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Money Market
In finance, the money market is the global financial market for short-term borrowing
and lending. It provides short-term liquid funding for the global financial system. The
money market is where short-term obligations such as Treasury bills, commercial
paper and bankers' acceptances are bought and sold.
The money market consists of financial institutions and dealers in money or credit
who wish to either borrow or lend. Participants borrow and lend for short periods of
time, typically up to thirteen months. Money market trades in short term financial
instruments commonly called "paper". This contrasts with the capital market for
longer-term funding, which is supplied by bonds and equity.
Bankers' acceptance - A draft issued by a bank that will be accepted for payment,
effectively the same as a cashier's check.
Certificate of deposit - A time deposit at a bank with a specific maturity date; large-
denomination certificates of deposits can be sold before maturity.
Repurchase agreements - Short-term loans—normally for less than two weeks and
frequently for one day—arranged by selling securities to an investor with an
agreement to repurchase them at a fixed price on a fixed date.
Commercial paper - An unsecured promissory notes with a fixed maturity of one to
270 days; usually sold at a discount from face value.
Eurodollar deposit - Deposits made in U.S. dollars at a bank or bank branch located
outside the United States.
Federal Agency Short-Term Securities - (in the US). Short-term securities issued by
government sponsored enterprises such as the Farm Credit System, the Federal Home
Loan Banks and the Federal National Mortgage Association.
Federal funds - (in the US). Interest-bearing deposits held by banks and other
depository institutions at the Federal Reserve; these are immediately available funds
that institutions borrow or lend, usually on an overnight basis. They are lent for the
federal funds rate.
Municipal notes - (in the US). Short-term notes issued by municipalities in
anticipation of tax receipts or other revenues.
Treasury bills - Short-term debt obligations of a national government that are issued to
mature in 3 to 12 months. For the U.S., see Treasury bills.
Money market mutual funds - Pooled short maturity, high quality investments which
buy money market securities on behalf of retail or institutional investors.
Source: Wikipedia.org
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The London Interbank Offered Rate (or LIBOR) is a daily reference rate based on the
interest rates at which banks offer to lend unsecured funds to other banks in the
London wholesale money market (or interbank market).
Scope
LIBOR rates are widely used as a reference rate for financial instruments such as:
They thus provide the basis for some of the world's most liquid and active interest rate
markets.
For the Euro, however, the usual reference rates are the Euribor rates compiled by the
European Banking Federation, from a larger bank panel.
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LIBOR is published by the British Bankers Association (BBA) after 11:00 am (and
generally around 11:45 am) each day, London time, and is a filtered average of inter-
bank deposit rates offered by designated contributor banks, for maturities ranging
from overnight to one year. There are 16 such contributor banks and the reported
interest is the mean of the 8 middle values. The shorter rates, i.e. up to 6 months, are
usually quite reliable and tend to precisely reflect market conditions. The actual rate at
which banks will lend to one another will, however, continue to vary throughout the
day.
LIBOR is often used as a rate of reference for Pound Sterling and other currencies,
including US dollar, Euro, Japanese Yen, Swiss Franc, Canadian dollar, Australian
Dollar, Swedish Krona, Danish Krone and New Zealand dollar.
Six-month LIBOR is used as an index for some US mortgages. In the UK, the 3 month
LIBOR is used for some mortgages especially for those with adverse credit history.
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1. Commercial banks as well as Islamic bank use KIBOR as basis for pricing
their products
Responses to Skepticism
1. Commercial banks as well as Islamic bank use KIBOR as basis for pricing
their products
Reply: Shariah Advisors have permitted the use of LIBOR as a benchmark for
the calculation of rent on the basis that it is well known, easily available and so there
can be no dispute over how our rent is calculated. Such clarity is a key part of Islamic
finance.
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with respect to core defining parameters is very different. Many things look the same
but are, in essence, fundamentally different.
There are three reasons why Western banks have succeeded in establishing themselves
in the Muslim countries, even with the prohibition of interest. First, with the fall of
Ottoman Empire and the rise of Western colonialism, Muslims lost their political and
economic power. Most Muslim countries came under the direct or indirect control of a
colonial power, either Britain or France. Western powers were able-to set up
institutions, including banks, firmly and successfully. Second, the Western banking
system was powerful, efficient, and innovative. Third, many highly educated and
liberal Muslims as well as some religious schools considered Western banks desirable
These techniques arc considered Islamic because they do not carry interest or "a
disguised form of interest". Furthermore, these techniques, because of close
compatibility with their Western alternatives, do not pose logistic and administrative
problems
Reply: The revival of Islamic values during the 1970s has led to the creation of
financial institutions with the aim of translating Islamic ideal into practical business
solutions. Muslim economists have demonstrate that an Islamic banking system is
superior to an interest-based banking system because the Islamic system is not based
on exploitation and has the capability to adjust to shocks which lead to banking
crises. The Islamic banking experiment is of comparatively recent origin and thus is
difficult to judge its viability and credibility conclusively. Evidence of its performance
is scanty and mixed. Islamic banking, however, has great potential for growth because
of a fundamentalist wave which is invading most of the Muslim countries of the
world.
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Consumer Price Index (CPI) is the main measure of price changes at the retail level. It
measures changes in the cost of buying a representative fixed basket of goods and
services and generally indicates inflation rate in the country.
The Sensitive Price Indicator (SPI) is computed on weekly basis to assess the price
movements of essential commodities at short intervals so as to review the price
situation in the country. The SPI is being presented in the Economic Coordination
Committee of the Cabinet (ECC).
The Wholesale Price Index (WPI) is designed to measure the directional movements
of prices for a set of selected items in the primary and wholesale markets. Items
covered in the series are those which could be precisely defined and are offered in lots
by producers/manufacturers. Prices used are generally those, which conform to the
primary sellers realization at ex-market, ex-factory or at an organized Wholesale level.
Following are the inflation rates based on CPI, SPI and WPI for the period of three
years and three months with respect to the corresponding period/month are given
below:-
The inflation rates based on CPI, SPI and WPI for the year 2007-08 increased by
8.56%, 11.79% and 11.01% respectively over the corresponding period of 2006-07. It
increased by 8.14%, 11.84% and 7.44% respectively in 2006-07 over the
corresponding period of 2005-06. In 2005-06, the rate of inflation increased by 8.48%,
6.58% and 10.97 % respectively over the same period of 2004-05. An analysis of data
for last three years for the same period indicates that
CPI & WPI were higher as compared to last two years but SPI was higher as
compared to 2005-2006 while lower as compared to 2006-07.
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Inflation Rates based on Sensitive Price Indicator (SPI), Consumer Price Index (CPI) and Wholesale Price Index (WPI)
Note: Yearly Inflation rate of Pakistan from the year 2001-2002 to date based on the
base year (2000-01=100)
It is evident from above that all above inflationary indices are very close with interest
rates of respected years. A comprehensive inflationary trend indicator, or
combination of CPI and WPI, based on more representative sampled can fulfill the
need of Islamic Banking benchmarking. The reason why we are focusing on
inflationary trend indexes, because inflation is the major and only uncontrollable and
phenomenal factor in the KIBOR.
Source:
GOVERNMENT OF PAKISTAN
STATISTICS DIVISION
FEDERAL BUREAU OF STATISTICS
MONTHLY REVIEW OF
PRICE INDICES (2000-01 = 100)
JANUARY, 2008
Summary Inflation Rates Based on
Consumer Price Index (CPI)
Sensitive Price Indicator (SPI)
Wholesale Price Index (WPI)
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Cost of Capital can be measured without resort to a fixed and predetermined interest
rate which was proposed by Abbas Mirakhor. The benchmark could be created based
on Tobin q theory.
Main assumption:
In the absence of a fixed and predetermined rate of interest, equity financing becomes
the only source of financial capital and as such, the economy’s financial system
becomes equity-based and hence, the equity market would provide a measure of the
cost of capital
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As we can see from the above chart of Gold Rate on CBOE (Chicago board of
Exchange) that Gold and other precious metal do absorb inflationary aspects in their
prices but their prices are very fluctuative to have an alternative to KIBOR.
Conclusion:
To develop the above mentioned hypotheses Islamic bank needs real devotion & time.
In my opinion the most best suited alternative to IBOR is Weighted Price Inflationary
Index because it is based on commodity prices bearing inflation & the data for
calculation is easily available too.
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