Islamic commercial paper is a short-term debt or ownership certificate, usually of less than one year, issued by a company or institution to fund its working capital, with a return generated by an asset, a sale or an agency mandate instead of interest.
A cash need lasting a few months
A company waiting for seasonal sales receipts would conventionally issue 3- or 6-month commercial paper bought at a discount. Because that discount is disguised interest, an Islamic issuer must back its paper with a genuine commercial transaction.
Why discounting a note is a problem
Buying 100 of debt for 98 and collecting 100 at maturity amounts to exchanging money for more money later, which is riba al-nasi'a. Sharia therefore requires the gain to arise from an asset that is sold or leased, or from a managed business activity.
A Murabaha structure behind the paper
Investors fund the purchase of goods that the vehicle resells to the company at a margin payable in six months. The paper then represents a trade receivable: bought at 100, it pays 102 at maturity, with the margin fixed at the time of sale.
Can the paper be sold before maturity?
Under AAOIFI rules, a Murabaha receivable may only be transferred at face value, which prevents an active secondary market. Malaysian authorities historically allowed debt to be sold at a negotiated price, a position most scholars elsewhere reject.
Making the paper tradable through real assets
To avoid the ban on selling debt, the issuer can back the paper with tangible assets leased under Ijara or with a portfolio managed under Wakala. The holder then owns a share of assets that can be freely transferred at a market price.
The tangible-asset majority rule
Many Sharia boards require at least half of the underlying portfolio to consist of real assets or usufructs, not receivables or cash. If receivables become dominant, the paper turns back into debt that cannot be traded at a discount.
A Wakala portfolio managed by the issuer
The issuer receives the funds as agent, invests them in a mix of Ijara, Murabaha and compliant shares, and targets an indicative return. Any surplus may go to it as an incentive fee, but it guarantees capital only in case of misconduct or negligence.
Malaysia's short-term Sukuk programmes
Malaysia has built a very active Islamic commercial paper market, often combined with medium-term programmes under a single set of documents. Issues are subject to the Securities Commission Malaysia guidelines and rated by local agencies.
Central banks and the IILM: very short Sukuk
Since 2013, the International Islamic Liquidity Management Corporation has issued rated, tradable Sukuk of a few months for Islamic banks in several countries. Some Gulf central banks also issue short Sukuk to absorb surplus liquidity.
The Bank of England's approach
In 2017 the Bank of England opened an interest-free Alternative Liquidity Facility based on Wakala, which accepts high-quality Sukuk as collateral. It addresses the shortage of short-term liquid assets available to British Islamic banks.
Who buys this paper and at what price?
Buyers are mainly Islamic banks, compliant money-market funds and Takaful operators seeking to park surplus cash for a few weeks. The return is often set by reference to an interbank rate, a pricing benchmark that most Sharia boards tolerate.
Red flags for investors
Investors check the real nature of the underlying assets, whether there is an undertaking to repurchase at face value, which AAOIFI rules forbid for ownership certificates, and actual liquidity, since many short papers are held to maturity for lack of buyers.
Specialist external source
The Bank of England sets out the principles of Islamic finance and explains how it adapted its liquidity tools for banks that cannot hold interest-bearing assets.