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(MENAFN - Arab News) Islamic banks in Malaysia in the last few days have achieved in the global Islamic finance industry what no other jurisdiction has done over the last three decades. They, through their statutory industry organization, the Association of Islamic Banking Institutions Malaysia (AIBIM), have unanimously adopted two standardized interbank master agreements for Islamic deposit-taking and placement transactions.
According to Zukri Samat, president of AIBIM, the standardized agreements were the Interbank Murabaha Master Agreement (IMMA) and Master Agency Agreement (MAA), and stressed that like any other money market products, the success of commodity Murabaha-based instruments would depend a lot on the existence of a standardized document as well as universally-acceptable structure and widely recognized by the market.
"Understanding this prerequisite, AIBIM, at the request of and driven by its members, has developed common and standardized documents, comprising the MAA and the IMMA, which can be used by Islamic banking institutions for their interbank transactions involving deposit-taking and placement," he told delegates at the launch of the master agreements in Kuala Lumpur on April 15 in the presence of Zeti Akhtar Aziz, governor of Bank Negara Malaysia, the central bank.
According to AIBIM, the MAA and IMMA are bilateral agreements between the deposit-placing entity (DPE) or the principal and the deposit-taking entity (DTE) or the bank. As an agent, the bank will receive instructions from the principal to buy commodities from suppliers. The purchase by the DTE or the bank would be effected upon spot payment and immediate delivery by suppliers.
"Upon conclusion of the commodity purchase by the bank on behalf of the principal, the bank may subsequently offer to purchase the commodities from the principal on a deferred cash payment basis, at an agreed sale price that takes into consideration the initial purchase price and the profit amount. The sale would then be effected upon acceptance of the offer by the principal.
"Eventually, the adoption of both IMMA and MAA should help set the stage for a critical mass of commodity Murabaha-based financial transactions ahead of the anticipated launch in July 2009 of Bursa Malaysia's Commodity Murabaha House, an international spot commodity platform," explained Zukri Samat.
The Commodity Murabaha House (CMH), launched by Bank Negara together with a host of Malaysian government regulatory entities, is set to revolutionize the international commodity Murabaha business, which is estimated at a staggering $1.2 trillion. However, some 60 percent of the proceeds of the global commodity Murabaha business is currently leaking into non-Islamic investments.
The Malaysian government is the only one which last year passed laws proscribing the leakage of Islamic funds into non-Islamic investments. In other words, in Malaysia by law all Islamic financial transactions must be Shariah-compliant in their entirety.
Elsewhere, including in the GCC (Gulf Cooperation Council), you still find conventional banks or corporates raising funds to recapitalize riba-based institutions or using the funds for activities, which do not necessarily meet Shariah investment criteria. An interesting development of the CMH is that several GCC banks, including Saudi banks, have joined the liquidity management scheme, which will be based on palm oil and zinc contracts. Hitherto the only main alternative was the commodity contracts based on the London Metals Exchange (LME) offered by one or brokerage and intermediation houses. It would be interesting to see how the LME reacts to the CMH and its potential ascendancy and future dominance in this market.
Another major question is the position of the Malaysian master agreements with or against the ones launched in October 2008 by the Bahrain-based International Islamic Financial Market (IIFM). At the time IIFM, in its usual hype, claimed that its Master Agreement for Treasury Placement (MATP) was "the world's first-ever standardized master agreement in Islamic finance." MATP, said the IIFM, is aimed for the use of over-the-counter (OTC) Commodity Murabaha transactions worldwide, which IIFM stressed was worth $100 billion, and would enhance cost, time and operational efficiencies of Islamic deposit arrangements.
The MATP comprised a stand-alone Master Murabaha Agreement, a Master Agency Agreement and Letter of Understanding. "The utilization of a standardized agreement for such a widely-used product will result in tremendous cost and resource savings for Islamic financial institutions. Most importantly, it will enable transparency, robustness and consistency in Islamic financial transactions." The biggest challenge for both master agreements is whether they would be mutually accepted or recognized. If they are then the question that beggars answering is then why have two sets of similar agreements?
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