Sponsored Reports 1 - Contributed by Securities Commission, Malaysia

Malaysia’s ICM: A Success Story

Islamic capital market, an integral segment in Malaysia’s financial system, continues to register robust growth — with the full complement of products, infrastructure, institutions, intermediaries and investors contributing to the depth and breadth of the capital market.

It has an extensive range of products and mechanisms, including Shariah screening systems for equities, Sukuk, unit trust, exchange-traded funds (ETFs), real estate investment trusts (REITs) and structured products and derivatives.

Islamic capital market successes
Islamic products now account for a significant portion of Malaysia’s capital market. In 2007, Sukuk accounted for 76% or US$37.38 billion of bonds approved by the Securities Commission Malaysia (SC).

A pioneer in global Sukuk, Malaysia launched the first US$600 million five-year global sovereign Sukuk in 2002. Being the largest issuer, representing 60% of global outstanding Sukuk, Malaysia aims to retain its leading position by broadening Sukuk variety from plain vanilla to exotics.

Notable Sukuk issuances in Malaysia
There are more than 350 Islamic equity funds operating in major financial centers globally, managing more than US$500 billion worth of assets. This indicates huge potential to further develop the Islamic capital market.

In the domestic equity market, 85% of securities listed on Bursa Malaysia are Shariah compliant, representing US$182 billion, or 65%, of the bourse’s total market capitalization.

In the unit trust industry, Malaysia, as at June 2008, had 138 Islamic unit trusts, from only two in 1993, with a combined net asset value (NAV) of US$5.6 billion —representing more than 35% of the global Islamic unit trust industry NAV. The country also has two listed Islamic REITs with hospitals and plantations as their main assets.

In January 2008, Asia’s first Islamic Exchange Traded Fund (ETF), MyETF, was launched tracked by the Dow Jones Islamic Market Malaysia Titan 25. Within the wealth management industry, various structured investment, targeted at institutions and high net worth individuals, have also been launched.
The 2008 Budget also included incentives to boost Malaysia’s Islamic capital market sector - with emphasis on Islamic fund management.

Malaysia is also committed to work with other centers in creating an Islamic capital market network to provide necessary linkages in optimizing opportunities across Islamic markets. In 2007, the SC signed a mutual recognition agreement with the Dubai Financial Services Authority for cross-border marketing and distribution of Islamic funds between Malaysia and the UAE.

Shariah Advisory Council for capital market
Established in 1996 at the SC, the Shariah Advisory Council (SAC) provided the single most important impetus for the success of other initiatives. As the highest point of reference for all Shariah-related matters in the capital market, many other building blocks were put in place. The extensive powers of the SC, in the issue and offering of securities in the market, paved the way for issuance of legally binding guidelines and requirements in the Islamic capital market — enabling the SC, for instance, to impose specific requirements for Islamic unit trust funds and Sukuk.

Other measures taken include the adoption and pursuit of a screening process to determine Shariah compliant securities; the issuance of numerous guidelines to impose additional requirements on products that are identified as Shariah compliant; and
the introduction of education and awareness programs through the publication of SAC resolutions and programs organized by the Securities Industry Development Centre.

Continuous product innovation
Malaysia’s Islamic capital market growth is also due to its wide range of products, which saw Islamic institutions evolve into originators of Islamic products and services – a notable achievement from the earlier days when they would merely adapt conventional structures as templates for “off-the-shelf” Islamic products. Today, a diversified array of products ranging from Shariah compliant equities, Sukuk, unit trust funds, Islamic ETFs and REITs to structured products and derivatives are available in Malaysia.

Clients’ increasingly sophisticated financial requirements are also another key driver for product innovation in Islamic finance. There is now greater awareness on the benefits of diversifying their balance sheet risk. Islamic finance investors are also more adventurous by investing in hedge funds and more complex capital market products.

The SC has facilitated the introduction of these products in the Malaysian market through numerous product-specific guidelines that provide clarity, consistency and enhanced disclosures for Shariah compliance such as guidelines for Islamic securities, REITs and ETFs.

Facilitative regulatory environment with strong investor protection
Malaysia’s comprehensive, facilitative and sophisticated Islamic capital market regulatory framework ensures participants in its capital market enjoy the same degree of clarity, certainty and protection. With an investor protection regime that is among the best in the world, Malaysia also offers investors in Islamic products end-to-end Shariah compliance.

Malaysia also has a comprehensive corporate governance framework in place, an international accounting framework based on the International Accounting Standards Board, and its securities and settlement systems and regulations conform to International Organization of Securities Commissions (IOSCO) principles.

According to the World Bank 2006 report, Malaysia scored top marks for disclosure and transparency of accounting standards. Additionally, the World Bank, in its “Doing Business Report 2007 and 2008”, ranked Malaysia fourth in terms of investor protection. An active member of IOSCO, the SC has an extensive and strong network with fellow regulators globally. It is also a signatory to the IOSCO multilateral memorandum of understanding on information sharing and enforcement of securities laws — a major milestone in strengthening supervision and enforcement efforts in the capital market. In addition, it recognizes the SC as a credible regulator with strong enforcement capability. High-quality intermediation services Malaysia has a broad range of intermediaries to meet the needs of investors and issuers in the Islamic capital market.

Intermediaries now engage in a broad range of complex financial transactions and operate in various market segments — banking, insurance and capital markets and provide specialized over-the-counter hedging and risk management products, and advise on sophisticated transaction structures.

Their expertise has been recognized by the global financial community in the Islamic capital market and has received numerous awards and recognition for their innovativeness in structuring Sukuk.
A number of Malaysian intermediaries have strengthened their position by forging strategic alliances with foreign jurisdictions and venturing into regional markets, enabling them to acquire skills and expertise on new products and overseas investments.

Similarly, the presence of several Islamic financial institutions from the GCC countries in Malaysia has significantly altered the Islamic capital market intermediation landscape here. More efforts are taken to attract more to set up operations in Malaysia.

Sponsored Reports 2 - Contributed by Bursa Malaysia, Malaysia

Innovation: Driving the Future of Malaysia’s Islamic Capital Market

A pioneer in Islamic finance for the past 30 years, Malaysia has paved the way and designed the building blocks in developing the global Islamic finance and capital market. Malaysia has also experienced rapid expansion in the industry as a result of intense international interest.

Coordinated by Malaysia International Islamic Financial Center (MIFC), concerted efforts of market players, regulators and intermediaries, in promoting Malaysia’s Islamic finance and the capital market, has also contributed to the growth.

These led to a proliferation of Shariah compliant products and services innovated by Malaysia — ranging from unit trusts, equities, structured products, derivatives, exchange-traded funds (ETFs), fund management and stockbroking services, which have increased the depth and breadth of the industry. Sukuk is one of the renowned innovations by Malaysia, and has been around since the 1990s.

As at the 31st March 2008, Malaysia has issued US$46.3 billion onshore outstanding corporate Sukuk, representing 24% average annual growth or 149% increase from US$18.52 billion in 2002. The offshore market (Labuan International Financial Exchange) had outstanding Sukuk worth US$4.75 billion.

Today, Malaysia’s contribution to Islamic finance has received global recognition. In June 2008, the MIFC was declared “Best International Islamic Finance Center 2008” at the second annual London Sukuk Summit Awards of Excellence.

Malaysia’s success lies in the integration of key structural components, namely the Islamic banking sector, Islamic debt capital and equity market, Islamic money market, Takaful industry and many other peripheral Islamic institutions, and its regulatory infrastructure including the liberalization and incentives to promote the Islamic fund management industry.

The Malaysian Islamic fund management industry has grown from just two Islamic unit trust funds in 1993 to 136, 25% of the total 539 funds, with a combined net asset value of RM16.41 billion (US$5.03 billion) as at end-March 2008.

Between 2003 and 2007, assets under management (AUM) posted 44% increase and are expected to record exponential growth by 2010 due to increasing number of Shariah compliant stocks. As at end-May 2008, 85% of all listed companies on Bursa Malaysia were Shariah compliant, accounting for 64% or US$193.3 billion of the total market capitalization.

Going forward, Malaysia’s key challenge lies in the innovation of its products that cater to the current needs of the domestic market.

Underlying framework
The development of Malaysian Islamic architecture over the last 30 years has been comprehensive and well planned to ensure that the necessary infrastructure is in place to support the development of products and services.

The government, the central bank, the Securities Commission and Bursa Malaysia, have been working toward a sustainable and market-friendly framework of legislation, rules and guidelines to support the growth of this industry.

The Shariah Advisory Council (SAC) approves the principles for different products and services while standards are established by the relevant bodies.

The government has also introduced a facilitative tax regime to boost the banking and Takaful industry, including a 10-year tax exemption for Islamic banks, banking units and Takaful operators on income from business conducted in international currencies.

Malaysia’s innovations
Malaysia was the first to introduce a global corporate Sukuk, sovereign Sukuk, the world’s largest corporate Sukuk of US$4.7 billion and redeemable Sukuk.

Several “world first” products are currently traded on the exchange’s main board, such as the world’s first healthcare REIT (Al-’Aqar KPJ) and first plantation REIT (Al-Hadharah Boustead).

‘Bursa Malaysia also established two Shariah indices with global index provider FTSE Group. The FTSE-Bursa Malaysia Hijrah Shariah Index and the FTSE-Bursa Malaysia Emas Shariah are used as benchmarks for Shariah compliant investments by asset managers to create new products.

Together with the Dow Jones Group, Bursa Malaysia also created Islamic investment benchmarks, such as MyETF, to track the Dow Jones Islamic Market Malaysia Titans 25 Indices. MyETF is the first Islamic ETF in Asia, and started trading in the first quarter of 2008.

In addition, the exchange has leveraged on its expertise to produce the best practices in Islamic stockbroking business. These guidelines aim to provide clarity on and augment the Islamic financial services industry. Both full-fledged Islamic stockbroking businesses and conventional outfits with Islamic windows can adopt this list of best practices.

Moving forward, Bursa Malaysia is planning more innovations in the Islamic investment space to cater to the global investor’s needs. An Islamic spot-commodity exchange will be launched next year, starting off with a single-commodity ringgit market and eventually evolve into a multi-commodity and multi-currency market that fulfils international market demands.

The SAC has approved this framework, which will facilitate the development of various financial products based on Islamic contracts such as Murabahah, Tawarruq and Musawwamah. The first commodity to be used is crude palm oil.

Another innovation in the pipeline is the Shariah compliant alternative to securities borrowing and lending, using waad (unilateral promises) structure, to support the creation and redemption of Islamic ETFs. Transactions involve real transfer of ownership of permitted Shariah compliant stocks between contracting parties. This structure provides a complete end-to-end Shariah solution for financial institutions to develop and offer Islamic ETFs to global investors.

Going forward
In retaining its lead position, Malaysia is focused on nurturing talents in the Islamic finance sector that would significantly contribute towards developing more innovative products to further accelerate the industry growth momentum.

With Islamic capital market and derivatives as the next potential area of high growth, Bursa Malaysia is in a prime position to further innovate new Islamic products to meet market demand.