KLIBOR vs MYOR-i: Why the Benchmark Matters in Islamic Finance

For decades, many Islamic financing facilities and sukuk in Malaysia have been priced using KLIBOR. While generally accepted from a Shariah perspective because it serves only as a reference benchmark and not as interest itself, KLIBOR is ultimately derived from activity in the conventional interbank market.

The introduction of MYOR-i (Malaysia Overnight Rate Islamic) represents a significant milestone in the continued maturation of Malaysia's Islamic finance ecosystem.

Some key distinctions:

✅ KLIBOR is a forward-looking term rate based on panel bank submissions and incorporate bank credit and liquidity premiums.

✅ MYOR-i is a transaction-based overnight rate derived from actual Islamic interbank market transactions, making it more closely linked to underlying Shariah-compliant market activity.

This development is about more than replacing one benchmark with another.

From a Shariah perspective, MYOR-i provides a reference rate rooted in Islamic market transactions rather than conventional lending activity.

From a benchmark integrity perspective, transaction-based rates are generally regarded as more transparent, robust and less susceptible to manipulation than submission-based benchmarks.

That said, the transition is not without challenges.

Unlike KLIBOR, which is known at the start of a profit period, MYOR-i is a backward-looking overnight rate that must be compounded or averaged over time. This creates important structuring, operational and documentation considerations, particularly for sale-based Islamic financing structures where certainty of price remains a fundamental Shariah requirement.

For financiers, issuers, legal advisers and Shariah committees, benchmark reform raises a range of issues, including:

• Benchmark transition provisions
• Fallback mechanisms
• Spread adjustments
• Operational readiness
• Product structuring considerations
• Shariah governance and approvals

Ultimately, the shift from KLIBOR to MYOR-i reflects a broader evolution in Islamic finance: moving towards benchmarks that are not only economically robust, but also more closely aligned with the activities of the Islamic financial market itself.

The real question may no longer be whether Islamic finance can use conventional benchmarks, but whether it now has a viable Islamic benchmark of its own.

This client alert is for general informational purposes only and does not constitute legal advice. Please contact us if you require advice on how these developments may affect your business.