Islamic Finance : Structure and Instruments
Ankara, Turkey
26-30 September 2011
Overview of the
Malaysian Islamic Capital Market
Mohd Radzuan Ahmad Tajuddin
Islamic Capital Market Business Group
29 September 2011
1
Islamic finance in Malaysia - background
•
The evolution of Islamic finance began with the setting up of the Pilgrims
Fund Board - savings mechanism under which funds for performing the Hajj
were set aside to cover the costs of performing the annual pilgrimage
•
Government and regulatory bodies recognized the need to develop Islamic
finance in order to create a financial niche for Malaysia
•
The evolution of Islamic finance in Malaysia :
1969 : Establishment of Pilgrim Fund Board
1983 : Islamic Banking Act enacted and the establishment
of first Islamic bank
1984 : Takaful Act enacted and the establishment of first
takaful company (Islamic insurance)
1993 : Securities Commission Act enacted providing SC with
mandate to develop capital market
2007 : Capital Market and Services Act
Fundamental
for
Islamic
Finance
development
Islamic finance activities in Malaysia…..
Islamic Banking
Takaful/Re-takaful
Islamic Capital
Market
• Islamic Banking Act 1983
• Takaful Act 1984
• Securities Commission Act 1993
• Capital Markets and Services Act
2007
3
Capital Market Institutional Framework in
Malaysia
• Established on 1 March 1993 under
the Securities Commission Act 1993
• Regulate and promote the
development of the capital market
• Reports to the Minister of Finance
• Capital Markets and Services Act
2007
4
Securities Commission Malaysia as the Main
Regulator for the Capital Market
Licensing and supervising
all licensed persons
Regulating all matters relating
to fund management activities
Supervising exchanges, clearing
houses and central depositories
Regulating all matters relating to
securities and futures contracts
Development of the
capital market
Regulating the take-overs
and mergers of companies
5
The Islamic Capital Market (ICM) in Malaysia has
Evolved..........
• Has evolved into an efficient conduit for mobilisation of funds for
Malaysian and foreign corporates

long term fund raising and investment; enhances depth &
resilience of Malaysian Islamic financial system and overall
financial system

68% of outstanding corporate bonds are structured using Shariah
principles –information as of H1 2011

89% of companies on the stock exchange are Shariah compliant
• Malaysian ICM products are accepted by both Islamic and non-Islamic
local investors as well as investors across various jurisdictions

Conventional investors regard ICM products as a new asset class

Emergence of new demand from the Middle East, South-East
Asia, South Asia and North Africa
6
……..and Continues to Spearhead Further
Development
•
Malaysia is regarded as a center for Islamic finance
− About two thirds of sukuk globally originates from Malaysia
− Islamic unit trust is the fastest growing segment of the Islamic capital market
− Leading international fund management companies establishing operations in
Malaysia
•
Issuance of sukuk is not confined to Islamic institutions
− Multilateral institutions such as World Bank and IFC have issued sukuk
− Non-Islamic institutions have issued sukuk
− Non-Muslim majority countries have shown interest to issue sukuk
•
Local and foreign financial institutions are now actively intermediating and
structuring ICM products
−
−
−
−
Sukuk
Islamic structured products
Islamic exchange traded funds
Islamic real estate investment trusts
7
ICM is a Key Component of the Malaysian Capital
Market*………..
Equity:
RM1,312.4
billion
Bonds:
RM813.1
billion
RM2,125.5
billion
Total Capital Market
RM2,125.5 billion
ICM
RM1,151.8
billion
54%
Equity:
RM836.2
billion
Sukuk:
RM315.6
Billion #
RM1,151.8
billion
* As at 30 June 2011
# Include sovereign & corporate sukuk
.....and Completes the Creation of Comprehensive
Islamic Financial Services Sector …
•
•
To effectively play its role as an efficient
conduit
Islamic
Banking
Contributes to the overall stability of
Islamic financial services sector :

Islamic banking to mobilise deposits and
provide financing

Takaful to provide mutual protection

Islamic capital market to provide long
term fund raising and investment and
enhance depth & liquidity of Islamic
financial system
Takaful
Islamic
capital
market
9
Achieved through Holistic and Phased Approach
Launched in 2001, the Capital Market Masterplan (CMP) provides a blueprint for long-term strategic
development of the Malaysian capital market with 152 recommendations covering 11 areas :
•
•
•
•
•
•
Equity market
Bond market
Derivatives market
Stockbroking industry
Market institutions
Investment management
PHASE 1
• Strengthen domestic
capacity and develop
strategic and nascent
sectors
2001
2003
•
•
•
•
•
Regulatory framework
Corporate governance
Islamic capital market
Technology & e-commerce
Training & education
PHASE 2
• Further strengthen
key sectors and
gradually liberalise
market access
2004
2005
PHASE 3
• Further strengthening of market
processes and infrastructure and
enhancing international positioning in
areas of comparative advantage
2006
2010
• More than 90% of plans implemented
• Commitment to phased liberalisation
• 13 specific recommendations for Islamic capital market – positioning Malaysia as an
international ICM centre
10
Growth with Governance
“... describes the challenge for our capital
market to expand its role in invigorating
national
economic
growth
while
addressing concerns about the efficacy of
markets in the aftermath of the global
financial crisis.”
CMP2: From foundation-building to transforming
competitive dynamics
Equity market
Bond market
RM1,275
bil
RM759
bil
RM444
bil
RM1,050
bil
RM294
bil
Source: SC
RM377 bil
RM273
bil
Islamic Capital
Market
2000
Investment
management
2010
RM55
bil
Derivatives
market
Different challenges in CMP2
 Capital market exceeds RM2
trillion
- Economies of scale
 Core segments are regional
leaders
- Connectivity
- New opportunities
 Large institutional funds
RM512
bil
RM84
bil
-
Efficient intermediation
-
Diversity
 Liberalised participation
-
Further internationalisation
-
Hub opportunities
CMP2: Maximise growth opportunities
Size of Malaysian capital market
• Internationalise to expand scale
RM trillion
- Foreign listings and issuances
6.0
- Expansion into international
markets
5.0
• Create hub opportunities
Potential upside
RM5.8 trillion
- Middle and back office
- Education and training
4.0
Baseline
RM4.5 trillion
3.0
• Widen ICM’s international base
- Expand service infrastructure
- Value-add Islamic fund
management
2.0
2010
Source: SC
2012
2014
2016
2018
2020
13
Thrust of CMP2 for ICM: Internationalisation of ICM
Expand growth boundaries by tapping global opportunities to grow scale
and to capitalise on hub opportunities
Expand international intermediation capabilities
 Strengthen Malaysia’s positioning in the global exchange landscape
 Strengthen connectivity of clearing and settlement infrastructure and reduce friction costs
 Pursue cross-border regulatory arrangements to facilitate the expansion of domestic
intermediaries abroad

Identify hub opportunities in middle and back-office functions
Widen Islamic capital market’s international base
 Build scale in the Shariah-compliant equity, sukuk and investment management segments
 Strengthen service and operational infrastructure to expand ICM’s international reach
 Promote shift from Shariah-compliant to Shariah-based approach
 Collaborate with industry to expand range of Shariah-compliant stockbroking and portfolio
products and services
 Develop seeding strategy to increase diversification of value-add Islamic investment
strategies and styles
 Increase international collaboration on Shariah research and product development
 Develop a code of conduct for Shariah advisers
 Strengthen training and professional development to increase supply of Shariah experts
14
What is ICM?
ICM refers to a market where the capital market transactions,
operations and activities are carried out in ways that conform
with Shariah principles and requirements.
What does this mean?
 prohibition of payment or receipt of riba (interest)
 prohibition of underlying contract with elements of gharar
(ambiguity)
 prohibition of maisir (gambling) activities
 prohibition of the production and sale of goods and services
that are prohibited in Islam
15
Fundamental Aspects of ICM
Islamic contracts are the underlying principles for all ICM
products and services
Contract of
exchange
 Bai bithaman ajil




Murabahah
Istisna’
Ijarah
Salam
Contract of
participation
 Musharakah
 Mudharabah
Contract of agency
 Wakalah
16
A Sound Shariah Framework is Fundamental for
ICM Development
•
Main thrust of Islamic capital market is compliance with Shariah
principles (Islamic jurisprudence)
•
National level Shariah Advisory Council (SAC) established under the
Capital Markets and Services Act 2007
− Confirms the role of SAC as the highest authority for the
ascertainment of Shariah principles in Islamic capital market
business or transaction
− Provides clarity and consistency with regard to Shariah matters
•
SAC works closely with industry to facilitate new products/concepts
•
SAC’s resolutions are published for the benefit of issuers, investors
and market players
17
The SAC Contributes Significantly to the Development
of ICM

Facilitates development and regulation of new products

Provides greater clarity and enhances market confidence and integrity
through dissemination of Shariah rulings

Regular interaction with industry and other Shariah experts provide
useful feedback for decision-making

Participation at international conferences and dialogues enhances
awareness and understanding of Malaysia’s Islamic capital market
“The SAC has been instrumental in the development of innovative Islamic
products and services and played a key role in transforming a niche growth
sector into a core component of the Malaysian capital market. This is possibly
the single most important catalyst for the rapid growth of the Islamic capital
market in Malaysia.”
18
18
Malaysian ICM Offers Comprehensive Array of
Shariah Compliant Products and Services
Products
Services
•
•
•
•
•
•
•
Shariah-compliant stocks
Islamic unit trusts
Islamic REITs
Sukuk
Islamic ETFs
Islamic Structured Products
Islamic Venture Capital/Private Equity
•
•
•
•
Islamic stockbroking
Islamic fund management
Islamic equity indices
Commodity trading platform
 To facilitate IFIs liquidity
management under tawarruq
arrangement
Future development!
 Islamic alternative fund
 Islamic gold ETF
 Shariah-compliant derivative
Future development!
 Islamic Stock Selling
and Buying (ISSB) platform
• Corporate finance and advisory
19
Shariah-Compliant Securities
What are Shariah-compliant securities
 Securities (stocks/shares) of a company listed on the
exchange (Bursa Malaysia) which are classified as
Shariah permissible for investment
 Primary business and investment activities that generate
income for the company must conform to Shariah
principles
20
Guiding Principles for Shariah-Compliant Securities
Classified as Shariah-compliant if the company is not
significantly involved in the following activities:
 Financial services based on riba (interest)
 Gambling
 Manufacture or sale of non-halal
products/services
 Conventional insurance
 Entertainment
 Manufacture or sale of tobacco-based
products or related products
 Conventional stockbroking or share
trading
 Other activities deemed non-permissible
Other criteria:
Interest income from
conventional fixed
deposits/interest
bearing instruments
Dividend received from
investment in other
Shariah non-compliant
securities
21
Guiding Principles for Shariah-Compliant Securities
for Mixed Companies
Classical scholars discussed as to what extent
Shariah non-compliant activities are allowed
Must be minimum and at tolerable level
– specific benchmarks are established
22
Specific Benchmarks are Established
5% benchmark
to assess the level of mixed contributions from the activities that are
clearly prohibited such as riba (interest-based companies like
conventional banks), gambling, sale of non-halal products/services
10% benchmark
to assess the level of mixed contributions from the activities that
involve the element of ‘umum balwa’ which is prohibited element
affecting most people and difficult to avoid e.g. interest income from
fixed deposits in conventional banks
20% benchmark
to assess the level of contributions of mixed rentals from Shariah
non-compliant activities
25% benchmark
to assess the level of mixed contributions from the activities that
generally permissible according to Shariah and have an element of
maslahah to the public, but there are other elements that may effect
the Shariah status of these activities e.g. hotel and resort operations,
share trading, stockbroking, as these activities may also involve other
activities that are deemed non-permissible to the Shariah
23
A Vibrant Shariah-Compliant Securities……
May-2011
Shariah compliant
847
securities*
% to total listed securities
89%
Market capitalisation (August 2011)
Shariah-compliant
Total market
% of Shariah-compliant
securities to total market
RM764.1 bn
RM1,241.9 bn
61.5%
 Shariah compliant securities constitute 89% of
all stocks listed on Bursa Malaysia
 The SC has issued a list of Shariah compliant
securities since 1997 and the list is updated
twice a year (May and November)
 The introduction of Shariah equity indices on
Bursa Malaysia:
 FBM Emas Shariah;
 FBM Hijrah Shariah; and
 DJIM Malaysia Titan 25
Year
Market capitalisation of
Shariah-compliant securities
% to total
(RM’billion)
market
2000
247.49
54.74
2001
285.50
59.23
2002
290.42
57.55
2003
391.12
57.70
2004
457.32
59.93
2005
439.77
63.25
2006
548.42
64.62
2007
705.05
63.74
2008
426.4
64.20
2009
637.9
63.80
2010
756.1
59.28
*The SAC updates the list twice yearly i.e. end may
and end November
24
.....Acts as Catalyst for Other ICM Products and
Services
 It sets the foundation for Islamic equity investment
 Prior to the issuance of Shariah List :
– Participation by Muslim investors – minimal
– Insufficient or no clear guidance on the stocks that can be traded
(Shariah) - Listed companies are involved in various activities (halal
and haram)
– The scenario had left Muslim behind in equities or shares investment
– Lost opportunity (in the early 1990s) when there was significant
increase in the number of companies listed on the stock exchange
25
Islamic Fund Management Companies
• Islamic fund management companies are allowed have 100%
foreign ownership
• Islamic funds are permitted to invest 100% of assets abroad
• 10-year stamp duty exemption and tax incentives on wide range of
Islamic investment instruments
• Income tax exemption on all Islamic fund management activity
fees until 2016
• One-stop center at the Securities Commission (SC) for all fund
management queries
• To-date, 16 IFMCs – 9 foreign-owned, 4 locally-owned and 3 on a
joint venture basis
26
Islamic Fund Management Companies (cont’d)
Year
2008
2009
2010
2011
No.
Licensed IFMCs
1.
Asian Islamic Investment Management Sdn Bhd
2.
CIMB-Principal Asset Management Berhad
3.
KFH Asset Management Sdn Bhd*
4.
Aberdeen Islamic Fund Management Sdn Bhd*
5.
AmIslamic Funds Management Sdn Bhd
6.
BNP Paribas Islamic Asset Mgt Malaysia Sdn Bhd*
7.
i-VCAP Management Sdn Bhd
8.
Nomura Islamic Asset Management Sdn Bhd*
9.
Reliance Asset Management Sdn Bhd*
10.
Prudential Al-Wara’ Asset Management Berhad*
11.
Amundi Malaysia Sdn Bhd*
12.
Franklin Templeton GSC Asset Management*
13.
Saturna Sdn Bhd*
14.
OSK-UOB Islamic Fund Management Bhd
15.
Muamalat Invest Sdn Bhd
16.
RHB Islamic Asset Management Sdn. Bhd
* Foreignowned IFMCs
27
Islamic Unit Trusts
700
300
Number of funds
500
340
291
200
100
584
416
400
300
565
521
71
83
100
134
149
155
150
160
0
249.6
Size of funds-NAV (RM bln)
579
600
595
250
226.81
191.71
200
169.4
150
100
134.4
121.8
87.4
98.5
50
6.8
8.5
9.2
2004
2005
2006
16.9
17.2
22.08
24.04
26.2
0
2004
2005
2006
2007
Islamic funds
2008
2009
2010
Jun-11
Total funds
Number of approved funds
Islamic funds
Dec-2010
Jun-2011
Islamic unit trusts
155
160
Total industry
584
595
Net asset value (NAV) of
approved funds
Islamic unit trusts
RM24.04bn
RM 26.18 bn
Total industry
RM226.81bn
RM 249.61bn
% to total industry
Dec-2010
10.6%
Jun-2011
10.5%
2007
2008
2009
2010
Jun-11
Total funds
• Fastest growing segment of the
Islamic capital market – CAGR of
25% over past 5 years
• High growth from a small base
and building critical mass
• Largest number of Islamic unit
trusts in the world
• Mutual recognition
arrangements with Dubai and
Hong Kong
28
Islamic Real Estate Investment Trusts (I-REITs)
Number of Listed REITs
Islamic REIT
Dec-2010
3
Jun-2011
3
Total REITs
Market capitalisation (RM million)
Islamic REIT
Total REITs
12
Dec-2010
2,360.0
10,580.0
14
Jun-2011
2,600.00
11,800.00
22.3%
22.0%
% to total REITs
•
Malaysia has an established framework on shariah-compliant REIT and is first to issue
Guidelines for Islamic REIT in 2005
•
Malaysia is first in the world to have a Shariah-compliant REIT listed on the stock
exchange
•
Currently, Malaysia has 3 Shariah-compliant REITs listed on its stock exchange – hospital REIT (Al-’Aqar KPJ REIT)-the first Islamic REIT in the world
– plantation REIT (Al-Hadharah Boustead REIT); and
– commercial building REIT (Axis REIT)
29
Islamic Exchange Traded Fund (ETF)
Number of approved ETF
Dec-2010
Jun-2011
Islamic ETF
1
1
Total ETF industry
5
5
Dec-2010
Jun-2011
RM613.0 mln
RM579.0 mln
RM 1,223.0 mln
RM 1,194.0 mln
50.1%
49.0%
Net asset value of approved funds
Islamic ETF
Total ETF industry
% to total ETF industry
•
Essentially a unit trust fund that is listed and traded on an exchange. Performance
objective is to closely track performance of underlying benchmark or index
•
Malaysia launched the Asia’s first Shariah compliant ETF in January 2008
•
The fund, known as MyETF Dow Jones Islamic Market Malaysia Titan 25 (MyETFDJIM25) . Has an initial authorized fund size of 10 billion units, representing a basket
of securities designed to track the performance of the Benchmark Index namely the
Dow Jones Islamic Market Malaysia Titan 25 (DJIM25)
•
The DJIM25 is made up of 25 Shariah-compliant securities of companies listed on
Bursa Malaysia
30
Malaysia has a well established sukuk market
Corporate Sukuk
approved
Number of sukuk
Size of sukuk
Size of total bonds
approved
% of size of sukuk
to total bonds
approved
Corporate Sukuk
Issued
Size of sukuk
issued
% of sukuk issued
to total bonds
issued
Corporate Sukuk
Outstanding
Size of outstanding
sukuk
% of outstanding
sukuk to total
outstanding
corporate bonds
2009
2010
Jun-2011
11
21
19
RM33.96bn
RM40.33bn
RM32.0bn
RM57.50bn
RM63.58bn
RM47.9bn
59.1%
63.0%
68.0%
2009
2010
Jun-2011
RM32.30bn
RM30.24bn
RM24.6bn
52%
57%
72.0%
2009
2010
Jun-2011
RM172 bn
RM181bn
RM196bn
57%
57%
58%
•
•
•
•
In 2011, 72% of total corporate bond issued were sukuk
Amount of corporate sukuk issued in 2011: RM24.6 bn
58% of outstanding corporate bond in Malaysia are sukuk
64% of total sukuk outstanding globally are from Malaysia
-IFIS
31
Internationalisation of ICM
 Malaysia is committed to working closely with other centres to create
international linkages and broaden markets for ICM products and services,
creating opportunities and stimulate cross border investment flows.
 So far, SC has signed MRAs and MoUs with :
 MRA with DFSA - both corporations will work closely to distribute
Prudential-managed Shariah funds in Malaysia and the Dubai
 MRA with HKSFC - to facilitate greater cross-border marketing and
distribution of Islamic funds
 Bilateral MoU with Luxembourg on information exchange
 Letters of Exchange with CBRC and MoU with CSRS of China – Malaysia
recognised as an approved investment destination
 SC has also established International Advisory Council to provide strategic
guidance and international perspectives.
32
Thank You
33