Creating space for Shariah-compliant instruments in Bangladesh’s money market

From time to time, high-value corporations — typically referred to as blue-chip companies — may need to raise funds through money market instruments without taking on additional equity-related exposure. This enables companies, banks or other large institutions to sell short-term securities to meet their immediate or project-based cash flow needs. 

The use of commercial paper as a tool for this purpose can be traced back to the early 1700s in the US, where merchants in New York began transferring their short-term obligations to dealers who acted as financial intermediaries. In Bangladesh, however, commercial paper remains relatively under-discussed.

Commercial paper is generally viewed as an effective instrument for corporations seeking to raise short-term funds, while also offering investors the opportunity to earn returns within a span of a few months to a year. As such, commercial papers provide a dual benefit: they serve corporate financing needs and allow portfolio diversification for investors.

According to Bangladesh Bank guidelines, commercial paper refers to an unsecured short-term debt instrument issued by highly rated corporations at a discount from face value, with the discount reflecting prevailing market interest rates. To issue commercial papers, a company may appoint a financial institution or bank as an Issuing and Paying Agent (IPA). Bangladesh Bank has issued separate guidelines to govern this process.

However, commercial paper investments, when structured conventionally, generate returns through interest. This poses a significant concern for the Muslim population in Bangladesh, given the centrality of riba (interest) prohibition in Islamic banking and finance. 

For this reason, a large portion of the population prefers Shariah-compliant financing mechanisms that offer halal profits. Therefore, it is imperative to structure commercial papers in a Shariah-compliant manner. This may require financial engineering to ensure alignment with Islamic financial principles.

While the issuance of Sukuk — the more well-known Islamic financing product — has gained global traction, including sovereign issuances like the £500 million Sukuk offered by the United Kingdom in 2021, its long-term maturity cycles can limit its appeal for certain investors or projects. As a short-term solution, Islamic Commercial Papers (ICP)—already in practice in countries like Malaysia and Pakistan—present a viable alternative for Bangladesh.

For example, Cagamas Berhad, Malaysia's National Mortgage Corporation, typically issues Sukuk but opted to issue RM300 million in ICPs in 2022, structured with a three-month maturity. In Pakistan, Hascol Petroleum pioneered the country's first ICP, based on the Shariah-compliant principles of Bai' Salam and Wakalah.

These examples highlight the flexibility of Islamic financial instruments and the possibility of adopting various Shariah-compliant modes to structure commercial paper. In a 2015 study titled "Conceptual Model of Islamic Commercial Paper for Banks and Credit Institutions Based on Murabaha Sukuk" (Money and Economy, Vol. 10, No. 3), Mesbahi Moghaddam et al. proposed a model based on Murabaha Sukuk, concluding that its features could be effectively adapted for ICP structures. This suggests that other Islamic financing methods—such as Murabaha, Salam, Ijarah, and Istisna—may also be used to engineer commercial papers in line with Shariah principles.

While Sukuk products are abundant in Islamic finance markets, their long-term nature may pose liquidity concerns for investors. For companies looking to fund short-term working capital needs or attract investors seeking transparent, Shariah-aligned returns, ICPs offer a compelling alternative. The selection of an appropriate Islamic financing mode and the design of the ICP structure will largely depend on the nature of the business and the project being financed.

For instance, a company involved in real estate development could raise funds through an ICP based on an Istisna contract (Shariah Standard No 11), in accordance with both domestic contractual laws and Islamic legal principles. Similarly, high-tech manufacturing companies might use the same Istisna structure to fund the production of machinery or industrial equipment. These examples illustrate how modern financial needs can be met through Islamic structures without compromising religious principles.

To facilitate such transactions, companies may establish temporary intermediaries. Countries that issue Islamic commercial papers typically follow AAOIFI Shariah Standards and other Islamic finance regulations to ensure compliance. However, in the Bangladeshi context, any ICP framework must balance local financial regulations with Islamic jurisprudence.

A relevant example lies in the regulatory limitation that banks in Bangladesh are not allowed to issue commercial papers or act as guarantors for them. This restriction applies to Islamic banks as well, meaning ICP issuance must originate from non-banking corporate entities. Consequently, the structuring of the ICP and the corresponding project agreements must comply with both domestic laws and Shariah standards.

One example of practical implementation is Prime Bank's partnership with City Group to launch an investment instrument titled Teer Islamic Commercial Paper, which offers investors Shariah-compliant returns over a 180-day cycle. This demonstrates that such instruments are not only feasible but can also be successfully introduced within Bangladesh's financial ecosystem.

In summary, Islamic Commercial Papers (ICP) present a promising avenue for aligning the growing financial needs of Bangladeshi corporations with the ethical and religious preferences of a significant portion of the population. 

By leveraging established Islamic financing modes and adhering to both local and international Shariah standards, Bangladesh has the potential to diversify its money market instruments and deepen its financial inclusion in a way that respects its cultural and religious fabric.

Maruf Hasan Tamal is currently a Research Associate of Legality (law firm) and a law graduate from the University of Dhaka. He can be reached via email at tamalwork77@gmail.com.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.