Malaysia luring gulf banks with Islamic facility

Malaysia's centra lbank is luring commercial banks from the Gulf to trade more in the country’s syariah-compliant money market with an Islamic overnight funding facility.

The collateralised murabahah facility,  “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 would allow Islamic banks to obtain funds from the central bank by pledging high investment grade sukuk as collateral, a Malaysian-based Islamic banker said.

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

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

Besides 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.

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