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5th CVM Seminar : Financial and Capital Markets in the Islamic World Opportunities and Challenges 8

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Title: 5th CVM Seminar : Financial and Capital Markets in the Islamic World Opportunities and Challenges 8


1
5th CVM Seminar Financial and Capital Markets
in the Islamic World Opportunities and
Challenges8 December 2008
  • The Asian Market
  • Malaysias Experience

Nik Ramlah Mahmood Securities Commission Malaysia
2
The Development of Malaysias Islamic Capital
Market A Regulatory Perspective
3
The Malaysian capital market forms a significant
component of the overall financial system
Total value of capital market (nov-2008) USD327
billion
Total value of capital market (1990) USD61.5
billion
Bonds USD145 bn (44)
Equity USD182 bn (56)
Equity USD40.6 bn (66)
Bonds USD20.9 bn (34)
4
with Islamic securities forming a substantial
portion
Islamic capital market value (Nov 2008) USD171
billion
Total value of capital market (Nov-2008) USD327
billion
Islamic Bonds/ sukuk US54 bn (32)
Bonds USD145 bn (44)
Equity USD182 bn (56)
Islamic equity US117 bn (68)
5
Islamic finance in Malaysia is relatively well
diversified
  • Malaysia inherited the British system of
    governance including the conventional financial
    services industry
  • The evolution of Islamic finance began from the
    setting up of the Pilgrims Fund Board
  • a 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 ICM 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 (Islamic insurance) entity
  • 1993 Securities Commission Act enacted
    providing SC with mandate
  • to develop capital market
  • 2007 Capital Market Services Act

To cater for domestic demand
6
and has evolved to provide viable investment and
financing alternatives for local institutions
  • An efficient conduit for mobilisation of funds
    for Malaysian corporates
  • long term fund raising and investment enhances
    depth resilience of Malaysian Islamic financial
    system and overall financial system
  • 55 of outstanding corporate bonds are structured
    using Shariah principles
  • 87 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
Malaysia is now the leading Islamic capital
market in the world
  • Malaysia is regarded as the leading center for
    Islamic finance
  • Two thirds of global sukuk 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 investment products
  • Islamic exchange traded funds
  • Islamic REITS

8
Malaysian ICM has been developed through clear
vision and well articulated policies
Capital Market Masterplan
  • Strong leadership and proactive role of
    government
  • Close collaboration with private sector
  • Progress of implementation closely monitored

Financial Sector Masterplan
9th Malaysia Plan
Malaysia International Islamic Financial
Centre (MIFC)
9
The Capital Market Masterplan (CMP)
Launched in 2001, the 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

To develop Malaysia as an international Islamic
financial centre
10
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 Securities Commission Act
    1993
  • Comprises prominent Shariah scholars, jurists
    market practitioners
  • Advises SC on all Islamic capital market matters
  • Provides investment guidance
  • Acts as a reference point for industry
  • Promotes product harmonisation and
    standardisation
  • SC works closely with industry and the SAC to
    facilitate new products/concepts
  • Publication of Resolutions of the SAC

11
with universal principles of securities
regulation applied to Malaysian Islamic capital
market
  • Islamic capital market products and services must
  • leverage on existing infrastructure
  • not compromise the universal goals of securities
    regulation
  • IOSCOs Objectives and Principles of Securities
    Regulation applies
  • Protection of investors
  • Ensuring markets are fair, efficient
    transparent
  • Reduction of systemic risk
  • IOSCO Islamic capital market task force 2001
    affirmed key issues
  • Conventional regulatory framework applicable to
    Islamic capital market products and services
  • Islamic capital market products and services may
    be introduced and developed within any existing
    well-structured securities market
  • Reaffirmed in 2008
  • IFSB efforts in setting international prudential
    standards

12
A two-tier approach in regulating Islamic
products
Tier I
General regulatory requirements
applicable to both conventional and Islamic
products
Bonds - Trust deed, mandatory rating, eligible
persons, etc Unit Trust -
Investment committees, trustees, management
company, etc. REITs - At least 75 investment
in real estate
Tier 2
Shariah - specific requirements
applicable to Islamic products
Sukuk - Additional disclosure for Musyarakah
Mudharabah structures via info memo,
Shariah adviser, utilisation of proceeds
Islamic Unit Trust - Shariah adviser to
certify that fund complies with Shariah
requirements Islamic REITs - Tenants
activities and rental income must comply with
Shariah requirements
13
issuance of Islamic capital market guidelines
  • Guidelines on the Offering of Islamic Securities,
    2004
  • Guidelines on Islamic REITs, 2005
  • Guidelines on Islamic Fund Management, 2007
  • Guidelines and Best Practices on Islamic Venture
    Capital 2008

13
14
facilitates the offering of a comprehensive
range of products and services
Islamic REITs
Islamic unit trusts
Sukuk
Shariah compliant futures contracts
Shariah compliant stocks
Islamic structured products
Islamic stockbroking
Islamic ETFs
Corporate finance / Advisory
Islamic fund management

Islamic banking takaful
15
Malaysia has built a reputation as a centre of
innovation
(USD1 RM3.5)
16
with landmark Islamic issues
17
Malaysia An International Islamic Capital
Market Hub
18
Malaysia An international investment hub
Competitive cost structure
Conducive lifestyle
Vibrant economy
Malaysia
Islamic finance niche
Efficient business environment
Deep, broad-based capital market
19
Malaysiapositive economic conditions with
moderate outlook
slowdown in economic growth due to global
environment, with stable and resilient banking
system
Malaysias Credit Rating A- (SP), A3 (Moodys)
20
...and an attractive business investment
destination
Ranked 3rd for regulating directors
Ranked 4th in investor protection
Ranked 3rd for most attractive outsourcing centre
Most protected
Most
New Zealand
New Zealand
Singapore
Singapore
Malaysia
Hong Kong
Canada
Malaysia
United States
United States
Cambodia
Israel
Israel
Canada
Source World Bank 2008
Source World Bank 2008
Source A T Kearney 2007
Hong Kong
Ireland
South Africa
United Kingdom
Mauritius
South Africa
World Economic Forum 2007 Global Competitiveness
Index
  • Malaysia ranked 21st in Global Competitiveness
    Index (World Economic Forum)
  • Investment Guarantee Agreements with over 50
    countries
  • Dynamic legal, regulatory and tax framework
  • Regional Centre of Arbitration in Kuala Lumpur
  • Affordable cost of living among cheapest in
    Asia
  • Liberal exchange control regime

21
A large Shariah-compliant equities market
Shariah-compliant Securities by market sector
Shariah-compliant Securities
Trading/Services 20
Construction 6
Properties 9
Plantation 4
Industrial Products 33
Technology 12
Others 1
Consumer Products 15
As at end-Nov 2008
Source Securities Commission
The SAC of SC releases the updated
Shariah-compliant securities list twice a year in
May and November
22
makes Malaysia an attractive Primary Listing
Destination
Kuala Lumpur Composite Index
  • Market capitalisation as at end-November 2008
    stood at RM657 billion (USD188 b)
  • Largest number of listed companies in ASEAN (982
    as at Sept-08)?
  • Well-balanced participation with retail,
    domestic institutional and foreign institutional
    accounting for roughly a third of trading values
    each
  • Market Diversity - 15 Sectors with 50 economic
    activities
  • Product Diversity Structured Warrants, REITs,
    ETFs, Shariah compliant products
  • A total of 13 listed REIT 2 Islamic and 1
    conventional converting to an Islamic at the end
    of the year
  • 3 listed ETFs, FTSE Bursa Malaysia Large 30
    Index, ABF Malaysia Bond Index Fund MyETF Dow
    Jones Islamic Market Malaysia Titans 25 (First
    Shariah ETF launched in Asia)
  • Resilient performer Among top performing
    markets in 2007 and performing in line with other
    Asian exchanges in 2008

KLCI record high 1516.22 on 11th Jan 2008
Oct-08
Gives excellent market coverage, peer
comparisons, sector premiums
23
Attractive value propositions
  • Vibrant economy with competitive cost structure,
    efficient business environment conducive
    lifestyle
  • Strategic, Islamic connectivity for Middle
    Eastern funds to capitalize on Malaysian growth
    opportunities
  • Valuation is comparable to regional exchanges and
    relatively higher valuation on niche sectors
  • Non-resident PLCs can repatriate any amount of
  • capital raised during IPO without BNM
    approval
  • Companies can choose to have their Shariah
  • compliant status determined pre-IPO

24
PE Valuations
KLCI Sectoral PE Valuations (end-Q3 2008)?
Regional PE Valuations (end-Q3 2008)?
25
Direct listing requirements for foreign companies
Requirement
Main Board
MESDAQ
Paid-up share capital
Min RM60 mil (USD17.14 m)
Min RM2 mil (USD0.57 m) or Min RM20 mil (USD5.7
m) (technology incubators)?
  • Tech-based companies
  • None
  • Tech incubators
  • At least 12 months in operations
  • Others
  • 3 years operating revenue

At least 3-5 full financial years
Operating history
Profit Track Record Test
  • Uninterrupted profit after tax (PAT) of 3-5 FYs
  • Aggregate PAT of at least RM30 mil (USD8.6 m)
    and
  • PAT of at least RM8 mil (USD2.3m) for latest FY

N/A
N/A
  • Market capitalisation of at least RM500 mil
    (USD142.9 m)
  • PAT of at least RM30 mil (USD8.6 m) for latest FY

Market Capitalisation/ Profit Test
N/A
  • Must have right to build an infrastructure
    project
  • which contributes to economic growth of Malaysia
  • concession not
  • cost not

IPC test
26
Secondary listing requirements for foreign
corporations
  • Flexible requirements for a foreign corporation
    seeking a secondary listing on Bursa Malaysia
  • The applicants home exchange must be a member of
    the World Federation of Exchanges and must have
    standards of disclosure rules at least equivalent
    to those of Bursa Malaysia
  • Market capitalisation at least equivalent to RMI
    billion (USD285.7m) on its home exchange
  • After tax profits of at least equivalent to RM60
    million (USD17.14 m) based on the audited
    financial statements for the most recent full
    financial year
  • The applicant must be incorporated in a
    jurisdiction whose corporation laws and other
    laws and regulations have standards at least
    equivalent to those in Malaysia, particularly
    with respect to-
  • Corporate governance
  • Shareholders and minority interest protection and
  • Regulation of take-overs and mergers

27
The Malaysian Islamic Capital Market Active
global sukuk centre
10x oversubscribed
Despite financial volatility due to continued
uncertainties, many large
issuances in 2007 and 1H 2008 were made
signifying large demand for sukuk
  • Malaysia has competitive advantage
  • Local currency bond market is largest in ASEAN
    region, as of end-Nov 2008
  • total RM523 bn (USD 145 bn)
  • sukuk RM194 bn (USD 54 bn)
  • New asset class, wide investor base
  • 57 of corporate debt securities are sukuk
  • Corporate sukuk issued in 2007 USD 20 bn
  • 1H 2008 USD 4.3 bn

28
Sukuk - Primary Market Activity in 2008
Sukuk approved based on various Shariah principles
Corporate Approval
2007
  • Decrease in amount of Sukuk approved in 2008 is
    partly due to
  • - Local and foreign FIs whose assets are
    conventional based, tapping the bond market
  • - One off large Cagamas issuance in 2007
    amounting to RM60 billion

Jan Sep 2008
Corporate Issuance
29
A fast growing Islamic fund management industry
Islamic REITs ETFs
  • Malaysia 1st to issue Guidelines for Islamic
    REIT (2005)
  • Malaysia 1st to have a Shariah-compliant REIT
    listed on the stock exchange.
  • Currently, 2 listed Shariah-compliant REIT
  • a healthcare REIT and
  • a plantation REIT (oil palm)

Lower income tax for investors
Tax transparency introduced. SC issued new
Guidelines.
Msian Govt waived RPGT and stamp duty.
  • ETFs
  • 1st Islamic ETF in Asia (Jan 2008)
  • RM840 million (USD240 m) MyETF Dow Jones Islamic
    Market Malaysia Titans 25
  • Listed on Bursa Malaysia

30
Islamic fund management Islamic unit trusts
NAV of Islamic Funds vs. Total Industry
No. of Islamic Funds vs. Total Industry
Islamic unit trust funds
(USD5 b)
(USD42.5 b)
Source Securities Commission
31
Islamic fund management companies
Liberal shareholding structure
  • Islamic fund management companies are allowed to
    have 100 foreign ownership
  • Islamic fund managers are permitted to manage
    both institutional retail funds
  • Islamic fund management companies are allowed to
    invest 100 of their assets abroad
  • RM7 billion (USD2 b) in start up funding will be
    channeled by EPF to Islamic Fund management
    companies
  • Income tax exemption on all Islamic fund
    management activity fees until 2016
  • Income tax exemption for non-resident Islamic
    finance experts
  • One-stop center at the Securities Commission (SC)
    for all fund management queries

Facilitative cross border investment policy
Greater access to institutional funds
Competitive operating environment
32
Islamic fund management companies
  • Shariah assets under management (AUM)
  • As at 30 June 2008, 10 (RM23 billion) of the
    total AUM of RM235 billion (USD67.14 b) for the
    fund management industry were Shariah mandates
  • 35 fund mgt companies in Malaysia have Shariah
    mandates
  • The first fully fledged local Islamic fund
    management company is CIMB Principal Islamic
    Asset Management
  • Growing interest by international companies to
    use Malaysia for their fund management activities
  • Aiiman Capital (owned by DBS Bank) is licensed
    while
  • The following have been approved for
    establishment
  • - Global Investment House
  • Kuwait Investment House
  • Reliance Capital Asset Management

33
Thank You
Securities Commission 3 Persiaran Bukit
Kiara 50490 Kuala Lumpur Malaysia www.sc.com.my
34
Islamic equity market Sizable component of the
capital market
Top 3 Shariah-compliant companies by sector and
market capitalization
Top 10 Shariah-compliant companies by market
capitalization
Plantation
RM billion
Company name
1.
19.10
IOI Corporation
2.
8.91
Kuala Lumpur Kepong
3.
3.27
Batu Kawan
Construction
RM billion
Company name
1.
10.78
YTL Corporation
2.
3.39
Gamuda
3.
2.16
IJM Corporation
Properties
RM billion
Company name
1.
2.76
SP Setia
2.
2.56
KLCC Property
3.
2.04
IOI Property
Oil Gas
RM billion
Company name
1.
19.19
Petronas Gas
2.
2.64
Shell
3.
0.87
SapuraCrest
  • Source Bursa Malaysia

35
Some existing foreign cross listings
Bursa and Copenhagen SE
Bursa and Tokyo SE
Bursa and HKEX
SE--------------------
36
Selected notable sukuk issuance
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