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alaysianIslamic

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Islamic capital market, an integral

segment in Malaysias nancial

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

signicant portion of Malaysias capital

market. In 2007, Sukuk accountedfor 76% or US$37.38 billion of bonds

approved by the Securities Commission

Malaysia (SC).

A pioneer in global Sukuk, Malaysia

launched the rst US$600 million ve-

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 MalaysiaThere are more than 350 Islamic equity

funds operating in major nancial

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 bourses

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, Asias rst Islamic

Exchange Traded Fund (ETF), MyETF,

was launched tracked by the Dow JonesIslamic 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 Malaysias Islamic

capital market sector - with emphasis

on Islamic fund management.

Malaysia is also committed to work

with other centers in creating an Islamiccapital 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 Malaysiaand 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

Contributed by Securities Commission, Malaysia

Issuer Amount Year Transaction highlights

Shell MDS RM125 million (US$33

million)

1990 Worlds rst ringgit Sukuk issuance by

foreign-owned, non-Islamic company

Kumpulan Guthrie US$150 million 2001 Worlds rst global corporate SukukGovernment of Malaysia US$600 million 2002 Worlds rst global sovereign Sukuk

International Finance

Corporation (World Bank)

RM500 million (US$132

million)

2004 First ringgit Sukuk issuance by

supranational agency

Cagamas MBS RM2.05 billion (US$540

million)

2005 Worlds rst Islamic residential

mortgage backed securities

Khazanah Nasional

(Rafesia Capital Limited)

US$750 million 2006 Worlds rst exchangeable Sukuk

Nucleus Avenue (Malakoff

Corporation)

RM8 billion (US$2.5

billion)

2007 First hybrid Sukuk in the world

Binariang GSM RM15.35 billion (US$4.8

billion)

2007 Worlds largest Sukuk

issue as at end-2007

Notable Sukuk issuances in Malaysia

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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 guidelinesand requirements in the Islamic capital

market enabling the SC, for instance,

to impose specic 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

identied as Shariah compliant; andthe introduction of education and

awareness programs through the

publication of SAC resolutions and

programs organized by the Securities

Industry Development Centre.

Continuous product innovation

Malaysias 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 achievementfrom the earlier days when they would

merely adapt conventional structures

as templates for off-the-shelf Islamic

products. Today, a diversied 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

nancial requirements are also another

key driver for product innovation inIslamic nance. There is now greater

awareness on the benets of diversifying

their balance sheet risk. Islamic nance

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-

specic 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

Malaysias 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 marksfor 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 theSC 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 nancial transactions

and operate in various market segments

banking, insurance and capital markets

and provide specialized over-the-counterhedging and risk management products,

and advise on sophisticated transaction

structures.

Their expertise has been recognized by

the global nancial 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 foreignjurisdictions and venturing into regional

markets, enabling them to acquire skills

and expertise on new products and

overseas investments.

Similarly, the presence of several Islamic

nancial institutions from the GCC

countries in Malaysia has signicantly

altered the Islamic capital market

intermediation landscape here. More

efforts are taken to attract more to set up

operations in Malaysia.

Table 3

Budget 2008

Liberalized

shareholding structure

Foreign ownership of fund management companies and REIT

management companies is allowed up to 70%;

Islamic fund management companies are allowed 100% foreign

ownership;

Facilitative cross-border

investment policy

With effect from the 1st October 2007, Islamic funds were permitted

to invest 100% of assets abroadGreater access to

institutional funds

Approximately US$2 billion in start-up funding will be channeled by

EPF to Islamic fund management companies;

More competitive

operating environment

management activity

fees until 2016;

Income tax exemption on all Islamic fund

Income tax exemption for non-resident Islamic nance experts;

One stop-center at the SC for all fund management-related queries.

0 Islamic FinanceAsia.August/September 2008