Islamic finance: Malaysia’s new collateralised murabahah explained

Author: Ashley Lee | Published: 22 Jun 2012
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Bank Negara Malaysia's introduced a new collateralised murabahah instrument last month. It aims to increase interbank lending and encourage an alternative method of liquidity management.

The collateralised murabahah is the shariah-compliant equivalent of the conventional sale and repurchase agreement. Its introduction enables Islamic banks to obtain funds from the central bank by pledging high investment-grade sukuk as collateral, and will increase liquidity in the market.

  The instrument was first introduced in June 2011 by the UAE's Central Bank to provide short-term liquidity on a murabahah basis to UAE banks. Andri Aidham Badri, a partner at Malaysian firm Kadir Andri & Partners, told IFLR that there were not many shariah-compliant instruments as far as treasury products were concerned.

But Malaysian banks have previously encountered differences between Malaysian and Gulf interpretations of the aspects of shariah law governing financial instruments. Malaysian instruments are occasionally not recognised by stricter interpretations of shariah elsewhere.

Before the introduction of collateralised murabahah, Malaysian banks relied on the bai al-inah facility to provide financing, an instrument that Middle Eastern and North African banks did not consider to be shariah-compliant. Badri said that the new product's acceptance across a wide geographic region will hopefully bridge the gap.

Craig Nethercott, a partner at Latham & Watkins and co-chair of the firm's global Islamic finance practice, said that the new facility is novel in its purpose, but that there was nothing fundamentally new about the murabahah structure used.

"Malaysia is developing the tools for a fully-fledged Islamic finance market at the same level of the conventional banking market, with all the necessary tools of managing liquidity and risk," said Nethercott.

But Nethercott expects new shariah-compliant instruments in the near future. "The time is right for a new cycle of development, though we have a good stable of products that can be used," he said.

He added that people use existing products when money is more readily available, but look towards developing instruments as the money supply tightens or as new sectors develop, such as solar and nuclear energy.

However, Nethercott and his colleague Bryant Edwards, partner and chair of Latham & Watkins' Middle East practice, urged Malaysia to expand its horizons, especially in the predominantly ringgit-denominated sukuk market.

"The next developmental step is conventional lenders in non-Muslim majority countries accessing liquidity available in Islamic finance," Nethercott said. "If Malaysia pursues shariah-compliant international issuances, then they have a significant advantage as the global Islamic financial centre."

"Our suggestion is to expand into the euro, the pound sterling and especially the dollar markets," added Edwards. "There's a deep pocket of US institutional investors who would be interested in investing in Southeast Asia through a well-regulated market with a track record of safety and prudence." 

Channel correspondents