concept of Islamic Money Market

By:Prof. Dr. Mohd. Ma’sum Billah

Introduction:

Most of the firms, company and individuals are seeking for the pure markets, which eliminate interest and other prohibited products. In consequence to this, Malaysia especially Central Bank of Malaysia has made an effort of making the Islamic Money Market as one of the vital market as compared to conventional money market. This can be seen from the words of Central Bank of Malaysia Governor, Dr Zeti Akhtar Aziz at the 2 nd International Islamic Finance Conference:

“The Islamic financial industry is ascending to prominence in an environment that is highly competitive and constantly subject to the forces of change. The industry has made significant progress, with the essential fundamentals underpinning financial infrastructure to support its sound expansion in place. The challenge before us is to bring the industry to its next stage of development and reinforce the robustness of the industry in a more challenging environment. Of importance is the need to evolve the strategies that need to be adopted to build key strengths and enhance institutional capacity in the industry. Indeed, collaborative efforts need to be intensified on the global front and integration accelerated. As the decade unfolds, Insya-Allah, the Islamic financial industry will evolve into an increasingly dynamic and vibrant industry.”

Money market defined

Existence of financial market allows the buyers and sellers to be brought together in a means where it aids them to transfer ownership of the financial instruments. Based on the nature of its instruments, this financial market can be divided to money markets and capital markets. Basically, capital market and money market are different in the term of the liquidity of the securities or instruments where the instruments in the capital market usually less liquidate than the instrument in the money market. The securities in the money market are short-term instruments with original maturity of less than one year, low risk and very liquid.

Although the term of money markets is applied in its names, it does not mean that the instrument involves in this market is the fiat money – the currency (like money exchange). It is called as money markets because the securities provided in this market have high liquidation, as they are so close to being money.

Characteristics of Money Market

The instruments in the money markets usually provide low returns because the instruments are low risk and have high liquidation feature as majority of them mature in less than 120 days. Most of the transactions in the money market are in large amount and therefore it prevents the individual investors to interference. Because the transaction does not take place in building but instead it is being settled through phone call and electronically, the money market usually have an active secondary markets. The instruments in the money market are differed in tem of it rates and its liquidity