New Malaysia’s Islamic Funding Facility May Attract Gulf Banks

Malaysia’s central bank is introducing an Islamic overnight funding facility which could encourage commercial banks from the Gulf to trade more in the country’s Sharia-compliant money market.

The collateralized Murabaha facility, announced last week, “will add diversity to the existing liquidity management tools and further promotes greater liquidity in the Islamic financial market,” the central bank said.

The new facility will allow Islamic banks to obtain funds from the central bank by pledging high investment grade sukuk as collateral, a Malaysian-based Islamic banker told Reuters by telephone.

Currently, Islamic banks can obtain funds from the Malaysian central bank through a deferred-payment sale agreement, but this structure is not considered permissible by some Sharia scholars outside Malaysia so banks from the Gulf have been reluctant to use it.

Because it involves Murabaha, a common cost-plus financing structure in Islamic finance, as well as collateral, the new facility is likely to be more acceptable to banks from the Gulf, the Malaysia-based banker said. It may also be more cost-effective, he added.

Last June the United Arab Emirates central bank introduced a similar facility to provide liquidity to banks in its own money market: a collateralized Murabaha facility in which banks can use Islamic certificates of deposit as collateral.
Al Rajhi Bank, Kuwait Finance House, Bank Alkhair and Elaf Bank are among the Middle Eastern institutions already active in the Malaysian market.

In addition to stimulating Malaysia’s Islamic money market activity, the new facility could encourage banks’ investment in sukuk by increasing demand for the use of sukuk as collateral.

The facility is in line with increasing allocations of funds into sukuk by Islamic banks, said Srinivasan Gopalakrishnan, assistant vice president at Bahrain-based Al Salam Bank, Reuters reported.