Interbank commodity Murabahah for funding liquidity management in Malaysia

Liquidity instruments for banks’ monetary operations are diverse and available for both conventional and Islamic financial institutions (IFIs). Interbank Commodity Murabahah (ICM) was offered in the Malaysian market from 2009 till 2018 as one of the liquidity management tools for Islamic banks. ICM utilisation and demand by Islamic banks are still low due to Shari’ah, operational risks, commodity costs, and timing issues. This research aims to analyse ICM practices and investigate ICM structure and mechanism as an instrument that fulfils IFIs’ liquidity needs and investment opportunities. In doing so, this research reviewed issues from Shari’ah and operational perspectives, such as the time for completion of transactions and the brokerage fees involved in commodity Murabahah transactions. Interviews, survey and autoregressive distributed lag model (ARDL) were used to assess current industry practices. This study found that higher costs brokerage fees charged by commodity suppliers and lengthy completion time caused by manual processes for transactions lead to declining ICM practices. Improper contract sequence was identified as a significant potential to raise Shari’ah non-compliance risks in the Tawarruq processes. The study recommends that Islamic banks adopt automated processes and standardised practices to mitigate Shari’ah and operational risks with more robust and efficient Structured Tawarruq. The findings of this study are expected to serve as a reference to industry players and regulators in improving the current Tawarruq processes of Islamic banks in Malaysia from controversial to more structured Tawarruq. IFIs should endeavour to identify better alternatives by creating more innovative products instead of mirroring conventional banking.