Development of Alternative Liquidity Management Instrument

Presented at

Global Islamic Liquidity Management Conference

Islamic Liquidity Management: Strengthening Building
Blocks for Internationalisation of Islamic Finance
Mohammad Khairi Saat
Head, Wholesale Products
Wholesale Banking Division

18 September 2012

Development of Islamic banking

g industry
y in Malaysia
y
((2000 2011))
- Sell and Buy Back Agreement (SBBA) as the only repo equivalent instrument

Refers to sale and purchase of securities (in the form of Shariahcompliant financial instrument), where both contracting parties promise to
buy or re-sell the securities in future
Shariah Advisory Council of Bank Negara Malaysia (BNM) resolved that
wa`d in the sale and buy-back agreement is permissible, provided that
wa`d is not stipulated as a condition for the sale and purchase of the
securities

Developing
g an alternative instrument
- Major areas of consideration
1.

Market Situation

Need for wider Shariah-accepted instrument,

i.e. that is acceptable in Malaysia as well as
Middle East

2.

Building Blocks

Need to have common structure agreed and

access that is available to market players
Enabler for low credit-risk financial instrument
i.e. based on secured securities consideration
Provide platform for industry players to expand
the utilization of sukuk holdings

Collateralised Commodity Murabahah (CCM) structure as an alternative

Introduction of CCM (2012)

Commodityy Murabahah has a wider Shariah

appeal across different jurisdictions
Use of collateral - typically tradable sukuk with
pledge structure under Rahn contract

1.

Shariah Contract

2.

Factors considered Structure that creates market acceptance i.e.

acceptability by BNM and the industry players
Fit with current regulatory requirements and
respective guidelines e.g.
e g BNM
BNMs
s Guidelines on
Standing Facilities

Structure use of CCM in respect of the Guidelines on Standing Facilities

Step 1:

Rahn (Pledge) - tradable Islamic securities are pledged to Central

Bank as security over the sale price of the commodities

Step 2 &3:

Central Bank appoints and authorizes the Islamic Bank as commodity

agent to purchase Shariah-compliant commodities from identified
commodity vendors - at a specified value and commodities
specifications

Step 4 & 5:

Upon full ownership of the commodities obtained, Central Bank sells

the commodities to the Islamic Bank as Purchaser on deferred
payment

Step 6 & 7:

Islamic Bank sells the commodities to another commodity vendor to

raise cash/liquidity

Diagram
g
Structure CCM
1

Pledge Islamic securities as security of payment

Agreement
g
to Pledge

Purchase commodity from Client

BNM (Central Bank)

(Pledgor)
6

Sell the
commodity
on the same
day

5
7

Commodity
Vendor pays
ARB the
Purchase Price

Commodity Supplier
Participant

(Purchaser)

Sale on deferred payment

Commodity
delivers on the
same day

ARB

Master
Commodity
Murabahah
Agreement

Purchase
commodity
on spot

Commodity Supplier
Participant
(e.g. Commodity Supplier A)

(e.g. Commodity Supplier B, C, D)

Legend:
Movement of commodity
Movement of cash
Pledge asset

Next Phase working

g towards cross border implementation
Key Point
Parties working together for a liquidity instrument that is internationally
accepted
Challenges
g
Shariah Requirements, Legal Framework, Documentation, Market
Acceptability
There is also question of having common securities as accepted collaterals