Money market is a component of the financial markets for assets involved in the short-term borrowing and lending with a maturity of one year or less. It is also refers to short term debt market that deals with different money market instruments. For example, there have a lot of money market instruments such as Treasury bills, commercial paper, bankers' acceptances, negotiable certificates of deposit, federal funds, and repurchase agreements.
The money market instruments are issued in primary market by governments, financial institutions and corporation with the purposes of obtain short-term financing. Corporation issue the money market securities and use proceeds to support their existing operations or to expand their operation. Financial institutions issue money market securities and bundle the proceeds to make loans to households or corporations. Therefore, these funds are used by household to spend on cars, homes, credit cards and so on. However, government issue money market securities and use proceeds to spend on the government programs.
Individual investors have limited access in money market instruments. Therefore, they can easier to gain access to the money market which is with money market funds or through money market bank account. Money market fund is a mutual fund that pools together the recourses of thousands of individuals to invest in certain managed investment. The money market bank account is an account that has some characteristic with money market fund. It also allows investors withdraw funds under most conditions.
2.2 Characteristic of money market instruments
Money market instruments were given the businesses or corporation, government and financial institutions of finance their short term cash requirements. There have some characteristics of money market instruments and will describe as below.
Liquidity
The money market instruments are very liquid to investors. This is because it has a short-term maturity and typically easy be sold in the secondary market. Besides, investors are easy to access to funding if they incur sudden unanticipated expenses. For example, insurance companies participant in money market because they may maintain a portion of their investment portfolio as money market securities for liquidity.
Lower default risk
Money market instrument have a lower default risk if compare to other investment like common stock. If investors want to avoid risk, they can purchase T-bills and hold them to maturity. This is because T-bills is backed by government and therefore are virtually free of default risk.
Safety
There have a high degree of safety which invests in money market instrument because the issuers have the highest credit ratings. For example, bankers' acceptances are very safe investments as they carry the obligation to honour payment by both corporate and bank.
Discount Pricing
They money market instruments usually issued at a discount from a par value. For example, T-bills do not offer coupon payment but they are sold at a discount from par value.
Lower return
The money market instruments are basically providing low returns to investors if compare to other market securities. This is because it is low risk and have higher liquidity feature as majority of them mature in less than 120 days.
2.3 The more popular money market instruments
Treasury bills
Treasury bills are short term debt issue by national government which uses the proceeds to finance the budget deficit. It has the maturity in 3 to 12 months. Treasury bills also free of credit risk and very liquidity.
Commercial paper
Commercial paper is issued only by credit-worthy firms and is an unsecured promissory note. It typically sold at a discount from face value with a fixed maturity of one to 270 days. An active secondary market for commercial paper does not exist.
Certificate of deposits
It is a time deposit at a bank with a specific maturity date which usually range from two weeks to one year. Besides, the large-denomination certificates of deposits also can be sold before maturity.
Repurchase agreements
It is indicate that one party sells securities to another with an agreement to repurchase the securities at a specified date and price. Its maturity normally from one day to 15 day and for one, three, and six months.
Banker's Acceptance
It is a bank accepts responsibility for a future payment and commonly used for international trade transactions. It maturity are often range from 30 to 270 days.
Foreign exchange swaps
It is exchanging a set of currencies in spot date and reversal of the exchange of currencies at a predetermined time in the future.
Money market mutual funds
It refers to pooled short maturity and high quality investments which buy money market securities on behalf of retail or institutional investors.
2.4 Money Market Products offered by Maybank in Malaysia
Malayan Banking Berhad (MAYBANK) is a largest bank and financial group in Malaysia with a market capitalization of over RM39 billion at the mid April 2009. It provides a full range of banking and financial products and services. For example, there are a lot of money market products which offered by Maybank in Malaysia. The following are money market products offered by Maybank:
Banker's Acceptance
In Maybank, it have provides both conventional and Islamic Banker's Acceptance with a maturity from 21 to 200 days. It is a discounting instrument and interest which is paid up front by deducting from the principal amount by Maybank on behalf of their clients for trade financing.
Short Term Revolving Credit
Revolving credit is refers to the short term financial tool for non-trade-related activities whereby Maybank agrees to make loans to their customers up to a specified maximum for a specified period. Typically, it is ranges from one to 12 months.
Repurchase Agreement (Repo)
In this repurchase agreement, Maybank are sells its money market instrument to their investors with an agreement to buy back the instruments at an agreed price or interest rate on a specific future date which approved by Bank Negara Malaysia. It is very flexibility and investors can retire their transaction earlier and will subject to rate adjustment.
Foreign Currency Account
Because of the Maybank has a worldwide branch networking and extensive correspondent banking relationship, it allow Maybank to quote the competitive pricing at the foreign currency account with the tenors ranging from one day to one year. Besides the MYR deposits, Maybank also have accepts currency deposits from other foreign currencies. For example, the major foreign currencies include USD, Euro and AUD.
e) Negotiable Instrument of Deposit
Besides other instrument, Maybank also have issue these negotiable instrument of deposit for their investors with a specific sum of money for a fixed period and at a prefixed interest rate. With the Maybank's financial strength and standing, their will guarantee their investors' investment and return. Before the date of maturity, investors also can buy or sell their negotiable instrument of deposit
f) Fixed Deposit
Investors can invest their money in fixed deposit with the interest at an agreed rate and specific period which offers by Maybank. In fixed deposits, investors can earn a higher rate of return if compare to saving account. The minimum placement for investors to invest is RM5, 000 for 1 to 2 months or RM1, 000 for 3 months or longer. Investors also will protect from interest rate fluctuations.
g) Other Investment Products
There have a lot of investment products which offer by Maybank to their investors except the products mention above. For example, the products include Private Debt Securities (PDS), Malaysia Government Securities (MGS), Treasury and Bank Negara Bills.
2.5 Islamic Money Market
During introduce of Islamic banking in early 1980s, Islamic money market was started in Malaysia. There have same characteristics of Islamic money market and conventional money market. The only differ between them is some restricted or prohibition within Islamic money market. Instruments which offers by Islamic money market should be follow to the Islamic law.
Nowadays, Islamic money market is an important component in the overall of the Islamic Financial Markets in Malaysia. There have a lot of Islamic money market products and it will describe as below.
2.6 Types of investment in Islamic Money Market
Al-Mudaraba Interbank Investment
This kind of investment is operates under "Bank within a Bank" concept. It is refers to a system whereby a deficit Islamic banking institution can obtain funds from another surplus Islamic banking institution based on profit sharing concepts. The minimum amount of investment is RM50, 000 and the period is between overnight to 12 months. However, the rate of return is based on the rate of gross profit and the profit sharing ratio can be negotiable by both parties. At the end of the period, the deficit Islamic banking institution must be repaid the principal invested together with a share of profit to another party.
Government Investment Certificate
This certificate was introduced in 1983 by government for the first time non-interest bearing which the purpose to meet the needs of the bank and other corporations who are interested. In Islamic law, interest is prohibited. Thus, the dividend will be paid on the certificate which is an alternative for interest.
Islamic Accepted Bill
The purpose of introduce Islamic Accepted Bill is to encourage both domestic and foreign trade by providing Malaysian traders with an attractive Islamic financing product. The Islamic principles like Al-Murabahah and Bai ad-Dayn were operate under these accepted bills. The bank customer will order these accepted bills to bank and the bank endorses these order and will responsibility pay a sum of money at future date to the holder of the acceptances. This bill must be finance to "halal" good for import or purchase and export for sales.
Islamic Negotiable Instruments
There have two negotiable instruments in Islamic banking which is Islamic Negotiable Instruments of deposit and negotiable Islamic debt certificate. Islamic negotiable instruments is refers a sum of money deposited within the Islamic banking and repayable to the bearer on a specified future date with the nominal value plus dividend. Besides, the negotiable Islamic debt certificate is refers to the sale of banking institution's assets to customer at an agreed price on cash basic. After that, the institutions will purchased the assets back from the customer at principal value plus profit.
Bank Negara Monetary Notes
These securities are issued by Bank Negara Malaysia using Islamic principles with the purpose of managing liquidity in the Islamic financial market. New issuances of these securities may be based on discounted or coupon bearing basis which depend on the investors' demand.
