Islamic Products Information Kit

Table of Contents
Ijarah (leasing)

Murabahah (cost plus)

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

Wadiah Yad Dhamanah (savings with guarantee)

Qardhul Hassan (benevolent loan)

Mudharabah (profit-sharing)

Rahnu (collateralised borrowing)

Malaysia International Islamic Financial Centre (MIFC)

Islamic Securities

Islamic Money Market

10

Historical Yields for Conventional & Islamic Securities

11

Ijarah (leasing)
Refers to a contract under which the lessor leases equipment, building or other
facilities to a client at an agreed rental rate and pre-determined lease period upon
the aqad (contract). The ownership of the leased equipment remains in the hand
of a lessor.
Application:
1) Issuance of Sukuk Ijarah
Acceptability:
1) The contract is acceptable in the Middle East except Sudan.
2) The rejection is due to the buy-back option by the original owner in this
arrangement.
Bank Negara
Malaysia (BNM)

1
Sell beneficial interest in
assets

BNM buyback the

assets

Leases the
asset

Rental
Payment

SPV
7
Redemption
upon maturity

2
Issuance of Sukuk
Ijarah

4
Payment for
Sukuk

Rental Distribution

Investor

Murabahah (cost plus)

A contract that refers to the sale and purchase transaction of an asset whereby
the cost and profit margin (mark-up) are made known and agreed by all parties
involved. The settlement for the purchase can be settled either on a deferred
lump sum or installments basis, will be specified in the agreement.
Application:
1) Deposit placement with BNM via Commodity Murabahah Transaction.
Acceptability:
1) Internationally accepted
3

Commodity Broker
will pay the proceeds
to BNM

Bank Negara
Malaysia (BNM)

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

For the 2nd leg,

BNM pays FIs
principal + profit
at maturity (on a
deferred basis)

B. FIs sell the

commodity to BNM
(at mark up price)
Financial
Institutions

For the 1st leg, FIs

transfer funds to the
agent to buy
commodity (to create
principal amount)

Commodity brokers may

net-off their positions via
exchange outside the
MBT

A. Commodity is
transferred to Agent
Commodity Broker A

Agent

Agent will buy

commodity direct
from the commodity
broker (cost price)

Asset flows (Book entry all on spot basis)

Fund flows (1st leg is spot & 2nd leg is deferred)

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

A contract which involves selling and buying of an asset where a seller will sell
the asset to a buyer on a cash basis and subsequently will buy the same asset
on a deferred payment basis at mark up price. It can also be applied when a
seller sells the asset to a buyer on a deferred basis and will later buy back the
same asset on a cash basis with a price which is lower than the deferred price.
Application:
1) Issuance of Bank Negara Negotiable Notes (BNNN).
2) Issuance of Profit-based GII.
Acceptability:
1) Bai Al-Inah is not acceptable by the Middle East countries
2) Some of the scholars regarded Bai Al-Inah as part of Interest-based
transaction.

Bank Negara
Malaysia (BNM)

Pay to
BNM

Pay to
FIs

4
Central Bank
purchase Assets

Central Bank
Sell Assets

Financial
Institutions

Wadiah Yad Dhamanah (savings with guarantee)

Wadiah is a trust concept which refers to the deposits or valuable goods that
have been kept with a depository agent. The depository agent will safeguard and
provide guarantee to the principle of the deposits or valuable goods. With
permission from the depositors, depository agent may invest the deposit to earn
some returns. However, the depositors are not entitled to any share of the returns
but the depository agent may give a gift (hibah) to the depositors as a token of
appreciation.
Application:
1) Wadiah Placement with BNM.
Acceptability:
1) Wadiah concept is widely acceptable by the Middle East scholars
Bank Negara
Malaysia (BNM)

Hibah
(if any)

Absorb funds from FIs via

Wadiah Inter bank
Acceptance

Pay back to FIs

upon maturity date

Financial
Institutions

Qardhul Hassan (benevolent loan)

A contract of loan between two parties on the basis of social welfare or to fulfill a
short-term financial need of the borrower. The amount of repayment must be
equivalent to the amount borrowed. It is however the borrower may choose to
pay more than the amount borrowed as long as it is not stated or agreed at the
point of contract.
Application:
1) Government investment issues (prior to 1993)
2) Placement of deposit.
Acceptability:
1) Qardhul Hassan concept is widely acceptable by the Middle East scholars.

Bank Negara
Malaysia (BNM)

Hibah
(if any)

FIs redeem the

certificate upon
maturity

BNM borrows fund

from FIs and issues
certificate of debt

Financial
Institutions

Mudharabah (profit-sharing)
A contract which is made between two parties to finance a business venture. The
parties are a capital provider or an investor who solely provides the capital and
an entrepreneur who solely manages the project. If the venture is profitable, the
profit will be distributed based on a pre-agreed ratio. In the event of business
loss, the loss shall be borne solely by a provider of the capital.
Application:
1) Mudharabah Interbank Money Market.
Acceptability:
1) Mudharabah concept is widely acceptable by the Middle East scholars.

Bank A provides fund to be

invested by Bank B with
agreed profit-sharing ratio

Financial Institutions A
(Capital Provider)

Financial Institutions B
(Entrepreneur)
2

Upon maturity profit gained

will be shared accordingly
and the principal will be
returned back to the
capital provider

Rahnu (collateralised borrowing)

Rahnu transaction is equivalent to the conventional colleteralised borrowing. It
refers to an arrangement whereby a valuable asset is placed as collateral to raise
funding. The amount borrowed must be equal with the collateral rendered. The
collateral may be transferred to lender in the event of default. To get the principal
back the lender will sells the collateral and take the principal amount. Any
excessive amount must be returned to the borrower.
Application:
1) Rahnu Lending Facility.
Acceptability:
1) Rahnu concept is widely acceptable by the Middle East scholars.
3

FIs will return the residuals

to BNM

Financial
Institutions (FIs)

BNM will provide loan to

the borrower

Bank Negara
Malaysia (BNM)

FIs will pledge securities as

collateral for loan given

Securities

If FIs fails to pay off the loan, BNM has the

right to sell the securities in order to get back
the principal amount

Malaysia International Islamic Financial Centre (MIFC)

Malaysia International Islamic Financial Centre (MIFC) was officially launched

on 14 August 2006 by Governor of Bank Negara Malaysia. The MIFC
initiative is specifically undertaken by the collective efforts of the country's
financial and market regulators, together with the participation of the industry
representing the banking, takaful and capital market in Malaysia.
As a centre for the offering of Islamic financial products and services by a
diversified range of financial institutions from anywhere in Malaysia in any
currency to non-residents and residents, MIFC specializes in the origination,
issuance and trading of Islamic capital market and treasury instruments,
Islamic fund and wealth management, international currency Islamic financial
services market (including deposit and financing), as well as in takaful and
retakaful.
In the promotion of Malaysia as a premier Islamic financial hub, MIFC will
become the global brand. MIFC initiative was launched against the backdrop
of a strong foundation and comprehensive pre-requisites in the Islamic
financial system which includes :
i.

Robust regulatory and supervisory framework.

ii.

Diversified range of players, including well-known international financial

institutions.

iii.

Wide array of products.

iv.

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

v.

Conducive legal and Shariah governance framework.

vi.

Continuous development of human talent infrastructure.

Islamic Securities
Securities Issuance (RM billion)

Type

RM
bil

GII
Khazanah
MITB
Cagamas BAIS (Sanadat)
BNNN
Total

3.0
1.8
4.8

2002
Change
%
50
89.0

RM
bil

2003
Change
%

2.0
3.0
3.0
8.0

50
59

RM
Bil

2004
Change
%

4.1
1.2
1.0
1.6
5.0
12.9

105
61
100
100
66

RM
bil

2005
Change
%

4.0
1.0
2.0
7.0
14.0

2
13
100
40

May-06
RM
Change
bil
(%)
6.0
1.0
8.0
15.0

62
50
15

Source: Islamic interbank money market

Type

GII
Khazanah
MITB
Cagamas
BNNN
Total

RM
bil

2002
Change
%

5
10
0
0
1.8
16.8

20
0
0
0
88.5

Securities Total Outstanding (RM billion)

2003
2004
2005
RM
Change
RM
Change
RM
Change
bil
%
bil
%
bil
%
7
10
0
0
3
20

40
0
0
0
59.1

9.1
9
1
1.6
5
25.7

30
11.1
100
100
66.6

10.1
10
2
1.6
7
30.7

10.9
11.1
100
0
40

RM
bil
13.6
8.3
2
1.6
6.6
32.1

May-06
Change
%
34.6
17
0
0
5.7

Source: Islamic interbank money market

Islamic Money Market

Type
Overnight
1-week
1-month
3-month
Others
Total

2002
RM
Change
bil
%
206.9
12.1
6.2
0.3
24.0
249.7

Interbank Money Market Transactions (RM million)

2003
2004
2005
RM
Change
RM
Change
RM
Change
bil
%
bil
%
bil
%
244.0
17.9
458.2
87.8
220.6
51.8
11.7
2.8
16.2
38.0
16.2
0.0
2.3
63.9
1.8
21.7
1.8
0.0
0.1
60.9
0.3
133.5
1.1
235.2
22.3
7.2
14.3
35.5
16.0
11.6
280.4
490.8
255.7

RM
bil
65.9
4.7
0.8
0.1
9.6
81.1

May-06
Change
%
70.1
70.8
51.3
91.0
40.0

Source: Islamic interbank money market

Year
Wadiah
Mudharabah
Papers
GII
Khazanah
MITB
Cagamas
BNNN
ABS
Corporate Bond
ICP
IMTN
IAB
NIDC
Total

2002
447
247

5
15
0
2
0
32
3
2
7
0
760

Money Market Transactions (RM billion)

2003
2004
2005
497
770
669
283
486
255

36
17
0
0
8
3
45
9
4
16
9
927

35
17
1
2
21
0
32
10
6
10
8
1,398

43
20
4
1
36
2
48
8
13
15
9
1,123

2006-May
356
81

16
1
3
0
21
0
11
4
13
8
6
521

Total
2,739
1,352

135
70
8
3
88
5
168
34
38
56
32
4,483

Source: Islamic interbank money market

10

Historical Yields for Conventional & Islamic Securities

a. 3-Year Securities
48
4.50
38
4.00
28
3.50
18

2.50
Mar-04

Jun-04

Sep-04

Dec-04

Mar-05

Jun-05

Sep-05

Dec-05

Mar-06

Jun-06

2.00

-2

Spread (bps)

Yield (%)

3.00

-12

1.50

-22

1.00

Spread Analysis (bps)

Max : 51.00
Min : 0.30
Avg : 4.27

0.50

0.00

MGS vs GII Spread RHS

MGS-3year
GII-3year

-32

-42

-52
Source : Bloomberg

11

b. 5-Year Securities

40.00

5.00

30.00
4.00

10.00

3.00

Mar-04

Jun-04

Sep-04

Dec-04

Mar-05

Jun-05

Sep-05

Dec-05

Mar-06

Jun-06

2.00

Spread (bps)

Yield (%)

20.00

-10.00

-20.00
1.00

Spread Analysis (bps)

Max : 35.50
Min : 0.10
Avg : 3.69

0.00

MGS vs GII Spreads RHS

MGS-5year
GII-5year

-30.00

-40.00
Source : Bloomberg

12