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Malaysia’s Islamic capital market (ICM) continues to show exciting and vibrant growth as can be seen from the ever-increasing size and diversity of products offered. This is attributable to numerous factors — including well-executed policies, a facilitative regulatory environment, increasing numbers and sophistication of intermediaries that continue to push the frontiers in terms of product innovation as well as the existence of a complete, matured and well established Islamic financial system. As an investment destination, we offer diversity of investment opportunities with considerable market depth and breadth in a facilitative and internationally benchmarked regulatory environment.
Indeed, Malaysia can now rightfully claim to have one of the most innovative and comprehensive ICMs in the world. Many “world-firsts” Islamic products have been issued out of Malaysia, such as the world’s first sovereign global Sukuk, world’s first listed REITs and world’s first rated Islamic residential mortgage backed securities. We have a diversified range of products and services with significant size and scale. In the equity market, 86% of all securities listed on Bursa Malaysia are classified as Shariah compliant. This amounts to about RM685 billion (US$199 billion), or 65% of the total market capitalization of Bursa. On the demand side, we have also seen remarkable growth in the Islamic unit trust industry. We now have 102 Islamic unit trust funds with total net aset value (NAV) amounting to RM9.6 billion (US$2.8 billion), representing 7.2% of the total NAV of our unit trust industry. This represents 38% of NAV of the global Islamic unit trust industry.
Similarly, our Sukuk market has experienced unprecedented growth. In 2006, over 55% of all bonds approved by the Securities Commision (SC) were Sukuk with a total value of RM42 billion (US$12.2 billion). In the first half of 2007, the SC approved a total of 19 Sukuk valued at RM10 billion (US$3 billion). Furthermore, according to the latest report as at end-June 2007, the global Sukuk is valued at US$57 billion with Malaysia originating over US$32 billion or 56% of the world’s Sukuk issues.
Strong investor protection
In order to facilitate product innovation and development in ICM, Malaysia established a Shariah Advisory Council (SAC) at the SC soon after SC’s own establishment in 1993. This was the single most important catalyst for the development of ICM products and services in Malaysia. Not only is the SAC able to respond to inquiries and proposals from the industry, often times, the SAC is also able to make pronouncements to encourage innovation from the industry. The guidelines issued by the SC such as those on Islamic unit trusts, Islamic real estate investment trusts (REITs) and Islamic securities always attract considerable interest from across the globe. This speaks volumes of the pioneering work of the SAC. The Resolutions of the SAC have been published twice, in 2002 and in 2006 for the second edition. This has been translated in the local language in several jurisdictions.
Furthermore, to ensure that product originators and fund managers are able to tap their own Shariah expertise, we introduced a system for the registration of Shariah advisers for unit trusts funds and for Islamic securities. To ensure that the market can tap from the best available Shariah expertise, our guidelines allow the registration of local as well as foreign advisers. To date, we have registered 47 Shariah advisers for unit trust funds and six Shariah advisers for Islamic securities. We currently have two foreign scholars registered as Shariah advisers. We expect to see this number grow in the near future.
Rules that limit or inhibit the market from flourishing have been removed or are being reviewed. For instance, measures allowing non-residents, in particular, multinational corporations and multilateral agencies to issue ringgit denominated bonds in Malaysia have led the International Finance Corporation and the World Bank to issue their first ever Sukuk in Malaysia. More recently, non-ringgit Sukuk were allowed to be issued in Malaysia by multilateral development banks, multilateral financial institutions, sovereigns and quasi-sovereigns, as well as by local or foreign MNCs. The increasing global interest in Malaysia’s liberalized and facilitative environment indicates that Malaysia has the potential to compete for international issuance of Sukuk.
In parallel with this, we have also taken initiatives to increase the connectivity of Malaysia’s ICM to a global ICM network with the signing of a mutual recognition agreement between the SC and the Dubai Financial Services Authority (DFSA), the first between two Islamic markets, for the cross-border distribution and marketing of Islamic funds between the two Islamic centers. Under the agreement, Islamic funds approved by the SC may be marketed and distributed in the Dubai International Financial Center (DIFC), with minimal regulatory intervention. At the same time, Islamic funds registered with the DFSA will be able to tap Malaysian investors. Malaysian capital market intermediaries will benefit from the gateway to distribute their Islamic funds to a fast-growing market while Malaysian investors will have access to a range of Islamic funds from the DIFC. Both regulators will work closely in the areas of supervision and enforcement of securities laws to ensure adequate investor protection.
Clearly, our ICM is not only built on a strong and well established Shariah foundation, our products and services are also offered within Malaysia’s robust regulatory framework for the capital market — a regulatory framework which is modern and facilitative and is internationally benchmarked. As you may be aware, Malaysia has, over the years, successfully put in place all the necessary building blocks of an efficient and well-regulated marketplace — we have securities laws comparable to the world’s best that are continuously being fine-tuned and calibrated to ensure efficiency and relevance. We have in place a comprehensive corporate governance framework, an international accounting framework based on IASB, and our securities and settlements systems and regulations conform to principles set by International Organization of Securities Commissions (IOSCO). In fact, Malaysia scored top marks for disclosure and transparency of accounting standards in the 2006 World Bank report on the country’s observance of standards and codes in corporate governance. Additionally, based on World Bank Doing Business Report 2006, Malaysia ranked sixth in the world in terms of investor protection and third in terms of regulating liability of directors.
High-quality intermediation services
Malaysia also has a range of intermediaries to meet the needs of investors and issuers in the ICM. We have investment banks, local and foreign Islamic banks, brokers and fund managers. The role played by these intermediaries has expanded dramatically in recent years. Intermediaries now engage in a broad range of complex financial transactions and operate in various market segments — banking, insurance and capital markets. They now underwrite complex financial transactions, provide specialized over-the-counter hedging and risk management products, and advise on sophisticated transaction structures.
In fact, Malaysian intermediaries are also now blazing the ICM trail in other markets by offering their skills and expertise to the global financial community. Numerous awards and recognition have been given to our local intermediaries for their innovativeness in structuring Sukuk. On the same note, other institutions, like our credit rating agencies, have the track record and expertise to seize the opportunities by offering their expertise to the global market. This will enhance the role of local players in the international arena.
Continuous Product Innovation
The growth of the ICM can also be attributed to the wide range of Islamic products available in Malaysia. We have witnessed Islamic institutions developing into originators of a wide range of Islamic products and services. This is a marked development from the early days when the financial institutions merely adapted conventional structures as templates for “off-the-shelf” Islamic products.
One key factor driving product innovation is that users of Islamic finance are now becoming a lot more sophisticated in their financial requirements. They are becoming more aware of the benefits of diversifying the risk on their balance sheet. The investor base of the Islamic finance world has also become slightly more adventurous, too — investors are investing in hedge funds and more complex capital markets products.
As a result of the contribution of all stakeholders, there is now a sufficiently wide array of Shariah compliant products in the ICM to fulfil the needs of investors looking for faith-based investing. Hence, investors buying Shariah products in Malaysia can be assured of “end to end” Shariah compliance — something that not many other centers can offer.
Conclusion
In the same vein, I wish to conclude by reiterating that Malaysia’s ICM offers a strong and attractive value proposition to global investors in terms of the comprehensive infrastructure and the quality, competitiveness and innovativeness of product solutions. The SC views Malaysia’s ICM as a high value-added segment that is now firmly well established. We now set our sights on the next phase which is to propel Malaysia’s ICM to the global arena through forging stronger alliances and linkages with other Islamic centers. This requires even greater commitment from the private and public sectors working in partnership — to invest in intellectual capacity and capabilities for product origination and distribution. I hope this forum provides opportunities for participants from various countries to explore possibilities for collaboration.
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