islamic products information kit bnm

Islamic Products Information Kit

Table of Contents Ijarah (leasing) 1

Murabahah (cost plus) 2

Bai’ al-Inah (sale and buy-back transaction) 3

Wadiah Yad Dhamanah (savings with guarantee) 4

Qardhul Hassan (benevolent loan) 5

Mudharabah (profit-sharing) 6

Rahnu (collateralised borrowing) 7

Malaysia International Islamic Financial Centre (MIFC) 8

Islamic Securities 9

Islamic Money Market 10

Historical Yields for Conventional & Islamic Securities 11

1

Bank Negara Malaysia (BNM)

Investor

SPV

5

2

3

6

4

1

Payment for Sukuk

7

Redemption upon maturity

8

Ijarah (leasing)

Refers to a contract under which the lessor leases equipment, building or other facilities to a client at an agreed rental rate and pre-determined lease period upon the aqad (contract). The ownership of the leased equipment remains in the hand of a lessor.

Application:

1) Issuance of Sukuk Ijarah Acceptability:

1) The contract is acceptable in the Middle East except Sudan. 2) The rejection is due to the buy-back option by the original owner in this

arrangement.

Sell beneficial interest in assets

Rental Payment

Leases the asset

Issuance of Sukuk Ijarah Rental Distribution

BNM buyback the assets

2


Commodity Broker B

Financial Institutions

Agent

Commodity Broker A

4

3

2

1

Murabahah (cost plus)

A contract that refers to the sale and purchase transaction of an asset whereby the cost and profit margin (mark-up) are made known and agreed by all parties involved. The settlement for the purchase can be settled either on a deferred lump sum or installments basis, will be specified in the agreement.

Application:

1) Deposit placement with BNM via Commodity Murabahah Transaction.

Acceptability:

1) Internationally accepted

Asset flows (Book entry – all on spot basis) Fund flows (1st leg is spot & 2nd leg is deferred)

C. BNM sells the commodity to the broker (at cost price)

For the 2nd leg, BNM pays FIs principal + profit at maturity (on a deferred basis) B. FIs sell the

commodity to BNM (at mark up price)

A. Commodity is transferred to Agent

Commodity brokers may net-off their positions via exchange outside the MBT

For the 1st leg, FIs transfer funds to the agent to buy commodity (to create principal amount)

Agent will buy commodity direct from the commodity broker (cost price)

Commodity Broker will pay the proceeds to BNM

3

Central Bank Sell Assets 1 3

Pay to BNM

Pay to FIs

Central Bank purchase Assets



2 4

Bai’ al-Inah (Sale and Buy-back transaction)

A contract which involves selling and buying of an asset where a seller will sell the asset to a buyer on a cash basis and subsequently will buy the same asset on a deferred payment basis at mark up price. It can also be applied when a seller sells the asset to a buyer on a deferred basis and will later buy back the same asset on a cash basis with a price which is lower than the deferred price.

Application:

1) Issuance of Bank Negara Negotiable Notes (BNNN). 2) Issuance of Profit-based GII.

Acceptability:

1) Bai’ Al-Inah is not acceptable by the Middle East countries 2) Some of the scholars regarded Bai’ Al-Inah as part of Interest-based

transaction.

4



3

21

Wadiah Yad Dhamanah (savings with guarantee) Wadiah is a trust concept which refers to the deposits or valuable goods that have been kept with a depository agent. The depository agent will safeguard and provide guarantee to the principle of the deposits or valuable goods. With permission from the depositors, depository agent may invest the deposit to earn some returns. However, the depositors are not entitled to any share of the returns but the depository agent may give a gift (hibah) to the depositors as a token of appreciation. Application:

1) Wadiah Placement with BNM.

Acceptability:

1) Wadiah concept is widely acceptable by the Middle East scholars

Pay back to FIs upon maturity date

Absorb funds from FIs via Wadiah Inter bank Acceptance

Hibah (if any)

5

21



3

Qardhul Hassan (benevolent loan) A contract of loan between two parties on the basis of social welfare or to fulfill a short-term financial need of the borrower. The amount of repayment must be equivalent to the amount borrowed. It is however the borrower may choose to pay more than the amount borrowed as long as it is not stated or agreed at the point of contract. Application:

1) Government investment issues (prior to 1993) 2) Placement of deposit.

Acceptability:

1) Qardhul Hassan concept is widely acceptable by the Middle East scholars.

BNM borrows fund from FIs and issues certificate of debt

Hibah (if any)

FIs redeem the certificate upon maturity

6

Financial Institutions A (Capital Provider)

Financial Institutions B (Entrepreneur)

1

2

Mudharabah (profit-sharing)

A contract which is made between two parties to finance a business venture. The parties are a capital provider or an investor who solely provides the capital and an entrepreneur who solely manages the project. If the venture is profitable, the profit will be distributed based on a pre-agreed ratio. In the event of business loss, the loss shall be borne solely by a provider of the capital.

Application:

1) Mudharabah Interbank Money Market.

Acceptability:

1) Mudharabah concept is widely acceptable by the Middle East scholars.

Bank A provides fund to be invested by Bank B with agreed profit-sharing ratio

Upon maturity profit gained will be shared accordingly and the principal will be returned back to the capital provider

7

BNM will provide loan to the borrower

Securities

If FIs fails to pay off the loan, BNM has the right to sell the securities in order to get back the principal amount

FIs will pledge securities as collateral for loan given

FIs will return the residuals to BNM

4

3

2

1


Financial Institutions (FIs)

Rahnu (collateralised borrowing)

Rahnu transaction is equivalent to the conventional colleteralised borrowing. It refers to an arrangement whereby a valuable asset is placed as collateral to raise funding. The amount borrowed must be equal with the collateral rendered. The collateral may be transferred to lender in the event of default. To get the principal back the lender will sells the collateral and take the principal amount. Any excessive amount must be returned to the borrower.

Application:

1) Rahnu Lending Facility. Acceptability:

1) Rahnu concept is widely acceptable by the Middle East scholars.

8

Malaysia International Islamic Financial Centre (MIFC)

Malaysia International Islamic Financial Centre (MIFC) was officially launched on 14 August 2006 by Governor of Bank Negara Malaysia. The MIFC initiative is specifically undertaken by the collective efforts of the country's financial and market regulators, together with the participation of the industry representing the banking, takaful and capital market in Malaysia. As a centre for the offering of Islamic financial products and services by a diversified range of financial institutions from anywhere in Malaysia in any currency to non-residents and residents, MIFC specializes in the origination, issuance and trading of Islamic capital market and treasury instruments, Islamic fund and wealth management, international currency Islamic financial services market (including deposit and financing), as well as in takaful and retakaful.

In the promotion of Malaysia as a premier Islamic financial hub, MIFC will become the global brand. MIFC initiative was launched against the backdrop of a strong foundation and comprehensive pre-requisites in the Islamic financial system which includes :

i. Robust regulatory and supervisory framework.

ii. Diversified range of players, including well-known international financial institutions.

iii. Wide array of products.

iv. Active and strong money and capital markets, including secondary market for trading of Islamic instruments.

v. Conducive legal and Shariah governance framework.

vi. Continuous development of human talent infrastructure.

9

Islamic Securities

Source: Islamic interbank money market


Securities Issuance (RM billion)

2002 2003 2004 2005 May-06 Type RM

bil Change

% RM bil

Change %

RM Bil

Change %

RM bil

Change %

RM bil

Change (%)

GII 3.0 50 2.0 50 4.1 105 4.0 2 6.0 62 Khazanah - - 3.0 1.2 61 1.0 13 - - MITB - - - - 1.0 100 2.0 100 1.0 50 Cagamas BAIS (Sanadat) - - - - 1.6 100 - - - - BNNN 1.8 89.0 3.0 59 5.0 66 7.0 40 8.0 15 Total 4.8 8.0 12.9 14.0 15.0

Securities Total Outstanding (RM billion) 2002 2003 2004 2005 May-06

Type RM bil

Change %

RM bil

Change %

RM bil

Change %

RM bil

Change %

RM bil

Change %

GII 5 20 7 40 9.1 30 10.1 10.9 13.6 34.6Khazanah 10 0 10 0 9 11.1 10 11.1 8.3 17MITB 0 0 0 0 1 100 2 100 2 0Cagamas 0 0 0 0 1.6 100 1.6 0 1.6 0BNNN 1.8 88.5 3 59.1 5 66.6 7 40 6.6 5.7Total 16.8 20 25.7 30.7 32.1

10

Islamic Money Market



Interbank Money Market Transactions (RM million) 2002 2003 2004 2005 May-06

Type

RM bil

Change %

RM bil

Change %

RM bil

Change %

RM bil

Change %

RM bil

Change %

Overnight 206.9 244.0 17.9 458.2 87.8 220.6 51.8 65.9 70.11-week 12.1 11.7 2.8 16.2 38.0 16.2 0.0 4.7 70.81-month 6.2 2.3 63.9 1.8 21.7 1.8 0.0 0.8 51.33-month 0.3 0.1 60.9 0.3 133.5 1.1 235.2 0.1 91.0Others 24.0 22.3 7.2 14.3 35.5 16.0 11.6 9.6 40.0Total 249.7 280.4 490.8 255.7 81.1

Money Market Transactions (RM billion) Year 2002 2003 2004 2005 2006-May Total

Wadiah 447 497 770 669 356 2,739Mudharabah 247 283 486 255 81 1,352 Papers GII 5 36 35 43 16 135Khazanah 15 17 17 20 1 70MITB - 0 1 4 3 8Cagamas 0 0 2 1 0 3BNNN 2 8 21 36 21 88ABS 0 3 0 2 0 5Corporate Bond 32 45 32 48 11 168ICP 3 9 10 8 4 34IMTN 2 4 6 13 13 38IAB 7 16 10 15 8 56NIDC 0 9 8 9 6 32Total 760 927 1,398 1,123 521 4,483

110.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06

Yiel

d (%

)

-52

-42

-32

-22

-12

-2

8

18

28

38

48

Spre

ad (b

ps)

MGS vs GII SpreadMGS-3yearGII-3year

Spread Analysis (bps)

Max : 51.00Min : 0.30Avg : 4.27

RHS

a. 3-Year Securities

Source : Bloomberg

Historical Yields for Conventional & Islamic Securities

12

0.00

1.00

2.00

3.00

4.00

5.00

Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06

Yiel

d (%

)

-40.00

-30.00

-20.00

-10.00

-

10.00

20.00

30.00

40.00

Spre

ad (b

ps)

MGS vs GII SpreadsMGS-5yearGII-5year

Spread Analysis (bps)

Max : 35.50Min : 0.10Avg : 3.69

RHS

b. 5-Year Securities

Source : Bloomberg

islamic products information kit bnm

Documents