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Al-mudharabah interbank investment clubs

Money market means market where money or its equivalent can be traded. Money is synonym of liquidity. Money market consists of financial institutions and dealers in money or credit who wish to generate liquidity. It is better known as a place where large institutions and government manage their short term cash needs. For generation of liquidity, short term borrowing and lending is done by these financial institutions and dealers. Money Market is part of financial market where instruments with high liquidity and very short term maturities are traded.

Due to highly liquid nature of securities and their short term maturities, money market is treated as a safe place. Money markets exist to facilitate efficient transfer of short-term funds between holders and borrowers of cash assets. For the borrower, it enables rapid and relatively inexpensive acquisition of cash to cover short-term liabilities.

RBI being the main constituent in the money market aims at ensuring that liquidity and short term interest rates are consistent with the monetary policy objectives. Money Market is a place for short term lending and borrowing, typically within a year. It deals in short term debt financing and investments.

On the other hand, Capital Market refers to stock market, which refers to trading in shares and bonds of companies on recognized stock exchanges. Individual players cannot invest in money market as the value of investments is large, on the other hand, in capital market, anybody can make investments through a broker. Stock Market is associated with high risk and high return as against money market which is more secure.

Further, in case of money market, deals are transacted on phone or through electronic systems as against capital market where trading is through recognized stock exchanges. Active trading in money market futures and options occurs on number of commodity exchanges.

They function in the similar manner like any other futures and options. An individual player cannot invest in majority of the Money Market Instruments, hence for retail market, money market instruments are repackaged into Money Market Funds. A money market fund is an investment fund that invests in low risk and low return bucket of securities viz money market instruments. It is like a mutual fund, except the fact mutual funds cater to capital market and money market funds cater to money market.

Money Market funds can be categorized as taxable funds or non-taxable funds. It can be opened at any bank in the similar fashion as a savings account. However, it is less liquid as compared to regular savings account. It is a low risk account where the money parked by the investor is used by the bank for investing in money market instruments and interest is earned by the account holder for allowing bank to make such investment.

Interest is usually compounded daily and paid monthly. For the most part, money markets provide those with funds—banks, money managers, and retail investors—a means for safe, liquid, short-term investments, and they offer borrowers— banks, broker-dealers, hedge funds, and nonfinancial corporations—access to low-cost funds. The term money market is an umbrella that covers several market types, which vary according to the needs of the lenders and borrowers.

One consequence of the financial crisis has been to focus attention on the differences among various segments of money markets, because some proved to be fragile, whereas others exhibited a good deal of resilience.

Money markets include markets for such instruments as bank accounts, including term certificates of deposit; interbank loans loans between banks ; money market mutual funds; commercial paper; Treasury bills; and securities lending and repurchase agreements repos.

These money market instruments, many of them securities, differ in how they are traded and are treated under financial regulatory laws as well as in how much a lender relies on the value of underlying collateral, rather than on an assessment of the borrower. The most familiar money market instruments are bank deposits, which are not considered securities, even though certificates of deposit are sometimes traded like securities. The most closely watched interbank market is in England, where the London interbank offered rate LIBOR is determined daily and represents the average price at which major banks are willing to lend to each other.

That market did not prove to be a reliable source of funding during the crisis. LIBOR rates rose sharply in comparison to other money market rates once the creditworthiness of banks was called into question.

Moreover, lending volume decreased significantly as banks struggled to fund their existing assets and were less interested in new lending. Emergency lending by central banks helped make up for the contraction of this funding source. Recent investigations by regulatory authorities have also called into question the integrity of the pricing process by which LIBOR is determined. Commercial paper is a promissory note an unsecured debt issued by highly rated banks and some large nonfinancial corporations.

Because the instrument is unsecured no more than a promise to pay, hence the name , investors look solely to the creditworthiness of the issuer for repayment of their savings. Commercial paper is issued and traded like a security.

But because it is short term by nature and not purchased by retail investors, it is exempt from most securities laws. Since the onset of the current global financial crisis, the credibility of the international monetary system has come under intense scrutiny, prompting calls for reform by a number of influential policy-makers in the developed and developing world alike. While neither the global financial and economic crisis of —09 nor the on-going Eurozone sovereign, debt crisis characterized as currency crises.

They have highlighted the need for greater policy coordination and triggered renewed questions about the capacity of the international monetary system to correct imbalances and support an orderly payments system. As the Fund has put it: The current non-system has the inherent weakness of a set-up with a dominant country-issued reserve currency, wherein the reserve issuer runs fiscal and external deficits to meet growing world demand for reserve assets and where there is no ready mechanism-forcing surplus or reserve issuing countries to adjust.

Mateos y Lago et al. The international monetary system is thus expected to provide the framework that ensures adequate liquidity without fuelling inflation and enables global imbalances to be corrected, or restricts their emergence, while facilitating an orderly payments system. It is also important that it should inspire confidence globally, with both the costs and burdens shared equitably among those who benefit from its smooth functioning. On several counts, however, the international monetary system has proved to be inadequate.

The gold specie standard arose from the widespread acceptance of gold as currency. The use of gold as money began thousands of years ago in Asia Minor. A formal gold specie standard was first establish in , when England adopted it following the introduction of the gold sovereign by the new Royal Mint at Tower Hill in The United States used the eagle as its unit; Germany introduced the new gold mark, while Canada adopted a dual system based on both the American gold eagle and the British gold sovereign.

The gold specie standard ended in the United Kingdom and the rest of the British Empire with the outbreak of World War 1. Currently no nation uses a gold standard as the basis of its monetary system, although many hold substantial gold reserves. Treasury notes replaced the circulation of gold sovereigns and gold half sovereigns. Legally, the gold specie standard was not repealed.

The end of the gold standard was successfully effected by the Bank of England through appeals to patriotism urging citizens not to redeem paper money for gold specie. It was only in , when Britain returned to the gold standard in conjunction with Australia and South Africa that the gold specie standard was officially ended.

The British Gold Standard Act both introduced the gold bullion standard and simultaneously repealed the gold specie standard. The new standard ended the circulation of gold specie coins. Instead, the law compelled the authorities to sell gold bullion on demand at a fixed price, but only in the form of bars containing approximately four hundred troy ounces of fine gold. Many other countries followed Britain in returning to the gold standard, this was followed by a period of relative stability but also deflation.

This state of affairs lasted until the Great Depression — forced countries off the gold standard. The main feature of the gold exchange standard is that the government guarantees a fixed exchange rate to the currency of another country that uses a gold standard specie or bullion , regardless of what type of notes or coins are used as a means of exchange. This creates a de facto gold standard, where the value of the means of exchange has a fixed external value in terms of gold.

After the Second World War, a system similar to a gold standard and sometimes described as a "gold exchange standard" was established by the Bretton Woods Agreements. Under this system, many countries fixed their exchange rates relative to the U. All currencies pegged to the dollar thereby had a fixed value in terms of gold.

Starting in the administration of President Charles de Gaulle and continuing until , France reduced its dollar reserves, exchanging them for gold at the official exchange rate, reducing US economic influence. This, along with the fiscal strain of federal expenditures for the Vietnam War and persistent balance of payments deficits, led US President Richard Nixon to end international convertibility of the dollar to gold on August 15, The Bretton Wood system is considered by economic historians to have broken down in the s:crucial events being Nixon suspending the dollar's convertibility into gold in , the United States' abandonment of capital controls in , and the UK's ending of capital controls in which was swiftly copied by most other major economies.

In some parts of the developing world, liberalization brought significant benefits for large sections of the population — most prominently with Deng Xiaoping's reforms in China since and the liberalization of India. According to Professor Gordon Fletcher in retrospect the s and 60s when the Bretton Woods system was operating came to be seen as a golden age. Today effectively there is the existence of Fiat Money.

This means that money is not backed by any commodity and certainly not gold. The word Dinar refers to gold coins used as a medium of exchange by Muslims throughout the Islamic history until the fall of the Ottoman caliphate. Dirhams, which were silver coins, were also commonly circulated.

However, the dinar and dirham were in circulation even before the advent of Islam but continued to be used by The Prophet peace be upon him. The dinar was the bezant gold coin whereas the dirham was the silver coin of the Sassan. At the time of the Rashidun Caliphates, there were carvings of Islamic symbol and the greatness of the Islamic rulers depicted on the currencies.

Hassan also identified that Umar al-Khattab r. The standards specified 10 dirhams as equivalent to 7 dinars, and each dinar has 4. With the spread of Islam, the Dinar was minted in large quantities and gradually displaced the bezant gold coins as the major international currency, circulating throughout the Muslim world and the Christian Europe as well. The dinar was equivalent to 4. Under this coin standard 10 dirhams were equal to 7 dinars or mithqals. Since the exchange between the dirham and dinar were fixed, the Islamic economies of those days basically operated on the gold standard.

In a technical sense, the Islamic Dinar is thus commodity money i. The Time of the Abbasids Caliphate AD the dinar and dirham currency had retained its usefulness even when, during the rule of the Abbasids, there were various different types of currencies issued by many rulers as the results of political unrest and disunity among the caliphs. This means that the weight and type of gold had remained intact.

Nevertheless, the use of paper currency was still not accepted even though there were efforts to introduce it. This shows that society at that time were more confident with valuable metal like gold and silver as compared to paper in serving as a currency. Sultani dinar was minted in accordance with the standard of Vanice dukat currency weighing 3. In the reign era of Selim I and Sulayman I, the local currency such as the dinar ashrafi of Egypt and gold coins of the Ziyan Dynasti in Morocco continued to be used in addition to the sultani dinar currency.

The gold dinar could not be defended due to the massive entry of silver currency from Europe and the dumping of worthless copper currency called mangir. At the end of the reign of the Ottomans, the official use of paper money had already started. It was only used for 23 years until officially revoked in H AD. The revocation was due to the overproduction of the currency beyond its limit. This resulted in the public loss of confidence in al- Qa'imah.

However, in the year H, al-Qa'imah was once again issued, but the issuance was stopped for a while because the people had refused to acknowledge it. In H, the production of al- Qa'imah was made for the third time and this time it was enforced by law.

This paper money continued to be used until the fall of the Ottomans in Ali The financial transformation also occurred during the Ottoman rule after al- Qaimah bills were introduced and enforced. Following that, there was a sequence of economic crisis, currency depreciation and inflation occurred in the period due to the non-gold and non-silver based currency. Thus, economic instability and currency system disorders were the major reasons for the fall of the Ottoman Caliphate in This effort was further recognized and pursued by Tun Dr.

Mahathir Mohammad, the Prime Minister of Malaysia at that time. Today, Malaysia has five gold dinar minting agencies i. The quality of gold, weight and size of dinar follow the standards of Hazreth Umar ibn al- Khattab may Allah be pleased with him, resembling the first gold dinar mint of Caliph Abd al-Malik ibn Marwan. Gold dinar minted in Malaysia also follows the same standards. The carvings on the surface of the coins differentiate the dinars.

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. Short-term notes issued by municipalities in anticipation of tax receipts or other revenues.

Accrual instruments are issued at the face value and mature at the face value plus interest. The Interbank money market The interbank lending market refers to the subset of bank-to-bank transactions that take place in the money market. The money market is a subsection of the financial market in which funds are lent and borrowed for periods of one year or less.

Funds are transferred through the purchase and sale of money market instruments— highly liquid short-term debt securities. These instruments are considered cash equivalents since they can be sold in the market easily and at low cost. They are commonly issued in units of at least one million and tend to have maturities of three months or less.

Since active secondary markets exist for almost all money market instruments, investors can sell their holdings prior to maturity. The money market is an over-the- counter OTC market. Banks are key players in several segments of the money market. To meet reserve requirements and manage day-to-day liquidity needs, banks buy and sell short-term uncollateralized loans in the federal funds market.

For longer maturity loans, banks can tap the Eurodollar market. Eurodollars are dollar- denominated deposit liabilities of banks located outside the United States or of International Banking Facilities in the United States. US banks can raise funds in the Eurodollar market through their overseas branches and subsidiaries. A second option is to issue large negotiable certificates of deposit CDs. These are certificates issued by banks, which state that a specified amount of money has been deposited for a period and will be redeemed with interest at maturity.

Repurchase agreements repos are yet another source of funding. Repos and reverse repos are transactions in which a borrower agrees to sell securities to a lender and then to repurchase the same or similar securities after a specified time, at a given price, and including interest at an agreed-upon rate. Repos are collateralized or secured loans in contrast to federal funds loans, which are unsecured. Support the fractional reserve-banking model The creation of credit and transfer of the created funds to another bank, creates the need for the 'net- lender' bank to borrow to cover short-term withdrawal by depositors requirements.

This results from the fact that the initially created funds have been transferred to another bank. If there was conceptually only one commercial bank then all the new credit money created would be redeposit in that bank or held as physical cash outside it and the requirement for interbank lending for this purpose would reduce. In a fractional reserve banking model it would still be required to address the issue of a 'run' on the bank concerned. Source of funds for banks Interbank loans are important for a well-functioning and efficient banking system.

Since banks are subject to regulations such as reserve requirements, they may face liquidity shortages at the end of the day. The interbank market allows banks to smooth through such temporary liquidity shortages and reduce 'funding liquidity risk.

Funding liquidity risk Funding liquidity risk captures the inability of a financial intermediary to service its liabilities as they fall due. This type of risk is particularly relevant for banks since their business model involves funding long- term loans through short-term deposits and other liabilities.

When interbank markets are dysfunctional or strained, banks face a greater funding liquidity risk, which in extreme cases can result in insolvency. In lieu of customer deposits, banks have increasingly turned to short-term liabilities such as commercial paper CP , certificates of deposit CDs , repurchase agreements repos , swapped foreign exchange liabilities, and brokered deposits.

Benchmarks for short-term lending rates Interest rates in the unsecured interbank lending market serve as reference rates in the pricing of numerous financial instruments such as floating rate notes FRNs , adjustable-rate mortgages ARMs , and syndicated loans.

These benchmark rates are also commonly used in corporate cash flow analysis as discount rates. Thus, conditions in the unsecured interbank market can have wide-reaching effects in the financial system and the real economy by influencing the investment decisions of firms and households. Efficient functioning of the markets for such instruments relies on well-established and stable reference rates. The benchmark rate used to price many US financial securities is the three-month US dollar Libor rate.

Up until the mids, the Treasury bill rate was the leading reference rate. However, it eventually lost its benchmark status to Libor due to pricing volatility caused by periodic, large swings in the supply of bills. In general, offshore reference rates such as the US dollar Libor rate are preferred to onshore benchmarks since the former are less likely to be distorted by government regulations such as capital controls and deposit insurance.

Monetary policy transmission Central banks in many economies implement monetary policy by manipulating instruments to achieve a specified value of an operating target. Instruments refer to the variables that central banks directly control; examples include reserve requirements, the interest rate paid on funds borrowed from the central bank, and balance sheet composition.

Operating targets are typically measures of bank reserves or short-term interest rates such as the overnight interbank rate. These targets are set to achieve specified policy goals, which differ across central banks depending on their specific mandates 2. If market participants are broadly content with the above proposals for the integration of MMIs into CREST, the following areas for further work should be taken forward.

A number of transitional issues are set out in Appendix VII, which will need to be considered further. Treasury Solicitors would need to consider any necessary transitional legislative provisions for the dematerialization of MMIs. The Working Group made some preliminary recommendations: All MMIs should be covered by the same transitional arrangements rather than a series of separate transitions for different types of MMIs. After the transition period any outstanding bearer securities with longer maturities up to five years in the case of some CDs , could be dematerialized under a legislative provision for the transformation of bearer securities to dematerialized form.

A big bang should be more manageable for a smaller number of paper MMIs; hence it would be easiest if it only applied to those relatively few MMIs with longer outstanding maturities. Issues requiring further consideration include: i The length of the notice period. This would depend on the legislative timetable, but would also relate to other priorities and available resources. What reference price would apply to MMIs? Moreover, how would MMIs be grouped? The Working Group recognized the trade-off between the desire for numerous categories in order to assign appropriate haircuts to different instruments, and the need to keep the approach to categories for MMI collateral relatively simple.

These baskets are based on the FTSE indices. However, who would assess and group MMIs? Settlement banks would need to find a solution that provided for simplicity of process as well as allowing adequate differentiation between instruments. What reference price should be used? The alternatives include a price source, a simple discount to maturity or an accrued interest approach.

An alternative could be to use a simple accrued interest or discount to maturity calculation to value MMIs. The Bank of England, for example, buys bills outright based on a simple discount formula using the repo rate and days until maturity. There could be scope for similar simple arrangements for the valuation of MMIs. This would have systems implications, and would require an agreed contractual and legal underpinning. CREST Co and market participants issuers and their issuing agents would need to consider this further.

Dematerialization of other instruments Progress towards the dematerialization of MMIs may also prompt moves to dematerialize other instruments. Some members of the Working Group suggested that euro CP could be a candidate for dematerialization. The Stock Lending and Repo Committee suggested that, as some stock lenders take Letters of Credit as collateral, it could be useful for them to be dematerialized as well.

The Bank would welcome further views on these points. Market structure issues The dematerialization of MMIs raises new opportunities for money market participants, particularly for the future of the secured lending market. Legislative and tax issues Many legal and legislative issue s will require further detailed work. Treasury Solicitors would need to consider the necessary legislative changes. These points will be taken forward at a later stage.

As noted above, there are also some general tax points that will need to be agreed with the Inland Revenue. Do religious beliefs help produce more ethical organizations and consumers? It identifies the Islamic business ideals and their practical implications, which organizations dealing with Muslim consumers need to adopt.

First, Islam, being a practical religion with clear daily procedures to follow, shapes the attitudes and behaviors of its adherents, the Muslim consumers, who represent more than a fifth of the world population. Third, because of the oil boom, as well as other factors, many Muslim countries are becoming the most affluent consumers in the world. Fourth, the level of foreign investment in Muslim countries is increasing. Fifth, there is a movement towards forming a Muslim trading bloc, although such a bloc might take some time to materialize.

Finally, sixth, there is a strong push towards the Islamization of countries where Muslims are a majority through laying down clear Islamic codes of conduct in all walks of life, and commerce is no exception to this Saeed et al. Moreover, the globalization of the world economy makes it a requirement for world businesses to be familiar with the Islamic perspective on commerce in order to understand the factors shaping the behaviours of Muslim consumers. Businesses that neglect the acquisition and utilization of such knowledge risk alienating a large proportion of their Muslim target market Saeed et al.

The Islamic religion has a finely tuned set of rules concerning all aspects of life. By recognizing these rules, the knowledgeable firm can not only serve the spiritual needs of the Muslim community but also capture a truly unique position in the Islamic marketplace Sacharow This law, which caters to the needs of Islamic society, is essentially preventative and is not based on harsh punishment except as a last measure. Islam consists of five pillars: affirmation of the faith Shahadah , that is, witnessing that there is no divinity but Allah and that Mohammad is the messenger of Allah; the five daily prayers which Muslims perform facing Makkah Mecca ; fasting from dawn to sunset during the lunar month of Ramadan; making the pilgrimage to Makkah once in a lifetime; and paying an obligatory charity of 2.

Muslims are also commanded to encourage others to perform good acts and to abstain from evil. That may come as a surprise to many non-Muslims, whose perceptions of the belief have been distorted by terrorists, many from the Middle East, whose acts in the name of Islam have been condemned by Muslim leaders everywhere. These rules are stated in the Shariah law. These rules apply to commerce as much as they apply to personal purification and cleanliness. Islam provides either general or detailed instructions about what is permissible and what is not.

Detailed instructions are provided on the acts of pure worship such as prayer, pilgrimage, fasting and charity, as well as a multitude of other aspects of life. For example, some rules, like forbidding the use of interest rates as a method of making money, represent a general guideline.

The responsibility of Muslim scholars throughout the ages is to identify which trade practices fall under this category and to advise Muslims against them or, in addition, provide alternative Shariah-compliant practices. Multinational corporations should be multicultural as well and not simply impose their own culture; they need to adapt their operations to make their Muslim customers, employees, and suppliers comfortable with their practices Pomeranz These companies can constructively use the power of religion through accommodating and harnessing Muslim values more effectively when conducting their businesses in the Muslim marketplace Rice In general, all Muslim practices and acts are classified under the following categories.

Halal, or permissible. It has three levels: o Wajib, or duty; obligatory acts. Failure to perform them is a sin. Duty can be described as the Core Halal, without which a firm cannot be seen as Shariah-compliant. Implications: firms must perform Wajib.

Examples include being honest and transparent. Not performing Mandoob is not a sin. Likeable can be described as the Supplementary Halal. Implications: do if possible. Examples include being helpful and going the extra mile. Engaging in Makrooh does not result in a sin unless it leads to one.

The most obvious example of Makrooh in Islam is divorce! Although it is Shariah compliant, it represents the border between compliance and non- compliance. It is loathed by society. Implications: avoid if possible. Mushtabeh, or doubted; acts that a Muslim should refrain from because they might be Haram themselves or they might lead to Haram.

Businesses should refrain as much as they can from engaging in doubted activities for the fear of being perceived to be unscrupulous by Muslim consumers. Firms engaging in these activities risk a Fatwa being issued against them. Haram, or not permissible; all acts condemned explicitly or implicitly by the Islamic religion. Engaging in them or in activities leading to them is a sin. These categories have obvious implications on what companies planning to engage the Muslim marketplace should and should not do.

It is of no relevance whether these companies are Muslim or not, what is of relevance is what they should do, i. To illustrate, the duty Wajib of a company in Islam is to maximize the good of the society as a whole, not profit maximization. Therefore, a company its personnel will be committing a sin if it does not actively seek societal value maximization.

A company however is at ease in choosing the means to do that, as long as those means are not Haram as long as they are permissible or not a sin. Although profit maximization is not the ultimate goal of trade in Islam, Islam accepts profits and trade and does not aim to remove all differences in income and wealth that may result in various social and economic classes Beekun But the Mercy of your Lord is better than the wealth of this world which they amass.

The implications of these categories on the marketing aspect of business are very thorough and encompass the entire marketing mix for both services and goods. The first component of the conventional marketing mix, e. In Islamic marketing, however, it is the Halal product, and the difference between the two is huge. From an Islamic marketing perspective the product that a company sells must be entirely Halal. This means that all inputs, processes and outputs must be Shariah-compliant, i.

Being Shariah-compliant is the quickest way to promote the company and its products. Products and acts that might be seen or interpreted as Makrooh despised or Mushtabeh doubted will be immensely difficult to sell to Muslims. The same is true for companies producing these products or engaging in such acts. Just as a drop of oil ruins the taste of an entire tank of pure water, it is enough for one insignificant stream to be not Shariah-compliant for the image of the remaining fully legitimate business streams to be ruined.

The bright side of this is that a company will need to purify all of its actions, resources and operations in order to be able to brand itself as Islamic and position itself favourably in the mind of the Muslim consumer. For example, a company that produces pork products will find it difficult to sell anything else it produces to Muslims because pork and all that is associated with it is forbidden in Islam.

Muslim consumers will not look at how good its other products are but will see only that it manufactures pork products. This image reflection is applicable worldwide, and more so in the Muslim societies, because the numerous religious self-appointed private and public dogwatches operating in these societies relentlessly scan for noncompliance.

Any company found to be engaged in anything other than Halal will be stamped as un-Islamic, a very costly stigma indeed! It took Coca-Cola 14 years to be removed from the Arab boycott list; engaging in business with Coca-Cola was shunned religiously almost entirely over the Arab and Muslim world. Between the years and and prior to the signing of the variousArab-Israeli peace agreements Coca-Cola was banned from trading in the Arab world because the company refused to abide by the Arab League economic boycott of Israel.

For decades, this cost Coca-Cola the opportunity to sell its products in Arab countries. By contrast, prior to , Pepsi had abided by the boycott and enjoyed the bounties of the lucrative Coke-less Arab markets in the boycott days. The image of the company was severely hurt that it took Coca-Cola many years after the peace agreements of to build its brand in the Arab market. Finally, although achieving the status of Shariah-compliant might seem hard at first sight, it is essential for success in the Muslim market.

A compliant company will get a distinctive competitive advantage over the less compliant competitors. Failure to observe these rules means that the company and its brands will be stamped as Shariah non-compliant and thus un-Islamic; an image that no company can afford to have in the biggest unified market in the history of mankind.

The Muslim ethical system has four sources: the Quran, the sayings and behaviour of Prophet Mohammad, the example set by his companions, and the interpretations of Muslim scholars of these sources. These provide an entire socioeconomic system that guides the behaviour of Muslims. The system stresses the importance of human well-being and good life, religious brotherhood and sisterhood, socioeconomic justice, and a balanced satisfaction of both the material and the spiritual Chapra In economics, Islam supplies a practical programme that includes detailed coverage of specific economic variables such as interest, taxation, circulation of wealth, fair trading and consumption.

Islamic law, which is obtained from the sources listed above, covers business relationships between buyers and sellers, employers and employees and lenders and borrowers Rice The Quran provides a balanced view of human motivation; desire for wealth and propensity for greed and selfishness in humans are recognized. Muslims prove their worth to God by behaving ethically in the midst of the tests of this worldly life.

These tests could take two forms: 1. These two temptations, although beneficial in part, fail the test of total purity and as such become forbidden. A business owner in this case must abstain from resorting to the use of conventional interest-based finance and resort, instead, to more hard work or to more innovative ways such as the possibility of pooling resources within the community or with other shareholders to run and support the business.

In general, Islamic ethics are governed by the following principles, each of which has significant business implications: 2. God is the sole creator of the universe, and his people should cooperate in carrying out His will Rice The implication for businesses is: one God, then one constitution, the divine constitution.

This constitution is detailed in the Quran, the teachings of Prophet Mohammad and the example set by his companions. The constitution, e. More specifically, since we all are part of the same human-hood and spiritually equal before God, even if not materially equal on earth Bassiouni , honesty, trust and a relationship between employers and employees that reflects this human-hood need to be developed and encouraged Wilson In other words, people are equal partners and each person is a brother or sister to the other Rice Iman faith.

In Islam, faith, or iman, is the basic motivating factor forbelievers, and it is this that determines conscience. Hence, business decisions are guided by iman, which in practice means following Shariah law, and engaging in what is Halal, or permitted, and avoiding that which is Haram, or forbidden Alawneh The business decision-maker has free choice, but religious principles provide a framework for the appropriate exercise of that choice Ali and Gibbs Khilafah trusteeship.

Although this does not mean denial of private property, it does have important implications. For instance, resources, which are God- given and for the benefit of all, must be acquired lawfully and redistributed in the best interest of everyone A-Faruqi No one is authorized to harm destroy or waste these resources.

When Abu Bakr, the first ruler of the Islamic state after Prophet Mohammad, sent an army on an expedition, he ordered the leader of that army not to kill indiscriminately or to destroy vegetation or animal life, even in war and on enemy territory. These God-given resources everything in creation is God-given are not seen as a free good, to be plundered at the free will of any nation, any generation or any individual Rice The rich and the powerful are not the real owners of wealth; they are only trustees.

They must spend it in accordance with the terms of the trust, one of the most important of which is fulfilling the needs of the poor. Islam teaches Muslims to be moderate in all of their affairs. Chapra notes that Islam recognizes the contribution of individual self-interest through profit and private property to individual initiative, drive, efficiency and enterprise. However, profit is not the chief motive Siddiqi Since Islam places a greater emphasis on duties than on rights, social good or the benefit of the society as a whole, not profit, should guide Muslim entrepreneurs in their decisions.

The argument underlying this stand is that if duties are fulfilled by everyone, then the individual self-interest is automatically controlled and the rights of all are protected Chapra Justice or Adl. Justice is a central theme in Islam and is required from all parties in all cases. Stand out firmly for justice, as witnesses to Allah, even as against yourselves, or your parents, or your kin, and whether it be against rich or poor: for Allah can best protect both.

Exploiting employees, abusing power or using a monopoly to overcharge consumers are all condemned Wilson However, businesses cannot be forced to sell at a loss or without a profit under the accusation that they are monopolies. In addition to its clear objective of eradicating injustice, inequity, exploitation and oppression from society, Islam instructs people not to lie or cheat, to uphold promises and to fulfil contracts.

Usurious dealings are prohibited, all wealth should be productive and people may not stop the circulation of wealth after they have acquired it, nor reduce the momentum of circulation Chapra The commitment of Islam to justice and brotherhood demands that the Muslim society takes care of the basic needs of the poor.

Individuals are religiously obliged and encouraged to earn a living and only when this is impossible does the state intervene; Islam greatly values work and clearly discourages dependence on state or on others. This free will though is directly linked to accountability; the more freedom a person has the more accountable a person becomes.

According to Islam, although people can fully exercise this free will in making decisions, including business decisions, it is a religious imperative to exercise responsibility to those they deal with and, ultimately, to God by observing His rules on earth Naqvi Money market: All financial instruments traded in a money market have a maturity of less than one years. It is strongly viewed that MII rate will move depending on the movement of the conventional money market rate which is also benchmarking against the overnight policy rate OPR but it is proven otherwise.

Ahmad, Kaleem and Mansor Md Isa International Journal of Islamic Financial Services, 4 4 , 1- 8. Bacha, Obiyathulla I. MPRA paper number , January. Pacific-Basin Finance Journal, 17 1 , — Engle, R. Haron, Sudin and B. Johansen, S. Evidence From Saudi Arabia.

The Journal of Energy and Development, 33 2 , Login Create Account Admin.

MANGGALA PUTRA FOREX

It is coupon bearing paper which the Government pay half yearly profit to the investors. 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.

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. Cagamas Mudharabah Bond was introduced on 1 March 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. 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.

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. 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:. 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 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. 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. 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.

Subsequently the assets is purchased back from the customer at principal value plus profit and to be settled at an agreed future date. 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. 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. This sukuk based on the Al-Ijarah or sale and lease back concept, a structure that is widely used in the Middle East. The proceeds from the issuance will be used to purchase Bank Negara Malaysias 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 with an issue size of RM million. Bank Negara Malaysia issues this instrument on a regular basis with subsequent issues ranging from RM million to RM million. The instrument serves as a last. The move significantly enhanced Islamic interbank activities by improving efficiency, limit misunderstandings and reducing the cost of Islamic banking transactions.

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. Learn more about Scribd Membership Home. Read free for days Sign In. Much more than documents. Discover everything Scribd has to offer, including books and audiobooks from major publishers. Start Free Trial Cancel anytime. Islamic Interbank Money Market Instrument. Uploaded by AnaszNazri. Document Information click to expand document information Description: know how and what are the Islamic Interbank Market product.

The benchmark rate used to price many US financial securities is the three-month US dollar Libor rate. Up until the mids, the Treasury bill rate was the leading reference rate. However, it eventually lost its benchmark status to Libor due to pricing volatility caused by periodic, large swings in the supply of bills. In general, offshore reference rates such as the US dollar Libor rate are preferred to onshore benchmarks since the former are less likely to be distorted by government regulations such as capital controls and deposit insurance.

Monetary policy transmission Central banks in many economies implement monetary policy by manipulating instruments to achieve a specified value of an operating target. Instruments refer to the variables that central banks directly control; examples include reserve requirements, the interest rate paid on funds borrowed from the central bank, and balance sheet composition.

Operating targets are typically measures of bank reserves or short-term interest rates such as the overnight interbank rate. These targets are set to achieve specified policy goals, which differ across central banks depending on their specific mandates 2. If market participants are broadly content with the above proposals for the integration of MMIs into CREST, the following areas for further work should be taken forward. A number of transitional issues are set out in Appendix VII, which will need to be considered further.

Treasury Solicitors would need to consider any necessary transitional legislative provisions for the dematerialization of MMIs. The Working Group made some preliminary recommendations: All MMIs should be covered by the same transitional arrangements rather than a series of separate transitions for different types of MMIs.

After the transition period any outstanding bearer securities with longer maturities up to five years in the case of some CDs , could be dematerialized under a legislative provision for the transformation of bearer securities to dematerialized form. A big bang should be more manageable for a smaller number of paper MMIs; hence it would be easiest if it only applied to those relatively few MMIs with longer outstanding maturities.

Issues requiring further consideration include: i The length of the notice period. This would depend on the legislative timetable, but would also relate to other priorities and available resources. What reference price would apply to MMIs?

Moreover, how would MMIs be grouped? The Working Group recognized the trade-off between the desire for numerous categories in order to assign appropriate haircuts to different instruments, and the need to keep the approach to categories for MMI collateral relatively simple. These baskets are based on the FTSE indices. However, who would assess and group MMIs?

Settlement banks would need to find a solution that provided for simplicity of process as well as allowing adequate differentiation between instruments. What reference price should be used? The alternatives include a price source, a simple discount to maturity or an accrued interest approach. An alternative could be to use a simple accrued interest or discount to maturity calculation to value MMIs. The Bank of England, for example, buys bills outright based on a simple discount formula using the repo rate and days until maturity.

There could be scope for similar simple arrangements for the valuation of MMIs. This would have systems implications, and would require an agreed contractual and legal underpinning. CREST Co and market participants issuers and their issuing agents would need to consider this further. Dematerialization of other instruments Progress towards the dematerialization of MMIs may also prompt moves to dematerialize other instruments.

Some members of the Working Group suggested that euro CP could be a candidate for dematerialization. The Stock Lending and Repo Committee suggested that, as some stock lenders take Letters of Credit as collateral, it could be useful for them to be dematerialized as well.

The Bank would welcome further views on these points. Market structure issues The dematerialization of MMIs raises new opportunities for money market participants, particularly for the future of the secured lending market.

Legislative and tax issues Many legal and legislative issue s will require further detailed work. Treasury Solicitors would need to consider the necessary legislative changes. These points will be taken forward at a later stage.

As noted above, there are also some general tax points that will need to be agreed with the Inland Revenue. Do religious beliefs help produce more ethical organizations and consumers? It identifies the Islamic business ideals and their practical implications, which organizations dealing with Muslim consumers need to adopt.

First, Islam, being a practical religion with clear daily procedures to follow, shapes the attitudes and behaviors of its adherents, the Muslim consumers, who represent more than a fifth of the world population. Third, because of the oil boom, as well as other factors, many Muslim countries are becoming the most affluent consumers in the world.

Fourth, the level of foreign investment in Muslim countries is increasing. Fifth, there is a movement towards forming a Muslim trading bloc, although such a bloc might take some time to materialize. Finally, sixth, there is a strong push towards the Islamization of countries where Muslims are a majority through laying down clear Islamic codes of conduct in all walks of life, and commerce is no exception to this Saeed et al.

Moreover, the globalization of the world economy makes it a requirement for world businesses to be familiar with the Islamic perspective on commerce in order to understand the factors shaping the behaviours of Muslim consumers.

Businesses that neglect the acquisition and utilization of such knowledge risk alienating a large proportion of their Muslim target market Saeed et al. The Islamic religion has a finely tuned set of rules concerning all aspects of life. By recognizing these rules, the knowledgeable firm can not only serve the spiritual needs of the Muslim community but also capture a truly unique position in the Islamic marketplace Sacharow This law, which caters to the needs of Islamic society, is essentially preventative and is not based on harsh punishment except as a last measure.

Islam consists of five pillars: affirmation of the faith Shahadah , that is, witnessing that there is no divinity but Allah and that Mohammad is the messenger of Allah; the five daily prayers which Muslims perform facing Makkah Mecca ; fasting from dawn to sunset during the lunar month of Ramadan; making the pilgrimage to Makkah once in a lifetime; and paying an obligatory charity of 2. Muslims are also commanded to encourage others to perform good acts and to abstain from evil. That may come as a surprise to many non-Muslims, whose perceptions of the belief have been distorted by terrorists, many from the Middle East, whose acts in the name of Islam have been condemned by Muslim leaders everywhere.

These rules are stated in the Shariah law. These rules apply to commerce as much as they apply to personal purification and cleanliness. Islam provides either general or detailed instructions about what is permissible and what is not. Detailed instructions are provided on the acts of pure worship such as prayer, pilgrimage, fasting and charity, as well as a multitude of other aspects of life.

For example, some rules, like forbidding the use of interest rates as a method of making money, represent a general guideline. The responsibility of Muslim scholars throughout the ages is to identify which trade practices fall under this category and to advise Muslims against them or, in addition, provide alternative Shariah-compliant practices. Multinational corporations should be multicultural as well and not simply impose their own culture; they need to adapt their operations to make their Muslim customers, employees, and suppliers comfortable with their practices Pomeranz These companies can constructively use the power of religion through accommodating and harnessing Muslim values more effectively when conducting their businesses in the Muslim marketplace Rice In general, all Muslim practices and acts are classified under the following categories.

Halal, or permissible. It has three levels: o Wajib, or duty; obligatory acts. Failure to perform them is a sin. Duty can be described as the Core Halal, without which a firm cannot be seen as Shariah-compliant. Implications: firms must perform Wajib. Examples include being honest and transparent.

Not performing Mandoob is not a sin. Likeable can be described as the Supplementary Halal. Implications: do if possible. Examples include being helpful and going the extra mile. Engaging in Makrooh does not result in a sin unless it leads to one. The most obvious example of Makrooh in Islam is divorce! Although it is Shariah compliant, it represents the border between compliance and non- compliance.

It is loathed by society. Implications: avoid if possible. Mushtabeh, or doubted; acts that a Muslim should refrain from because they might be Haram themselves or they might lead to Haram. Businesses should refrain as much as they can from engaging in doubted activities for the fear of being perceived to be unscrupulous by Muslim consumers. Firms engaging in these activities risk a Fatwa being issued against them. Haram, or not permissible; all acts condemned explicitly or implicitly by the Islamic religion.

Engaging in them or in activities leading to them is a sin. These categories have obvious implications on what companies planning to engage the Muslim marketplace should and should not do. It is of no relevance whether these companies are Muslim or not, what is of relevance is what they should do, i. To illustrate, the duty Wajib of a company in Islam is to maximize the good of the society as a whole, not profit maximization.

Therefore, a company its personnel will be committing a sin if it does not actively seek societal value maximization. A company however is at ease in choosing the means to do that, as long as those means are not Haram as long as they are permissible or not a sin.

Although profit maximization is not the ultimate goal of trade in Islam, Islam accepts profits and trade and does not aim to remove all differences in income and wealth that may result in various social and economic classes Beekun But the Mercy of your Lord is better than the wealth of this world which they amass. The implications of these categories on the marketing aspect of business are very thorough and encompass the entire marketing mix for both services and goods.

The first component of the conventional marketing mix, e. In Islamic marketing, however, it is the Halal product, and the difference between the two is huge. From an Islamic marketing perspective the product that a company sells must be entirely Halal. This means that all inputs, processes and outputs must be Shariah-compliant, i. Being Shariah-compliant is the quickest way to promote the company and its products.

Products and acts that might be seen or interpreted as Makrooh despised or Mushtabeh doubted will be immensely difficult to sell to Muslims. The same is true for companies producing these products or engaging in such acts. Just as a drop of oil ruins the taste of an entire tank of pure water, it is enough for one insignificant stream to be not Shariah-compliant for the image of the remaining fully legitimate business streams to be ruined.

The bright side of this is that a company will need to purify all of its actions, resources and operations in order to be able to brand itself as Islamic and position itself favourably in the mind of the Muslim consumer. For example, a company that produces pork products will find it difficult to sell anything else it produces to Muslims because pork and all that is associated with it is forbidden in Islam.

Muslim consumers will not look at how good its other products are but will see only that it manufactures pork products. This image reflection is applicable worldwide, and more so in the Muslim societies, because the numerous religious self-appointed private and public dogwatches operating in these societies relentlessly scan for noncompliance.

Any company found to be engaged in anything other than Halal will be stamped as un-Islamic, a very costly stigma indeed! It took Coca-Cola 14 years to be removed from the Arab boycott list; engaging in business with Coca-Cola was shunned religiously almost entirely over the Arab and Muslim world.

Between the years and and prior to the signing of the variousArab-Israeli peace agreements Coca-Cola was banned from trading in the Arab world because the company refused to abide by the Arab League economic boycott of Israel. For decades, this cost Coca-Cola the opportunity to sell its products in Arab countries. By contrast, prior to , Pepsi had abided by the boycott and enjoyed the bounties of the lucrative Coke-less Arab markets in the boycott days.

The image of the company was severely hurt that it took Coca-Cola many years after the peace agreements of to build its brand in the Arab market. Finally, although achieving the status of Shariah-compliant might seem hard at first sight, it is essential for success in the Muslim market. A compliant company will get a distinctive competitive advantage over the less compliant competitors.

Failure to observe these rules means that the company and its brands will be stamped as Shariah non-compliant and thus un-Islamic; an image that no company can afford to have in the biggest unified market in the history of mankind. The Muslim ethical system has four sources: the Quran, the sayings and behaviour of Prophet Mohammad, the example set by his companions, and the interpretations of Muslim scholars of these sources.

These provide an entire socioeconomic system that guides the behaviour of Muslims. The system stresses the importance of human well-being and good life, religious brotherhood and sisterhood, socioeconomic justice, and a balanced satisfaction of both the material and the spiritual Chapra In economics, Islam supplies a practical programme that includes detailed coverage of specific economic variables such as interest, taxation, circulation of wealth, fair trading and consumption.

Islamic law, which is obtained from the sources listed above, covers business relationships between buyers and sellers, employers and employees and lenders and borrowers Rice The Quran provides a balanced view of human motivation; desire for wealth and propensity for greed and selfishness in humans are recognized.

Muslims prove their worth to God by behaving ethically in the midst of the tests of this worldly life. These tests could take two forms: 1. These two temptations, although beneficial in part, fail the test of total purity and as such become forbidden. A business owner in this case must abstain from resorting to the use of conventional interest-based finance and resort, instead, to more hard work or to more innovative ways such as the possibility of pooling resources within the community or with other shareholders to run and support the business.

In general, Islamic ethics are governed by the following principles, each of which has significant business implications: 2. God is the sole creator of the universe, and his people should cooperate in carrying out His will Rice The implication for businesses is: one God, then one constitution, the divine constitution.

This constitution is detailed in the Quran, the teachings of Prophet Mohammad and the example set by his companions. The constitution, e. More specifically, since we all are part of the same human-hood and spiritually equal before God, even if not materially equal on earth Bassiouni , honesty, trust and a relationship between employers and employees that reflects this human-hood need to be developed and encouraged Wilson In other words, people are equal partners and each person is a brother or sister to the other Rice Iman faith.

In Islam, faith, or iman, is the basic motivating factor forbelievers, and it is this that determines conscience. Hence, business decisions are guided by iman, which in practice means following Shariah law, and engaging in what is Halal, or permitted, and avoiding that which is Haram, or forbidden Alawneh The business decision-maker has free choice, but religious principles provide a framework for the appropriate exercise of that choice Ali and Gibbs Khilafah trusteeship.

Although this does not mean denial of private property, it does have important implications. For instance, resources, which are God- given and for the benefit of all, must be acquired lawfully and redistributed in the best interest of everyone A-Faruqi No one is authorized to harm destroy or waste these resources. When Abu Bakr, the first ruler of the Islamic state after Prophet Mohammad, sent an army on an expedition, he ordered the leader of that army not to kill indiscriminately or to destroy vegetation or animal life, even in war and on enemy territory.

These God-given resources everything in creation is God-given are not seen as a free good, to be plundered at the free will of any nation, any generation or any individual Rice The rich and the powerful are not the real owners of wealth; they are only trustees. They must spend it in accordance with the terms of the trust, one of the most important of which is fulfilling the needs of the poor.

Islam teaches Muslims to be moderate in all of their affairs. Chapra notes that Islam recognizes the contribution of individual self-interest through profit and private property to individual initiative, drive, efficiency and enterprise. However, profit is not the chief motive Siddiqi Since Islam places a greater emphasis on duties than on rights, social good or the benefit of the society as a whole, not profit, should guide Muslim entrepreneurs in their decisions. The argument underlying this stand is that if duties are fulfilled by everyone, then the individual self-interest is automatically controlled and the rights of all are protected Chapra Justice or Adl.

Justice is a central theme in Islam and is required from all parties in all cases. Stand out firmly for justice, as witnesses to Allah, even as against yourselves, or your parents, or your kin, and whether it be against rich or poor: for Allah can best protect both. Exploiting employees, abusing power or using a monopoly to overcharge consumers are all condemned Wilson However, businesses cannot be forced to sell at a loss or without a profit under the accusation that they are monopolies.

In addition to its clear objective of eradicating injustice, inequity, exploitation and oppression from society, Islam instructs people not to lie or cheat, to uphold promises and to fulfil contracts. Usurious dealings are prohibited, all wealth should be productive and people may not stop the circulation of wealth after they have acquired it, nor reduce the momentum of circulation Chapra The commitment of Islam to justice and brotherhood demands that the Muslim society takes care of the basic needs of the poor.

Individuals are religiously obliged and encouraged to earn a living and only when this is impossible does the state intervene; Islam greatly values work and clearly discourages dependence on state or on others. This free will though is directly linked to accountability; the more freedom a person has the more accountable a person becomes. According to Islam, although people can fully exercise this free will in making decisions, including business decisions, it is a religious imperative to exercise responsibility to those they deal with and, ultimately, to God by observing His rules on earth Naqvi Money market: All financial instruments traded in a money market have a maturity of less than one years.

Maturity or tenor of instruments is short term. Instruments traded in money markets are usually in very large denominations Not accessible to individuals, only FIs can purchase and sell, or governments and brokers. Capital market: All financial instruments traded in a capital market have a maturity of more than one year.

Maturity or tenor of instruments is medium term. Up to 5 years. Instruments may be in large denominations or small. Money market provides a market for FIs to tap into liquid assets or sell assets for cash when their asset and liability book is mismatched. Mismatching is inherent in the commercial bank business for instance as liabilities are callable on demand and are short term whereas assets and investments are long term in nature and cannot be liquidated in the short term without incurring a loss.

Assets are long and liabilities are short. Achieved through channelling surplus liquid resources for investment, and to meet short term liquidity needs. Market for trading short term Islamic Instruments that are liquid but also offer a return on the investment. Market also provides a pricing mechanism or platform form trading these instruments by communicating information to all participants.

Liquidity Management Centre of Bahrain LMC Islamic Money Market of Malaysia 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 Interbank Money Market IIMM was introduced on January 3, as a short-term intermediary to provide a ready source of short-term investment outlets based on Syariah principle. To enable Islamic financial institutions to manage their liquidity mismatch through short and medium term liquid investments structured in accordance with the Shari'a principles. The Liquidity Management Centre LMC was established for the purpose of facilitating the investment of the surplus funds of Islamic banks and financial institutions into quality short and medium term financial instruments structured in accordance with the Shari'a principles.

LMC is committed to playing a key role in the creation of an active and geographically expansive Islamic inter-bank market which will assist Islamic financial institutions in managing their short-term liquidity. In addition, the LMC will attract assets from governments, financial institutions and corporates in both private and public sectors in many countries. The sourced assets will be securitized into readily transferable securities or structured into other innovative investment instruments.

Enable IFIs to act as investors and borrowers Provide short term, liquid, tradable, asset backed instruments, where IFIs can invest their surpluses. Provide short term investment opportunities that are more competitively priced. Enable IFIs to assume term risk, securitise and liquidate such assets to improve the quality of the portfolio. Create secondary market activity with designated market makers, where such instruments can be actively traded.

It means to Facilitate IFIs to effectively manage their asset keep a balance between the demand for and liability mismatch. To promote economic growth. Money market can Enable IFIs to act as investors and borrowers.

To provide help to Trade and Industry. Money Provide short term, liquid, tradable, asset backed market provides adequate finance to trade and instruments, where IFIs can invest their surpluses. Similarly, it also provides facility of discounting bills of exchange for trade and industry. To help in implementing Monetary Policy. It Provide short-term investment opportunities provides a mechanism for an effective that are more competitively priced.

To help in Capital Formation. Money market Enable IFIs to assume term risk, securities and makes available investment avenues for short- liquidate such assets to improve the quality of the term period. It helps in generating savings and portfolio.

Money market provides non-inflationary sources Create secondary market activity with designated of finance to government. It is possible by issuing market makers, where such instruments can be treasury bills in order to raise short loans. However this does not leads to increases in the prices. Objectives of IMM Currently, Islamic banks are often forced to place the reserve liquidity they need to maintain under central bank requirements with international conventional banks through another Islamic money market tool, commodity murabaha, as there are not enough highly rated sukuk issues they could use instead.

But most Islamic scholars say commodity murabaha is a mere paper trail replicating conventional money market instruments and only grudgingly accept its use as there is no alternative. Islamic bankers face the dilemma that scholars call for their instruments to be underpinned by real assets, but central banks often do not qualify these as being sufficiently risk-freeto be used in short-term liquidity management instruments.

The initiative by the ILM could be a way out, but bankers caution the costs of truly backing the sukuk issues with assets could make that more costly. Market is to further strengthen the institutional structure of Islamic banking operations.

Achieved through channeling surplus liquid resources for investment, and to meet short-term liquidity needs. To provide room for overcoming short-term Market for trading short term Islamic Instruments deficits. To enable the Central Bank to influence and Market also provides a pricing mechanism or regulate liquidity in the economy through its platform form trading these instruments by intervention in this market.

To provide a reasonable access to users of Short- term funds to meet their requirements quickly, adequately and at reasonable costs. Islamic Money Market of Malaysia 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.

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.

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.

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. 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. It is coupon bearing paper which the Government pay half yearly profit to the investors. 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.

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. Uses bai bihaman ajil ABBA concept to finance the purchase of Islamic housing finance debt and Islamic hire purchase debts.

Cagamas Berhad Cagamas , the National Mortgage Corporation, was established in to promote the broader spread of house ownership and growth of the secondary mortgage market in Malaysia. It issues debt securities to finance the purchase of housing loans from financial institutions and non-financial institutions. The provision of liquidity to financial institutions at a reasonable cost to the primary lenders of housing loans encourages further expansion of financing for houses at an affordable cost.

The Cagamas model is well regarded by the World Bank as a successful secondary mortgage liquidity facility. Cagamas is the leading issuer of AAA debt securities in Malaysia as well as one of the top Sukuk issuers in the world. The National Shariah Advisory Council viewed that the WI transaction is allowed based on the permissibility to promise for sale and purchase transactions. 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.

Bai Al-Dayn refers to the sale of a debt arising from a trade transaction in the form of a deferred payment sale. 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 days. Upon maturity of al-Murabahah financing, the customer shall pay the bank the cost of goods plus profit margin. 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. 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. 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.

Subsequently the assets is purchased back from the customer at principal value plus profit and to be settled at an agreed future date. The borrower will pledge its securities as collateral for the loan granted.

If there is surplus money, the lender will return the balance to the borrower. 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. 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 with an issue size of RM million. Bank Negara Malaysia issues this instrument on a regular basis with subsequent issues ranging from RM million to RM million. Has created an active bond market yield curve. Trade of these instruments helps Islamic banks deal with liquidity issues, excess liquidity they buy, shortage they sell.

Its an active market. Islamic money market yields that move coordinated with conventional rates simply means that, users of an IIMM would face the same extent of interest rate risk that conventional players do. It is indeed ironical that despite creating new markets and institutions that are supposed to enable interest free operations, players end up with as much interest rate exposure if not more. This unfortunately is the reality of IIMMs operating within a dual banking system.

Just as water cannot be at two levels within the same container, an Islamic financial system operating within a larger conventional macro environment cannot completely sterilize itself from interest rate risks. If a common customer, pool that can freely move funds between banking systems is the explanation for interest rate risk transmission to Islamic banks. The results of this study imply that the existence of an IIMM may actually enhance this transmission.

There are at least additional channels of transmission with an IIMM. It is reasonable to expect that these changes would cost the industry hundreds of millions of dollars. These costs must be considered against the very real possibility that, in light of these costs and burdens, intermediaries instead may choose to offer alternative cash products, including unregulated or less regulated investment vehicles, rather than build complex systems to continue to offer money market funds.

This move to alternatives would seem all the more likely if redemption restrictions sharply reduce investor interest in money market funds. Indeed, 90 percent of institutional investors have indicated that they would reduce their usage or stop using money market funds altogether if redemption restrictions were put in place.

In addition, a daily redemption restriction is highly unlikely to work within existing sweep and retirement plan products, forcing broker dealers, trusts, and retirement plan sponsors to seek other products. They could be expected to drive investors to abandon what has been for decades a convenient and liquid cash-management vehicle for millions of investors, rapidly shrinking and disrupting the financing available to businesses, state and local governments, and nonprofits, and increasing systemic risk by pushing hundreds of billions of dollars from money market funds to less- regulated, less-transparent alternative funds.

Given the very strong correlation we have seen between the inter-bank rates, changes in interest rates in the conventional money market would simply be transmitted to Islamic banks when they use the IIMM for their liquidity management. Similarly, since IIMM instruments are priced using discounting, interest rate changes cause re pricing risk because discount rates change.

Prices and yields of IIMM instruments will invariably converge with those of conventional money markets because of the possibility for pure arbitrage. As such, Islamic institutions issuing IIMM instruments will face higher cost if conventional interest rates rise, while investors of IIMM instruments would get lower returns if the opposite happens. The third transmission channel arises from central bank intervention. Failing which, profitable arbitrage against the central bank or a carry trade between the markets would both be feasible.

Given this, no matter how supportive a central bank is of the Islamic financial sector, it cannot possibly maintain dual rates nor cause changes in one market and not in the other. Does this mean that not having an IIMM is better in a dual banking system? Obviously not. While an IIMM may provide additional channels for rate risk transmission, as we saw in the first section, it nevertheless plays several pivotal roles, liquidity management being the most important.

The challenge then is to have well functioning IIMMs that do not pass on rate risks. One tempting solution is to detach the Islamic financial system form the conventional one and keep it truly separate by not allowing transactions across markets. Not only would this not be feasible, it would also be hugely distortionary and very costly to maintain.

Unless the Islamic financial sector is to be kept as a small niche, it would simply not be possible to keep it totally detached. For countries like Malaysia and most GCC countries which are trading nations locked into the global economic system, this is not an option. Rather than aiming to detach the Islamic financial system from the conventional, a more realistic and workable approach, may be one of reducing the reliance.

That is, an incremental approach that reduces the reliance that IIMMs now have on the conventional money markets. A large part of the current dependence on conventional money markets is due to the smallness of IIMMs, their lack of instruments, shallow liquidity etc. Linking them across borders eliminates many of these problems. Risk will be dissipated and not concentrated on small national IIMMs.

Attempting to link IIMMs across countries would obviously raise its own set of problems. Issues of regulatory regimes, taxes, exchange controls, currency risks, etc. However, linking IIMMs across countries need not necessarily be a very new phenomenon.

There is precedence, the Euromarkets. An internationally linked network of IIMMs could bring about many of the benefits, particularly in the areas of risk management that the Euromarkets have brought. Yet, the Euromarkets were not created by design but came about spontaneously to fulfill latent demands. There is much that we can learn from the experience of the Euromarkets as we seek to develop and enhance Islamic money markets.

Related Papers. By Muhammad M. Ma'aji and Rahima Ali. Profits and Losses Sharing paradigm in Islamic banks: Constraints or solutions for liquidity management? By hichem hamza. By Musleha Binti Mokter. Growth and Prospect of Islamic Finance in Bangladesh. By Muhammad Ayub. Download pdf. Remember me on this computer. Enter the email address you signed up with and we'll email you a reset link.

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Accounting for Islamic Bank Mudharabah Investment

PARAGRAPHKhan Road, Karachi - Interbank Brokerage Profile Interbank Brokerage Division on 23 June Archived from Money Market and Foreign Exchange that are supported directly by treasury back office. Archived from the original on Retrieved 10 July World Economic. Centralization of the Waqf System. Collateral in Islamic Finance. Archived from the original on and Society. Distribution of Profit: Tabung Haji. An extended version of this. Features of Islamic Approach. Taxation of Waqfs in India. Credit Systems for the Poor.

Download scientific diagram | 1 Mudharabah Interbank Investment (MII) from or liabilities of the bank are normally held on a short-term basis (Saiti et al., ). Download scientific diagram | 1 Mudharabah Interbank Investment (MII) from The discussion demonstrates that the existence of a viable Islamic interbank solutions in Malaysia for liquidity management such as the Bursa Suq Al-Sila. Downloadable! This paper is intended to identify the determinants of Islamic Interbank Money Market (IIMM) rate in Malaysia with a specific focus on.