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Following the phenomenal success of the inaugural Malaysian Islamic Finance forum last year, Malaysia again successfully hosted the MIF 2007 Issuers and Investors Forum on the 13th and 14th August at Mandarin Oriental, Kuala Lumpur.
This year’s edition focused on Malaysia’s role as the dominant force in Islamic finance and its function as the link between the Middle East and Asian countries. Tan Sri Dato Sri Dr Zeti Akhtar Aziz, governor of Bank Negara Malaysia, and Dr Nik Ramlah Mahmood, senior executive director of the Securities Commission (SC), delivered the keynote addresses. On the first day, the issuers’ day, there were about 450 attendees with approximately 19% international participants. The second day — the investors’ day — saw the attendance of 420 participants, including 24% international delegates. The delegates for both days came from over 35 countries across the globe.
During her keynote address, Zeti focused on the vast growth potential of the global Sukuk market and Malaysia’s experience in strengthening the market for global Sukuk activities. She emphasized that Malaysia not only represents the largest Sukuk market in terms of outstanding size, but also in terms of number of issuance. “As part of our ongoing efforts to position Malaysia as an attractive gateway for the issuance of Sukuk, a number of legal and regulatory requirements have been further customized to reduce the cost of Sukuk issuance. Profits and dividends received by non-resident investors from holding ringgit and non-ringgit Islamic instruments issued in Malaysia are exempted from withholding tax. Special purpose vehicles (SPVs) for Islamic financing purposes via the Islamic capital market are not subject to the administrative procedures under the Income Tax Act 1967. In addition, companies that establish these SPVs are given a tax deduction on the issuance cost of the Islamic securities incurred by the SPV. The issuance cost for all Islamic securities approved by the SC are also eligible for tax deduction. Finally, there is a stamp duty exemption for 10 years on instruments relating to Islamic securities under the Malaysian International Islamic Financial Center. These initiatives have positioned Malaysia as a competitive and attractive Sukuk market in the global arena,” she said.
The panelists on the issuers’ day discussed various topics that focused on the effect of the US subprime market on Sukuk issuance, the opportunities that Malaysia has to offer issuers and factors that issuers need to consider before issuing Sukuk. The subprime market credit crisis in the US has indirectly caused the issuer to pay attention to the timing of the issuance. “The subprime market does have an impact on the bond market. In the Islamic space, a few transactions were cancelled because the issuer felt the time was not right to go into the market. In my opinion, the current credit crises will bring some bad and good news. The bad news is, the issuer will face more covenants and thin pricing. Nonetheless, there is a considerable amount of liquidity in the market and the Sukuk issuance will keep on continuing,” said Salman Younis, the managing director of Kuwait Finance House (Malaysia).
Looking at the opportunities that Malaysia has to offer for issuers, Badlisyah Abdul Ghani, CEO of CIMB Islamic, said, “In Malaysia, we have developed every single infrastructure to (attract) business. We have a developed local Islamic capital market and with various incentives from the government, issuers can expect a customized structuring to meet their requirements at an efficient cost.”
Salman added that Malaysia has done a lot for Islamic finance what no other country has. “We would like to support innovation in this market and take it to the next stage. We would like to bring in issuers and inform them that there are alternative structures in Malaysia that have been successful. Malaysia has the framework, the track record and more importantly, the transparency. This is the right place,” he elaborated.
Mohd Izan Ghani, senior vice-president of Khazanah Nasional, a successful issuer of the US$850 million exchangeable Sukuk, highlighted Khazanah’s experience on the factors that issuers need to consider before going for issuance. “First and foremost, we must plan for the issuance i.e. we must decide when is the right time to tap into the market. For example, if we are going for a roadshow of our issuance, July or August is a not suitable time to be going to GCC countries because they will be out on summer vacation. In addition, we as the issuer must know what we want to achieve and select the right adviser for the issuance. The adviser must have structuring capacity and be able to offer the widest opportunities for us. Nonetheless, we must confirm with the adviser what they are expected to deliver. This will ensure smooth running of the issuance process,” he noted.
Dr Nik Ramlah highlighted during her keynote address on the investors’ day that the single most important catalyst for the development of Islamic capital market products and services in Malaysia was the establishment of the Shariah Advisory Council (SAC) at the SC. “Not only is the SAC able to respond to inquiries and proposals from the industry, often, it is also able to make pronouncements to encourage innovation from industry. The guidelines issued by the SC, such as those on Islamic unit trusts, Islamic REITs and Islamic securities, always attract considerable interest from across the globe,” she said.
Nik Ramlah also added that in order to encourage the structuring of new and innovative products, the Malaysian government has introduced tax incentives for the use of globally accepted Shariah structures. “In relation to this, the government has provided tax incentive on expenses incurred on Sukuk issuance under the Shariah principles of Musharakah, Mudarabah, Istisnah and Ijarah because the issuance of Islamic securities based on these Shariah principles is expected to draw greater interest from foreign investors, particularly those from the Middle East since these principles are more well-known in the international market,” she elucidated.
Other issues discussed on investors’ day were the benefit of investing in Malaysia, the investment opportunities prevalent in the market and the challenges that exist in the Islamic finance industry. Daud Vicary Abdullah, the chief operating officer of Asian Finance Bank, said that the biggest advantage that Malaysia has is a clear articulation of plans by the government. “The Malaysian government has in place the financial sector masterplan that has been carefully planned and executed. This creates and connects the environment in a financial system — namely the banking, Takaful and money market. Malaysia also has a strong legal, tax and regulatory environment.”
He added that the sectors that will bring about a lot of opportunities in the Islamic banking industry include traditional ones like real property and infrastructure and more recent ones such as transportation (shipping and aircraft).
Keith Driver, CEO of HSBC Amanah Takaful, believed that Malaysia and Indonesia had the most potential growth. “If we analyze the population structure of these countries, the majority is made up of a young population. However, the younger generation is not attracted to buy insurance. What do we need to sell to them? We need to come up with a product to cater for this segment. Nonetheless, they will eventually get older and there is our future prospect client for Takaful. That’s why there is high growth in these markets,” he said.
It was also agreed that Indonesia’s market represents the awakened giant. However, efforts to improve the regulatory framework are vital before development can take place in Indonesia. Besides Indonesia, India is also looking into developing its Islamic financial system. According to Taher Badshah, the investment adviser of Kotak Mahindra Investment, India holds promising opportunities because it has strong economic growth and quite a number of Muslims (10% of the population is Muslim). “There is no Islamic banking available to the Indian population. However, we have a strong equity market. A large number of Shariah compliant corporations are based in India. That’s why we are looking at Shariah compliant investment fund activities. For now, we are issuing funds for investors outside India. Eventually, we will develop investment products for the local Muslim investors,” he explained.
The discussion on the second day also revolved around the Islamic finance industry as a whole facing a number of challenges. These include the need to modify an investor’s expectations. Currently, the investors come into the market with the expectation of making high returns but only taking a low risk. This is where consumer education could play a role. The most acute problem in Islamic finance is human capital. We lack qualified and experienced Islamic bankers, investment bankers, marketing teams, fund managers, lawyers etc. This is where education and training could help narrow the gaps in the workforce. Improvements to the regulatory framework are fundamental to bring the industry forward because sometimes, the law of the land acts as the impediment to the industry. And last but not least, there is a vital need to work towards Shariah harmonization.
Concluding the two-day forum, event chairman Abdulkader Thomas highlighted a point that has put Malaysia at the forefront of the Sukuk market. “MIFC (Malaysia International Islamic Financial Center) is a promising one-stop center that offers various infrastructure including underwriters, rating agencies, tax and legal consultants, the administrators, the custodial and body of Shariah scholars... Certain things (like Bai al-Inah) would not transmit. However, there is good overall quality of Shariah innovation here. I don’t see Malaysia as Shariah disadvantaged, I see it as Shariah enabled.” |
