Money Market – Components in Islamic Finance

Money Market – Components 1. Interbank deposits – trading activity - Between bank-to-bank.- Consist of short-term borrowed (I day, overnight or 1 week)- This popular because have a realtions between borrowing and lending to

settle down the clearance check.- Example : CIMB Bank have a RM 250 Billion check withdrawal dari

customer Maybank, but CIMB just have a RM 200 Million.- So, CIMB a debt with Maybank as much as rm 50 Million, so there’s is

interest the debt.- Below is the calculation for the interest.

Money Market – Components

2. Trading of money market instruments • Consist of any salin variety of security (short-term)• No physical money market.• The suppliers of funds for money market instruments are institutions and

individuals.• Important for businesses because it allows companies with a temporary

cash surplus to invest in short-term securities

Malaysian Money Market Instruments

• 3.1 : Malaysian Treasury Bills (MTB)• It give in a small amount because its have a

limit liquidity.• The typical maturities are 3, 6 and 12 months. • Example, Goverment had give a debt to 1MDB

around 2.1 Billion in a short period payment.

• 3.2 Bank Negara Malaysia Bills (BNB)

• BNB are short-term securities issued by Bank Negara Malaysia and are bidded on yield basis. The maturity is always less than a year.

• The yield is specified as a rate of discount and the tenor of BNB are expressed in actual number of days.


• 3.3 : Malaysian Government Securities (MGS) • MGS are sovereign debt papers or bonds

issued by the Malaysian government to raise funds in the domestic capital market. They typically have fixed coupon rates (interest rates) that are paid on a semi annual basis.

• 5 years >


3.4 : Bankers Acceptances (BAS) • The financial institution promises to pay the exporting firm

a specific amount on a specific date, at which time it recoups its money by debiting the importer’s account. A banker’s acceptance, or BA, works much like a post-dated check, which is simply an order for a bank to pay a specified party at a later date.

• HSBC give pinjaman


• 3.5 : Commercial Papers (CP) • Commercial Papers are short term, unsecured

(promissory notes) debt instruments issued by corporations

• Commercial paper is a money-market security issued (sold) by largecorporations to obtain funds to meet short-term debt obligations (for example, payroll), and is backed only by an issuing bank or corporation's promise to pay the face amount on the maturity date specified on the note.


• 3.6 : Cagamas notes • Cagamas Notes are short-term securities with

the tenor of 12 months or less. • The notes are similar to MTB and normally

issued at a discount. The issuer is the National Mortgage Corporation; CAGAMAS.

• At maturity they are redeemable at nominal value.


• 3.7 : Cagamas bonds • Cagamas bonds are longer term debt instruments issued by

the National Mortgage Corporation • The bonds are often the result of securitization of housing

loans of local commercial banks that have been purchased by CAGAMAS.

• The bonds have either a fixed coupon rate or a floating coupon.


• 3.8 : Khazanah bonds • Khazanah bonds are essentially rated as

government paper • They share many of the same features of MGS

securities.



• 3.9 :Negotiable instrument of deposits (NIDS) • To enable bank deposits to be traded on the

secondary market • NIDs being of private issuance, typically

provide a higher yield than the treasury bills • The underlying asset is typically an MGS,

government bond or other liquid instruments

Pricing Of Money Market Instruments

The factors that determine an instrument’s price :• Time left to maturity (in days) • The nominal or face value of the instrument

(redeemable amount) • The required return or yield for the instruments

(discount factor) and • The coupon / interest payment, if any

• Determining the price of a Money Market Instrument

• P = Price of instrument• FV = Face value or redeemable amount at maturity• r = Required yield (discount factor)• t = number of days left to maturity

* This formula just to get the interest at the end of the contract.

Interest Rates, Yields And Price Of Money Market Instruments

• Based on discounting and hence, are very sensitive to changes in interest rates

• Funds flow easily between the two and this ensures co-movement in their yields/rates of return.

• If the rate a lower, that means the price is higher, and its turn back if the rate is higher.

• And its consist of two player which one is the surplus, and another is the deficit one.

SURPLUS BANK

• DEFICIT BANK

Lend funds

Price

Interest rates

The Central Bank, Money Market And Monetary Policy Operations

A central bank’s activity in money markets typically has four broad policy objectives;

• 1) Ensuring the smooth functioning of the banking system

• 2) Implementation of monetary policy • 3) Offsetting imbalances resulting from the external

sector • 4) Sterilization of forex market operations

1. Ensuring the smooth functioning of the banking system

• This to make sure theres is no imbalances in liquidity between player.

• Because if it exist a net shortage could lead to a credit crunch if unchecked

• And will cause excess liquidity that will give a bad impact for the company

2. Implementation of monetary policy

• Monetary policy has two legs : i) interest rates ii) money supply

- The central control the liquidity of money by these type of control which if theres a lot of money in market, so they make higher rate, and if theres no money, so they supply it back.

• central bank can undertake the sale of government securities:

i) drive down liquidity and thereby raise the yields and interest rates

ii) offering higher rates on deposits of commercial banks

3. Offsetting imbalances resulting from the external sector

• External imbalances can quickly translate into sudden imbalances

• i) Sudden inflow of funds through FDI • Ii) Outflow due to higher rates elsewhere

4. Sterilization of forex market operations

• often intervene in foreign exchange markets to influence exchange rates

• In order to offset any side effects due to the foreign exchange intervention

Managing asset – liability mismatches

• Why do mismatches ?- Due to the different maturity of items • When a bank’s asset-liability imbalances are temporary in

nature, depending on the interbank money market is perfectly acceptable. How?

- i) A bank with surplus funds can either lend by placing deposits with other banks in the interbank deposit system or lend by purchasing money market instruments

- Ii) A bank with a cash deficit can borrow by either taking / accepting deposits in the interbank deposit system or sell money market instruments

•Relying on money markets to fund asset growth is a risky strategy.

Money Market – Components in Islamic Finance

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