Malaysia operates Islamic money market
Malaysia operates Islamic money market
KUALA LUMPUR (AFP): Malaysia's central Bank Negara said yesterday it had decided to use the Islamic interbank money market as another avenue to influence liquidity in the banking system.
"As and when the situation warrants, Bank Negara may conduct its money market operations via the Mudharabah interbank investments (Islamic papers) to provide liquidity in the market," the bank said in a statement.
The central bank decision, with immediate effect, changes its previous policy of only intervening through the conventional money market.
The decision was also aimed at boosting Malaysia's Islamic interbank money market, which was launched in January 1994 under Islamic principles of profit-sharing.
Malaysia was among the first few in the Moslem world to introduce the Islamic money market, which followed the launch of the Islamic banking system that now runs alongside mainstream conventional banking practices.
While conventional banks charge interest, which in Islam is forbidden, the Islamic banking system charges a fee or commission for services and adopts a profit-sharing concept.
When the central bank intervenes, it either mops up from or releases liquidity into the money market to determine the liquidity level and influence the direction of domestic interest rates or to stabilize the ringgit.
Since its inception, the Islamic interbank money market had accumulated funds worth 9.6 billion ringgit (US$3.84 billion) at the end of last year from 2.1 billion ringgit a year before, the central bank said.
The amount is, however, still small compared to overall money market operations, it said.
The central bank would from now on prescribe a minimum benchmark for players to peg their Islamic money market rates for a more attractive spread to spur more activity.
The benchmark would be the prevailing rate of the Malaysian government investment issues plus a spread of 0.5 percent, the bank said.
"Without an appropriate benchmark, the Islamic money market rates declared on maturity tend to be volatile and unrealistic and have driven players away, " a central bank official said.