Malaysia: Islamic Money Market Instruments

Central Bank of Malaysia established the Islamic money market in 1994 to cater to the needs of the Islamic Banks by managing its excess and deficits funds in short term investments. The Mudharabah Interbank Investment (MII) was the first instrument introduced. The number of instruments developed increased from year to year to include a single or multiple Islamic contracts from mudharabah (profit and loss sharing), musyarakah (partnership), murabahah (mark up cost), bay bithaman ajil (deferred payment sale), bay ad dayn (sale of debt), and bay al inah (instantaneous sale and purchase). This is an introductory paper to the Islamic money market with the aim of understanding the overall process of the instruments and the Islamic contracts used in the sale and purchase of securities in the primary and secondary interbank money market. The money market where medium and short-term instruments are being traded is dissimilar from the debt and capital market, which dealt with long-term investments. An increase in the number of money market instruments in the Islamic money market increased the Islamic bank’s exposure to a wide range of risks such as credit, operational, profit and liquidity risks. We will attempt to explain the process of Islamic money market instruments and the possible Islamic contracts used in the sale and purchase of securities in the primary and secondary interbank money markets. The Islamic money market was established to avoid interest, uncertainty (gharar) and gambling (maisir) as promulgated by the Shariah divine laws. There are 10 instruments discussed in this paper consisting of various types of instruments such as Mudharabah Interbank Investment, Islamic Interbank Clearing System, Sale and Buy Back Agreement, Islamic Accepted Bill, Government Investment Issues, Islamic Treasury Bills, Cagamas Mudharabah Bond, Islamic Certificates, Islamic Private Debt Securities and Ar-Rahnu Agreement.