Global Islamic Markets

Background of Malaysia Islamic Money Market

When Bank Negara Malaysia (BNM) set out to introduce Islamic banking in Malaysia in the early 1980s, it had in mind a two-phased approach. In the first phase, BNM wanted to ensure that the Islamic banking system contained all the three important components of a viable banking system, namely a large number of Islamic financial instruments to meet the various needs of the Muslim business community, a large number of financial institutions providing Islamic financing facilities and an Islamic interbank money market. The Islamic interbank money market, by linking the institutions and the instruments, was expected to provide depth to the Islamic financial system.

Malaysia’s first Islamic bank, Bank Islam Malaysia Berhad (BIMB) was set up in 1983, licensed under section 3 (4) of the Islamic Banking Act 1983. The first 10 years were concentrated on developing a large number of Islamic financial instruments. By early 1993, a total of 21 Islamic financial products had successfully been introduced, to meet the needs of the Muslim business community in Malaysia.

The next step was to create a large number of financial instruments offering Islamic products. BNM implemented this in 1993 by allowing existing commercial banks, finance companies and merchant banks to offer Islamic banking services on a parallel basis with their conventional banking services. The scheme was called Skim Perbankan Tanpa Faedah (SPTF) or Interest-Free Banking Scheme. By the end of 1993, two of the three components for a viable Islamic banking system were already in place.

What remained missing was the third component, namely an Islamic Interbank Money Market (IIMM). Bank Negara introduced this on January 3, 1994. The scope of activities of the IIMM included the purchase and sale of Islamic financial instruments among market participants (including the Bank), interbank investment activities through the Mudarabah Interbank Investment (MII) Scheme and a cheque clearing and settlement system through an Islamic Interbank Cheque Clearing System (IICCS).

In the initial phase the Islamic financial instruments that were traded in the IIMM were based on Bai al Dayn. These were Islamic accepted bills, Islamic mortgage sukuk and Islamic private debt securities.

In addition, financial institutions are able to sell Government Investment Issues (GIIs) to BNM as and when required to meet their liquidity needs. GIIs are government securities issued at par via Islamic concept of Bai Bithamin Ajil at the initial phase. However on 22nd July 2013 BNM announced an inaugural issuance of GII under Murabahah contract which is essentially a certificate of indebtedness arising from a deferred mark-up sale transaction of an asset, such as commodity (mainly crude palm oil), which complies with Shariah principles.

The IIMM has since then saw an evolution with the introduction of the concepts of Wadiah, Wakalah and Murabaha to facilitate mobilisation of liquidity.