Islamic Products Information Kit

Table of Contents

Ijarah (leasing) 1

Murabahah (cost plus) 2

Bai al-Inah (sale and buy-back transaction) 3

Wadiah Yad Dhamanah (savings with guarantee) 4

Qardhul Hassan (benevolent loan) 5

Mudharabah (profit-sharing) 6

Rahnu (collateralised borrowing) 7

Malaysia International Islamic Financial Centre (MIFC) 8

Islamic Securities 9

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 8

Sell beneficial interest in BNM buyback the

assets assets

Leases the
3 asset Rental 5
Payment

SPV

Redemption
upon maturity
2

4
Issuance of Sukuk
Ijarah Payment for Rental Distribution
6
Sukuk

Investor

1
 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

Commodity Broker
3 will pay the proceeds
to BNM
Bank Negara
Malaysia (BNM) Commodity Broker B

C. BNM sells the

commodity to the
For the 2nd leg, broker (at cost
4
BNM pays FIs price)
principal + profit
at maturity (on a
B. FIs sell the
deferred basis)
commodity to BNM
(at mark up price)
Financial
Commodity brokers may
Institutions
net-off their positions via
exchange outside the
MBT
For the 1st leg, FIs
1
transfer funds to the
agent to buy
commodity (to create A. Commodity is
principal amount) transferred to Agent

Agent Commodity Broker A

Agent will buy

2
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)

2
 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)

2 Pay to Pay to 4
BNM FIs

Central Bank Central Bank

1 Sell Assets purchase Assets 3

Financial
Institutions

3
 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)

3 Hibah
(if any)

Absorb funds from FIs via Pay back to FIs

2
1
Wadiah Inter bank upon maturity date
Acceptance

Financial
Institutions

4
 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
3
(if any)
1 2

BNM borrows fund FIs redeem the

from FIs and issues certificate upon
certificate of debt maturity

Financial
Institutions

5
 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.

1
Bank A provides fund to be
invested by Bank B with
agreed profit-sharing ratio

Financial Institutions A Financial Institutions B

(Capital Provider) (Entrepreneur)

Upon maturity profit gained

2
will be shared accordingly
and the principal will be
returned back to the
capital provider

6
 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.

FIs will return the residuals

to BNM

BNM will provide loan to

the borrower
Financial Bank Negara
Institutions (FIs) Malaysia (BNM)

2 FIs will pledge securities as

collateral for loan given

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

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

7
 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.

8
 Islamic Securities
Securities Issuance (RM billion)

2002 2003 2004 2005 May-06

Type RM Change RM Change RM Change RM Change RM Change
bil % bil % Bil % bil % bil (%)

GII 3.0 50 2.0 50 4.1 105 4.0 2 6.0 62

Khazanah - - 3.0 1.2 61 1.0 13 - -
MITB - - - - 1.0 100 2.0 100 1.0 50
Cagamas BAIS (Sanadat) - - - - 1.6 100 - - - -
BNNN 1.8 89.0 3.0 59 5.0 66 7.0 40 8.0 15
Total 4.8 8.0 12.9 14.0 15.0

Source: Islamic interbank money market

Securities Total Outstanding (RM billion)

2002 2003 2004 2005 May-06
Type RM Change RM Change RM Change RM Change RM Change
bil % bil % bil % bil % bil %

GII 5 20 7 40 9.1 30 10.1 10.9 13.6 34.6

Khazanah 10 0 10 0 9 11.1 10 11.1 8.3 17
MITB 0 0 0 0 1 100 2 100 2 0
Cagamas 0 0 0 0 1.6 100 1.6 0 1.6 0
BNNN 1.8 88.5 3 59.1 5 66.6 7 40 6.6 5.7
Total 16.8 20 25.7 30.7 32.1

Source: Islamic interbank money market

9
 Islamic Money Market
Interbank Money Market Transactions (RM million)
2002 2003 2004 2005 May-06
Type RM Change RM Change RM Change RM Change RM Change
bil % bil % bil % bil % bil %
Overnight 206.9 244.0 17.9 458.2 87.8 220.6 51.8 65.9 70.1
1-week 12.1 11.7 2.8 16.2 38.0 16.2 0.0 4.7 70.8
1-month 6.2 2.3 63.9 1.8 21.7 1.8 0.0 0.8 51.3
3-month 0.3 0.1 60.9 0.3 133.5 1.1 235.2 0.1 91.0
Others 24.0 22.3 7.2 14.3 35.5 16.0 11.6 9.6 40.0
Total 249.7 280.4 490.8 255.7 81.1
Source: Islamic interbank money market

Money Market Transactions (RM billion)

Year 2002 2003 2004 2005 2006-May Total
Wadiah 447 497 770 669 356 2,739
Mudharabah 247 283 486 255 81 1,352

Papers
GII 5 36 35 43 16 135
Khazanah 15 17 17 20 1 70
MITB - 0 1 4 3 8
Cagamas 0 0 2 1 0 3
BNNN 2 8 21 36 21 88
ABS 0 3 0 2 0 5
Corporate Bond 32 45 32 48 11 168
ICP 3 9 10 8 4 34
IMTN 2 4 6 13 13 38
IAB 7 16 10 15 8 56
NIDC 0 9 8 9 6 32
Total 760 927 1,398 1,123 521 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

3.00
8

Spread (bps)
Yield (%)

2.50
-2
Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06

2.00
-12

1.50
-22

1.00 Spread Analysis (bps) MGS vs GII Spread RHS -32

MGS-3year
Max : 51.00 GII-3year
Min : 0.30
0.50 -42
Avg : 4.27

0.00 -52
Source : Bloomberg
11
 b. 5-Year Securities

5.00 40.00

30.00

4.00
20.00

10.00

Spread (bps)
3.00
Yield (%)

-
Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06

2.00
-10.00

-20.00
1.00 Spread Analysis (bps) MGS vs GII Spreads RHS
MGS-5year
Max : 35.50 GII-5year -30.00
Min : 0.10
Avg : 3.69

0.00 -40.00
Source : Bloomberg
12