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Islamic Interbank Money Market
 
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Information > About IIMM

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 Inter bank Money Market (IIMM) was introduced on January 3, 1994 as a short-term intermediary to provide a ready source of short-term investment outlets based on Syariah principle. Through the IIMM, the Islamic banks and banks participating in the Islamic Banking Scheme (IBS) would be able to match the 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) Mudarabah Interbank Investment (MII)
b) Wadiah Acceptance
c) Government Investment Issue (GII)
d) Bank Negara Monetary Notes-i (BNMN-i)
e) Sell and Buy Back Agreement (SBBA)
f) Cagamas Mudharabah Bonds (SMC)
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)


Types of Instruments in Islamic Interbank Money Market

The IIMM covers the Mudharabah Interbank Investment and Interbank trading of Islamic financial instruments.


a) Mudharabah Interbank Investment (MII)    Back to Top

MII refers to a mechanism whereby a deficit Islamic banking institution (investee bank) can obtain investment from a surplus Islamic banking institution (investor bank) based on Mudharabah (profit sharing). The period of investment is from overnight to 12 months, while the rate of return is based on the rate of gross profit before distribution for investment of 1-year of the investee bank. The profit sharing ratio is negotiable among both parties. The investor bank at the time of negotiation would not know what the return would be, as the actual return will be crystallised towards the end of the investment period. The principal invested shall be repaid at the end of the period, together with a share of the profit arising from the used of the fund by the investee bank.


b) Wadiah Acceptance    Back to Top

Wadiah Acceptance, is a transaction between BNM and the Islamic banking institutions. It refers to a mechanism whereby the Islamic banking institutions placed their surplus fund with BNM based on the concept of Al- Wadiah. Under this concept, the acceptor of funds is viewed as the custodian for the funds and there is no obligation on the part of the custodian to pay any return on the account. However, if there is any dividend paid by the custodian, is perceived as 'hibah' (gift). The Wadiah Acceptance facilitates BNM's liquidity management operation as it gives flexibility for BNM to declare dividend without having to invest the funds received.

Under the liquidity management operation, BNM uses the Wadiah Acceptance to absorb excess liquidity from the IIMM by accepting overnight money or fixed tenure wadiah.

c) Government Investment Issue (GII)    Back to Top

When the first Islamic bank in Malaysia began operations in 1983, the bank cannot 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) {now replaced with Government Investment Issues (GII)}. The GII was introduced in July 1983 under the concept of Qard al- Hasan.

The concept of Qard al- Hasan does not satisfy the GII as tradable instruments in the secondary market. To address this shortfall, BNM opens a window to facilitate the players to sell and purchase the papers with the central bank. The price sold or purchase by the players is determined by BNM, which maintains a system to record any movement in the GII.

On 15 June 2001, the Government of Malaysia with the advice by Bank Negara Malaysia, issued a 3 -year GII of RM2.0 billion under a new concept of of Bai Al-Inah. The move therefore had added depth to the IIMM as the GII is now tradable in the secondary market via the concept of Bay ad- Dayn (debt trading).

On 16 March 2005, the Government of Malaysia with the advice by Bank Negara Malaysia, issued first Profit-Based GII 5 -year tenure of RM2 billion. It is coupon bearing paper which the Government pay half yearly profit to the investors.

On 17 June 2005 the Government has ammended the Government Funding Act 1983 (previously known as the Government Investment Act 1983) to increase the issuance size limit of GII from RM 15 billion to RM 30 billion. As at end of 2005, the outstanding amount of the GII issued is RM10.1 billion.


d) Bank Negara Monetary Notes-i (BNMN-i)    Back to Top

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 Government Investment Issues (GII).


e) Sell and Buy Back Agreement (SBBA)    Back to Top

Sell and Buy Back Agreement (SBBA) is an Islamic money market transaction entered by two parties in which an SBBA seller (seller) sells assets to an SBBA buyer (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) Cagamas Mudharabah Bonds (SMC)    Back to Top

Cagamas Mudharabah Bond was introduced on 1 March 1994 by Cagamas Berhad to finance the purchase of Islamic housing debts from financial institutions that provides Islamic house financing to the public. The SMC Mudharabah Bond is structured using the concept of Mudharabah where the bondholders and Cagamas will share the profits according to the agreed profit-sharing ratios.


g) When Issue (WI)    Back to Top

When Issue is a transaction of sale and purchase of debt securities before the securities is being issued. The National Shariah Advisory Council viewed that the WI transaction is allowed based on the permissibility to promise for sale and purchase transactions.


h) Islamic Accepted Bills (IAB)    Back to Top

Islamic Accepted Bill also known as Interest-Free Accepted Bill (IAB), was introduced in 1991. The objectives 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 Al-Murabahah (deferred lump-sum sale or cost-plus) and Bai ad-Dayn (debt-trading).

Al-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:-

  • i) Imports and local purchases    Back to Top
    The financing would be financed under al-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 al-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 on 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.

  • ii) Exports and local sales    Back to Top
    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 documents, 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)    Back to Top

The INI covers two instruments such as:-

  • i) Islamic Negotiable Instruments of Deposit (INID)
    The applicable concept is Al-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.

  • 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 is purchased back from the customer at principal value plus profit and to be settled at an agreed future date.

j) Islamic Private Debt Securities    Back to Top

Islamic Private Debt Securities (IPDS) has been introduced in Malaysia since 1990. At the moment, the IPDS which are outstanding in the market were issued based on the Shariah compliant concept of Bai Bithaman Ajil, Murabahah and al Mudharabah.


k) Ar Rahnu Agreement-I (RA-i)    Back to Top

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.

BNM will use RA-I as a liquidity management tool for its money market operations. Return from the RA-I will be in the form of gift (hibah) and is determined based on the average inter bank money market rates.


l) Sukuk Bank Negara Malaysia Ijarah (SBNMI)     Back to Top

This sukuk based on the Al-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 takes place on 16 February 2006 with an issue size of RM400 million. Bank Negara Malaysia issues this instrument on a regular basis with subsequent issues ranging from RM100 million to RM200 million.

 
DEVELOPMENT OF BNM OPERATIONS IN ISLAMIC INTER BANK MONEY MARKET

03 Jan 1994 Islamic Inter bank 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 Al Wadiah was introduced.

13 May 2002 Akauntan Negara Malaysia (ANM) opened current account (Islamic) with Bank Negara which is based on Al 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 of 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 Al-Wadiah . 

16 Mar 2005 Issued first Profit-Based GII (Government Investment Issues)coupon bearing. .

24 Jun 2005 Islamic Derivatives Seminar to promote new Islamic Instruments; Islamic FX Forward and Islamic Rate Swap (IRS).

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 standardized documents for deposit taking and placement transactions. The move significantly enhanced Islamic interbank activities by improving efficiency, limit misunderstandings and reducing the cost of Islamic banking transactions. 

24 Nov 2009 The Association of Islamic Banking Institutions Malaysia (AIBIM) has 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.

            
 

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