TREASURY OPERATION IN

ISLAMIC BANKS
Mahnoor Qamar
Roll No:172260
M.S (Finance)
TREASURY OPERATION:

• Treasury Management or (Treasury operations) includes

management of an enterprise's holding, with the ultimate
goal of managing the firms liquidity and matigating its
operational, financial and reputational risk.
• Recently, due to entry of numbers of Islamic Bank and with
the increase in balance sheet of existing Islamic Banks, the
need for development of Islamic treasury is being acutely
felt.
NEED FOR ISLAMIC TREASURY OPERATION:

• Treasury operation of a conventional bank primerily

involves following operations:
1. Short Term Acceptance.
2. Short Term Investment and Liquidity Management.
3. Bill purchase and discounting of receiveable.
4. Spot FX as well as, forward sale and forward purchase.
5. Derivative Options.
• The first two activities are usually practiced through the
borrowing and lending on the basis of interest/returns yeild.
Involvement of Riba/Interest in such transactions renders
them Haram/Prohibited according to the Islamic Shariah.
• The last (3rd, 4th and 5th) activities are also not allowed in
shariah because of involvement of Gharar as well as Riba.
• Therefore, there is a strong need to develop Islamic
alternatives to such products.
ISLAMIC ALTERNATIVES:
• Islamic alternatives for each operations are as follows:

Short Term Acceptance: In case islamic banks need funds, they

can acces the short term money market on either of the
following basis:
1. Musharakah/Mudarabah
2. Tawarruq
MUSHARAKAH/MUDARABAH CONTRACTS:

• In case Musharakah/Mudarabah are used for the purpose of

accepting funds from the markets, following process may be
used:
1. Islamic Bank will create or securitize a pool of assets comprising
Murabaha/Salam/Istisna and Ijarah product/Assets preferably booked
with high rated clients of bank.
 Thesize of assets booked under Ijarah should be at least 51% of the total
pool size.
 However, if HanfiSchool of Thought is adopted, then trading will be allowed
even if the non liquid assets are less than 50% but the size of the assets
should not be negligible, which means it should be at least 10%.
2. The presence of assets booked under the above mentioned
modes (other than Musharakah and Mudarabah), make the
volatility of profit occuring in the pool relatively lower.
3. Whenever the Islamic Bank requires funds, they can
contact Financial Institution (FI), which will invest in these
assets on the basis of Musharakah/Mudarabah only.
4. A specific weightage/ration should be assigned to FI,
keeping in the view agreed profit rate.

5. At the time of Maturity of the investment, Islamic Bank will

TAWARRUQ

In some case , Tawarruq arrangment can also be adopted in the following

manners:
1. Islamic Bank will select a comodity/stocks, which is liquid in nature(such
asmetal sold in Commodity Exchange or shares of Microsoft company etc)
with the consent of conventional bank
2. Conventional bank will purchase the commodity from market and would sell
the commodity to Islamic Bank on murabaha basis.
3. After taking the delivery, the Islamic banks sell it to the market `on the spot
basis .In this way, Islamic bank will obtain the requried liquidity.
4. Islamic bank will pay thw price of the commodity yo conventional bank on
the due date
MAJOR PROBLEMS WITH ISLAMIC BANKS
• A major problem with Islamic banks is of the Placement and Liquidity
Managment. Islamic bank generally have problems of surplus liquidity, rather
than lack of it. These issues may be resolved in the following manners :
• Musharakah/Mudarabah :
• Some conventional financial institution such as leasing companies and
investment banks book assets in both islamic and conventional ways. Islamic
bank should coordinate with these institutions to segregate the accountig
processes of assets booked under islamic structures. After the segregaton
process, a pool ofthese assets can be created
ISLAMIC BONDS(SUKUK):

Dealing in conventional bonds i not permissble according to Shariah because of

the following two aspects:
1. Firstly, they represent a portion of debt payable by the issuer. Earning of
any kind of profit on them falls under the catergory of Riba/prohibited
Returns
2. Second aspect of bonds pertains to trading of bonds. Shariah prohibits
trading of debt(Bai Dain) as it involves Gharar(uncertainity), because if sold
to a third person andthe borrower defaults in repayment of loan, ther would
not be a recource to the buyer of debt to receive the debt from the seller of
debt
 SECURITIZATION OF ASSETS:
it is very essential requirement to explore such alternatives of bond which can
be traded freely traded in the secondary market in Shariah complaint way. These
alternatives can be developed through the seuritization of assets
For the purpose of securitization, pool of asset needsto be created and the
operations of pool would be as follows :
1. The portfolio may contain mixture of Ijarah and Murabaha assets. However,
the poroportion of Ijarah assets shouldbe greater than 50% of the total worth
of the pool
2. Every subscriber can be given a certificate, which represents his
proportionate ownership in the assets the of portfolio.
3. The profit earned by the portfolio would be shared among the subbscriber
 CONTINUED.....

according to their ratio of investment, after the deduction of managment fee of

the manager.
4. Loss, if any would also be shared among the subscriber on pro rata basis.
5. Certificates can be bought and sold in the secondary market at any value.
The above structure cnan be used to issue long-term bonds by the
Governments and large corporations.
Government of Bahraian has successfully issued Salam sukuk as an Islamic
alternative to treasury bills and ijarah sukuk as an alternative to Bonds
RESERVE REQUIREMENTS:
• The Central bank should also grant special pemissions for managing SLR
and other statutory requirements through maintaining SLR without intrest.
Sukuk can also be used for this purpose. The Goverments of Pakistan
(ISSUED) Sukuk are being given the SLR eligibility by the State Bank of
Pakistan which is one of the major reasons for their success.
• BILL PURCHASE
• Bill purchase and its discounting is not allowed in Shariah as it involves Bai
Al Dain ( sale of debt) and Riba. However, assignment of debt (Hawalah al
Dain) is allowed.
 continued....

The lawful alternatives of bill purchase and discounting as per Shariah may be
resstored to through the following modes:
1. Musharakah/Mudarabah

2. Wakalah & Hawalah

3. Bai Salam of Currencies
4. Tawarruq

5. Murabaha
MUSHARAKAH/MUDARABAH:
• The bank will enter into a Musharakah arrangment with the exporter. The
bank will invest with the exporter, an amount equivalent to the existing
receiveables of the exporter(which are to be discounted ), for manufacturing /
supplying of goods to specifically identified customers of the exporters .
• profit from these customers of expoerters will be shared between the bank
and the exporters as per agreed ratios .
• profit can be shared at either of the following basis:
1. Operting profit level
2. Net profit level
CALL AND PUT OPTIONS AND DERIVATIVES:
• The option to Sell and Option to purchase(Call andPut Options) are allowed
in Shariah. However, fee charged on the Options separately or tranferring or
selling these Options which is known as “Derivatives” having Gharar are not
permissible because :
• These options are right to sell/puchase of a subject matter given by the
buyer/seller to seller/buyer and his right can not b sold as per Shariah.
• Similarly, short sale is not allowed in Shariah, as Islam prohibits selling any
thng which is not owned and pocessed (physically or constructively) by the
seller. Therefore, long sale(after taking possession) is allowed and short sale
is noy allowed.
THANK YOU