1 islamic treasury products: an update prof dato’ dr. mohd azmi omar [email protected] seminar...

1

Islamic Treasury Products: An Update

Prof Dato’ Dr. Mohd Azmi Omar

[email protected]

Seminar on Islamic Banking & Capital Market: Products & Instruments, 23-24 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


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 TurkeyInternational Islamic University Malaysia

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


6

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


http://www.ambg.com.my/i/tps/al_mudh_gia.asp

http://www.ambg.com.my/i/tps/al_mudh_sia.asp

http://www.ambg.com.my/i/tps/nidc.asp

http://www.ambg.com.my/i/tps/inid.asp

http://www.ambg.com.my/i/tps/gii.asp

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


http://www.ambg.com.my/i/tps/bnnn.asp

http://www.ambg.com.my/i/tps/ipds.asp

http://www.ambg.com.my/i/tps/sbba.asp

http://www.ambg.com.my/i/tps/iab_ba.asp

8

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

9

Outstanding Amount of Financial Instruments As At 22 May 2007


10

ISLAMIC INTERBANK MONEY MARKET MONTHLY VOLUME BY TENOR BETWEEN

JANUARY-2001 TO MAY-2007 (RM mil)


11

NEGOTIABLE ISLAMIC DEBT INSTRUMENTS MONTHLY VOLUME TRANSACTED THROUGH MONEY BROKERS BETWEEN

JANUARY-2003 TO MAY-2007


12

ISLAMIC ACCEPTED BILLS (IAB) MONTHLY VOLUME TRANSACTED THROUGH MONEY BROKERS BETWEEN

JANUARY-2001 TO MAY-2007


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)


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


15

• 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


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.

Commodity Murabahah Programme (CMP-i)

Corporate Client appoints ABC as its agent to buy commodity from Commodity Exchange. ABC buys the commodity by cash via Trader 1.

Client then sells the commodity to ABC via deferred payment. The Sale Price represents the return from deposit for the Client.

ABC sells the commodity at Commodity Exchange via Trader 2 for cash..

Corporate Client

ABC, acting as agent

ABC, as principal

Trader 1

Trader 2

1

2

3

Commodity$

Deferred

$Commodity

Commodity $

1717

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


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.


20

• Shariah Principle– 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.


21

• 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.


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

Islamic Profit Rate Swap

FINANCING PORTFOLIO

(RM)

1.

Client has fixed rate financing

portfolio assuming at

6.0%p.a.

SCBMB

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.

6.0% Fixed

4.5% Fixed

3-Month KLIBOR

2323

CLIENT

Islamic Profit Rate Swap -Combination of Commodity Murabahah Sale & Purchase

TRADER 2

ABC

ABC as Agent

TRADER 1

1

2

34

5

6

Sale Price equivalent to 4.5% fixed

Purchase Price equivalent to 3-Month KLIBOR

Commodity A

Commodity A

Commodity A

Commodity B

Commodity B $$$ $

Commodity B

2424

CLIENT

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


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.


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– Not tradeable in secondary market


28

THANK YOU & WASSALAM

1 islamic treasury products: an update prof dato’ dr. mohd azmi omar [email protected] seminar...

Documents