitive tender basis, to form the underlying transaction of the deal. Allotment is based on highest price tendered (or lowest yield). Price is determined after profit element is imputed (discounting factor). The successful bidders will then pay cash to the Government. The bidders will subsequently sell back the assets to the Government at par based on credit term. The Government will issue MITB to bidders to represent the debt created. MITB are tradable on yield basis (discounted rate) based on bands of remaining tenure (e.g., Band 4= 68 to 91 days to maturity). The standard trading amount is RM5 million, and it is actively traded based on Bai ad-Dayn (debt trading) principle in the secondary market.

However, we found that the Treasury Bills also can be adapted with the concept of Mudaraba basis. Mudaraba bonds can be issued, therefore the government will be involved to collects the proceeds from banks with short term liquidity and may actions like the Mudarib. This will be proceeds on the continuous basis so that the government could secure a constant flow of funds through the frequent issuing of Mudaraba bonds. Therefore, we mention that the Mudaraba bonds should be carefully to studied and chosen so that they can be more liquidated within the some of specific period- 3 months, six months or may be up to 1 years.

Features of Malaysia Islamic Treasury Bills (MITB)

· MITB are issued by BNM on behalf of the Government to raise short-term funds for the financing of Government expenditure;

· The instruments are issued using Islamic principles which are deemed acceptable to Shariah requirement;

· MITB are issued and traded based on a discounted basis;

· The tenors issued are between 21 days to 1 year;

· Zero credit risk is assigned as it is issued by Bank Negara Malaysia.

The Process of Malaysia Islamic Treasury Bills (MITB)

1. Identify Assets

2. Sell assets on a tender, basis at a discount from par value

3. GOM buy back the certificate of GOM assets at par value (100.00) to be paid on the maturity date

4. Though the sale and purchase transaction, a debt has been created. This debt is securitized through the Issuance of MITB

5. GOM thru BNM to allot MITB to successful banks via Rentas

Attracted with the diagram of process of MITB