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As liquidity management in Islamic finance relies heavily on commodity Murabahah and Agency agreements, the IIFM Board of Directors approved the development of the first ever global Islamic finance standard documentation in this area. The IIFM Master Agreements for Treasury Placement (MATP) were developed and validated by the global IIFM Documentary Convergence Group.
The MATP was published in 2008 and comprises of standalone Master Murabahah Agreement and a Master Agency Agreement. The standard documentation involves commodity Murabahah based on two structures namely: (i) Commodity Murabahah under Agency Agreement, and (ii) Commodity Murabahah based on Principle to Principle. The standard is issued based on the structure memorandum.
As per market assessment, institutions are widely using the MATP documentation in the Islamic inter-bank market particularly involving cross border trades and it has emerged as the main reference point for Islamic liquidity management transactions. The standard agreements also provide the Islamic financial institutions with cost and time efficiency. It has freed up the time spent on repeated bilateral legal and Shari’ah negotiations so that the industry can focus more on structuring other innovative liquidity management solutions.
1. Plain vanilla Murabahah: It is a plain vanilla known Murabahah transaction Internationally.
Accepted globally for its viability and clarity from the business point of view (i.e. it is commercially viable) as well as Shariah standpoint. (the biggest advantage).
First ever global standard documentation published in Islamic finance for liquidity management purpose.
2. Structures. MATP involves two structures as follows:
(a) Agency Agreement/Arrangement:
In this structure, the deposit taking entity acts as buying agent (either disclosed or undisclosed) of the deposit placing entity.
(b) Principal to Principal:
In this structure, the deposit taking entity and the deposit placing entity act as principals with no agency relationship.
Each structure has dealt with the issue of cash flow and commodity flow (together with title flow).
The purchase of the commodities will be OTC.
3. Documentation: The key standalone documents of MATP structures are as follows:
(a) Master Murabahah Agreement &
(b) Master Agency Agreement for the Purchase of Commodities
4. First Sale versus Second Sale: As per the Shari’ah requirement:
(a) In the First Sale, the Deposit Placer is not obliged to sell the commodity to the Deposit Taker but rather the Deposit Placer may elect to effect the First Sale with the Deposit Taker.
(b) In the Second Sale, the Deposit Taking Entity will sell the commodity to any party other than the Deposit Placing Entity or the Supplier.
To stay away from the organized tawarruq which has a lot of Shariah issues.
Use: Widely used in Islamic inter-bank market particularly involving cross border trades as per the IIFM recent survey, as well as the gathered information during personal meetings by the IIFM secretariat with financial institutions, market participants, certain regulators and joint partners globally.
Further features & clarification: To avoidorganized tawarruq most institutions use Structure 1 which is the “Deposit taking entity acts as buying agent of the deposit placing entity as well as principal in the second leg of the transaction.
Note: Available through login. For further details please contact IIFM at info@iifm.net