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The Islamic capital market (ICM) continues to entice interest and enthusiasm from the global financial community. For many, the stage of awareness and understanding is over. They have begun to scan the globe in search of new investment and business opportunities. Malaysia’s comprehensive ICM offers many such opportunities to domestic and global investors alike.
The country’s success in building a comprehensive ICM can be attributed to the foresight and pioneering efforts of our policymakers, finance professionals and Shariah scholars who saw a need to create effective institutions and instruments to mobilize savings to serve the needs of the Muslim community and to ensure that these savings could be effectively utilized to promote economic growth.
Islamic equities and Sukuk
In this regard, one of Malaysia’s traditional strengths is its diverse range of listed companies — along with arguably the best offering of small and medium-sized enterprises in Asean and the Middle East. In addition, they operate in diverse industries, with companies that are asset-based such as plantations, resources and properties as well as in a broad range of manufacturing, services and technology-based industries.
From this large pool of companies trading at attractive valuations, many continuously strive to strengthen their corporate governance practices and are increasingly focusing on managing their capital efficiently to generate greater shareholder value. This has resulted in a steady stream of income from dividends and capital repayments as well as in terms of capital appreciation over the past decade.
These features, coupled with the fact that 85% of the listed securities on Bursa Malaysia accounting for 65.6% of total market capitalization are Shariah compliant, imply that Malaysia has an attractive Islamic equity value proposition. This is reaffirmed by the fact that more and more companies going for initial public offering are voluntarily seeking to have their Shariah compliant status determined by our Shariah Advisory Council (SAC) before proceeding with listing. This is clear recognition of the premium that Shariah compliant status confers on these companies.
Islamic equities best embody the Islamic principle of equitable risk-sharing. It is perhaps timely for corporate leaders and fund managers to review the possibilities of maximizing the potential brand value of Islamic industries. One possibility may be to shape a value-added definition of an Islamic corporation either as defined by specific aspects of corporate governance, ethical conduct and particularly through their contribution to the development and well-being of society. The creation of valuation premiums through defining a distinctive Islamic approach in generating shareholder value and the eventual ability to trade the shares of these companies across different Islamic stock markets certainly represent an exciting prospect.
Malaysia, as most would be aware, pioneered the development of the global Sukuk market with the launch of the first sovereign five-year global Sukuk in 2002. Since then, its Sukuk market has experienced unprecedented growth, with the country firmly established as one of the largest issuers of Sukuk over the years.
Last year, 76% of bonds approved by the Securities Commission Malaysia (SCM) were Sukuk. Challenging market conditions this year have naturally had an impact on the issuance of bonds. Nonetheless, the first six months saw the approval of 22 Sukuk issues totaling RM17.7 billion (US$5.28 billion), accounting for 31% of total bonds approved during the period.
There are several reasons why Sukuk issuances from Malaysia, whether denominated in ringgit or US dollar, will continue to attract international investors and issuers. First, Malaysia has a strong base of domestic investors to anchor the distribution of a major Sukuk issue. Second, Sukuk pricing for Malaysian-originated issues is highly competitive and there is also strong availability of expertise as well as an established regulatory framework that meets both Shariah and legal requirements.
Islamic unit trusts and fund
management
The investment management industry is the fastest-growing segment of our capital market with cumulative growth rates of 24% per annum. This growth is expected to strengthen even further on the back of various deregulatory and liberalization measures we have introduced including the establishment of a more facilitative regime for investment product approvals, the easing of restrictions on investments abroad and liberalized rules for the establishment of foreign fund management companies.
We are also making available a host of tax and other incentives for Islamic fund management companies establishing operations in Malaysia, and this has already generated strong interest from leading fund management companies and international firms. Recently, we announced the first batch of Islamic fund management licenses to Kuwait Finance House, DBS Bank and CIMB-Principal.
I am heartened by the strong response and the quality of the names that have been engaging with us. Many of these firms are looking to make Malaysia their global centers of excellence when it comes to Islamic fund management. I believe the presence of the international Islamic fund management companies, together with the five global fund management companies already established under an earlier liberalization scheme, as well as some of our own major firms will help drive the growth and vibrancy of the industry in Malaysia.
Shariah compliant unit trust funds chalked up sales totaling almost RM3 billion (US$896.3 million) this year, a growth of 84% compared to last year. The robust growth in this market segment is really significant when compared to the 11% growth in net sales for conventional products over the same period.
Such growth is reflective of the increasing innovation capabilities in the Malaysian industry, with many of the recent product offerings providing features of capital protection with only a portion invested in structured products like swaps, options and hedging instruments for a range of underlying assets including currencies and commodities.
We have also approved products for other regional markets; indicating new areas of growth to increase market share. Therefore, the challenge is for intermediaries to be innovative in their Shariah product offerings with more structured features capturing the entire horizon of investibles in line with the changing appetites of investors. The exploration of new greenfield markets capitalizing on Malaysia’s lead in product development would certainly be another area of growth.
We have established a mutual recognition arrangement with the Dubai Financial Services Authority and are working with other jurisdictions to allow greater cross-border offering of Islamic funds. I am confident therefore that given our unique geographical position and expertise in Islamic finance, and with the support of market players such as yourselves, we will succeed in positioning Malaysia as a center for Islamic fund management and a gateway to the region for the mobilization and management of Islamic funds.
Shariah governance and investor protection
Of course, to meet the topmost requirement of investors seeking Shariah compliant products, Malaysia offers a consistent, reliable and robust Shariah compliance framework. The opinions of our Shariah scholars are well researched and relatively well documented.
Certainty, consistency and clarity of the rulings are facilitated through the establishment of a single forum for the ICM, a national Shariah Advisory Council (SAC), which was established by SCM in 1996. Membership of SAC consists of highly qualified Malaysian individuals with wide international exposure as well as international scholars from the region. SAC was established pursuant to the Securities Commission Act, and serves as the sole authority for the issuance of rulings and guidelines on the ICM.
With increased product diversification, complexity and sophistication, the risk to investors can increase correspondingly.
It is therefore essential that industry players take the necessary steps to enhance investor protection by investing in compliance, risk management and corporate governance so that they can discharge their responsibilities to investors appropriately.
At the same time, resources have to be invested to enhance the investors’ knowledge of the products and enable them to better manage the risks.
In this regard, a key aspect of Malaysia’s regulatory approach is to ensure that an investor in the country’s ICM enjoys the same degree of clarity, certainty and protection as would an investor in the conventional market. We emphasize a common regulatory approach based on the International Organization of Securities Commissions’ objectives and principles of regulation.
The requirements for disclosure, transparency and governance apply equally to both Islamic and conventional products, thus ensuring that an investor in an Islamic product receives the same legal and regulatory protection and recourse that would be available to the investor of a conventional product.
Undoubtedly, the ICM is the segment of our market that provides us the most potential for a sustainable competitive advantage. It is the most liberalized sector of the Malaysian capital market; has been a trailblazer in innovation, recording numerous world firsts in regulatory and product development since 2002; achieved tremendous growth and propelled us onto the global stage.
But there is still so much more that we can do to enhance the value proposition of our ICM to both domestic and global investors. From our perspective, while Malaysia has the products, the delivery channels — particularly in reaching investors across our borders — are still not fully developed. Similarly, it would benefit from the listing of international Islamic products such as equities and Sukuk as well as the increased availability of fund products from other Islamic centers.
Therefore, even as we pursue developmental initiatives to widen access of our markets to regional and global issuers and investors, it is equally important for our domestic intermediaries to increase their visibility abroad and to enhance their focus on regional and global expansion.
It is heartening to note that in this regard, a number of Malaysian intermediaries have already taken steps to forge strategic alliances with intermediaries in other jurisdictions and are venturing into regional markets, enabling them to acquire skills and expertise in new products and overseas investments.
Their ability to partner with other players and leverage off each other’s strengths in product manufacturing and distribution will inevitably expedite the growth of Islamic markets and intermediaries.
Malaysia is committed to working closely with other centers to create an ICM network that will enable it to optimize opportunities in unlocking Islamic savings through effective intermediation, and create opportunities that will stimulate cross-border investment flows.
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