Malaysia has emerged as a front-runner in the global Islamic financial services industry, with the state of the art infrastructure and unparalleled government support. With the development of Commodity Murabaha (CM) transactions on Bursa Malaysia under its Bursa Suq Al Sila’, it attempted to snatch away the business of liquidity management by Islamic banks from the London Metal Exchange (LME).
While a one-step forward from the LME CM practice, Bursa Malaysia’s Suq Al Sila’ necessarily represents the case of trading in commodities with complete irrelevance of commodities to the intended outcome, which is no more than exchange of cash between two participating banks.
The practice of Islamic banking cannot be criticised because of obvious advancements one may notice in Islamic banking in the recent past. The most recent development in Malaysia is the issuance of new guidelines by Bank Negara Malaysia (BNM) on the use of Bai Ina in Islamic banking transactions. The observance of new restrictions will certainly enhance the Shariah authenticity of Islamic financial products in Malaysia.
It is also needed to bring the practice of Islamic banks closer to the real economic transactions. Bringing the liquidity management and treasury operations of Islamic banks closer to the real economic activity can serve this purpose.
Malaysia, being an unchallenged global leader in Islamic banking and finance, is well positioned to develop a new model of Islamic banking, which must be emulated by other countries that aspire to develop Islamic banking.
Crude palm oil, rubber and tin (which is a dying industry) sectors can be reinvigorated with the help of Islamic banks. While the front side of Islamic banking can continue to serve the households and small businesses, the strategic sectors like above should be provided a back-door access to cheaper credit through capital markets and treasury operations of Islamic banks.
One way of doing so is by developing a sukuk platform for strategic sectors. The proposed sukuk platform should allow corporates and commodity growers in the strategic sectors to issue small tranches of sukuk for meeting their working capital requirements. These sukuk must be issued on tangible assets like inventories and other goods and services, so that they are fully tradable from a Shariah viewpoint.
BNM can play an important role in promoting this instrument by binding Islamic banks and financial institutions to buy certain amount of the sukuk by using a proportion of their proprietary funds. While listed and traded on Bursa Malaysia, these sukuk will allow the participating banks to buy and sell them in the market, as part of their liquidity management operations.
Such an instrument will allow Malaysia to attract funds from other parts of the world for meeting working capital financing of their strategic sectors. These sukuk, being a liquidity management instrument, will allow the businesses in the strategic sectors to have cheaper access to financing, as compared to the current rates they have to pay to the banks offering them overdraft facilities.
The proposed sukuk can be based on a variety of Shariah principles, but it is preferred that they are issued on the real assets like commodities and other manufactured goods. Such instruments will be fully tradable from a Shariah viewpoint and hence are expected to draw interest from the Middle Eastern investors. Other alternative structures could be based on a Salam (an Islamic contract the allows a seller to sell something before it may come into existence, but should ordinarily be available in the market).
Istisna’, or commissioned manufacturing, is another contract that may be used as a basis for such instruments. However, the Salam and Istisna’ based instruments are not deemed tradable in the secondary markets in the Middle East, and hence will be limited in their usage by Islamic banks and financial institutions in Malaysia.
As long as these instruments give the funding benefit to the businesses in the strategic sectors, the debate on whether they are tradable in the secondary market can be extended without limiting their use. This will be similar to the approach taken by BNM, which promoted the use of Bai Ina with some relaxed conditions and tightened the screw only when it deemed that the market would not be adversely affected by such a decision.