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5th CVM Seminar : Financial and Capital Markets in the Islamic World Opportunities and Challenges
8 December 2008
The Asian Market: Malaysia’s Experience
Nik Ramlah MahmoodSecurities Commission
Malaysia
2
The Development of Malaysia’s Islamic Capital Market –
A Regulatory Perspective
3
The Malaysian capital market forms a significant component
of the overall financial system…
EquityUSD40.6 bn
(66%)
BondsUSD20.9 bn
(34%)
Total value of capital market (1990)
USD61.5 billion
Total value of capital market (nov-2008)USD327 billion
EquityUSD182 bn
(56%)
BondsUSD145 bn
(44%)
4
Islamic capital market value (Nov 2008): USD171 billion
Total value of capital market (Nov-2008): USD327 billion
EquityUSD182 bn
(56%)
BondsUSD145 bn
(44%)
…with Islamic securities forming a substantial portion
Islamic equity
US$117 bn (68%)
Islamic Bonds/sukuk
US$54 bn (32%)
• 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 market2007 : Capital Market Services Act
Islamic finance in Malaysia is relatively well diversified…
To cater for domestic demand
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
• Strong leadership and proactive role of government
• Close collaboration with private sector
• Progress of implementation closely monitored
Capital Market Masterplan Capital Market Masterplan
Malaysia International Islamic Financial Centre
(MIFC)
Malaysia International Islamic Financial Centre
(MIFC)
Financial Sector MasterplanFinancial Sector Masterplan
9th Malaysia Plan9th Malaysia Plan
9
The Capital Market Masterplan (CMP)
• Equity market• Bond market• Derivatives market• Stockbroking industry• Market institutions• Investment management• Regulatory framework • Corporate governance
• Islamic capital market
• Technology & e-commerce• Training & education
Launched in 2001, the CMP provides a blueprint for long-term strategic
development of the Malaysian capital market with 152 recommendations
covering 11 areas :
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
• Islamic capital market products and services must − leverage on existing infrastructure− not compromise the universal goals of securities regulation
• IOSCO’s Objectives and Principles of Securities Regulation applies
…with universal principles of securities regulation applied to Malaysian Islamic capital market
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 applicable to both conventional and Islamic products
General regulatory requirements
Tier 2 applicable to Islamic productsShariah - specific requirements
Bonds - Trust deed, mandatory rating, eligible persons, etc
Unit Trust - Investment committees, trustees, management company, etc.
REITs - At least 75% investment in real estate
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 requirementsIslamic REITs - Tenants’ activities and rental
income must comply with Shariah requirements
1313
…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
14
…facilitates the offering of a comprehensive range of products and services
ProductsProductsShariah
compliant stocks
Islamic unit
trusts
Islamic REITs
Sukuk
Islamic ETFs
Islamic structure
d products
Shariah compliant
futures contracts
Islamic banking & takaful
Corporate finance / Advisory
ServicesServicesIslamic fund management
Islamic stockbroking
15
Malaysia has built a reputation as a centre of innovation…
Centre of innovation
• First sovereign 5 year global sukuk of US$600 million in 2002 (Govt. of Malaysia)
• First global sukuk of USD150 million issued by Guthrie Berhad in 2001
• First Islamic residential mortgage backed securities issued by Cagamas Berhad in 2005
• First Islamic Ringgit bond issuance of RM760 million (USD217m) by a multilateral financial institution in 2005 (World Bank)
• First listed Islamic Real Estate Investment Trust in 2006
• First Islamic structured product in 2007
(USD1 = RM3.5)
16
Recent Landmark ICM Issues• Largest sukuk funding programme of RM60 billion (USD17.14 b) by
Cagamas
• Largest corporate sukuk of RM15.4 billion (USD4.4 b) by Binariang GSM
• Largest exchangeable sukuk of USD850 million by Khazanah
• RM3 billion (USD0.86 b) Islamic stapled income securities by Telekom and Hijrah Pertama
• First Asian Islamic ETF launched by i-Valuecap Management in 2008
…with landmark Islamic issues
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Malaysia – An International Islamic Capital Market Hub
18
Vibrant economyVibrant economy
Competitive cost structure
Competitive cost structure
Efficient business environment
Efficient business environment
Conducive lifestyleConducive lifestyle
Deep, broad-based capital
market
Deep, broad-based capital
market
Islamic finance niche
Islamic finance niche
MalaysiaMalaysia
Malaysia : An international investment hub…
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…slowdown in economic growth due to global environment, with stable and resilient banking system…
Malaysia…positive economic conditions with moderate outlook…
Malaysia’s Credit Rating: A- (S&P), A3 (Moody’s)
Sound Economic
Fundamentals
Sound Economic
Fundamentals
Low inflation of2.0% @ Dec 2007(2008: 5.5 – 6%)
Lowunemployment
(3.5% in Q2 2008)
Diversified andflexible economic
structure
Low external debt (end-June ’08:
34% of GNI)
High grossnational savings
(38.4% of GNI)
High internationalreserves
(USD100 b @November ‘08)
…Malaysia’s real GDP shows moderate growth
Strong domestic demand
conditions …high foreign exchange reserves and low external debt provide one of the strongest external positions globally
Stable growth at 5% – 5.5% in 2008
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...and an attractive business & investment destination
Canada
Israel
South Africa
United Kingdom
Ireland
United States
Malaysia
Hong Kong
Singapore
New Zealand
Most protected
Ranked 4th in investor protection
Cambodia
Israel
Mauritius
South Africa
Hong Kong
United States
Canada
Malaysia
Singapore
New Zealand
Most
Ranked 3rd for regulating directors
Mexico
Bulgaria
Philippines
Chile
Indonesia
Brazil
Thailand
Malaysia
China
India
Most attractive
Ranked 3rd for most attractive outsourcing centre
Source: A T Kearney 2007
Source: World Bank 2008
Source: World Bank 2008
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
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Source: Securities Commission
A large Shariah-compliant equities market…
Shariah-compliant Securities
63.5416.47 (USD119)2008+
63.7705.12007
64.6548.42006
63.3439.82005
62.1448.22004
59.9383.92003
60.3290.52002
65.2303.2 (USD86.6)2001
% of M-capIslamic equities
M-cap of IslamicEquities (RM bln)
Year
Industrial Products
33%
Construction 6%
Trading/Services
20%
Properties 9%
Plantation 4%
Technology 12%
Consumer Products 15%
Others 1%
0.43%6594.186565.90FBM Hijrah Shariah
0.97%5900.375843.46FBM EMAS Shariah
0.29%866.14863.61KL Composite Index (KLCI)
% change30 Nov 200831 Oct 2008Equity market indices
87%% to total listed securities
855 securitiesNumber of Shariah-compliant securities-Nov 2008
Shariah-compliant securities on Bursa Malaysia
* The SAC of SC releases the updated Shariah-compliant securities list twice a year in May and November
Shariah-compliant Securities by market sector
+As at end-Nov 2008
22
0
200
400
600
800
1000
1200
1400
1600
Jun-05Sep-05Dec-05Mar-06Jun-06Sep-06Dec-06Mar-07Jun-07Sep-07Dec-07Mar-08Jun-08Sep-08
…makes Malaysia an attractive Primary Listing Destination
• 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
No. of Listed Companies : 982
30%
20%13%
10%
11%
6%4% 4% 1% 1%
Industrial products Tading/ServicesConsumer Products PropertyTechnology ConstructionFinance PlantationInfrastructure Project Cos Others
Gives excellent market coverage, peer comparisons, sector premiums
KLCI record high: 1516.22 on 11th Jan 2008
Kuala Lumpur Composite Index
Oct-08
*
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
11.710.9
9.99.5
7.8
11.4
0.0
4.0
8.0
12.0
Hong Kong
KoreaMalaysia Taiwan Thailand
Singapore
11.710.9
9.99.5
7.8
11.4
0.0
4.0
8.0
12.0
Hong Kong
KoreaMalaysia Taiwan Thailand
Singapore
10.911.4
8.6
7.4
10.9
0.0
4.0
8.0
12.0
KLCI
Oil & Gas Plantation
Industrial ProductsTrading/Services
10.911.4
8.6
7.4
10.9
0.0
4.0
8.0
12.0
KLCI
Oil & Gas Plantation
Industrial ProductsTrading/Services
PE Valuations
Regional PE Valuations (end-Q3 2008)
KLCI Sectoral PE Valuations(end-Q3 2008)
25
Direct listing requirements for foreign companies
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/AMust have right to build an infrastructure project – • which contributes to economic growth of Malaysia• concession not < 15 yrs• cost not < RM500 mil (USD142.9 m)
IPC test
• Tech-based companies:
None• Tech incubators:
At least 12 months in operations
• Others:
3 years operating revenue
At least 3-5 full financial yearsOperating history
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)
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
26
Secondary listing requirements for foreign corporations
Flexible requirements for a foreign corporation seeking a secondary listing on Bursa Malaysia:
• The applicant’s 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
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
Despite financial volatility due to continued uncertainties, many large issuances in 2007 and 1H 2008 were made
signifying large demand for sukuk
111
86
73
5650
43
0
20
40
60
80
100
120
Percentage (%)
Korea Malaysia Singapore Thailand China Hong Kong
Bond Market as a % of GDP
USD550 m Khazanah Exchangeable Sukuk 2008 *
Europe26%
US 11%
Asia & Others13%
Middle East50%10x
oversubsc
ribed
28
Corporate Approval
Sukuk - Primary Market Activity in 2008
Jan-Sep 2007
Jan-Sep 2008
Size of sukuk issued 25.92 15.03
Size of conventional bonds issued 17.65 24.64
Total corporate bonds issued 43.57 39.67
% size of sukuk issued to total corporate bonds issued
59% 38%
Jan – Sep 2007 Jan - Sep 2008
No. of issues
Size of issues
(RM‘bil)
No. of issues
Size of issues
(RM‘bil)
Sukuk approvals
43 86.77 36 24.60
Conventional bond approvals
51 31.27 43 65.43
Total 94 118.04 79 90.03
% of Sukuk approved to total corporate bonds approved
46% 74% 46% 27%
Corporate Issuance
Sukuk approved based on various Shariah principles
2007
Murabahah19%
Ijarah11%
Istisna9%
BBA2% Mudharabah
1%
Musyarakah58%
Musyarakah64%
Murabahah3%
Ijarah23%
BBA7%
Mudharabah3%
Jan – Sep 2008• 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
29
A fast growing Islamic fund management industry – Islamic REITs & ETFs
13579
1113151719
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
No of Listed REITs
13579
1113151719
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
No of Listed REITs
M’sian Govt waived RPGT
and stamp duty.
Tax transparency
introduced. SC issued new Guidelines.
Lower income tax for investors
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)
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)
ETFs: 1st Islamic ETF in Asia (Jan 2008) RM840 million (USD240 m) MyETF Dow Jones Islamic Market Malaysia Titans 25 Listed on Bursa Malaysia
30Source: Securities Commission
Islamic fund management – Islamic unit trusts
No. of Islamic Funds vs. Total Industry NAV of Islamic Funds vs. Total Industry
71
291
83
340
100
416
134
521
149
582
0
100
200
300
400
500
600
2004 2005 2006 2007 2008
Islamic funds Total funds
6.8
87.4
8.5
98.5
9.2
121.8
16.9
169.4
17.5
148.8
0
30
60
90
120
150
180
2004 2005 2006 2007 2008
Islamic funds Total industry
Number of approved funds 2007 Sep-2008
Islamic 134 149
Total industry 521 582
Net asset value (NAV) of approved funds
Islamic (RM billion) 16.90 17.54
Total industry (RM billion) 169.40 148.81
% of Islamic to total industry 10.0% 11.8%
Islamic unit trust funds
(USD42.5 b)
(USD5 b)
31
Islamic fund management companies
Liberal shareholding structure
Facilitative cross border
investment policy
Greater access to institutional funds
Competitiveoperating
environment
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
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
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
Top 10 Shariah-compliant companies by market capitalization
10.
9.
8.
7.
6.
5.
4.
3.
2.
1.
10.14PPB Group
31.76MISC
13.41Digi.com
Company name RM billion
Sime Darby 35.15
Tenaga Nasional 25.57
Petronas Gas 19.19
IOI Corporation 19.10
TM International 14.19
Telekom Malaysia 13.90
Plus Expressway 13.45
Islamic equity market: Sizable component of the capital market
•Source: Bursa Malaysia
Top 3 Shariah-compliant companies by sector and market capitalization
Plantation
3.
2.
1.
3.27Batu Kawan
8.91Kuala Lumpur Kepong
19.10IOI Corporation
RM billionCompany name
Construction
3.
2.
1.
2.16IJM Corporation
3.39Gamuda
10.78YTL Corporation
RM billionCompany name
Properties
3.
2.
1.
2.04IOI Property
2.56KLCC Property
2.76SP Setia
RM billionCompany name
Oil & Gas
3.
2.
1.
0.87SapuraCrest
2.64Shell
19.19Petronas Gas
RM billionCompany name
35
Some existing foreign cross listings
Foreign-owned with listings on Bursa
Companies with Foreign-based Operations listed on Bursa
Dual Listing
Bursa and Copenhagen SE
Bursa and Tokyo SE <-----------------Bursa and London SE-------------------->
Key WestGefung
HoldingsSino Hua-An International
Bursa and HKEX
36
Selected notable sukuk issuance
Issuer Facility/ AmountYear of Issue
Bid-to-cover ratio
Transaction Highlights
Shell MDS Sdn. Bhd
RM125 m (USD36m) 1990Private
placement
• World’s 1st RM Islamic corporate bond issued
KL International Airport
RM2.2 b (USD630m) 1996Private
placement Government of Malaysia
USD600 million 2002 2x• World’s 1st global sovereign sukuk• Upsize from USD500 mil to USD600 mil
IFC &World Bank
RM500 m (USD143m)RM760 m (USD217m)
20042005
4.3x1.9x
• 1st RM sukuk by supranational• Largest supranational deal in RM
Khazanah Nasional (Rafflesia Capital Limited)
USD750 million 2006 6x• World’s 1st exchangeable sukuk• Largest exchangeable instrument
issued out of Asia ex-Japan (2006)
Cagamas Berhad
RM60 b (USD17b) prgm, up to 40 years. Issued:
• RM2.745 b IMTNs
• RM1.515 b ICPs
2007/ 2008
•Private placement
• 3.83x (RM750 mil
MTNs)
• Largest, longest term funding program
• 1st combined Islamic and conventional program (CP/MTN)
• 13% non-resident investors for ICPsAEON Credit Services
RM400 m (USD114m) 2007 Bought-deal • 1st Japanese-owned co. issuing sukuk
Tesco StoresRM3.5 b (USD1b) prgm RM400m, RM300m
2007 6x, 4x• 1st sukuk issuance by a British owned
MNC
Binariang GSM (Maxis Comm.)
RM15.35 b (USD4.4b)28 Dec 2007
2x • Largest-ever sukuk issue in the world
Khazanah Nasional
USD550 million 12 Mac 2008
10x• Exchangeable into Parkson Retail
Group, a HK-listed company
Toyota CapitalRM1 b (USD0.3b) prgm. Issued: RM100 m ICPs
May 2008
Private placement
Islamic Dev. BankRM1 b (USD0.3b) prgm: Issued: RM300 million
Aug 2008 1.5x • IDB’s first RM sukuk