FINANCIAL SECTOR TALENT ENRICHMENT PROGRAMME

ISLAMIC TREASURY OPERATIONS

Table of Contents
CONTENTS

1. Overview
2. Objectives of Treasury
3. Development of Malaysia Financial Markets
4. Islamic Money Market
5. Islamic Financial Instruments
6. Islamic Derivatives Instruments
7. Islamic Foreign Currency
8. FOREX Trading
9. FOREX Transactions in Islamic Banking Operations
1
Overview
Overview

• Islamic Treasury involves activities that are carried

out in ways that do not conflict with the conscience
of Muslims and the religion of Islam.
• It represents an assertion on religious law that
prohibits the following transactions:
• Usury (riba)
• Gambling (maisir)
• Ambiguity (gharar)
2
Objectives of Treasury
 Objectives of Treasury

• Ensure liquidity is available to meet all current and

future obligations,
• Maximize return on investment portfolio managed,
• Ensure bank is funded in the most appropriate and
cost efficient manner,
• Identify and mitigate financial risk that could erode
bank’s financial standing.
 Objectives of Treasury - Sources & Uses of Funds

• Primarily responsible to manage a pool of bank’s

excess fund. This fund comprises of:
• Customers Deposits (CD),
• Inter-bank Deposits (ID),
• Shareholders Fund (SHF) and
any other sources approved by the bank . . .
• after being utilized on statutory requirements,
financing and investment.
Objectives of Treasury - Sources & Uses of Funds

SOURCES USES
Customer Deposits Statutory Reserve
Liquidity Requirement
Current Account Financing
Retail Saving Account Trade Finance
Markets Investment Account - General Investment in quoted/
Special unquoted share

Negotiable Islamic Debt Certificate Investment

Pool of Fund in Islamic
Money
Managed Financial
Markets
Mudharabah Inter-bank Deposit by Treasury Instruments

Shareholders Funds Investment in Bank

Investment in Subsidiary
Paid up capital Investment in quoted/
Share Premium unquoted share
Share Reserves

Investment /Financing
Retail Liquidity Requirement
Markets Specific Investment Account
Statutory Reserves
3
Development of Malaysian
Financial Markets
Development of Islamic Financial Market

Characteristics : Characteristics :
Characteristics : Global market
Small Niche Broader Market

Needs: Needs:
Needs: 1. International
1. Alternative to 1. Variable needs
of Client acceptance
conventional bond 2. Liquidity
Products 2. Inter-bank instruments
3. Secondary market 3. Hedging Tools
2. Primary market
Focus Product : Focus Product :
Focus Product : Bank - Clients
Bank – Clients Bank - Clients
Bank - Bank Bank – Bank
Bank – Govt

Example of Product : Example of Product :

Zero Coupon Islamic Example of Product:
GIC-Qardul Hassan, Soveriegn Sukuk,
Accepted Bills-I, BBA & Bond, BBA fixed rate,
Istisna’ bond, Securitisation of
Musharakah IPDS. financial assets,
Murabahah CP
Islamic Derivatives
Development of Islamic Financial Market

Early Stage (1983-1992)

Small Niche

After 11 years (1992-2000)

Broader Market

After 18 years (2000 and beyond)

Global Market
Development of Islamic Financial Market

Early Stage (1983-1992)

Small niche

• Malaysian Government issuance of GIC

• Bank Islam issued Accepted Bills - Islamic
• Shell Malaysia issued BBA Fixed rate bond
• Sarawak Shell issued Musharakah bond

• Primary markets only

Development of Islamic Financial Market

After 11 years (1992-2000)

Broader Markets

• Islamic Money Market in Malaysia

• Petronas issued Zero Coupon bond
• Cagamas issued Sanadat Mudharabah bond
• KLIA issued 2.2 billion BBA Fixed Rate bond
• Moccis issued Murabahah Islamic Commercial Paper
• Khazanah issued Benchmark bond

• Evolution of Secondary market

Development of Islamic Financial Market

After 18 years (2000 and beyond)

Global Markets

• Guthrie issued USD150 milion Sukuk Al Ijarah

• Malaysian Govt issued USD500 million Sukuk
• Issuance of IPDS by Supranational Institutions
• Bank Islam introduced FX Forward & Swap
• Introduction of Commodity Murabahah Products
• Standard Chartered introduced Islamic Profit Rate
Swap, Cross Currency Swap & Forward

Global Recognition of Islamic Financial Instruments

4
Islamic Money Market
Islamic Money Market

• Introduced by BNM in January 3, 1994

• Defined as:
• Activities guided by Syariah principle
• Wholesale transactions
• Liquid and low risk instruments
• Less than 1 year
• Market players are Islamic banks and commercial and
investment banks with Islamic window.
• The activities include:
• Inter-bank Mudharabah
• BNM Wadiah Tender
• Trading of Islamic Financial Instrument
Islamic Money Market

• Inter-bank Mudharabah (IBM)

• A system where a Islamic bank obtains investment from
another Islamic bank on the basis of Mudharabah to
source, invest and square their short term fund.
• Mudharabah is a joint venture between two parties i.e one
party with fund and the other party who is the entrepreneur.
• Both parties will then negotiate and agree on the amount,
tenor of investment and profit sharing ratio. Any loss must
be borne by the investor.
• IBM is an alternative to the conventional money market,
the activities are based on profit sharing principle; as
opposed to interest on borrowing / lending activities in the
conventional money market.
Islamic Money Market

• The period of investment ranges from over night to 12

months.
• The minimum amount of investment is RM50,000.00
• The rate of return shall be based on the gross profit
before distribution for investment of 1 year of the
receiving bank.
• The profit of IBM is calculated based on the following
formula :
Profit = prt(k)
36500
where :
p = Principal investment
r = Gross Profit Rate of the Receiving FI
t = Number of Day Invested
k = Profit Sharing Ratio of the Investing FI
Islamic Money Market

Example :
IRHB invest RM1,000,000 with BIMB for 30 days.
Profit sharing ratio is negotiated at 75:25. Based on the
prevailing gross profit rate during transaction i.e. 5.5%,.
IRHB is expected to receive net profit of 4.125%. Upon
maturity of the investment, BIMB’ s effective gross profit
rate has increases to 6%.

Therefore, profit payable to provider of fund

= 1,000,000 x 6% x 30 x 0.75
365

= 3,698.63 i.e. a return of 4.5% p.a

Islamic Money Market

• BNM Wadiah Placement

• BNM accept placement of fund from the money market
under the concept of Wadiah.
• Under Wadiah contract, BNM undertake to safeguard the
fund placed with them and will refund the same amount on
maturity date.
• Islamic banks will place excess fund with BNM for safe
keeping.
• The period of placement range for overnight only.
• Profit (if any) is paid based on discretion of BNM.
Islamic Money Market

• BNM Wadiah Tender

• Similar approach with Wadiah placement.
• The information of tender is being disseminated early
morning of the Wadiah issuance through FAST.
• The period of placement ranges from 1 week to 3 months.
• The amount tendered will be prorated with issuance size
and successful tender is based on their bid size.
• Profit (if any) is paid based on discretion of BNM.
Islamic Money Market

• Trading of Islamic Financial Instruments

• IMM creates a secondary market where participants trade
all the available Islamic financial instruments.
• The market allows:
• Easy access to Islamic Instruments
• Provide liquidity in the market for the financial
instruments
• Trading and Arbitraging
• between instruments with same tenor
• between tenor of the same class of instruments
• Each instrument is different from one another in terms of
risk profile, yield, tenor, marketability and liquidity.
Islamic Money Market

Risk Spectrum
Increased risk and volatility

Corporate Papers Financial Institutions Sovereign Papers

(riskier, more volatile (less risky, less volatile, (risk free, less volatile
high return) reasonable return low return)

Reduced yield on investment

Islamic Money Market

Calculation of Effective Yield/Yield to Maturity are as

follows:

(SP-PP) x 36500
EY/YTM =
t X PP

Where SP = Selling Price /Maturity Price

PP = Purchase Price/Principal Price
t = Number of days held
5
Islamic Financial Instruments
Islamic Financial Instruments

ƒ Bank Negara Monetary Notes - i (BNMN-i)

ƒ BNMN-i is a liquidity management tool issued by BNM to
manage liquidity in the Islamic Money Market.
ƒ BNMN-i was introduced by BNM on December 8, 2006 to
replace Bank Negara Monetary Notes.
ƒ Issued under the Islamic principle of Bai al Enah, the
transaction involved a for forward sale (principal plus
profit) of assets owned by BNM and the corresponding
spot purchase (immediate delivery) of the said assets.
ƒ Minimum standard amount is RM5 million.
Islamic Financial Instruments

• Bank Negara Monetary Notes-i (BNMN-i)

• The issuance of BNMN-i is on tender basis to principal
bidder with information of the issuance being published
through FAST a few days before the issue date.
• The bidding proceed is based on the following formula :
Proceed = Face Value of Tender x 1 – ((r x t)/36500)
where r = discounting rate
t = tenor of issue
• The successful bidder is the market participant who
tendered for the highest price for the asset offered by
BNM.
• Debt created from the Bai al Enah contract is traded in
the secondary market under Bai Al Dayn concept.
Islamic Financial Instruments

Issuance process of BNMN-i

BNM BNMN-i
4. Through the sale and purchase
transaction, a debt has been
created. This debt is securitized
through the issuance of BNNN
5. BNM to
1. Identify Assets 3. BNM buy back the certificate of allot BNMN-i
BNM assets at par value to successful
(100.00) to be paid on the banks via
maturity date Rentas

Certificate of BNM Principal Dealers

Assets
2. Sell assets on a tender basis at
a discount from par value
Islamic Financial Instruments
ƒ Bank Negara Malaysia Sukuk Ijarah (BNMSI)
ƒ BNMSI is another short term money market instrument
issued by BNM under the Islamic principle of Ijarah.
ƒ Under Ijarah contract, BNM undertake to sell an asset to an
SPV who will issue BNMSI to finance the purchase price.
SPV will lease back the asset to BNM with agreed rental
which will be further paid to BNMSI holders. On the expiry
of lease, BNM will purchase back the asset from SPV and
the sukuk will be redeemed.
ƒ Tenor of BNMSI ranges from 1 year to 3 years with
quarterly rental payment.
ƒ The tender is based on the rental rate and the successful
bidder is the one who tendered for the lowest rental rate for
the BNMSI.
Islamic Financial Instruments

Issuance process of BNMSI

2. SPV to issue BNMSI
1. SPV purchase to finance the purchase
asset from BNM asset
Sukuk Holder
Original Issuer 6. SPV shall make
BNM periodic distribution of
rental proceeds. On
expiry of lease, BNM
shall purchase the asset
back and sukuk will be
SPV (Lessor)
redeemed.
3. SPV shall use the
proceed to pay BNM for
4. SPV shall
the purchase of Ijarah
lease the asset
asset from BNM
back to BNM

5. BNM shall pay BNM

periodic rental to SPV
(Lessee)
Islamic Financial Instruments

ƒ Malaysia Islamic Treasury Bills (MITB)

ƒ MITB is a short term money market instrument issued by
the Government under the Islamic principle of Bai al Enah.
ƒ Under Bai al Enah contract, the Government will
undertake to sell identified asset to successful FI’s on
cash basis at a discount and subsequently buy back the
same asset at par on deferred payment.
ƒ MITB’s tenor, issuance process and trading in the
secondary market is similar to BNMN-i.
Islamic Financial Instruments

Issuance process of MITB

Government of MITB
Malaysia 4. Through the sale and purchase
transaction, a debt has been
created. This debt is securitized
through the issuance of MITB
5. GOM thru
1. Identify Assets 3. GOM buy back the certificate of BNM to
GOM assets at par value allot MITB
(100.00) to be paid on the to successful
maturity date banks via
Rentas

Certificate of GOM Principal Dealers

Assets
2. Sell assets on a tender basis at
a discount from par value
Islamic Financial Instruments

ƒ Government Investment Issues (GII)

ƒ Issued by law under the Government Investment Act 1982
(amended 1990)
ƒ Investment in GII constitutes an investment to the
government based on the principle of Bai Al Inah.
ƒ Under Bai al Enah contract, the Government undertake to
sell identified asset to successful FI’s on cash basis and
subsequently buy back the same asset plus profit on
deferred payment.
Islamic Financial Instruments

ƒ Government Investment Issues (GII)

ƒ Tenor ranges from 3 years to 10 years.
ƒ Issuance of GII is on tender basis to principal bidder
with information of the issuance being published through
FAST a few days before the issue date.
ƒ Tendering procedure for GII is similar to instruments
issued by Government or BNM.
ƒ Pricing of GII in the secondary market is based on the
normal bond market pricing convention.
Islamic Financial Instruments

Issuance process of GII

Government of GII
Malaysia 4. Through the sale and purchase
transaction, a debt has been
created. This debt is securitized
through the issuance of GII
5. GOM thru
1. Identify Assets 3. GOM buy back the certificate of BNM to
GOM assets (principal plus allot MITB
profit) to be paid on the maturity to successful
date banks via
Rentas

Certificate of GOM Principal

Assets Dealers
2. Sell assets on a tender basis
either on discount or par value
Islamic Financial Instruments

• Accepted Bills – Islamic (AB-i)

• AB-i is a bill of exchange which is either:
• drawn by the Bank and accepted by the
importer/purchaser – underlying syariah concept is
Murabahah
• drawn by the exporter/seller and accepted by the
Bank – underlying syariah concept is Dayn
• The bill constitutes a debt owed to the Bank, thus
eligible for trading in the secondary market.
• The underlying Shariah transaction for trading in the
secondary market is known as Bai Al-Dayn (debt trading)
• The rate of discounting of AB-i shall reflect the current
market standing
Islamic Financial Instruments

• Accepted Bill - Islamic (AB-i)

• Calculation of proceeds of AB-i is derived at as follows:

Proceed = FV ( 1-
rxt
365
)

Where FV = Face Value

r = Discounting rate (in %)
t = Number of remaining days to maturity
Islamic Financial Instruments

• Islamic Commercial Papers

• ICP are debts issued by corporation to fund their capital

requirement on short term, roll over basis.
• It is issued under the concept of Murabahah.
• Prior to issuance of ICP the rated by rating agency.
• Corporation must obtain approval from Securities
Commission (SC)
• Types of ICP:
• Murabahah Notes Issuance Facility (MUNIF)
• Islamic Revolving Underwritten Facility (IRUF)
• Guaranteed Revolving MUNIF (GRUNIF)
Islamic Financial Instruments

Issuance process of ICP

Corporation ICP
4. Through the sale and purchase
transaction, a debt has been
created. This debt is securitized
through the issuance of ICP
5. Lead
1. Identify Assets 3. Corporation buy the assets arranger to
(principal plus profit) to be paid allot ICP
on the maturity date to successful
banks

Tender Panel
Assets Members
2. Sell assets on a tender basis
either on discount or at par value
Islamic Financial Instruments

• Islamic Commercial Papers

• Calculation of proceeds of Islamic Commercial Papers is
derived at as follows:

Proceed = FV ( 1-
rxt
365
)

Where FV = Face Value

r = Discounting rate (in %)
t = Number of remaining days to maturity
Islamic Financial Instruments

• Negotiable Islamic Debt Certificate (NIDC)

• NIDC is the Shariah-compliant alternative to the Negotiable
Instrument of Deposit (NID) currently offered by the
conventional banks.
• The underlying Shariah transaction for the creation of
NIDC is Bai Bithaman Ajil – BBA (Deferred payment sale).
• NIDC is issued to the customer as an evidence of the
Bank’s debt to the customer.
• The debt is tradable in the secondary market under the
concept of Bai Al-Dayn.
• NIDC certificate is a security items that must be kept by
the customer’s authorized custodian which is usually the
issuing bank.
Islamic Financial Instruments

ƒ Formula to calculate price of NIDC, with maturity less than

1 year:

RV
Price =
1+ ( TxY
36500
)
[Price are rounded up to 4 nearest decimal point]

Where RV = Redemption value per RM100 nominal value

T = No. of days from settlement date to maturity date
Y = Yield / Profit rate
Islamic Financial Instruments

ƒ Formula to calculate price of NIDC, with maturity exceeding 1 year:

RV
Price =
( 1+
Yld
m )
n-1+DSC/DCC

Where RV = Redemption value per RM100 nominal value

Yld = Yield in % p.a.
DSC = No. of days from settlement date next quasi coupon
date (as if the instrument pay semi annual profit)
DCC = No. of days in quasi coupon period
n= No. of remaining quasi coupon profit period
m= No. of dividend payment per year
Islamic Financial Instruments

• Commodity Murabahah Program (CMP)

• CMP is a universally accepted trade transaction
structured as a money market instruments under the
contract of Murabahah.
• The trade involve a spot purchase of Syariah approved
commodities for immediate delivery and a forward sale
on deferred payment term.
• There are three types of CMP:
• Commodity Murabahah Deposit
• Commodity Murabahah Investment
• BNM Commodity Murabahah Tender
• Profit on CMP is calculated based on the simple interest
formula i.e. Principal x Rate x Tenor
 Islamic Financial Instruments

Commodity Murabahah Deposit

Counter Party
2

Commodity
Deferred C/party then sells the
BIMB, commodity to BIMB via
$ deferred payment. The
1 Acting as Agent
Sale Price represents
the return from deposit
$ Commodity BIMB, as Principal for BIMB.
C/party appoints
BIMB as its agent to
buy commodity from Trader 1
London Metal Commodity $ 3
Exchange (LME).
BIMB buys the BIMB sells the
commodity by cash commodity at LME via
via Trader 1.
Trader 2 Trader 2 for cash.
 Islamic Financial Instruments
Commodity Murabahah Investment
BIMB then sells the commodity to
C/party. Sale Price represents
BIMB’s expected return from
BIMB investment and will be paid by
C/party via deferred payment.

Deferred 2
1 $ Commodity
$
Commodity

Trader 1 Counter Party

BIMB buys a
Commodity at
LME by cash via C/party then appoints BIMB
Trader 1 BIMB as Agent as agent to sell the
Commodity at LME by cash
via Trader 2. The cash
belongs to C/party,
$ Commodity representing investment
proceeds.
3
Trader 2
Islamic Financial Instruments

ƒ Cagamas Islamic Bond (CIB)

ƒ CIB are bonds issued by Cagamas Berhad under the Islamic
principle to raise funds for their operations.
ƒ Cagamas business includes purchase of Islamic mortgage, hire
purchase and other asset classes from financial institutions
ƒ Bond issuance range between 1 to 7 years with profit payable semi
annual basis
ƒ From purchases of asset with recourse, Cagamas has expanded it
business to include outright purchases of financial assets
ƒ There are 3 types of Cagamas Islamic Bond:
1. Sanadat Murabahah Cagamas
2. Cagamas Bai Bithaman Ajil Islamic Securities (BAIS)
3. Cagamas Islamic Residential Mortgage Backed Securities
Islamic Financial Instruments
Overview of Cagamas Structure

Customers Principal Dealers/

Investors

5 6 9
2 1 Issue Receive Pay
Pay monthly Grant Islamic CIB cash coupon
8
instalment financing
Remit Cagamas instalment

4
Receive cash
Approved 3
Sellers Cagamas
Sell Islamic debts

7
Pre-sale
Appoint Approved Sellers as servicer During sale
Post-sale
Islamic Financial Instruments

1. Cagamas Mudharabah Bond (CMB)

ƒ Based on the concept of Al Mudharabah CMB allows the
bondholders and Cagamas to share profit generated from
the issuer operation in purchasing financial assets from
Islamic financial institutions.
ƒ Both parties agree to share the profit derived from the
venture based on an agreed profit sharing ratio.
ƒ The bondholder will bear any loss of diminution in the
principal amount of the bond
Islamic Financial Instruments

2. Cagamas Bai Bithaman Ajil Islamic Securities

(BAIS)
ƒ Introduced to replace SMC with its first issuance in
August 2004.
ƒ Issued based on the principle of Bai al Inah.
ƒ Under Bai al Enah contract, Cagamas undertake to sell
identified asset to successful investors on cash basis
and subsequently buy back the same asset at par on
deferred payment basis.
ƒ The profit rate is fixed and paid twice a year.
ƒ Calculation of proceed is similar with coupon bearing
bonds calculation.
Islamic Financial Instruments

3. Cagamas Islamic Residential Mortgage Backed

Securities (RMBS-i)
ƒ First issued on August 8, 2005.
ƒ Issued based on the principle of Musyarakah, Cagamas
and bondholders enter into a joint venture to fund the
issuer operation in purchasing financial assets from
Islamic financial institutions.
ƒ Profit is shared by both Cagamas and bondholders
based on an agreed profit sharing ratio.
ƒ Both Cagamas and bondholder will bear any loss
arising from the bond issuance according to the ratio
agreed by both parties.
Islamic Financial Instruments

• Islamic Bond (IB)/ Islamic Debt Securities (IDS)

• IB’s are debts issued by the multinational or big
•. corporation to raise funds for their operations.
• Typically issued for long term capital expenditure
requirements and project financing for concessionaires,
infrastructures and utilities.
• The tenor of issuance of IB’s ranges between minimum
period of 3 years and maximum of 20 years.
• SC approval is required prior to any bond issuance and
must be rated (except for quasi government issuance) .
• There are two types of IB:
1.Zero Coupon Islamic Bond
2.Fixed Rate Islamic Bond
Islamic Financial Instruments

1. Zero Coupon Islamic Bond

• Issued at a discount from the face value.
• This bond does not have any inward cash flow in
term of profit payable every semi annual and bond
holder only received the face value upon maturity
of the bond.
• The few Syariah contracts used as underlying
transaction include:
a. Murabahah - Khazanah Bond
b. Bai Bithaman Ajil – SILK & Encorp
b. Qardh Al Hassan - Petronas Dagangan & Petronas Gas
Islamic Financial Instruments

Price of Bond is calculated based on the following formula:

P = FV
1+i mn-1+D/E
m
Proceed = NV x PB
100
P = Price of Bond
FV = Face value per RM100 nominal value
i = Yield to maturity
m = Number of coupon payment per year
n = Number of years to maturity
D = Number of days from value date to next coupon date (as if the bond pays semi annual coupon)
E = Number of day in coupon period
NV = Nominal Value of bond
Islamic Financial Instruments

2. Coupon Islamic Bond

• Issued at nominal value which is equivalent to the face
value (amount payable upon maturity).
• A series of coupon (annual or semi annual ) is paid based
on fix agreed rate.
• The underlying Syariah concept is Bai Bithaman Ajil Ijarah,
Mudharabah and Musyarakah.
• The few Syariah contracts used as underlying transaction
for Coupon Islamic Bond include :
a. Bai Bithaman Ajil – KLIA Bond, SAJ, TNB
b. Ijarah - Segari Energy Venture. Silterra, KL Kepong
c. Mudharabah – PG Municipal Council, Mukah Power, OCBC Sub Debt
b. Musyarakah – KL Sentral, PLUS, Rantau Abang
Islamic Financial Instruments

P = mn c/m x 100 + FV -
Σ t-1+D/E mn-1+D/E
t=1 (1 + i/m) (1 + i/m )

100 x c x A
m E

Proceed = NV x PB + NV c x A
100 2 E

Where P = Price of Bond per RM100 nominal value

FV = Face Value per RM100 nominal value
I = Yield to maturity
m = Number of coupon payment per year
n = Number of years to maturity
c = Coupon rate per annum
A = Number of days from last coupon payment to value date
D = Number of days from value date to next coupon date
E = Number of days in current dividend period
NV = Nominal value of bond transacted
6
Islamic Derivatives Instruments
Islamic Derivatives Instruments

• Starting from middle of 2005, the Islamic financial market

has started to explore application of derivatives in Islamic
finance.
• Basic building blocks of derivatives:
• Swap
• Forward
• Options
• Futures
• National Syariah Council has approved FX Forward/Swap
and Islamic Profit Rate Swap and with more research
undertaken by the market there will be more derivatives
instruments endorsed by the council thus opening up the
development of Islamic structured products in the near
future.
Islamic Derivatives Instruments
3 IPRS
1. Islamic Profit Rate Swaps (IPRS)

‰ Main objective of IPRS is to assist banks and corporate in

the management of profit rate risk.
‰ An agreement to exchange a series of profit/return/ coupon
rates between two counterparties (normally consist of a
Fixed Rate Party and a Floating Rate Party);
‰ Implementation is by the execution of a series of underlying
Murabahah contracts on commodities.
Islamic Derivatives Instruments
IPRS (cont’d)
Financial
Asset
Receives Fixed
Returns

I Pays Fixed Rate

P IPRS
R BIMB Counterparty
S Receives Floating Rate

Pays Floating
Obligations

Financial Liability
 Islamic Derivatives Instruments
IPRS (cont’d)
• IPRS Stage 1: Fixed Profit Rate Leg

Broker Broker
3
1 Bank Islam as Agent

IPRS Bank Islam

Counterparty 2

CParty buys commodity from CParty sells commodity to Bank Islam Bank Islam sells commodity to
1 broker through Bank Islam as
2 at FIXED price (costPlus - Deferred)
3 broker
Agent

Commodity Flow

Funds Flow
 Islamic Derivatives Instruments
IPRS (cont’d)
IPRS Stage 2: Floating Profit Rate Leg

broker broker
1
3 Bank Islam as Agent

IPRS
Counterparty 2 BIMB

BIMB buys commodity from broker BIMB sells commodity to CParty at CParty sells commodity
1 2 FLOATING price (costPlus - Deferred)
3 to broker through Bank
Islam as Agent

Commodity Flow

Funds Flow
Islamic Derivatives Instruments

2. Islamic Forward Rate Agreement (IFRA)

‰ Main objective of IFRA is to assist banks and corporate in

the management of profit rate risk.
‰ An agreement to exchange profit/return/ coupon rates
between two counterparties at a single specified period
‰ Implementation is by the execution of a single Murabahah
contracts on commodities.
‰ IFRA can also be structured to hedge a series of amortized
cashflow.
Islamic Derivatives Instruments

3. Islamic Cross Currency Swaps (ICCS)

‰ ICCS enables counter-party to switch their asset or liability

from one currency to another to :
‰ Hedge currency risk
‰ Profit rate risk
‰ The agreement to exchange currency between two counter-
parties can be between fixed profit rate to fixed profit rate,
fixed to floating or floating to floating.
‰ Implementation is by the execution of a series of underlying
Murabahah contracts on commodities.
Islamic Derivatives Instruments
Initial Exchange of Principal and Periodic Profit Payment

US
Subsidiary
1. USD 2.USD Profit
Principal Payment

2.USD Profit Payment

I
C Malaysian 2.MYR Profit Payment
BIMB
C Corporate 1. MYR Principal
S
1.USD Principal

1. MYR 2.MYR Profit

Principal Payment

MYR
Financing
Islamic Derivatives Instruments
Exchange of Principal on Maturity Date

US
Subsidiary
3. USD
Principal

I 3.USD Principal
C Malaysian BIMB
C Corporate 3. MYR Principal
S

3. MYR
Principal

MYR
Financing
7
Islamic Foreign Currency
 Islamic Foreign Currency

• Treasury operation also involves activities related to foreign

exchange which conform to Syariah. The activities include :
• Commercial transactions
• Inter-bank trading (Proprietary Trading)
• Forms of foreign exchange transactions include spot, swap
and forward.
• Exchange of one currency against another is permissible in
Islam under the concept of Al Sarf. However such
transaction must be under the following conditions
• involving two different currencies
• delivery of currencies must be done concurrently
 Islamic Foreign Currency

• Inter-bank trading which account to more than 90% of the

total foreign exchange volume worldwide can be classified
as follows:
i. Investment - Fundamental / Long term in nature
ii. Speculation - Technical / Short term in nature
iii. Gambling - No basis / information
• Transaction acceptable is for investment and speculation.
• Trading is subject to the net open position permissible by
BNM and internal approved daylight and overnight
exposure of the respective financial institution.
• Prices of the underlying concept for FX Forward and Swap
is Waad Mulzim (Unilateral Promise)
• This is to facilitate settlement process and satisfy market
convention for a forward contract where the delivery of the
exchange is done at a specified future date.
• In other word, Wa’ad is made on the transaction date and
the Sarf akad is perform on settlement date.
8
FOREX Trading
FOREX TRADING

• Front Line Operations

• Back Office Operations
FOREX TRADING

Front Line Operations:

• Corporate Forex
• Proprietary Trading
• Funding
FOREX TRADING

Corporate Forex:
• Provides quotations to corporate customers
• Provides advisory services to corporate
customers
• Daily branch FX counter rates
• Marketing
FOREX TRADING

Proprietary Trading:
• Trading on the inter-bank market
• Taking position for the bank
• Guided by limits imposed by bank
• ‘Squaring off’ corporate positions
FOREX TRADING

Funding:
Placing of excess foreign currency funds
(borrowing of shortage currency funds) in
deposits/trading of excess funds
FOREX TRADING

Back Office Operations:

• Settlement of transactions
• Confirmation of transactions
• Limit monitoring
9
FOREX Transactions in Islamic
Banking Operations
 OVERVIEW

• A marketplace where one currency (e.g. MYR) is exchanged

with another currency (e.g. USD) at a price determined by
market forces
• Operates in Over The Counter (OTC) market
• Global foreign exchange (FX) market is the biggest market
in the world
• Average global daily turnover in foreign exchange
transactions is more than USD1.5 trillion.
• Operates in a 24 hour market.
OVERVIEW

Corporations: Individuals:
•Trade •Investments
•Investment •Personal use

Commercial Banks:
•Provide services to corporations
and individuals
•Trading for own accounts

Central Bank: Brokers:

•Managing reserves/intervention
ƒMiddlemen
•Provide direction to other
participants
OVERVIEW

Factors Affecting FX Rates:

• Economic Factors:
Gross Domestic Product (GDP), Consumer Price
Index (CPI), Money Supply, Balance of Payment
(BOP), Capital Flows
• Government and Central Bank Policies
Fiscal/monetary policies
External debt, budget deficits/surpluses
Current account deficits/surpluses
OVERVIEW

Factors Affecting FX Rates:

ƒCentral Bank’s action and policies
ƒSpeculative position
ƒPolitical
ƒTechnical
Seasonal demand, year-end factors
ƒMarket information and rumours
Foreign Exchange Trading Policies

• Bank Negara Malaysia’s Exchange Control

Notices
• Exchange Control Act 1953
• Rules on Ringgit Operations Monitoring
System (RIMS)
Foreign Exchange Trading Policies

Bank Negara Malaysia’s Exchange Control Notices

• ECM 2: Dealings in Gold & Foreign Currency

• ECM 3: External Accounts
• ECM 4: General Payments
• ECM 5 : Export of Goods
• ECM 6: Credit Facilities to Non-Residents
• ECM 7: Foreign Currency Accounts
• ECM 8: Domestic Credit Facilities to Non-Resident Controlled
Companies
• ECM 9: Investment Abroad
• ECM 10: Foreign Currency Credit Facilities & Ringgit
Foreign Exchange Trading Policies

Bank Negara Malaysia’s Exchange Control Notices

• ECM 12: Securities

• ECM 13: Import & Export of Currency Notes, Bills of Exchange,
Assurance Policies, etc.
• ECM 14: Dealings with Specified Persons and In Restricted
Currencies
• ECM 15: Labuan International Offshore Financial Centre
• ECM 16: Approved Operational Headquarters
Types of FX Instruments:

•Spot
•Forward
•Swap
•Futures
•Non-Deliverable Forward (NDF)
•Options
•Structured Products/Derivatives
 OVERVIEW

Various Types of FX Transactions and Value Dates

Immediate Contracts

FX Contracts

Forward Contracts
 OVERVIEW

Various Types of FX Transactions and Value Dates

Immediate Contracts

Value Tomorrow
Value Today (TOD)
(TOM)

Value Spot
FINANCIAL SECTOR TALENT ENRICHMENT PROGRAMME

Thank you