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Mohd Radzuan Ahmad Tajuddin Islamic Capital Market Business Group 29 September 2011

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. Islamic finance in Malaysia - background.

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Mohd Radzuan Ahmad Tajuddin Islamic Capital Market Business Group 29 September 2011

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  1. 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

  2. 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

  3. Islamic finance activities in Malaysia…..

  4. 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 MINISTER OF FINANCE BNM (Central Bank) SECURITIES COMMISSION EXCHANGE • Asset Managers, Unit • Trusts Management • Companies Investment Banks Listed Companies Stockbrokers

  5. Securities Commission Malaysia as the Main Regulator for the Capital Market Supervising exchanges, clearing houses and central depositories Development of the capital market Licensing and supervising all licensed persons Regulating all matters relating to fund management activities Regulating all matters relating to securities and futures contracts Regulating the take-overs and mergers of companies

  6. 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

  7. ……..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

  8. ICM is a Key Component of the Malaysian Capital Market*……….. Total Capital Market RM2,125.5 billion ICM RM1,151.8 billion 54% * As at 30 June 2011 # Include sovereign & corporate sukuk

  9. .....and Completes the Creation of Comprehensive Islamic Financial Services Sector … • To effectively play its role as an efficient conduit • 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 Islamic Banking Islamic capital market Takaful

  10. Achieved through Holistic and Phased Approach PHASE 1 PHASE 2 PHASE 3 • Further strengthening of market • Strengthen domestic • Further strengthen processes and infrastructure and capacity and develop key sectors and enhancing international positioning in strategic and nascent gradually liberalise areas of comparative advantage sectors market access 2001 2003 2004 2005 2006 2010 2001 2003 2004 2005 2006 2010 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 • Regulatory framework • Corporate governance • Islamic capital market • Technology & e-commerce • Training & education • 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

  11. 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.”

  12. CMP2: From foundation-building to transforming competitive dynamics Different challenges in CMP2 Equity market Bond market Investment management • Capital market exceeds RM2 trillion • Economies of scale • Core segments are regional leaders • Connectivity • New opportunities • Large institutional funds • Efficient intermediation • Diversity • Liberalised participation • Further internationalisation • Hub opportunities RM1,275 bil RM759 bil RM377 bil RM444 bil RM273 bil RM55 bil Islamic Capital Market Derivatives market RM1,050 bil RM512 bil RM294 bil RM84 bil 2010 2000 Source: SC

  13. CMP2: Maximise growth opportunities • Internationalise to expand scale • Foreign listings and issuances • Expansion into international markets • Create hub opportunities • Middle and back office • Education and training • Widen ICM’s international base • Expand service infrastructure • Value-add Islamic fund management Source: SC

  14. 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

  15. What does this mean? 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. • 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

  16. Fundamental Aspects of ICM Islamic contracts are the underlying principles for all ICM products and services Contract of exchange Contract of participation • Bai bithaman ajil • Murabahah • Istisna’ • Ijarah • Salam • Musharakah • Mudharabah Contract of agency • Wakalah 16

  17. 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

  18. 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

  19. Malaysian ICM Offers Comprehensive Array of Shariah Compliant Products and Services • Future development! • Islamic alternative fund • Islamic gold ETF • Shariah-compliant derivative Products • Shariah-compliant stocks • Islamic unit trusts • Islamic REITs • Sukuk • Islamic ETFs • Islamic Structured Products • Islamic Venture Capital/Private Equity • Future development! • Islamic Stock Selling • and Buying (ISSB) platform • Islamic stockbroking • Islamic fund management • Islamic equity indices • Commodity trading platform • To facilitate IFIs liquidity • management under tawarruq • arrangement • Corporate finance and advisory Services 19 19

  20. 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

  21. Guiding Principles for Shariah-Compliant Securities Classified as Shariah-compliant if the company is not significantly involved in the following activities: • Other criteria: • Interest income from conventional fixed deposits/interest bearing instruments • Dividend received from investment in other Shariah non-compliant securities • 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

  22. 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

  23. 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 1 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 2 3 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 4

  24. A Vibrant Shariah-Compliant Securities…… • 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 • *The SAC updates the list twice yearly i.e. end may and end November

  25. .....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

  26. 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

  27. Islamic Fund Management Companies (cont’d) * Foreign-owned IFMCs

  28. Islamic Unit Trusts • 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

  29. Islamic Real Estate Investment Trusts (I-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

  30. Islamic Exchange Traded Fund (ETF) • 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 (MyETF-DJIM25) . 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

  31. Malaysia has a well established sukuk market • 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

  32. 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.

  33. Thank You

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