Islamic Finance – Islamic Capital Market - Malaysian Islamic bonds and notes structure
In the Malaysian context, bonds and notes are distinguished from one another as was stated above. Bonds are typically issued for long-term funding, whereas notes, also known as Medium Term Notes (MTN) and Commercial Papers (CP), are typically issued for medium- and short-term financing. Market practise gives the Bay' Bithaman Ajil (BBA) contract, also known as the deferred payment sale for Islamic bonds, and the Murabahah contract, also known as the MTN and CP contract, respectively, for Islamic notes. These distinctions are not the result of a Shari'ah classification or requirement; rather, they are pushed by the market. It demonstrates that their "sell and buy-back" agreement is where the issuer's duty to reimburse the investor stems from. Also take notice that there is no SPV in either of the following diagrams, unlike the ones that came before. This is mainly due to the lack of separation between the roles of the originator and issuer in this situation, which places the SPV unnecessarily in the context of a BBA bond. BBA bonds are basically the issuer's obligations that are supported by an ongoing flow of receivables from compliant contracts of exchange. Investors are mainly exposed to the originator's credit risk. The Murabahah Commercial Paper has a comparable structure, but in this case a facility agent is in charge of managing and processing the short-term instrument's tendering process. In both of the aforementioned structures, the issuer—who would be the borrower in a standard bond—will choose an asset to be used in the sale and buyback deal. However, MCP uses a bidding procedure for the investors to purchase the asset. As a result, the issuer will ask the members of the tender panel to submit offers to buy the commodity. There is no Shari'ah requirement for this commercial activity. Prior to issuing the bonds under the BBA bond, investors are typically named. Contrary to Murabahah MTN or CP, which are founded on a tender panel member bidding process, this deal is referred to as a bought deal.
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