(Sukuk.net - Arab News) Malaysia's Commodity Murabaha House (CMH) is set to launch a palm oil Murabaha in June this year which would allow Islamic banks and other financial institutions to create transactions using palm oil contracts. At the same time, according to Peter Chin, Malaysian plantation industries and commodities minister speaking at a palm oil conference in the Malaysian capital on Thursday, "The palm oil Murabaha spells opportunity of additional income for oil palm planters offering extra stocks to CMH."

Islamic banks can use commodity Murabaha as a liquidity management scheme for overnight and short-term deposits. The sector still lacks a Shariah-compliant liquidity management scheme that is truly global and fully Shariah-compliant. Hitherto, most of the commodity Murabaha deals have been done through brokers in London using contracts on the London Metals Exchange as the underlying commodities. The CMH is effectively an alternative to the LME contracts.

The Islamic Development Bank, similarly, is considering establishing a mega International Islamic Inter-Bank (IIIB), with a capital of at least $10 billion, with the specific purpose of providing liquidity management to the global industry and also act as Lender of Last resort for Islamic banking. There could be important synergies between such a bank and the CMH, whose contracts and financing by laws have to be entirely Shariah-compliant. The global commodity Murabaha market is estimated at an enormous $1.2 trillion and most of the proceeds — up to 60 percent — are still estimated to be invested in instruments such as US Treasuries, Eurobonds etc.

In April 2007, Bank Negara Malaysia (central bank) together with the Securities Commission and Bursa Malaysia and industry players, first established the Commodity Murabaha House, which will act as a liquidity management scheme for Islamic bank overnight and short-term deposits in Malaysia, based on using crude palm oil as the underlying commodity traded for investment. Bank Negara in a space of weeks of launching the CMP, executed CMP master agreements with eight Islamic banking institutions to promote the use of the instrument for liquidity management.

Malaysia's CMH and CMP holds much promise not only because it is fully Shariah-compliant, but is also flexible in terms of the underlying commodity contracts. Although palm oil is one of the major underlying commodities currently contemplated, there is flexibility to use other commodities including metals.

Already GCC-based Islamic and other financial institutions are signing up to the CMP under the CMH. Saudi Hollandi Bank, which recently launched a SR1.5 billion Sukuk program and raised SR770 million through a first tranche issuance at end December 2008, became the first Saudi financial institution to sign up to the CMP.

"Some people may argue that doing the CMP is regressing," explained Badlisyah Abdul Ghani, CEO of CIMB Islamic Bank and head of Islamic finance at the CIMB group, one of Malaysia's top banking groups. "There is nothing wrong with the Commodity Murabaha as a structure. What is not liked is when the proceeds of the commodity Murabaha are used for non-Shariah purposes. This is a fact. This leakage of Islamic funds is huge, which we estimate is over $1.2 trillion. The basic funds are mostly invested in US treasuries and non-Shariah compliant investment products. We need a situation where commodity Murabaha conducted in the market is done in such a way that the proceeds arising from transaction are utilized Islamically. In other words, Islamic finance liabilities must match Islamic finance assets."

The Malaysian CMP has important legal and market implications, which are bound to impact on other markets where commodity Murabaha deals are transacted including the GCC states and the UK through the London Metals Exchange (LME).

In Malaysia, under the Islamic Banking Act 1983, all financial institutions offering Islamic financial products are obliged under law to ensure that their products do not contradict Shariah financial principles. "We never employed commodity Murabaha as practiced abroad. We are bound by our Islamic Banking Act which requires the whole transaction to be Shariah-compliant — how you raise the funds, and how you utilize and manage the funds. Because of this, market players are encouraged to seek Islamic assets.

This in turns encourages product development and innovation. The result has been an extremely vibrant and deep Islamic debt market in Malaysia, in which Islamic funds are chasing Islamic assets," confirmed Abdul Ghani.

Conventional banks in Malaysia offering Islamic finance products such as the commodity Murabaha must similarly comply with Section 124 of the Islamic Banking Act. They must separate their Islamic balance sheet and PNL in tangible form from their conventional ones, to ensure that they are operating Islamic funds in a Shariah-compliant way. This regulatory framework and an Islamic interbank money market is only to be found in the Malaysian financial space.

The Malaysians of course use commodity Murabaha, Mudaraba and Wadiah interbank placements. Some bankers prefer that individual countries first set up a formal Islamic interbank market in their jurisdiction with the relevant regulatory and legal architecture.

Only after then the market can talk about a global Islamic money market. Others stress that because of the rapid globalization of Islamic finance, a global Islamic money market is imperative. Similarly, in times of crisis, investors prefer to seek refuge in cash and short-term alternatives, such as commodity Murabaha.
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