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EXPERIENCE OF ECONOMIES IN SECURITISATION: MALAYSIA N. Kokularupan

EXPERIENCE OF ECONOMIES IN SECURITISATION: MALAYSIA N. Kokularupan Chief Executive Officer, Cagamas Berhad. ASEAN+3 Workshop on t he Rise of Asset Securitisation in East Asia 7 - 9 November 2005. Outline. Overview of the Bond Market Asset Securitisation in Malaysia The Way Forward.

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EXPERIENCE OF ECONOMIES IN SECURITISATION: MALAYSIA N. Kokularupan

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  1. EXPERIENCE OF ECONOMIES IN SECURITISATION: MALAYSIA N. Kokularupan Chief Executive Officer, Cagamas Berhad ASEAN+3 Workshop on the Rise of Asset Securitisation in East Asia 7 - 9 November 2005

  2. Outline • Overview of the Bond Market • Asset Securitisation in Malaysia • The Way Forward

  3. Financial System in Malaysia Financial System in Malaysia Banking Sector Non-banking financial Intermediaries Financial Markets Money and foreign exchange markets Commodity futures market Financial futures and options market Capital market

  4. Development of The Capital Market Government (1960s – 1980s) • Until the early 1960’s, the bond or debt securities market was practically non-existent in Malaysia • Until the mid-1980s, the Government was the main financier of growth and development • In 1970, public sector debt accounted for about 2/3 of total debt financing (1/2 in 1985) • MGS – captive market and generally held to maturity. Hence, trading was very thin and only picked up from late 1999 onwards • Several regulatory and operational reforms were introduced to create an active and viable secondary market for MGS • MGS remained the most actively traded bonds, accounting for about RM17.98 billion (87.6%) of the total monthly trading volume of RM20.52 billion in May 2005

  5. Development of The Capital Market • By the mid-1980s, due to recession, the Government actively promoted the private sector as the main engine of growth • The banking system became a dominant source of financing especially for infrastructure development • There was rapid growth in the banking system loans which expanded at an average rate of 16% in the period 1985-1997, and accounted for an impressive 59% of total debt financing at the end of 1996, compared with public sector debt of 22% • In 1996, prior to the Asian financial crisis, the banking system loans to GDP exceeded over 130% (2004: 114.8%), while the percentage of corporate bonds to GDP was only 18.4% (2004: 41.9%) Banking System

  6. Development of The Capital Market Capital Market • Prior to the 1997-1998 Asian financial crisis, the bond market was not deep and liquid enough to become a major mobiliser of savings and intermediator of funding needs • With the onset of the crisis, Malaysia quickly recognised the need of having an efficient capital market in order to provide viable alternatives to the banking system for long-term financing • In recent years, significant progress has been made in the development of the capital market. In 2004, total funds raised from the capital market continued to remain high at RM42.7 billion (2003: RM50.4 billion) • In particular, Malaysia recognises the need to deepen and broaden the bond market as an important feature of the financial landscape to reduce vulnerability of the financial system and overall systemic risk

  7. Net Funds Raised in the Capital Market

  8. Development of the Malaysian Bond Market 1986 Government’s measures • From late 1986, the Government took measures to liberalise the MGS market and to widen the range and distribution of MGS in order to add depth and breadth to the market • The Government took affirmative action to develop the PDS market as a whole to enable the private sector to tap alternative sources of financing • Set up Cagamas Berhad, the national mortgage corporation, to promote the PDS market

  9. Cagamas: Developing the PDS Market • The fledgling capital market only began to grow more rapidly after the establishment of Cagamas • Arising from Cagamas’ experience in issuing debt securities, other corporations have started to issue PDS as an alternative to borrowing from the financial institutions • The reduction in Cagamas’ market share of the PDS market from 60.5% as at end-1989 to 24.4% as at end-1998 and to 14.3% as at end-2004, reflects the increase in the popularity of debt issuance by others

  10. Amount Outstanding: Cagamas Bonds vs PDS

  11. Development of the Malaysian Bond Market 1990s - present With the existence of debt market • More sources of financing directly via bond market • Mostly conventional bonds in the beginning • Deepening and broadening of bond market to include structured products to cater for sophisticated financing requirements • Supportive regulatory framework

  12. 1989 Development of the Malaysian Bond Market • As the demand for longer-term financing increased and economic conditions became conducive for the development of the PDS, the Government, SC and BNM then began to put in place a sound and robust market infrastructure, institutional framework and regulations which are prerequisites for the orderly development of the capital market • These include: • Introduction of The Guidelines for the Issuance of PDS to ensure orderly development of the market and to protect investors' interest • Introduction of a Principal Dealer System to provide a reasonable continuous 2-way price quotations for debt securities

  13. 1990 1993 1995 Development of the Malaysian Bond Market • Introduction of the Code of Conduct and Market Practices for Scripless Trading in the Malaysian Securities Market to lay down the basic market rules • Implementation of the electronic inter-bank funds transfer and scripless book-entry system to fully automate confirmation of trades and settlement of cash and securities transfers • Establishment of the first domestic rating agency to provide a guide for assessing the quality of debt securities Establishment of the Securities Commission (SC) following the Government’s decision to develop a more focussed regulatory authority over an increasingly sophisticated capital market Establishment of the second domestic rating agency to create a healthy competitive environment

  14. 1997 1996 2000 1999 Development of the Malaysian Bond Market Establishment of Fully Automated System for Issuing/Tendering (FAST) as a centralised system to facilitate the primary issuance of all unlisted securities either through tender or non-tender Implementation of the Bond Information and Dissemination System (BIDS) to provide up-to-date and timely information on bond trading to market participants Initiation of The Capital Market Master Plan to chart the strategic positioning and future direction of the Malaysian capital market for the next ten years SC became the single regulatory body for the supervision and regulation of the corporate bond market Source: BNM

  15. Developing MGS Benchmark Yield Curve • Prerequisite for the development of a bond market is the existence of a benchmark to: - price issues - facilitate the intermediation process through efficient market pricing and borrowing and lending decisions in the primary and secondary markets • Steps undertaken: - Regular issuance of 3, 5 and 10-year benchmarks - Reopening of off-the-run issues and ensuring reasonable issue size - Active two-way quotation for benchmark securities by Principal Dealers - Since March 2000, BNM publishes the auction calendar for the issuance of MGS on an annual basis. Details include: (a) tenure for issue (c) quarter and month of issuance (b) new issue or re-opening (d) via auction or private placement

  16. 1996 1997 1998 1999 2000 2001 2002 2003 2004 RM billion Outstanding amount 119 134 157 203 245 278 278 328 363 Public bonds 72 71 82 90 103 117 125 149 175 Private bonds 47 63 75 113 142 161 153 179 188 Total bonds outstanding (% of GDP) 46 47 56 67 71 83 77 83 81 Growth of the Malaysian Bond Market • Private sector bonds exceeds the public sector since 1999. Share of outstanding private sector bonds increased to 51.8% in 2004 (1996: 39.5%) • In many developed countries, bond issuance represents more than 90% of their GDP. Bond issuance in Malaysia is still small, but the volume of growth has been phenomenal Source: BNM, Aseambankers

  17. Growth of the Malaysian Bond Market • Both the Government and corporate sector turning to the capital market to meet their funding requirements • Recognition that bonds are a more stable source of long-term financing

  18. Evolution of the Islamic Capital Market Infant Market Broader Market Deeper Market 1983 - 1993 Foundation and Infrastructure 1994 - 2005 Formalisation and Development Future - Innovation and Strategic Alliance • Development of Markets, Players and Products • Islamic Banking Act 1983 • Bank Islam Malaysia 1983 • Issuance of Government Investment Issues (GII) • Takaful Act 1984 • Islamic PDS debuted in Malaysia in 1990 - issuance of Shell MDS Sdn Bhd valued at RM140 million • 1993 – Conventional banks with Islamic windows • 1994 – Islamic Interbank Money Market • 1995 – Issuance of Islamic PDS • 1997 – National Syariah Supervisory Council • 2000 – Tradable GII • 2002 – Islamic Financial Services Board • 2003 – Islamic repo • 2004 – 3 new full-fledge Islamic banking licenses • Stronger acceptance for Islamic products • Product development • New concept of issuance and trading that conforms with the international Syariah interpretation • Islamic financial hedging instrument • Increase the issuance amount and maturity of Islamic Government instrument • Integrated international Islamic financial market

  19. Issuance of Government Investment Issues

  20. Islamic Bonds vs Conventional PDS • The main advantages to the issuer: - Provides an avenue for Islamic investors to invest in Syariah compliant investments - Guarantees access to a larger investors base - Provides potential lowering pricing to issuers via the wider investors base from the participation of Islamic investors

  21. Islamic PDS Outstanding in the Market • The Islamic bond market has experienced rapid growth in importance and size since its emergence in the 1990s

  22. Islamic Bonds • Islamic capital market guidelines, as well as the Islamic Capital Market Master Plan have strategically outlined prospective areas of development and growth • The issuance of Islamic bonds has expanded steadily at an average growth rate of 42.5% since 1995, primarily due to investor awareness of alternative funding sources i.e. Islamic instruments and the increased number of Islamic funds launched over the years • In a niche mainstream financial industry, Islamic debt instruments account for a large proportion of the PDS market - In 2004, the total funds raised via the issuance of Islamic bonds amounted to RM15.1 billion (17.6% of the total funds raised in the bond market) - In 2004, Islamic bonds constituted more than 46% of total outstanding PDS

  23. Islamic Bonds • In a bid to deepen and broaden the Islamic bond market, the Government has been regularly issuing Islamic and conventional securities with different maturities, enabling the creation of a benchmark yield curve • At the international level, the issuance of the first sovereign global Islamic Sukuk by the Government of Malaysia in 2002 acted as a catalyst for other countries and corporations to tap the international Islamic financial market

  24. Outline • Overview of the Bond Market • Asset Securitisation in Malaysia • The Way Forward

  25. Brief History of ABS in Malaysia • In February 2001, the Capital market Masterplan was launched - sets the strategic position and future direction of capital market development for Malaysia • In April 2001, SC introduced the Guidelines on the Offering of Asset-Backed Securities (ABS) Guidelines • In Malaysia, the first ABS deal was undertaken in Aug 2001 by Prisma Assets Bhd Instrument : CBO Issue size : RM255 million Tenure : 5 years Underlying asset : Diversified pools of PDS

  26. Value of ABS Issued in Malaysia • Securitisation deals outstanding as at 16 June 2005 amounted to RM9.29 billion or 6.4% of total corporate bonds outstanding Source: BNM, Department of Statistics, Aseambankers

  27. Benefits of Securitisation Originators Investors Capital Market • Transforms relatively illiquid assets into liquid and tradable capital market instruments • Cheaper financing costs due to higher rating via credit enhancement • Allows diversification of financing sources • Facilitates removal of assets from the originator’s balance sheet • Provides a variety of product choices at attractive spreads that attract a diversified investor profile • Allows investment products to be tailored to meet specific investor needs • - variety and flexibility of credit • - maturity and payment structures • The existence of secondary securitisation markets for benchmark purposes • Facilitates and encourages efficient allocation of capital • Reduces risks within the banking system

  28. Efforts to Promote ABS Regulatory framework • In 2000, the SC became the single approval authority for all corporate bonds issue including ABS • In 2000, the SC has established an Asset Securitisation Consultative Committee (ASCC) to advise the SC on steps needed to develop asset securitisation • Introduction of: - 2001 - Guidelines on the Offering of ABS by SC - 2003 - Prudential Standards on Asset-Backed Securitisation Transactions by BNM Market knowledge amongst issuers • Cheaper costs and increasing investor familiarity with the way an ABS works are among the key reasons for the growing demand

  29. Efforts to Promote ABS Legal and Tax • January 2001- Transactions relating to the issuance of ABS are exempted from stamp duty and property gains tax • September 2004 - Interest income derived by non-resident companies from Ringgit denominated debentures and Islamic securities is exempted from witholding tax Accounting • The Malaysian Accounting Standards Board (MASB) has adopted relevant International Accounting Standard (IAS) for asset securitisation, to be effective on 1 January 2006

  30. Issuance of ABS Source: SC, RAM and MARC

  31. Issuance of ABS Total 13,250.56 Source: SC, RAM and MARC

  32. Conventional Securitisation Securitisation of the Government’s staff housing loans and issuance of residential mortgage-backed securities by Cagamas MBS Bhd

  33. Islamic Securitisation Securitisation of the Government’s staff Islamic home financing and issuance of Islamic Residential Mortgage-Backed Sukuk Musyarakahby Cagamas MBS Bhd

  34. Potential for Securitisation in Malaysia • Tremendous potential for securitisation growth driven by auto loan receivables, credit card receivables, portfolio of housing loans, portfolio of small and medium enterprise (SME) loans and property rental receivables • The broadening and deepening of the Islamic financial market has seen the rise of Islamic debt, in particular Islamic asset securitisation / Sukuk as an alternative to conventional debt as a means of raising financing • Sukuk structures that have been developed in the International Islamic market include Sukuk al-Ijarah and the Sukuk al-Salam

  35. Outline • Overview of the Bond Market • Asset Securitisation in Malaysia • The Way Forward

  36. The Malaysian Bond Market Future Industry growth • Further product development e.g. structured products such as ABS and Islamic instrument • Continuous refining of regulatory framework • New identified areas of growth • Increase in sophistication to deliver the financing needs of various projects • Access to larger investor base, lower pricing to long-term issuers and provide an avenue for efficient and effective allocation of savings into investments

  37. Towards a Robust Debt Capital Market Malaysian Debt Capital Market Macroeconomics Stable and predictable macroeconomic environments MGS market Healthy government bond market creates a conducive environment for the development of a robust corporate bond market Corporate governance Improved financial and transaction disclosure will help alleviate issues of credit risk Regulatory framework Developing and enforcing formal regulatory framework Investors base Pension funds, insurance companies and other savings institutions play an important role in expanding investor base Regional market Promoting regional bond market centres

  38. The Way Forward • The capital market will remain as an important source of financing for the economy. With successful completion of financial restructuring in Malaysia, issuance of PDS is likely to be used for expansion activities • The issuance of ABS is set to grow with support from the securitisation of the Government’s staff housing loans • Funds to be raised from the capital market to spur the growth of SMEs • Other on-going developments will further drive the growth of Malaysian capital market - This includes the regional economic and financial cooperation under the Asian Bond Markets Initiative which is expected to fasten efforts in exploring securitisation and cross-border bond issuance

  39. Reference • Aseambankers, Broadening the Malaysian Debt Market, 23 June 2005 • http://www.bnm.gov.my/ • http://rmbond.bnm.gov.my/ • http://www.sc.com.my/ • http://www.marc.com.my/ • http://www.ram.com.my/ • http://www.statistics.gov.my/

  40. THANK YOU For more information, please visit our website at: www.cagamas.com.my or email: info@cagamas.com.my

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