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
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
“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
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
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
“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.”