Fundamentals of Islamic Money and Capital Markets

Chapter 4

Islamic Money Market

Learning outcomes

At the end of this chapter, you should be able to:

1 Explain the many functions performed by money markets.

2 Identify the key participants in the money market.

3 Understand how banks invest surplus funds and obtain funding for deficits.

4 Understand the characteristics of the Malaysian Islamic money market instruments.

5 Calculate the price or proceeds of Islamic money market instruments.

Introduction

The money market is an essential and integral component of the financial system. The money market, capital market, derivative market, commodity market, and foreign exchange market together constitute the country’s financial market. They share a common function by providing an avenue for transactions of financial assets between buyers and sellers and between lenders and borrowers. The money market can be described as the financial market for transactions in wholesale short-term funds. The tenor in money market transactions is from overnight to 12 months, although the most common tenor is three months or less. In many countries, transactions in the primary and secondary money market are over-the-counter (OTC) via electronic telecommunication, but some are done in an exchange such as the Bursa Suq Al-Sila’ in Malaysia.

The capital market caters to long-term financial transactions with maturities longer than 12 months. The financial instruments in the capital market are more varied than the money market and they include sukuk, bonds, and ...