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    Money Market Overview



    Who Participates in the Money Market?
    The money market is a huge network involving both banks and other large financial organizations.

    Banking Institutions:
    • Central Bank (BNM)
    • Commercial Banks
    • Investment Banks

    Non-Banking Institutions:
    • Insurance Companies
    • Pension Funds
    • Mutual Funds & Unit Trust Companies
    • Discount Houses & Money Brokers

    2. What is the Money Market Used For? (Functions)
    There are three main reasons why these participants use the money market:

    • To Manage Daily Cash (Liquidity Management)
      • The Problem: Banks sometimes have too much cash (surplus) or not enough cash (deficit) for the day.
      • The Solution: They use the money market to borrow cash to cover shortfalls or invest extra cash for a short time to earn interest. This helps manage the "mismatch" between money coming in and money going out.
    • To Control the Economy (Central Bank Policies)
      • The Central Bank (BNM) uses this market to manage the country's money supply.
      • They do this by buying or selling securities (Open Market Operations) to influence interest rates and the amount of money flowing in the system.
    • To Make Profit (Trading)
      • Participants buy and sell money market instruments to earn returns on their investments.
      • They choose investments based on how much risk they can take and when they need the money back (maturity).


    Conventional Money Market Instruments



    1.Treasury Bills (Government IOUs)

    What are they? 
    Short-term loans to the national government.


    Safety: They are considered the safest investment because they have no default risk (the government guarantees them).


    How do you make money? 
    You buy them at a discount (cheaper than their actual value).

    Example:
    You buy a bill for $980. When it matures, the government pays you the full $1,000 face value. The $20 difference is your profit.

    Timeframe: They mature in 3, 6, or 12 months.


    Liquidity: Very easy to sell quickly if you need cash.
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    2. Repurchase Agreements (REPOs)

    What are they?
     A widely used short-term deal involving two parties: a borrower and a lender.

    How it works:

    1. The borrower sells a security (like a bond) to the lender to get cash now.
    2. The borrower agrees to buy it back later at a slightly higher price.

    The Cost: The difference between the selling price and the buy-back price acts as the interest on the loan.

    Timeframe: Very short—usually 3 to 14 days.
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    3. Negotiable Certificates of Deposits (CDs)

    What are they?
     A special type of bank deposit that specifies an interest rate and a maturity date.

    Key Feature: Unlike a regular fixed deposit, these can be traded. You can sell this certificate to someone else in the secondary market if you need the money before the maturity date.

    Returns: They generally pay a higher yield (more profit) than Treasury Bills.

    Timeframe: Usually mature in 1 to 4 months.
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    4. Commercial Paper (CPs)

    What are they? 
    Short-term, unsecured IOUs issued by large corporations (not the government).

    Why buy them? 
    Because they are riskier than government bonds (since a company could theoretically fail), they offer higher returns to attract investors.

    Flexibility: Companies often "roll over" this debt, meaning they issue new paper to pay off the old ones.

    Timeframe: They mature in no longer than 270 days.

    The Islamic Money Market (IMM)



    1. Why Do We Need an Islamic Money Market?
    Just like conventional banks, Islamic banks face Liquidity Risk. This happens because of a mismatch in their funds:


    The Problem: Islamic banks hold assets that are hard to sell quickly (illiquid, like long-term house financing), but their liabilities are very liquid (depositors can withdraw their cash at any time).


    The Reality: Their balance sheets look very similar to conventional banks—they have money coming in and money going out every day.

    2. The Solution: Managing Surplus and Deficit
    To solve this liquidity problem, Islamic banks need a marketplace to manage their daily cash flow:


    Surplus Banks (Too much cash): If a bank has extra funds for the day, it can "lend" or invest that money with other banks to earn a profit.


    Deficit Banks (Not enough cash): If a bank is short on funds, it can obtain funding from others.

    Key Difference: Unlike the conventional market which uses interest-based loans, the Islamic Money Market uses Shariah contracts (like profit-sharing or trade-based deals) to move this money around.

    3. The Two Main Components
    The Islamic Money Market is divided into two major activities:

    Islamic Inter-Bank Market: Banks dealing directly with other banks (e.g., Mudarabah Interbank Investment).

    Trading of Islamic Instruments: Buying and selling financial certificates (e.g., Islamic Treasury Bills, Sukuk) in the open market.

    Islamic Inter-Bank Market Mechanisms



    1. Mudarabah Interbank Investment (MII)

    The Concept: A profit-sharing partnership. instead of a loan.

    The Players:
    • The Investor (Surplus Bank): Called the Rabbul Mal. They provide the cash.
    • The Manager (Deficit Bank): Called the Mudarib. They receive the cash to manage it.

    How it Works:

    • They agree on a Profit Sharing Ratio (e.g., 70:30) upfront.
    • If the investment makes money, they split the profit based on that ratio.
    • The Risk: If there is a financial loss, the Investor (Surplus Bank) bears all of it. The Manager loses only their time and effort.
    • Rules: The minimum investment is RM50,000 and the tenure can range from overnight to 12 months.
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    2. Commodity Murabahah (Tawarruq)

    The Concept: Getting cash by buying and selling real commodities (like Crude Palm Oil). It is a "Cost-Plus" sale.

    How it Works (The Flow):


    Step 1: 
    The Surplus Bank (Lender) buys a commodity (e.g., oil) from a broker.
    Step 2: 
    The Surplus Bank sells that commodity to the Deficit Bank (Borrower) at a higher price (Cost + Profit), but allows them to pay later (deferred payment).
    Step 3: 
    The Deficit Bank now owns the commodity but needs cash, so they immediately sell it to a different broker for spot cash.
    The Result: 
    The Deficit Bank gets the cash they need immediately, and the Surplus Bank gets a profit when the payment is made later.
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    3. Wakalah (Agency) Investment
    The Concept: Hiring an agent to do the work for you.

    How it Works:

    • The Investing Bank (Principal) gives funds to the Investee Bank (Agent).
    • The Investee Bank acts as an agent to invest those funds into business activities.
    • The Payment: The Investee Bank charges a specific Fee (Wakalah fee) for their service. The Investing Bank gets the profit generated from the investment.

    Trading of Islamic Money Market Instruments




    1. Malaysian Islamic Treasury Bills (MITBs)

    What are they?
     Short-term government securities used to fund the government's operating expenses.

    How they work (The Principle): 
    They use the Bay al-Inah (Sell and Buy-Back) concept.
    • The government sells assets to investors for cash.
    • The government immediately buys them back at a higher price (par value), to be paid later.
    • The difference in price is the investor's profit.
    Who buys them? 
    Both Islamic and conventional banks can trade these.
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    2. Sukuk BNM Ijarah

    What is it?
     A certificate issued by the Central Bank (BNM) based on the Ijarah (Leasing) principle.

    How it works:

    1. BNM sells assets to a Special Purpose Vehicle (SPV) called BNM Sukuk Berhad.
    2. The SPV leases (rents) the assets back to BNM.
    3. BNM pays rent to the SPV. This rental money is distributed to investors as their profit.
    4. At the end (maturity), the SPV sells the assets back to BNM.
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    3. Negotiable Islamic Debt Certificates (NIDC)

    What is it?
     A document proving that a bank owes money to an investor for a specific deposit.


    The Principle: It uses Bai Bithaman Ajil (BBA), which is a sale with deferred payment.

    How it works:

    1. The bank sells an asset to the investor for cash (the deposit).
    2. The investor sells it back to the bank at a higher price (original price + profit).
    3. The bank pays this higher price later (deferred).
    Trading: Because it is a debt certificate, it can be sold to others at a discount before it matures.
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    4. Islamic Negotiable Instruments of Deposit (INID)

    What is it? 
    Similar to the NIDC, but based on Partnership rather than Debt.

    The Principle: It uses Mudarabah (Profit-Sharing).

    How it works:
    1. The Investor acts as the Rabbul Mal (capital provider).
    2. The Bank acts as the Mudarib (manager).
    3. Instead of a fixed interest rate, the investor gets a share of the profits generated by the bank.
    Benefit: These often offer higher returns (yields) than treasury bills.
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    5. Cagamas Sukuk
    These are securities issued by the National Mortgage Corporation (Cagamas) to support housing loans.


    Sanadat Mudarabah Cagamas: Used to finance Islamic housing debts under a profit-sharing contract.


    Sanadat Cagamas: Used to finance housing debts using the BBA principle, where the asset cost equals the bond's value.
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