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The relationship between
Going
leakage in commodity
Murabahah and
Sukuk pricing
operation
Middle
CPO as for the case in Malaysia) and sells
Eastern market while it is a relatively new
this commodity to the client on a deferred
product in Malaysia. Although much
basis. The client as the owner of the
applied
in
the
has been discussed and written about
commodity Murabahah (also known as
Tawarruq or reverse Murabahah), this
article aims to shed light into how the
leakage in commodity Murabahah may
commodity now sells the same commodity
to another broker so he could obtain the
activities
of
commodity
to help enhance our comprehension of
the matter and avoid creating confusion
in the market.
Diagram 2: Commodity Murabahah
employed in deposit mobilization
1.
2.
cash he was looking for and utilize it in his
operation. The ability to give the client the
cash he was looking for renders popularity
to commodity Murabahah.
affect the pricing of Sukuk.
or
are some vital points that we must clarify
bank buys commodities (metals on LME or
extensively
original
Murabahah susceptible to leakage? These
been
has
our
commodity Murabahah cause leakage in
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Murabahah
to
leakage are we referring to? How can
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Commodity
back
apprehension in the introduction, what
3.
4.
On the other hand, when using
Client buys commodity on spot basis
from broker A
Client sells the commodity to Islamic
bank using Murabaha on deferred
Islamic bank sells the metal to Broker
B on spot basis and obtain cash
Islamic bank makes the payment of
selling price upon maturity
commodity Murabahah as a deposit
Leakage in commodity
mobilizing instrument, since the client has
the money and is looking for avenues to
place the fund and earn return, he would
Tawarruq as purchasing a commodity
agent) and then sell it to the Islamic bank
for a deferred price and selling it to a
on a deferred basis. Effectively the client
third party for a spot price so as to obtain
has made a placement that resembles
1.
2.
3.
4.
Islamic
bank
buys
commodity on spot basis
from broker A
Islamic bank sells the
commodity to Client
using Murabaha on
deferred basis (cost +
Client sells the metal to
Broker B on spot basis
and obtain cash
Client makes periodic
payment
to
Islamic
bank
Broker A
1
$
Islamic
bank
2
4
1
Broker A
Client
$
2
3
Broker B
Islamic
bank
$
“The concern of abuse that allows
leakage of Islamic funds into conventional
Broker B
3
$
Client
deposit taking activities,” Badlisyah Abdul
He highlighted that it is important to know
that there is nothing wrong with commodity
Shari`ah perspective. It is valid under the
Shari`ah principle of Tawarruq.
cash. It can be applied to facilitate true
“There
commodities trading or can be employed
1
below
illustrates
a
basic
structure
of commodity Murabahah used in a
client is looking for funding, the Islamic
are
many
commodity
up charged in the selling price of the
Murabahah products out there that are
commodity. The Islamic bank would now
genuine and are managed in a 100%
on-sell the commodity to another broker,
Shari`ah
gets the cash and invests it elsewhere. This
the utilization of the proceeds from such
is illustrated in Diagram 2 below.
product. The wrongness of commodity
compliant
4
manner;
including
Murabahah arises only when the product
é
is abused to facilitate collection of Islamic funds for usage in activities that ultimately
abusing bank’s commodity Murabahah
product. When the banks who have these
instruments. This abuse leads to the leakage of Islamic funds into the conventional riba-
commodity Murabahah products is asked
where the funds are actually utilized and
for them to disclose their matching Islamic
Avenues that lead to leakage of
Islamic fund
assets they would respond that they are not
One must wonder how this leakage could creep into the deposit taking leg of
provision in the commodity Murabahah
commodity Murabahah? Referring to Diagram 2 above, when the Islamic bank has
agreement that states the proceeds are
sold the commodity to Broker B, it will obtain cash. The next question is, what does the
to be used for 100% Shari`ah compliant
Islamic bank do with the cash? Does it invest in its own operation (which is of course
purposes because they do not want to be
Shari`ah compliant) or does it enter into a back to back commodity Murabahah
trapped by the requirement,” Badlisyah
transaction with a conventional bank? If the Islamic bank enters into parallel commodity
shared his experience in the market.
required to do so under law or regulation.
Many of them even refused to include a
Murabahah arrangement with a conventional bank, now the Islamic fund is placed with
a conventional bank.
The follow-up question would be, where does the conventional bank place this
fund? Does it have a Shari`ah compliant asset to invest in or does the conventional
would slither in when the conventional bank uses the proceeds it has obtained from
compliant activities. Simply put, the counterparty of the commodity Murabahah deposit
opens the avenue for leakage (via the utilization of proceed). The same problem may
occur if a client places the fund directly to an Islamic window of a conventional bank.
The phenomenon is depicted in Diagram 3 below.
Implication from
leakage of Islamic
funds
Why should the leakage of commodity
Murabahah be an important concern
to
the
Islamic
2.
3.
1
effective
liquidity
$
management
for
Islamic banks and Islamic investors and
Client/
Islamic bank
Client/IB buys commodity
on spot basis from broker A
Client/ IB sells the commodity
to conventional bank using
Murabaha on deferred
Conventional bank sells the
metal to Broker B on spot
basis and obtain cash
market
from this leakage? According to Badlisyah,
it competes
1.
(ICM)
ICM products are seen as tools to facilitate
Diagram 3: Leakage in commodity Murabahah deposit placement
Broker A
capital
participants? What will be the implication
Murabahah
and
success
directly with
products.
will
commodity
ICM’s
replace
growth
commodity
Murabahah and prevent the leak while the
Murabahah abuser. We can thus say that
2
there is negative relationship between
the demand for commodity Murabahah
and ICM instruments because both are
3
Broker B
Conventional
Bank
$
substitute product.
“The leakage essentially causes the
demand for ICM product to be weak. Both
ICM product and commodity Murabahah
Leakage:
Where is this
proceed
invested
commodity Murabahah typically provides
better return than ICM products as banks
can simply quote a higher return while
the return on ICM products depends on
credit rating and appetite of investors.
How deep is the leakage? In other
more than half of the amount is estimated
words, how severe is this problem? Although
being managed by conventional banks
with Islamic window under the commodity
ascertain the exact depth of the problem,
Murabahah products, which can be in the
Badlisyah provided some estimate of the
form of a fund or a treasury product.
“The situation becomes worst when
US$1.3
trillion
Islamic
funds
currently
Islamic
banks
who
genuinely
take
Islamic funds innocently place it in the
As such, more Islamic banks and Islamic
investors prefer to place their investment in
commodity Murabahah, thus causing the
majority of Islamic funds to be placed in
conventional banks with Islamic windows.
This inadvertently will cause the market
demand for ICM product to become
smaller,” Badlisyah enlightened.
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He further explained that since the
conventional banks are now middleman for
the Islamic funds, the issuer of ICM product
is then dependent on the conventional
bank to take up any offering of new ICM
products. “As a result the expected higher
price tension that you would expect
from a larger investor base (i.e. both
conventional and Islamic investors) is lost.
The cost of ICM products becomes higher
and becomes less attractive. Data shows
that the price for ICM product particularly
Sukuk are now about 20bps to 50bps more
expensive than conventional bonds in the
global debt capital market,” Badlisyah
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quoted.
Contrary to the global Sukuk market,
the Sukuk pricing in Malaysia has been
cited to be tighter than the conventional
bond. Badlisyah upholds that this is the
positive impact resulting from no leakage
Sukuk pricing is certainly an area that
affecting pricing in the Middle East Sukuk
in commodity Murabahah. “All commodity
warrants attention for research and will
market. One needs to keep in mind that the
leakage may not be a direct independent
Murabahah products in Malaysia have to
be managed in line with the Islamic Banking
Islamic
broader
variable that affects Sukuk pricing, it may
Act 1983 which requires 100% Shari`ah
research topic may look into factors
however be an intervening i.e. indirect
compliance in business operations. With
affecting Sukuk pricing. While there may
variable that affects the demand (or
no leakage into the conventional market,
be a number of other determinants that
investor base) for Sukuk. Therefore, besides
capital
market.
The
studying
assets. As a result, it adds to the demands
carried out to explore if the non-leakage
for ICM products on top of demands from
in commodity Murabahah is one of the
conventional investor base. That is why in
reason contributing to tighter pricing in
Malaysia Sukuk is 3-20bps cheaper than
Malaysia. A comparative analysis could
conventional bond,” he reasoned.
then be undertaken to evaluate factors
the
determinants
of
Sukuk
pricing, one could also embark on a study
demand, where the leakage may have a
on the topic!
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