REGULATING GOLD MURABAHAH IN
ISLAMIC BANKING
Associate Professor Rifki Ismal
5th International Conference on Islamic Banking and Finance:
Risk Management, Regulation and Supervision
Islamic Research and Training Institute (IRTI)
Islamic Development Bank (IDB)
Jordan, 6-8 October 2012
1
2
BACKGROUND: GOLD MURABAHAH
• Gold Murabahah endorsed by DSN is a Murabahah contract
which allows Islamic banks to finance gold trading with a
deferred payment basis.
• In fact, gold Murabahah is a new trend because of: (i) the
world gold price hike, (ii) a liquid asset & tradable in the
market and, (iii) protection wealth from inflation.
• Nevertheless, it may face market risk, liquidity risk, credit
risk, default risk and reputation risk due to market fluctuation
and cause losses to investors. It then affects the
performance of Islamic banks.
• The paper attempts to analyze: (a) the behavior of gold
prices as the most determinant factor for investors to
purchase gold including gold Murabahah and the behavior of
gold investors in purchasing or selling their gold Murabahah.
At the end, it proposes some recommendations to regulate
gold Murabahah contract in the Islamic banking industry.
3
UNDERLYING THEORY
• Expected price of gold and probability of occurrence.
Investors want to know the future price of gold, probability of
occurrence, the behavior of gold prices, and the time to
purchase gold.
• The transactions of gold Murabahah involves on the spot
price of purchasing gold and expected price of gold due to
the volatility gold prices in the market.
E(Vt) = the expected price of gold in the certain period;
rt+1 = the probability of occurrence of the gold price;
Vt = the price of gold in the next period.
The probability of occurrence is determined by constructing
intervals and locating prices in the intervals based on certain
division
ttt VrVE 1)(
4
UNDERLYING THEORY
• In an observed period, the highest price of gold is b and the
lowest one is a. Then, the difference between the highest and
the lowest price of gold or (x) is divided into four intervals of
gold prices.
a b
Interval 1 Interval 2 Interval 3 Interval 4
X
Interval 1:
41
xay
Interval 2:
242
xay
xa
Interval 3:
4
3
23
xay
xa
Interval 4:
4
34
xay
• the probability of occurrence of a gold price in certain interval
is a basis to compute expected price of gold in a certain
period. The formulas of the probability of occurrence per
interval and expected price of gold are written as:
5
UNDERLYING THEORY
4
1
11 t
ty
yr
14
1
11)( V
y
yVE
t
t
Probability of interval 1: Expected price:
Probability of interval 2:
4
1
22 t
ty
yr
Expected price: 24
1
22 )( V
y
yVE
t
t
Probability of interval 3:
4
1
33 t
ty
yr
Expected price:34
1
33 )( V
y
yVE
t
t
Probability of interval 4:
4
1
44 t
ty
yr Expected price:
44
1
44 )( V
y
yVE
t
t
• the risk of gold price volatility is a variance
between actual price of gold and expected price of
gold multiplied by the probability of occurrence.
1)( tttt EVVrVar
V
y
yV
y
yVar
t
t
tt
t
tt 4
1
1
4
1
)(or
EARLY TERMINATION & SIMULATION
• the early termination risk is a risk happening prior to the
maturity date of gold Murabahah contract.
• If Pt = payment price of gold Murabahah, P0 = initial price of
gold, r = Murabahah margin, It = installment of gold
Murabahah, D = down payment, t = tenor of Murabahah, then
0rPPt
T
t
tt
t
DPI
1
• Early termination occurs if (Pt+1) > (Pt).
• Simulation of the maximum limit of gold Murabahah contract:
maximum gold Murabahah financing of Rp250 million and
Rp150 million per debtor.
n
n
np
MN
1
0
0
1
MpNn
n
n
Max or
ntntt npnpnpnpM ...332211
Max early
termination
ANALYSIS OF HISTORICAL GOLD PRICES
• A stable period of gold
prices (January 1999 –
September 2004);
• A increasing period of gold
prices (September 2004 –
May 2011)
• A volatile period of gold
prices (May 2011 –
February 2012).
200
400
600
800
1000
1200
1400
1600
1800
2000
01/0
1/1
999
01/0
1/2
000
01/0
1/2
001
01/0
1/2
002
01/0
1/2
003
01/0
1/2
004
01/0
1/2
005
01/0
1/2
006
01/0
1/2
007
01/0
1/2
008
01/0
1/2
009
01/0
1/2
010
01/0
1/2
011
01/0
1/2
012
stable (<400)
increasing (400-1500)
volatile (>1500)
•The first period is notified by the average prices of gold below
USD400/ounce and, low volatility in the last 6 years.
•The second period occurs when the prices of gold moved up
from the lowest price of USD402/ounce (10 September 2004) to
USD1563/ounce (29 April 2011), and
•the last period is noted when the prices of gold keeps rising up
to USD1900/ounce followed by a very high volatility.
ANALYSIS OF PROBABILITY OF OCCURENCE
Stable Prob of Occurrence Increasing Prob of Occurrence Volatile Prob of Occurrence
< 296 0.53 < 693 0.44 < 1591 0.25
296 - 339 0.19 693 - 983 0.30 1591 - 1694 0.34
339 - 383 0.13 983 - 1273 0.16 1694 - 1797 0.32
> 383 0.15 > 1273 0.10 > 1797 0.09
Price Interval Harga and Probability per Period
•in the stable period, the highest probability of occurrence (53%)
was in the prices were below USD296/ounce.
•in the increasing period, (i) when the prices were less than
USD693/ounce (44%), and (ii) if the prices were USD693/ounce
– USD983/ounce (30%).
•in the volatile period, when the prices of gold were between (i)
USD1591/ounce – USD1694/ounce (34%); (ii) USD1694/ounce
– USD1797/ounce (32%) and, (iii) less than USD1591/ounce
(25%).
FINDINGS
•When the prices of gold are stable, the next prices tend to
decrease or stand in the lower position than the existing
one.
•Hence, from the investors (gold Murabahah investors)
point of view, investing funds in gold, when the price is
stable, will not be really profitable.
•When the prices of gold are increasing, the next prices
will go up (maximally 10.78%) or will moderately go down.
•Lastly, when the prices of gold are volatile in the high
position, the next prices will inflate modestly with the
maximum inflation of 3.35%.
ANALYSIS OF THE EXPECTED PRICE OF GOLD
250
270
290
310
330
350
370
390
410
430
01/0
1/1
999
05/0
2/1
999
12/0
3/1
999
16/0
4/1
999
21/0
5/1
999
25/0
6/1
999
30/0
7/1
999
03/0
9/1
999
08/1
0/1
999
12/1
1/1
999
17/1
2/1
999
21/0
1/2
000
25/0
2/2
000
31/0
3/2
000
05/0
5/2
000
09/0
6/2
000
14/0
7/2
000
18/0
8/2
000
22/0
9/2
000
27/1
0/2
000
01/1
2/2
000
05/0
1/2
001
09/0
2/2
001
16/0
3/2
001
20/0
4/2
001
25/0
5/2
001
29/0
6/2
001
03/0
8/2
001
07/0
9/2
001
12/1
0/2
001
16/1
1/2
001
21/1
2/2
001
25/0
1/2
002
01/0
3/2
002
05/0
4/2
002
10/0
5/2
002
14/0
6/2
002
19/0
7/2
002
23/0
8/2
002
27/0
9/2
002
01/1
1/2
002
06/1
2/2
002
10/0
1/2
003
14/0
2/2
003
21/0
3/2
003
25/0
4/2
003
30/0
5/2
003
04/0
7/2
003
08/0
8/2
003
12/0
9/2
003
17/1
0/2
003
21/1
1/2
003
26/1
2/2
003
30/0
1/2
004
05/0
3/2
004
09/0
4/2
004
14/0
5/2
004
18/0
6/2
004
23/0
7/2
004
27/0
8/2
004
40
60
80
100
120
140
160
Actual price (kiri)
Expected price (kanan)
350
550
750
950
1150
1350
1550
10/0
9/2
004
05/1
1/2
004
31/1
2/2
004
25/0
2/2
005
22/0
4/2
005
17/0
6/2
005
12/0
8/2
005
07/1
0/2
005
02/1
2/2
005
27/0
1/2
006
24/0
3/2
006
19/0
5/2
006
14/0
7/2
006
08/0
9/2
006
03/1
1/2
006
29/1
2/2
006
23/0
2/2
007
20/0
4/2
007
15/0
6/2
007
10/0
8/2
007
05/1
0/2
007
30/1
1/2
007
25/0
1/2
008
21/0
3/2
008
16/0
5/2
008
11/0
7/2
008
05/0
9/2
008
31/1
0/2
008
26/1
2/2
008
20/0
2/2
009
17/0
4/2
009
12/0
6/2
009
07/0
8/2
009
02/1
0/2
009
27/1
1/2
009
22/0
1/2
010
19/0
3/2
010
14/0
5/2
010
09/0
7/2
010
03/0
9/2
010
29/1
0/2
010
24/1
2/2
010
18/0
2/2
011
15/0
4/2
011
100
150
200
250
300
Actual price (kiri)
Expected price (kanan)
1450
1500
1550
1600
1650
1700
1750
1800
1850
1900
20/0
5/2
011
27/0
5/2
011
03/0
6/2
011
10/0
6/2
011
17/0
6/2
011
24/0
6/2
011
01/0
7/2
011
08/0
7/2
011
15/0
7/2
011
22/0
7/2
011
29/0
7/2
011
05/0
8/2
011
12/0
8/2
011
19/0
8/2
011
26/0
8/2
011
2-S
ep-1
19-S
ep-1
116-S
ep-1
123-S
ep-1
130-S
ep-1
17-O
ct-1
114-O
ct-1
121-O
ct-1
128-O
ct-1
14-N
ov-1
111-N
ov-1
118-N
ov-1
125-N
ov-1
12-D
ec-1
19-D
ec-1
116-D
ec-1
123-D
ec-1
130-D
ec-1
16-J
an-1
213-J
an-1
220-J
an-1
227-J
an-1
23-F
eb-1
210-F
eb-1
2
150
200
250
300
350
400
450
500
550
600
Actual price (kiri)
Expected price (kanan)
STABLE
PERIOD
INCREASING
PERIOD
VOLATILE
PERIOD
FINDINGS
•When the prices of gold are stable and suddenly go up
unexpectedly (not persistently), the expected price of gold is low. It
is because the investors are not sure if the next prices will increase
or decrease as it happens unintentionally.
•When the prices of gold go up persistently, the expected price of
gold also raises because the investors have been assured and
have adjusted their (short term) price expectation from the low
level into the higher one.
•However, in a certain level when the prices of gold (are believed)
have reached their highest level, such a high expectation of gold
prices will then rebound. It is because the investors believe that the
increasing trend of gold price will not always increase persistently
in a very long time.
•Finally, when the prices of gold are volatile in their high level, the
expected price of gold tends to be stable (moderately). It is
because investors wait and see the next pattern of the gold prices.
ANALYSIS OF RISK OF PRICE FLUCTUATION
35
40
45
50
55
60
65
70
75
01/0
1/1
999
12/0
3/1
999
21/0
5/1
999
30/0
7/1
999
08/1
0/1
999
17/1
2/1
999
25/0
2/2
000
05/0
5/2
000
14/0
7/2
000
22/0
9/2
000
01/1
2/2
000
09/0
2/2
001
20/0
4/2
001
29/0
6/2
001
07/0
9/2
001
16/1
1/2
001
25/0
1/2
002
05/0
4/2
002
14/0
6/2
002
23/0
8/2
002
01/1
1/2
002
10/0
1/2
003
21/0
3/2
003
30/0
5/2
003
08/0
8/2
003
17/1
0/2
003
26/1
2/2
003
05/0
3/2
004
14/0
5/2
004
23/0
7/2
004
250
270
290
310
330
350
370
390
410
430
450
Variance (kiri)
Actual price (kanan)
Poly. (Variance (kiri))
90
110
130
150
170
190
210
10/0
9/2
004
19/1
1/2
004
28/0
1/2
005
08/0
4/2
005
17/0
6/2
005
26/0
8/2
005
04/1
1/2
005
13/0
1/2
006
24/0
3/2
006
02/0
6/2
006
11/0
8/2
006
20/1
0/2
006
29/1
2/2
006
09/0
3/2
007
18/0
5/2
007
27/0
7/2
007
05/1
0/2
007
14/1
2/2
007
22/0
2/2
008
02/0
5/2
008
11/0
7/2
008
19/0
9/2
008
28/1
1/2
008
06/0
2/2
009
17/0
4/2
009
26/0
6/2
009
04/0
9/2
009
13/1
1/2
009
22/0
1/2
010
02/0
4/2
010
11/0
6/2
010
20/0
8/2
010
29/1
0/2
010
07/0
1/2
011
18/0
3/2
011
350
550
750
950
1150
1350
1550
Variance (kiri)
Actual price (kanan)
Poly. (Variance (kiri))
140
190
240
290
340
390
20/0
5/2
011
03/0
6/2
011
17/0
6/2
011
01/0
7/2
011
15/0
7/2
011
29/0
7/2
011
12/0
8/2
011
26/0
8/2
011
9-S
ep-1
1
23-S
ep-1
1
7-O
ct-1
1
21-O
ct-1
1
4-N
ov-1
1
18-N
ov-1
1
2-D
ec-1
1
16-D
ec-1
1
30-D
ec-1
1
13-J
an-1
2
27-J
an-1
2
10-F
eb-1
2
1450
1500
1550
1600
1650
1700
1750
1800
1850
1900
1950
Variance (kiri)
Actual price (kanan)
Poly. (Variance (kiri))
STABLE
PERIOD
INCREASING
PERIOD
VOLATILE
PERIOD
FINDINGS
•When the prices of gold are stable, the risk of price
fluctuation remains very low. Even, the increasing of the
gold prices in the modest magnitude will not automatically
increase the risk of price fluctuation.
•However, when the prices of gold inflate persistently, the
risk of price fluctuation goes along such inflation.
•Nevertheless, the risk of price fluctuation will then go
down when such a persistent increase of gold prices has
been maximum (top of the threshold)
•The same as finding in the increasing trend of gold
prices, when the prices are volatile in the high level, the
risk of price fluctuation tend to be stable moderately.
ANALYSIS OF EARLY TERMINATION
0
2
4
6
8
10
12
May-0
1
Nov-0
1
May-0
2
Nov-0
2
May-0
3
Nov-0
3
May-0
4
Nov-0
4
May-0
5
Nov-0
5
May-0
6
Nov-0
6
May-0
7
Nov-0
7
May-0
8
Nov-0
8
May-0
9
Nov-0
9
May-1
0
Nov-1
0
30% Mark up, 1 Y tenor
20% Mark up, 1 Y tenor
Stable period
Increasing periodv
o
l
a
t
i
l
e
p
e
r
i
o
d
0
5
10
15
20
25
Oct-0
0
Apr-0
1
Oct-0
1
Apr-0
2
Oct-0
2
Apr-0
3
Oct-0
3
Apr-0
4
Oct-0
4
Apr-0
5
Oct-0
5
Apr-0
6
Oct-0
6
Apr-0
7
Oct-0
7
Apr-0
8
Oct-0
8
Apr-0
9
Oct-0
9
Apr-1
0
Oct-1
0
20% Mark up, 2 Y tenor
40% Mark up, 2 Y tenor
Stable period
Increasing periodv
o
l
a
t
i
l
e
p
e
r
i
o
d
•Down payment determines the share of investors’ funds to be invested in
gold Murabahah. If the gold Murabahah transactions need to be restricted,
down payment should be raised and vice versa.
•The high Murabahah margin could lower the probability of the investors to
terminate their gold Murabahah contract prior to its maturity date.
•The possibility to have a higher gold price than the current price is higher in
the increasing period of gold prices as indicated previously and in this gold
Murabahah termination assessment.
ANALYSIS OF EARLY TERMINATION
•The longer the tenor of gold Murabahah contract, the higher
the possibility for gold Murabahah investors to unilaterally end
the contract especially when the price of gold is in the
increasing trend.
•When the price of gold tends to go up, the banking regulator
can raise the margin of gold Murabahah or at least set it in an
appropriate level followed by shortening the tenor of gold
Murabahah contract.
•Such strategy may mitigate the frequency of gold Murabahah
termination because the possibility of the new gold price to
exceed its initial price is controlled by Murabahah margin.
•In addition, the advantage of doing termination is minimized by
the short term tenor of gold Murabahah
MAXIMUM TRANSACTION PER PERSON
•The assessment informs that the lesser the maximum amount of gold
Murabahah transaction per investor, the lesser the frequency of gold
Murabahah termination prior to its maturity date.
•Further, the combination of minimizing the limit of the maximum
amount of gold Murabahah per investor and the short tenor of gold
Murabahah contract may limit the frequency of early termination
compared to a higher limit of maximum amount of gold Murabahah
with a long tenor.
0
20
40
60
80
100
120
140
160
Jan-9
9
Jul-99
Jan-0
0
Jul-00
Jan-0
1
Jul-01
Jan-0
2
Jul-02
Jan-0
3
Jul-03
Jan-0
4
Jul-04
Jan-0
5
Jul-05
Jan-0
6
Jul-06
Jan-0
7
Jul-07
Jan-0
8
Jul-08
Jan-0
9
Jul-09
Jan-1
0
Jul-10
Jan-1
1
Total Number of Early
Termination
0
10
20
30
40
50
60
70
80
90
Jan-9
9
Jul-9
9
Jan-0
0
Jul-0
0
Jan-0
1
Jul-0
1
Jan-0
2
Jul-0
2
Jan-0
3
Jul-0
3
Jan-0
4
Jul-0
4
Jan-0
5
Jul-0
5
Jan-0
6
Jul-0
6
Jan-0
7
Jul-0
7
Jan-0
8
Jul-0
8
Jan-0
9
Jul-0
9
Jan-1
0
Jul-1
0
Jan-1
1
Total Number of Early
Termination
RECOMMENDATIONS
•The regulation for gold Murabahah transaction should not
be fixed (permanent) but it needs to be reviewed regularly
based on the trend (pattern) of the gold prices.
•The regulation for gold Murabahah contract might be
different in the cases of stable, increasing and volatile
periods of gold prices.
•The key variables to manage gold Murabahah transactions
and mitigate risk of early termination are:
•margin of gold Murabahah contract as it determines the
possibility and frequency of terminating gold Murabahah
contract prior to its maturity date,
•tenor of gold Murabahah contract as it controls the
intention of investors to shortly end the gold
•down payment as it can manage the amount of gold
Murabahah, frequency of transactions and, unilateral
termination of gold Murabahah contract
Associate Prof. Dr. Rifki Ismal is both a
central banker and lecturer. He earned
bachelor degree in economics from University
of Indonesia, master in economics from
University of Michigan, ann arbor (USA) and
PhD in Islamic economics and Finance from Durham
University (England). An Associate Professor in Islamic
Banking and Finance is from the Australian Government
(Australian Center for Islamic Financial Studies)
SHORT BIO
