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Malaysia’s Capital Market Masterplan, 2001-2010: A Case Study

JimWoodsome

WORKINGPAPER–February2016

Thispaper,preparedfortheCapitalMarketAuthorityofRwanda,examinestheprocessMalaysia’sgovernmentundertooktoreformanddevelopitscapitalmarketsinthewakeoftheAsianfinancialcrisisduringtheperiod2001-2010.Thepaperislargelybasedonhistoricalcontextandisintendedtogleanlessonsfromtheprocessitself.ThepapergivesspecialattentiontohowtheMalaysiangovernment

perceivedthechallengesitfacedatthattime,andthepoliciesformulatedtoaddressthem,butdoesnotattempttoassesstheefficacyofthosepolicies.Further,thepaperdoesnotattempttoanalyzerecent

politicalandfinancialdevelopmentsinMalaysia.

ThispaperwaspreparedbyJimWoodsome,seniorprogramresearchanalystfortheMilkenInstituteCenterforFinancialMarkets(CFM).HewouldliketothankLatifahMericanCheong,formerassistantgovernoratBankNegaraMalaysia,StaciWarden,executivedirectorofCFM,LauraDealLacey,executivedirectoroftheMilkenInstituteAsiaCenter,andJacquelineIrving,directorofCFM,forcomments.


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Executive Summary

IntheaftermathoftheAsianfinancialcrisis,theMalaysiangovernmentsetouttostrengthenandbroadenthecountry’sfinancialsector,includingunderdevelopedcapitalmarketswhichwerethenrelativelynarrowandweredominatedbygovernmentdebtandequities.Afteradecade-longeffortguidedbytheCapitalMarketMasterplan(CMP),Malaysia’scapitalmarketsspannedamuchbroaderrangeofproductsandservicestoincludeprivateequity,arobustinvestmentmanagementindustry,andalargerroleforcorporatebonds,especiallyIslamicsecurities.

TheCMPbeganaspartofatwo-prongedapproachdesignedtomeetMalaysia’sneedformorediversifiedsourcesoflong-termfinance.TheFinancialSectorMasterplan(FSMP)focusedprimarilyonstrengtheningbankingandIslamicfinance,alongwithinsuranceandtheventurecapitalindustry.TheseparateCMPsetouttoenhancetheregulatoryframeworkandexpandcapital-marketdevelopmentintonewfinancialinstitutionsandservicessuchasunittrusts,private-debtsecurities,privatepensionfunds,andIslamicsecurities.

ThispaperwillfocusontheprocessthegovernmentfollowedasitcreatedandimplementedCMP,withspecialattentiongiventohowthegovernmentperceivedthechallengesitfacedandwhatstepsittooktoaddressthem.SeveralhighlightsfromMalaysia’sexperienceinclude:

1. SEQUENCINGANDTAKINGACOMPREHENSIVEAPPROACH.TheMalaysiangovernmentbelievedthatastrongbankingsectorwasaprerequisitetocapital-marketdevelopmentandliberalization.FollowingstabilizationofthebankingsectorandthewidereconomyfromtheeffectsoftheAsianfinancialcrisis,BankNegaraMalaysia(BNM,thecentralbank)andtheMalaysianSecuritiesCommission(SC)developedandimplementedten-yearmasterplanstofurtherdevelopthefinancialsectorandthecapitalmarkets,respectively.

2. DESIGN.TheSCprepareditsCapitalMarketMasterplanthroughaconsultationprocessthatlastedoverayearandinvolvedhundredsofmeetingswithrelevantstakeholdersinthepublicandprivatesectors,aswellasinternationalexperts.

3. IMPLEMENTATION.TheSCdevelopedasequencedimplementationprocesswithspecificassignments,performancebenchmarks,andavenuesforfeedbackandmid-courseadjustments.

4. BROADENINGTHEISSUERBASE.Toencourageissuerstoutilizethecorporatebondmarket,theSCstreamlinedtheissuanceprocessandallowedsomeissuerstosignupforshelfregistration.

5. BROADENINGTHEINVESTORBASE.Toencourageinvestorstoparticipateinthedomesticcapitalmarkets,thegovernmentemphasizedimprovingcorporategovernance,withaviewtowardbolsteringinvestors’confidenceincorporatestewardshipoftheirfunds.TheSCalsofocusedonexpandingthemenuofproductsandservicesavailabletoinvestors.

6. IMPROVINGINTERMEDIATION.Toimprovemarketliquidity,theSCpromotedtheconsolidationandliberalizationofmarketinstitutions(principally,theequityandderivativesexchanges)andmarketintermediaries(principally,thestockbrokerageindustry)withtheaimofachievingbettereconomiesofscaleandscope.


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7. CULTIVATINGACOMPETITIVENICHE.Thegovernmenttreatedcapitalmarketsasafacilitatorofeconomicgrowth,notakeydriverofit.TheexceptiontothiswastheIslamiccapitalmarket,wherethegovernmentdeterminedthatithadanopportunitytobuildaninternationallycompetitiveexportservicesector.

8. DEVELOPINGHUMANCAPITAL.Thegovernmentdevotedresourcestotrainingandeducation,bothdomesticallyandinpartnershipwithinstitutionsabroad.

IntroductionPre-CrisisCapital-MarketDevelopmentandtheAsianFinancialCrisisOverthepastfortyyears,Malaysiahastransformedfromapredominantlyrural,commodities-basedeconomytoamanufacturingcenterandtradehub.Beginninginthe1970s,thegovernmentadoptedanexport-ledgrowthstrategy,similartothosepursuedbyJapan,SouthKorea,Taiwan,andothers.Economicdevelopmentincreasinglyfocusedoncreatingastrong,private-sector-driveneconomy.

Thedevelopmentofcapitalmarketsreflectedthisorientation.Initialcapital-marketdevelopmentfocusedonformalizingtheequitymarket,whichdatedtothecolonialera,asasourceofnon-bankfundingforprivatecompanies.ThegrowthofthebondmarketwasfirstdrivenbytheissuanceofMalaysiangovernmentbondsastheprerequisiteforestablishingthesovereignyieldcurveandinvestorbasenecessaryfordevelopmentofthecorporatebondmarket.Subsequently,anactivecorporatebondmarketbegantofacilitateissuesbytheprivatesectortofinancelonger-terminfrastructureandotherpublic-privatepartnershipprojects.

Duringthe1980s,thegovernmentsoughttoshiftmoreeconomicdecision-makingpowertotheprivatesector.Malaysia’sequitymarketgrewsubstantiallyintheearly1990sasstate-ownedenterpriseswereprivatized.However,thecorporatebondmarketremainedunderdeveloped,andmostdebtfinancingcontinuedtobeintermediatedbybanks.

ThedependenceofMalaysia’seconomyonbankfinanceleftitvulnerabletothe1997Asianfinancialcrisis.ThecrisisoriginatedinThailandbutquicklyspreadtoMalaysiaandothercountriesinSoutheastAsia.Malaysia’scurrency,theringgit,wassubjecttowavesofspeculativeattacksin1997,whichledtoportfolioinvestmentoutflowsandexchangeratedepreciation.1Stockandrealestatepricesfellprecipitously,corporateprofitsshrank,andbanks’balancesheetsweakenedasnonperformingloans(NPLs)rose,precipitatingabankingcrisis.2TheMalaysiangovernmentbrieflytightenedfiscalandmonetarypolicyinanefforttowinbackmarketconfidence,butthenreversedcourseinearly1998,optingtoprioritizeeconomicstimulus.3Inthefallof1998,theMalaysiangovernmentpeggedtheringgittotheU.S.dollarandimplementedcapitalaccountcontrolsinanattempttoinsulatethecountryfrom

1BNMintervenedtodefendtheringgitbutsoonabandonedthisapproachinfavorofpreservingMalaysia’sinternationalreserves.SeeBankNegaraMalaysia,1999,pp.570-572.2BankNegaraMalaysia,1999,pp.583-586;seealso,IMF,2001,p.1.3BankNegaraMalaysia,1999,pp.590-593.


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theregionalchaos.Fortunately,Malaysia’slevelofexternaldebtwassmallatthetimeand,asaconsequence,thecountrydidnotexperienceanexternaldebtcrisis.Intheaftermathofthecrisis,thegovernmentfocusedfirstonshoringuptheweakenedbankingsector.(SeeBox1.)Oncethebankingsectorhadbeenstabilized,thegovernmentthenturneditsattentiontothelonger-termdevelopmentofthefinancialsectorandthecapitalmarkets.ImpetusforCapital-MarketMasterPlanOncethecrisishadpassed,aconsensusemergedthatMalaysiawouldhavetostrengthenitsexistingfinancialinstitutions,manyofwhichhadbeenweakenedbythecrisis,aswellasdiversifyandenhancethecompetitivenessofitsfinancialsector.

Twofactorsinparticular—onedomesticandoneforeign—motivatedthedecisiontodrafttheCMP.Thedomesticimpetuswastoreducethematuritymismatchinthedomesticbankingsectorand,concurrently,toreducetheeconomy’srelianceonbankintermediationforlong-termfinancingbyshiftingresponsibilityforsuchfinancingawayfromdepositorsandtowarddirectinvestors.

Theforeignimpetuswastoimprovethecapacity,competitivenessandresilienceofthedomesticfinancialsectorinanticipationoffurtherinternationalliberalization.AsasignatorytotheGATSFinancialServicesAnnex,Malaysiawasobligatedtofurtheropenitsfinancialsector.Malaysianofficialswerelookingaheadtoafuturemarkedbyhighervolumesofcross-borderfinancialflowsandheightenedcompetitionfromregionalexchangesandforeignmarketparticipants.Theyfearedthatforeignfinancialmarketparticipantscouldexitthecountryinacrisis.TheythereforesoughttoprepareMalaysianfinancialinstitutionsandmarketsforthiseraofincreasingglobalization.

Asitbecameclearthatthegovernmentwascommittedtosomekindofreform,marketparticipantspushedforclarityonitsprioritiesandtimehorizon,callingfor“anoveralllong-termstrategicplanthatwouldidentifykeyareasandtimeframesformarketenhancementanddevelopment.”4Thegovernmentdecidedthatanexplicitframeworkwasneededtoguidethe“orderlyandeffectivederegulationandliberalizationofthecapitalmarket”andtoidentifyandpursueareasofstrategiccompetitiveadvantagethatcouldbeexploitedinternationally.

Planning and Implementation of Capital-Market DevelopmentOverviewMalaysia’sCapitalMarketMasterplanwasdraftedtoguidethedevelopmentofMalaysia’scapitalmarketsduringthedecade2001-2010.TheCMPlaidoutastructuredandcomprehensivereformplanthatsoughttoestablishnewmarkets,assetclasses,andintermediariesandtostrengthenexistingones.TheCMPwasdevelopedwithaviewtowardestablishingdomesticcapitalmarketsthatwouldbeinternationallycompetitiveandmeettheneedsofdomesticissuersandinvestorsandfacilitatelong-termeconomicgrowthinlinewithMalaysia’snationaldevelopmentplans.

4SecuritiesCommissionofMalaysia,2001,p.5.


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Thisdesignandimplementationprocessdependedonanumberoffactors,includingconsensusamongrelevantpublic-andprivate-sectorstakeholdersontheneedforacomprehensivereformplan;anextensiveconsultationanddraftingprocess;clearlyarticulatedobjectivesandconcreterecommendations;well-definedresponsibilitiesandmeasuresofprogress;and,finally,animplementationprocessthatwassequencedandallowedforregularfeedbackandadjustment.DecisiontoProceedandtheCMPMandateThemandateforthedevelopmentoftheCMPwaspresentedtoandapprovedbytheministeroffinanceinthesummerof1999.5InAugust,theFinanceMinistryandtheSecuritiesCommissionjointlyannouncedthemandatetothepublic,andshortlythereaftertheCMP’stermsofreference(ToR)werereleased.TheToRidentifiedtheCMP’skeytasks,including:

! FormulationofacomprehensivevisionandprogramforthedevelopmentofMalaysia’scapitalmarkets

! Formulationofaframeworkfortheorderlyandeffectivesequencingofderegulationandliberalization

! IdentificationandmappingoutofthestrategicpositioningofMalaysia’scapitalmarkets,bothdomesticallyandinternationally6

TheCapitalMarketStrategicCommittee(CMSC)wasestablishedtooverseeandguidetheCMP’sdevelopmentinSeptember1999.7ItwasheadedbythechairmanoftheSCandincludedprivate-sectorrepresentativesfromlocalandinternationalcapitalmarkets.IntegrationwithOtherPlansandOverarchingVisionWhileundertakenindependently,theCMPwasdevelopedatthesametimeastheFinancialSectorMasterplan.ThedevelopmentoftheFSMPfollowedtherebuildingofthebankingsectorintheaftermathofthecrisis(seeBox1)andwasinitiatedandundertakenbyBNM.TheFSMPcoveredbanking,insurance,domesticdevelopmentfinancialinstitutions,andventurecapitalfinancing.InboththeFSMPandtheCMP,theultimateobjectivewastoestablishacompetitive,stableenvironmentfordomesticfinancialinstitutionstocompetewithforeign-ownedinstitutionsinamoreopenmarket,throughasequencedseriesofreforms.

BoththeCMPandtheFSMPweredevelopedwithreferencetoMalaysia’seconomicdevelopmentgoals,asoutlinedinthecountry’sVision2020planandinitsfive-yearOutlinePerspectivePlans.(SeeFigure1.)AmongMalaysianpolicymakers,therewasageneralconsensusthatthepurposeofthefinancialsectorwastobeanenablerofgrowth.Thatis,capital-marketdevelopmentwouldbepursuedwithaviewtowardsupportingthegrowthoftherealsectorandMalaysia’stransitiontoafullyindustrializedandhigh-incomeeconomy.

5SeeAppendix2forthefullCMPdevelopmenttimeline.6SecuritiesCommissionofMalaysia,2001,p.6.7SeeAppendix3forthefulllistofCMSCmembers.


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FIGURE1.Malaysia’sCMP,FSMP,andEconomicDevelopmentPlans

Source:SecuritiesCommissionofMalaysia

ThevisionforMalaysia’scapitalmarketswasthattheyshouldbe:

! INTERNATIONALLYCOMPETITIVEinallcoreareasnecessarytosupportMalaysia’sbasiccapitalandinvestmentneeds,aswellasitslonger-termeconomicobjectives

! AHIGHLYEFFICIENTconduitforthemobilizationandallocationoffunds! SUPPORTEDBYASTRONGANDFACILITATIVEREGULATORYFRAMEWORKthatenablesthecapital

markettoperformitsfunctionseffectivelyandprovideahighdegreeofconfidenceinitsusers8

ConsultationProcessandInteragencyCoordinationThroughoutthedraftingoftheCMP,theSCsoughttomaintainawideandbroadlyrepresentativeconsultationprocess,onethatengagedthegeneralpublic,relevantgovernmentagencies,electedofficials,andindustryparticipants.9

InOctober1999,theCMPlaunchedawebsitetokeepthepublicabreastofdevelopmentsandasameansofcollectingfeedback.Priortothefinalizationofmanyspecificreformmeasures,theSCdisseminatedconsultationpapersforpubliccommentandindustryfeedback.

8SecuritiesCommissionofMalaysia,2004,p.141.9SecuritiesCommissionofMalaysia,2001,p.7


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TheSCalsoconductedmoretargetedoutreachtodomesticfinancialinstitutions,relevantindustryandprofessionalbodies,marketparticipants,andinternationalacademicsandotherexperts.Inaddition,theSChiredprivateconsultantstoprovideresearchandindependentanalysis.

Suchconsultationswerecritical,notonlyforobtainingthesupportofkeystakeholders,butalsoforensuringthatthefinalplanaccuratelyreflectedandaddressedrealmarketconditions.Meetingswithlegislatorswereespeciallyimportant,giventhatmanyreformswouldrequirenewlawstobepassed.

TheCMPandtheFSMPweredraftedseparately,withlimitedconsultationbetweentheSCandBNM.Ingeneral,itisimportantforfinancialregulatoryauthoritiestocoordinateinthedevelopmentofrelatedplans,toensurethattherearenooverlapsorgapsincoverage.Inthiscase,however,thelegalauthoritiesoftheSCandBNMprovidedacleardemarcationofresponsibilitiesandjurisdictions.10

10Theonlyexceptiontothiswasventurecapital,whichwasinitiallyhandledbyBNM,butisnowregulatedbytheSC.

BOX1:RecapitalizingandReformingtheBankingSectorintheWakeoftheCrisisBailingOuttheBankingSystemandOtherReformsIntheinitialaftermathofthecrisis,theMalaysiangovernmentfocusedonrebuildingthebankingsectorthroughtheestablishmentofinstitutionstoresolvethehighlevelofNPLs,torecapitalizethebanks,andtorestructurecorporatedebt.Todealwithnonperformingloans(NPLs),thegovernmentsetupanasset-managementinstitution,theAssetManagementCorporation(knownasDanaharta).Danaharta’smandatewastotakeoverNPLsandthentomanageandmaximizetheirrecoveryvalue.RemovingNPLsfrombanks’balancesheetsenabledthebankstofocusonrebuildingtheircapitalandrestructuring,aswellastoundertakenewlendingtosupporttherevivalofeconomicgrowth.Duringthecrisis,theNPLraterosefrom3.8percentoftotalloansin1996to13.6percentin1998.DanahartawasmodeledaftertheKoreaAssetManagementCompany(KAMCO)andtheIndonesianBankRestructuringAgency(IBRA)(Randhawa,p.397).Danaharta’smandatewastofirstbuyNPLsfrombanks(withatargetofbuyingatleast70percentofallNPLsheldbyMalaysianbanks),therebyfreeingupthebanks’balancesheets,andthenattempttomaximizetheirrecoveryvalue(Sivalingam,p.396).Danahartaachievedafinalloanrecoveryrateof58percentandwasclosedin2005(Sivalingam,p.396),andtheNPLratewasreducedto9.5percent(Sivalingam,p.396).Torecapitalizethebankingsystem,thegovernmentestablishedtheDanamodalNasionalBerhad(Danamodal).Banks’risk-weightedcapital(RWC)hadbeenseriouslyerodedbythecrisis,downto10.1percentin1998.TheDanamodalinjectedRM7.1billionintothebankingsystem,andbythetimeitwasclosedin2003,theRWCratioforMalaysia’sbankingsectorwasbackupto13.2percent.Torestructurecorporatedebt,thegovernmentcreatedtheCorporateDebtRestructuringCommittee(CDRC).OutofrecognitionthatMalaysia’sbankruptcycodewasoutofdateandnotuptothetaskathand,theCRDC’smandatewastoserveasamediatorbetweencreditorsanddebtors.BythetimetheCDRCwasclosedin2002,ithadfacilitatedRM52.5billionofdebtrestructuring(Sivalingam,p.397).Thedirectcostsofthebailoutwereestimatedat5percentofGDP(Randhawa,p.397).Inadditiontothesemeasures,thegovernmentalsoundertookotherreformsofthebankingsector,includingconsolidation(Malaysia’shighlyfragmentedbankingsystemwasreducedfrom71institutionsto30,organizedin10bankinggroups),theadoptionoftheprinciples-basedregulatorysystempromulgatedbytheInternationalAccountingStandardsBoard(IASB),andtheintroductionofdepositinsurance(previously,bankdepositshadenjoyedonlyanimplicitgovernmentguarantee)(Sivalingam,p.398).


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Duringthisstage,interagencycompetitioncouldbechanneledeffectivelytowardmotivatingeachplanningteamtodoitsbest.CoordinationbetweentheSCandBNMbecamemoreimportantduringtheimplementationphase,particularlyforreformsthatinvolvedinternationaltransactions.FormulationandApprovalTheCMPsetoutsixobjectives,fromwhichflowed24strategicinitiativesand152specificrecommendations.(SeeTable1.)Fiveofthesixobjectivesfocusedonkeyaspectsofthecapitalmarkets,includingissuers,investors,marketinstitutions,marketintermediaries,andtheregulatoryframework.Thesixthobjectivefocusedondevelopingaparticularmarketsegment—Islamicfinance—whereMalaysiabelieveditcouldestablishaninternationalcompetitiveadvantage.Source:Cheong,Slide16

Withtheexceptionofthesixthobjective,thefocusoftheCMPwasondevelopingthecapitalmarketstocomplementMalaysia’seconomicgrowth,nottobeadriverofgrowthitself.OnlyinthecaseofIslamicfinancedidMalaysiaseektoestablishaninternationallycompetitiveservicesector.

TheCMPwaspresentedtoandapprovedbyFinanceMinisterY.B.TunDaimZainuddininOctober2000andreleasedtothepublicin2001.

BOX2:SummaryofKeyElementsofCMPDraftingProcessThekeyelementsoftheCMPdraftingprocesscanbesummarizedasfollows:

§ Relevantresearch

§ Countrycomparatorstudies

§ Consultationwiththeindustry

§ Consultationwithsubject-matterexperts

§ Considerationsoftaxincentivestosupportcertainmarketsandtransactions

§ Whererelevant,pilottestingofmeasures

§ Atappropriatetimes,submissionofoutputandrecommendationstosteeringcommittee

§ Disseminationofconsultationpapersbeforeimplementationofspecificmeasures

§ Securingbuy-inofstakeholderspriortofullimplementation

§ PresentationtotheMinistryofFinanceandlatertablinginParliamentinthecaseoflawsandregulations


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TABLE1:CapitalMarketMasterplan:ObjectivesandStrategicInitiativesObjectives StrategicInitiatives1.Issuers:Tobethepreferredfund-raisingcenterforMalaysiancompanies

1.1.Enhancetheefficiencyofthefund-raisingprocess1.2.Implementacomprehensiveprogramtodevelopthecorporatebondmarketasacompetitivesourceoffinancing1.3.Facilitatethedevelopmentoftheventurecapitalindustrytofinanceemerginghigh-growthcompanies1.4.Fosteraliquidandefficientmarketforthesecondarytradingofsecurities

2.Investors:Topromoteaneffectiveinvestmentmanagementindustryandamoreconduciveenvironmentforinvestors

2.1.Developastrongframeworkforcorporategovernanceandshareholdervaluerecognition2.2.Heighteneffortstoestablishavibrantandcompetitiveinvestmentmanagementindustry2.3Enhancetheroleofinstitutionalinvestorsintheprovisionandmanagementoffunds2.4Facilitateeffectiveriskmanagementbyactivelydevelopingthederivativesindustry2.5Facilitatetheintroductionofabroadrangeofcapitalmarketproductscateringtovariousrisk-returnprofiles

3.Institutions:Toenhancethecompetitivepositionandefficiencyofmarketinstitutions

3.1.RestructureMalaysianexchangesandclearinginstitutionstostrengthentheirefficiencyandcompetitiveness3.2.EnsureMalaysianexchangesarewellpositionedtorespondtochangingmarketdynamicsthroughtheadoptionofflexiblebusinessstructuresandcommercially-orientedstrategies3.3.Enhancetheefficiencyofthetrading,clearing,andsettlementstructure

4.Intermediaries:Todevelopastrongandcompetitiveenvironmentforintermediationservices

4.1.Fosterconstructivecompetitionthroughthederegulationofservices,products,andfixedfeestructures4.2.Developstrongfull-servicebrokerstoprovideacompetitivemarketforintegratedfinancialservices4.3.EnsureMalaysianintermediationservicesareanchoredonappropriateprudentialstandards,withhighlevelsofbusinessconductandprofessionalskills4.4.Adoptapragmaticprogramforliberalization,supportedbyappropriatesafeguards

5.Regulation:Toensureastrongerandmorefacilitativeregulatoryregime

5.1.Movetowardamarket-basedsystemofregulationforcapitalmarketactivities5.2.Ensureregulatoryparityandconsistencybetweenallinstitutionsandparticipantsconductingsimilarcapitalmarketactivities5.3.Ensurestrongenforcementofregulationsgoverningthecapitalmarket5.4.Enhancecapacityformaintainingsystemicandfinancialstability

6.CompetitiveAdvantage:ToestablishMalaysiaasaninternationalIslamiccapital-marketcenter

6.1.FacilitatethedevelopmentofawiderangeofcompetitiveproductsandservicesrelatedtotheIslamiccapitalmarket6.2.CreateaviablemarketfortheeffectivemobilizationofIslamicfunds6.3.Ensurethereisanappropriateandcomprehensiveaccounting,tax,andregulatoryframeworkfortheIslamiccapitalmarket6.4.EnhancethevaluerecognitionoftheMalaysianIslamiccapitalmarketinternationally

Source:SecuritiesCommissionofMalaysia


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SequencingTheSCchosetosequencethereforms(asopposedtotakinga“bigbang”approach),withtheCMPbrokendownintothreephasesover2001-2010.(SeeTable2.)Inthefirstphase,reformsfocusedonenhancingdomesticcapacity.Inthesecondphase,theyworkedtointensifycompetitionamongdomesticplayers.Inthethirdphase,themarketswerefurtheropenedtoforeigncompetition.

TABLE2:SequencingFramework

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Strengthendomesticcapacityanddevelopstrategicandnascentsectors

Furtherstrengthenkeysectorsandgraduallyliberalizemarketaccess

Furtherexpandandstrengthenmarketprocessesandinfrastructurewiththegoalofbecomingafullydevelopedcapitalmarketandenhancinginternationalpositioninginareasofcomparativeandcompetitiveadvantage

Phase 1 Phase 2 Phase 3 Source:SecuritiesCommissionofMalaysia,CapitalMarketMasterplan,p.272

Thesequencingframeworkwasintendedtotakeintoaccountthecurrentstatusofmarketparticipantsandinstitutionsandtoensurethattheywerereadyforliberalizationandderegulation,toaccountformarketstability,toensurethatderegulationdidnotcompromisetheintegrityofthemarkets,andtorespecttheavailabilityofresources.11Somereformsthatweredeemedespeciallyurgent(suchastheconsolidationofthestockbrokingindustry)wereinitiatedbeforetheCMPwasfinalized.Specificreformmeasureswereassignedtargetsandtimelines,withanunderstandingthatsometargetsweresequentialwhileotherswereinterrelatedandneededtobedevelopedconcurrently.Implementation,ProgressMonitoring,Reporting,andFeedbackTheCMPspecifiedclearlinesofauthorityandresponsibilityforimplementationandmonitoringoftheplan.(SeeFigure2.)TheSC,whichboreultimateresponsibilityfortheCMP’simplementation,incorporatedtheCMP’sobjectivesandstrategicinitiativesintoitsownbusinessplan.ThereformprocesswasmonitoredbyanImplementationTaskForcewithintheSC,whichservedasthesecretariatfortheentirereformprocess.Itspurposewastooverseeandfacilitatecoordinationamongtheworkingcommitteesandotherstakeholders,resolveissuesofdisagreement,monitortheprogressandeffectivenessofnewmeasures,andmanagethecommunicationsprogram.

Workingcommitteesboreresponsibilityforimplementationattheoperationallevel.ThesecommitteescomprisedmarketparticipantsandrepresentativesofindustryassociationsaswellasstafffromtheSC.



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MinisterofFinance

BankNegaraMalaysia

SecurijesCommission

ImplementajonTaskForce

VariousWorkingCommikees

ExchangesClearinghouses&DepositoryInsjtujons

OtherMarketParjcipants

CapitalMarketAdvisoryCouncil

Treasury

Inthecaseofcorporatebondmarketdevelopment,thealreadyexistingNationalBondMarketCommitteewastapped.

ACapitalMarketAdvisoryCouncil(CMAC),whichincluded15prominentmarketparticipantsandbusinesses,wasappointedtoprovidetheSCwithindependentprogressassessmentsandrecommendationsforwheretheCMPneededtobeadjustedbasedonmarketdevelopments.12

FIGURE2:ImplementationStructure Source:SecuritiesCommissionofMalaysia,CapitalMarketMasterplan,p.266

Finally,theCMPoutlinedameansfortrackingprogressandadjustingplansbasedonfeedbackandonnewmarketdevelopments,bothdomesticallyandabroad.(SeeFigure3.)Beforetransitioningfromonephasetoanother,itwasseenasimportantthattheprerequisitetargetsbemet—orelsethetransitionwouldbedelayed,lesttheplanbeimplementedoutofsequence.Thiswasdonetoensurethattheliberalizationprocessdidnotcompromisemarketintegrityorinvitefinancialinstability.

Further,itwasanticipatedthatthecapitalmarketswouldcontinuetoevolveoverthecourseoftheten-yearimplementationschedule,sopolicymakerswereencouragedtoperiodicallycheckthatthereformstheywereimplementingwerestillrelevantanduseful.

12SeeAppendix3forthefulllistofCMACmembers.


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FIGURE3:CMPImplementationProcess

Source:SecuritiesCommission,Malaysia,CapitalMarketMasterplan,p.265

Source:Cheong,Slide17

Issuers: Improving Access to Capital Markets, With a Focus on Domestic Corporate Bond Market DevelopmentOverviewInordertomakeMalaysia’seconomylessdependentonbankfinancing,akeyfocuswastoenhancetheattractivenessofthecapitalmarketstopotentialissuersbystreamliningtheissuanceprocess,andenablingtheintroductionofnewproductcategoriesandtypesofissuers.TheCMPwasespeciallyfocusedondevelopingthedomesticcorporatebondmarket,whichhadgrownonlyslowlyinthe1990s.

ApprovalofMasterplan

ImplementRecommendations

MonitorProgress UpdateMasterplan

ReportProgress

-MinisterofFinance -SC-Othergovt.agencies-Relevantmarketinstitutionsandparticipants

BOX3:SummaryofCMPImplementationSuccessFactors§ Asafirstpriority,meetpre-conditionsbeforestartingtoimplementtheCMP.Marketsmustcontinue

tofunctionreasonablywellwhileplanisbeingimplemented§ Introducestructuredimplementationmechanism,withafull-timetaskforceintheSCandbegin

consultationprocesses§ MasterPlanimplementedinstages,withcheckpoints.Successateachstageisaprerequisitebefore

movingontothenextstage§ Provisioninlawdoesnotrequireimmediateimplementation;implementwhenmarketreadinessis

established§ Controltheimplementationprocess.Donotlosesightofoveralleconomicdevelopmentandwork

withincountry’sspecificsocio-economiccontext§ Throughoutimplementation,understandthefinanciallandscape,identifywhatisbestforthecountry

inthechangingenvironment:• Seekviewsofstakeholdersthroughdiscussionsandworkshops• Highlightareasofweaknessthatrequirefurtherdevelopment• Identifyimprovementsincapitalmarketinfrastructureforneedsofthetransforming

economy• Buildconsensusandbuy-inofindustry• Externalconsultantbroughtintoassistininformationgatheringanddevelopingacoherent

thinkingmethodology

§ Studyexperiencesofothercountriesonthedifferentissues


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TheChallengeThroughthe1980s,Malaysia’scapitalmarketsweredrivenprimarilybygovernmentdebtissuestofundpublicdevelopmentexpenditurethatcouldnotbemetfromgovernmentrevenues.13Atthistime,governmentdebtaccountedforthree-quartersofthefundsraisedinMalaysia’scapitalmarkets.14Theprivatizationprogramofthelate1980sandearly1990shelpedtodeepentheequitymarkets.However,Malaysia’scorporatebondmarketwasslowtodevelop.WhentheAsianfinancialcrisishit,Malaysia’sprivatesectorwasstillalmostwhollyreliantonthebankingsystemfordebtfinancing.DeepeningtheIssuerBasebyImprovingAccess:CentralizingRegulatoryAuthorityTostreamlinetheissuanceprocessandreducethetimetoissue,thegovernmentcentralizedresponsibilityforregulatingthecorporatebondmarketwiththeSC,givingitsoleapprovalandregisteringauthority.15Previously,regulatoryresponsibilityhadbeenspreadoutoveranumberofagencies.Centralizingregulatoryauthorityalsoservedtoinstillasenseofownershipinoneagency,whichthegovernmenthopedwouldenable“greaterfocusonthedevelopmentofafacilitativeregulatoryframeworktoaddresstheurgentfundingneedsoftheprivatesector.”16DeepeningtheIssuerBasebyImprovingAccess:ReformingtheIssuanceApprovalProcessToencouragecorporationstoraisedebtfinancinginthecapitalmarkets,theMalaysiangovernmenttookstepstosimplifytheissuanceprocess.AtthetimeoftheCMP’spublication,thetime-to-marketforbondissueswasninetotwelvemonths.17Raisingfundsinthecapitalmarketsistime-sensitive,andsuchlongdelays,especiallywhencoupledwithuncertaintyaboutapproval,canmakethisavenueunacceptable.

InJuly2000,theSCreleasedtheGuidelinesontheOfferingofPrivateDebtSecurities(PDSGuidelines).Theguidelinesremovedand/orreducedanumberofrequirements,includingunderwritingrequirements,minimumcreditrequirements,andrestrictionsontheuseofproceeds.Italsoshiftedtoapost-vettingapprovalsystem,underwhich“theissuerandtheprincipaladvisorneededonlytofileadeclarationofcompliancewiththePDSGuidelines.”Thisreducedtheapprovalbottleneck,allowingtheSCtoreducethetimetomarketforbondissuestofourteenworkingdays.Lastly,theSCalsointroducedashelf-registrationscheme,whichgavecertainapprovedissuersevenmorecontroloverthetimingofissuance.BroadeningtheIssuerBase:IntroducingNewProductCategoriesInadditiontodeepeningtheissuerbasethroughstepped-upissuanceofgovernmentsecuritiesandprivatedebtsecurities,Malaysiaalsodevelopedframeworksthatencouragedthedevelopmentofnewproductcategories,includingrealestateinvestmenttrusts(REITs)andothermortgage-backeddebt

13SecuritiesCommissionofMalaysia,2001,p.9.14SecuritiesCommissionofMalaysia,2001,p.9.15SecuritiesCommissionofMalaysia,2004,p.163.16SecuritiesCommissionofMalaysia,2004,p.163.17SecuritiesCommissionofMalaysia,2004,p.163.


14

instruments;Islamicbonds(includingtheworld’sfirstconvertibleIslamicbond);andasset-backedsecurities(ABS).

Toencouragethedevelopmentofadomesticsecuritizationandstructuredproductsmarkets,theSCpublishedGuidelinesontheOfferingofAsset-BackedSecurities(2001)andGuidelinesontheOfferingofStructuredProducts(2003).Theguidelinesweredisclosure-basedandintroducedframeworksformorestreamlinedissuanceprocedures.18

TheMalaysiangovernmentalsointroducedtaxincentivestopromoteABS,includingtaxdeductionsforexpensesincurredintheissuanceofABSandtaxneutrality(e.g.,ABSwouldbetaxedthesameasothersecurities).Intheensuingthreeyears,theSCapproved13issuesvaluedatRM7billion.19BroadeningtheIssuerBase:ForeignIssuersMultilateraldevelopmentbankswerepermittedtoissuelocalcurrencybondsin2004andmultinationalcorporationsin2006.Malaysiahasbeensuccessfulinencouragingforeigncorporationstoissuedebtonitsdomesticmarket.SouthKoreanfirmswerethefirsttoraisefinancingontheMalaysianbondmarket—theywouldusuallyswaptheissuanceproceedsintoU.S.dollarsandthenintoKoreanwon.

Investors TheChallengeAsof1999,Malaysia’sinstitutionalinvestors,whichincludedpensionfunds,insurers,andunittrusts,managedarelativelysmallshareofthecountry’ssavings.TheycontrolledjustRM280billion—halfofthebankingsector’sRM560billion.Investmentmanagementfundswereheavilyconcentratedtoo,bothinstitutionally(morethanhalfwasmanagedbyasingleinstitution—thegovernment’sEmployeeProvidentFund)andintermsofassetdiversification(mostfundswereinvestedingovernmentbondsandbankdeposits).

TheSCperceivedthatastheeconomygrewandsavingsrose,institutionalinvestors’assetswouldgrowtoo.(Malaysiathenenjoyedoneofthehighestsavingsratesintheworld.)TheSCwantedtofacilitatetheirgrowthtobenefitthenation’scapitalmarkets.Atthesametime,theSCworriedthatthisgrowthwouldput“increasedpressure”onthecapitalmarketstoprovideattractivereturnsandtoofferawiderandmoresophisticatedarrayofproductsandservices.20Withfallingtransactioncostsandreducedbarrierstocross-borderfinancialflows,domesticinvestorsmightincreasinglyturntomarketsabroadiftheirneedsandpreferencescouldnotbemetathome.21

TheSCbelievedthatMalaysia’scapitalmarketscouldremainattractivetodomesticinvestorsifdomesticcompanieswereseenasgoodinvestmentsandifinvestorshadawiderarrayofproductsand

18SecuritiesCommissionofMalaysia,2004,pp.165-167.19SecuritiesCommissionofMalaysia,2004,p.165.20SecuritiesCommissionofMalaysia,2001,p.32.21SecuritiesCommissionofMalaysia,2001,p.32.


15

servicestochoosefrom.Tothisend,theCMPfocusedonregulationsmeanttoenhancecorporategovernanceandshareholderprotectionandonliberalizingtheinvestmentmanagementindustry.CorporateGovernance,ShareholderProtection,andShareholderActivismPoorcorporategovernancewaswidelyseenasoneofthecausesoftheAsianfinancialcrisis.22Assuch,theMinistryofFinanceinitiatedcorporategovernancereformin1998,beforetheCMPwasdrafted.TheFinanceCommitteeonCorporateGovernance,whichtheSCheaded,wasformedin1998.In1999,itreleasedasetofmorethan70recommendationsforimprovingcorporategovernance,includingthedraftingofaprescriptivecodeofbestpractices,modeledontheUK’sHampelCommittee;measurestomakecorporateboardsmoreresponsivetoshareholders;bettertrainingandeducation;andlawstobetterprotectminorityshareholders.23Thecommitteealsomaderecommendationstoimprovedisclosureandtransparency,includingguidelinesonprospectusregulationandenablingcivillawsuitsforinsufficientormisleadingdisclosure.24

TheCMPfurtherstrengthenedminorityshareholders’rightsanddisclosurerequirements.TheMalaysiangovernmentpassedadditionalcorporategovernancelegislationinthefollowingyears,includingtheAnti-CorruptionCommissionBill(2008)andtheWitnessProtectionBill(2004).

TABLE3:CorporateGovernanceReformsinMalaysia

1999-2000 2001 2004 2007 2009 2010 High-levelFinanceCommitteeReportonCGCodeonCGCreationofMinorityShareholderWatchgroup

CMP1CGrequirementsinKLStockExchangeListingRequirements

Whistle-blowingprovisionintroducedinSecuritiesLaw

Qualificationcriteriafordirectors'auditcommitteestrengthenedEnforcementpowersforcivilandadministrativeactionsexpandedMSWGguideforbestpracticesforinstitutionalstakeholders

SC'senforcementpowersstrengthenedbyamendmentstotheCompaniesActof1965

AuditOversightBoardcreatedSecuritiesIndustryDisputeResolutionCenterestablished

Source:OECD,p.162

Atthesametime,becauseinstitutionalinvestorscontrollargepoolsofmoney,theirparticipationwasseenascrucialtopromotinghigherstandardsofcorporategovernance.25TheSCsoughttopromoteshareholderactivismamonginstitutionalinvestorsthroughtrainingandthedevelopmentofasetofbestpractices,publishedin2007.

22Randhawa,p.388.23SinghandYusof,pp.26-27.24SinghandYusof,p.27.25SecuritiesCommissionofMalaysia,2001,p.50.


16

BOX4:Malaysia’sUnitTrustIndustryMalaysia’sassetmanagementindustrywasintroducedin1959,anearlybeginningcomparedwithothermarketsatsimilarstagesofdevelopment.However,onlyfivenewcompanies,withatotalofeighteenfunds,wouldbeestablishedoverthenexttwentyyears(SinghandYusof,p.12).Anumberofreformswereintroducedtoacceleratethedevelopmentoftheasset-managementindustry,includingtaxincentives,theliberalizationofforeignownershipinstockbrokingandfund-managementcompanies,easingoflimitsthatpensionandprovidentfundscaninvestinequities,openingtoforeignfundlistingandinvestments.First,theywidenedaccesstounittrustsbyexpandingdistributionchannels.Originally,unittrustsweremarketedanddistributedbyagentsoftheunit-managementtrustcompanies,whichwereconcentratedinthecities.Thismeantmanymarkets,especiallyinsmalltowns,lackedaccesstounittrusts.In2000,bankswereauthorizedtodistributeunittrusts,aswerepostoffices.Regulationswerepassedtoallowunittruststobesoldonline.In2007,theSCallowedlicensedcorporateunittrustadviserstodistributeunittrusts(SC,p.20).Second,theintroductionofShariah-compliantunittrustfundsmadetheseinvestmentsacceptabletoabroaderrangeofpeople.Third,fundswereallowedtoinvestabroadstartingin2005,givingMalaysianinvestorstheabilitytodiversifytheirportfolios.Finally,theyallowedforeignassetmanagementfirmstocompeteintheMalaysianmarket.Since2009,foreignfirmshavebeenallowedtoestablishwholesalefundmanagementcompanieswith100percentforeignownership;intheretailsector,theforeignownershipceilingwasraisedto70percent(OECD,p.224-25).

ExpandingtheRangeofProductsandServicesInstitutionalinvestorsweregivengreaterflexibilityinhowtheymanagedtheirinvestments.Theywouldbeabletoinvestinunlistedfundsintheexpectationthatthiswouldservetodeveloptheprivateequityandventurecapitalindustries;theywouldbeallowedtouseexchange-tradedderivatives;andtheywouldbeallowedtooutsourcefundmanagementtothirdparties.

ForeignInvestorsandInternationalIntegrationMalaysiade-internationalizedtheringgitduringtheAsianfinancialcrisis.Itmovedbacktowardaflexibleexchangerateregimein2005andhasgraduallyliberalizedtheforeignexchangeadministrationrules,whichfacilitatelargertradeandFDIflows.ForeignparticipationroseintheMalaysianequitiesandbondmarkets.Foreigninvestorsheld18.5percentofsecuritieslistedonBursaMalaysiaasof2011.26

Market Institutions: Modernizing Equity and Derivatives ExchangesTheChallenge:StagnationintheEquitiesandDerivativesMarketsMalaysia’sstockmarketdatesbacktothecolonialera,butthemodernexchange,theKualaLumpurStockExchange,wasestablishedin1973.Inthe1980sand1990s,theexchangesawitsinfrastructure

26OECD,p.223.


17

modernized.Inthelate1990s,MalaysiaalsointroducedMesdaq,anOTCmarketexchange,topromotehigh-growthtechnologycompanies.

AmongthecountriesofSoutheastAsia,Malaysiawasearlytodevelopmarketsinderivatives.TheKualaLumpurCommodityExchange(KLCE)wasestablishedin1980—thefirstsuchexchangeinSoutheastAsia.TheKualaLumpurOptionsandFinancialFuturesExchange(KLOFFE)wasestablishedin1990.Finally,theMalaysiaDerivativesClearingHouse(MDCH)wasestablishedin1995.

Malaysia’sequitymarketgrewsubstantiallyintheearly1990s.Severalmajorprivatizationscontributedtotheequitymarket’squintuplinginfiveyears,fromRM132billionin1990toRM807billionin1996.27However,duringthefinancialcrisis,Malaysia’sstockmarketcapitalizationfellbyhalf,andmarketliquiditywasalsodramaticallyreduced:Fromapre-crisispeakof230percentofGDPin1993,tradingfellto40percentin1998andonlyslowlyrecovered.Foreignportfolioflowsalsofelldramatically.

TheSCwasconcernedwiththeimpactofthecrisisontheequitymarket,aswellastheexchange’sbroadercompetitiveness.TheSCnotedthat“aslargeissuersseekgreaterliquidityandeaseofaccesstonewcapital,exchangesareincreasinglycompetingamongsteachothertoincreasetheirmarketshare.”28ConsolidationoftheExchangesAfocusoftheCMPwastoimprovethecompetitivenessandefficiencyofmarketinstitutionsandtoenhanceliquidityandefficiencyinthesecondarymarket.

LookingatMalaysia’sownexchanges,theCMPexpressedconcernthat“thecurrentexistenceofseveralmarketinstitutionsasseparateentitiesresultsinafragmentationofliquidityanddispersestheoverallcapacity,efficiency,andmarketingpositionofMalaysianmarketinstitutions.”29TheCMPnotedthatmanyexchangesabroadwererespondingtocompetitionthroughconsolidationand/orstrategicalliances.

Thetheorywasthatmergingexchangescouldenhanceliquidity,lowercosts,andmakeiteasiertointroduceandsupportnewproducts.AsRajitSingh,theexecutivechairmanoftheSC,hasnoted,consolidationcan“improveeconomiesofscaleandscopebysharingmarketinfrastructureandintegratingcommonoperationfunctionsacrossthemergedinstitution.”30Asingleexchangewillfinditeasier,throughitsenhancedprominenceandnegotiatingstrength,to“pursuestrategicalliancesandotherinternationalbusinessstrategies.”31

27SecuritiesCommissionofMalaysia,2001,p.10.28SecuritiesCommissionofMalaysia,2001,p.37.29SecuritiesCommissionofMalaysia,2001,p.39.30SinghandYusof,p.20.31SinghandYusof,p.20.


18

BursaMalaysia

BursaMalaysiaSecurijes100%

BursaMalaysiaDerivajves75%

BursaMalaysiaDerivajvesClearing100%

LubuanFinancialExchanges100%

BursaMalaysiaSecurijesClearing100%

BursaMalaysiaDepository100%

BursaMalaysiaNominees100%

BursaMalaysiaInformajon100%

BursaMalaysiaBonds100%

BursaMalaysiaIslamicServices100%

Finally,theSCbelievedthatasingleexchangewouldmakeiteasiertointroducenewproductsandservicesandtodevelop“marketsegmentsthatdonotpresentlyhavesufficientdepthtosupportseparateexchanges.”32

In2001,BursaMalaysiawasformedfromthemergerofthetwoequitiesexchanges(KLSEandMesdaq),threederivativesexchanges(KLOFFE,COMMEX,andMME),threeclearinghouses,andonecentraldepository.33Today,BursaMalaysiaisaholdingcompanyforallMalaysianinstitutionsoperatingintheMalaysianequityandderivativesmarkets(IMF,MarketInfrastructure,p.8).BursaMalaysiahastwomainsubsidiaries:BursaMalaysiaSecurities(BMS)isawhollyownedsubsidiaryandisthestockexchangewhereallequities,ETFs,warrants,andREITsaretraded,alongwithcommercialpaperandIslamicsecurities.34Theothersubsidiary,BursaMalaysiaDerivatives,inwhichtheChicagoMercantileExchangemaintainsa25percentequitystake,isthefuturesandoptionsexchange.

FIGURE4:BursaMalaysiaOrganizationStructure(Current)

Source:BursaMalaysia

32SinghandYusof,p.20.33SecuritiesCommissionofMalaysia,2004,p.136.34Withtheexceptionofcommercialpaper,allotherfixed-incomesecuritiesaretradedontheBNM-managedsystem,theFullyAutomatedSystemforIssuing/Tending(FAST).


19

DemutualizationofExchangesAfterconsolidatingtheexchangesunderoneorganization,theCMPturnedtothedemutualizationoftheexchanges.Demutualizationistheprocessofconvertingamember-owned(mutual),nonprofitexchangeintoaninvestor-owned,for-profitcorporation.35Demutualizationwasseentoofferseveralpotentialbenefits.First,thesaleoftheexchangecouldbringincapitalwhichcouldbeusedtoinvestinnewtechnologyandexpandthecapacityoftheexchange.Second,demutualizationcouldleadtoenhancedcorporategovernance,astheexchangewouldnowberesponsibleforcreatingvalueforitsshareholders.Finally,andrelatedly,beingprofit-drivencouldpotentiallyincentivizetheexchangetofocusonservingtheinterestsofallitsstakeholdersand“notsimplyreflectthemajorityvoteamongdifferent-sizedbrokers.”36

TheMalaysianParliamentpassedtheDemutualization(KualaLumpurStockExchange)Act2003,whichcameintoforceonJanuary5,2004.BursaMalaysiawaslistedonMarch18,2005.

Strengthening Intermediaries: Consolidating and Reforming the Stockbrokerage IndustryTheChallenge:LackofCompetitionandLowLiquidityMarketmakerscontributetothesmoothfunctioningofbothprimaryandsecondarymarketsbyprovidingliquidityservicesandreducingsearchcosts.37Marketmakersincludesecuritiesdealers,whomaintaininventoriesofsecuritiesandstandreadytobuyorsellatquotedprices(andprofitfromthespread)andbrokers,whoactonbehalfofbuyersandsellers(andprofitfromcommissions).

InMalaysia,the“limitedintensityofcompetition”withinthestockbrokingindustrywasseenasacauseoflowliquidityandalsoofalackofinnovationinproductsandservices.38Theproblem,astheSCsawit,wasabrokerageindustrythatwasfragmentedandoverlyprotected.Asof2000,Malaysiahad62licensedstockbrokerages,32futures-brokingcompanies,and735futuresbrokers’representatives.39Firmswerewidelydispersed,owingtoagovernmentpolicythatlimitedtheconcentrationofbrokeragefirmsbygeographicregion.40Theindustrywasalsoshelteredbyanumberofbarrierstoentry,includingstrictlicensinganddomesticownershiprequirementsandfixedbrokeragecommissions.41

ThecrisishadrevealedthefragilityofMalaysia’sstockbrokerageindustry.Manywerepoorlygovernedanddidnothaveproperriskcontrolsinplace.TheSCdeemedtheindustrytobetooinflexibleand,becauseofitsdependenceonbrokeragefees,tooexposedtomarketdownturns.42Itdeterminedthattheindustryneededtobeconsolidatedandliberalized.

35Ferhani,p.30.36SinghandYusof,p.21.37CarmichaelandPomerleano,p.10.38SecuritiesCommissionofMalaysia,2004,p.223.39SinghandYusof,p.5.40SinghandYusof,p.13.41SinghandYusof,p.24.42SecuritiesCommissionofMalaysia,2001,p.34.


20

ConsolidationandLiberalizationConsolidationwithinthestockbrokingindustry,theSCbelieved,“wouldincreaseeconomiesofscaleandscope;createlarger,better-capitalized,andbetter-managedinstitutions;andultimatelyprovideinvestorswithhigher-qualityservicesatreasonablecost.”43In2000,theSCreleasedthePolicyFrameworkforStockbrokingIndustryConsolidationandtheReductionofTransactionCosts,whichoutlinedthestrategyforfosteringmergersandacquisitionsintheindustry.Italsoestablishedincentivesforthecreationofanewclassoffull-service“universalbrokers”(UBs).Universalbrokerswouldbeallowedtoofferamuchwiderrangeofintermediationservices,including“corporatefinanceservices,futuresbroking,fundmanagement,futuresfundmanagement,anddealingindebtsecurities.”44TheSCbelievedthatsuchfirmswouldbebetterpositionedtostanduptointernationalcompetitionasMalaysia’scapitalmarketswereliberalized.FirmsthatwishedtobecomeUBswererequiredtomergewithatleastthreeotherbrokerages.45FirmsthatdidnotintendtobecomeUBswerestillrequiredtomergewithatleastoneotherfirm.Bytheendof2003,sixUBshadbeenestablished.46

TheSCalsoderegulatedthestockbrokingindustry’sfixed-feestructure,aswellasthegeographicrestrictionsonbranching.Finally,inanefforttofurtherspurcompetition,theSCliberalizedforeignparticipationinthestockbrokingindustry.

43SinghandYusof,p.25.44SecuritiesCommissionofMalaysia,2004,p.229.45SinghandYusof,p.25.46SecuritiesCommissionofMalaysia,2004,p.230.

BOX5:ForeignCompetitionAllowingforeignentrymaybenefitcapitalmarketdevelopmentthrough:

§ Accesstoforeignexpertise§ Accesstoforeigncapital§ Risksharing§ Enhancedcompetition(Carmichael,p.213)

Thisapproachalsoposesrisks,oneofwhichisthatforeignfirmswillutterlydominatelocalfirms,andsolocalinstitutionswillneverdevelop(Carmichael,p.213).Further,ifforeignfirmsdonotemploydomesticresidents,thedesiredskillstransferwillnottakeplace(Carmichael,p.213).Somecountriesacceptforeigndominanceofatleastsegmentsoftheircapitalmarkets,reasoningthathavingdevelopedcapital-marketinstitutionsismoreimportantthanwhetherthoseinstitutionsaredomesticorforeign.Whetherornottoopenupdomesticcapitalmarketstoforeigncompetitionissubjecttogovernmentdiscretionregardingthetrade-offsmentionedabove.Inkeepingwiththemultilateralcommitmentsithadenteredinto(includingthegeneralAgreementonTradeinServicesandtheASEANFrameworkAgreementonServices),Malaysiabegantoliberalizerulesonforeigninvolvementinfinancialservicesbeginninginthemid-1990s.TheCMPhelpedMalaysiatofurthermoveawayfromprescribedhardlimitsonforeignownershipandtowardassessmentsthatemphasizedprudentialandbest-interest-of-Malaysiacriteria.Malaysiahasnowsubstantiallyincreasedforeigninvolvementinassetmanagementandstockbroking.


21

Developing an Internationally Competitive Islamic Financial CenterTheOpportunity:EarlyDevelopmentoftheIslamicCapitalMarketMalaysia’sIslamiccapitalmarkettracesitshistorybacktothePilgrimsFundBoard.Establishedinthe1960stohelpMalaysianMuslimssavefortheirpilgrimagetoMecca,thefundalsoofferedinvestmentstailoredforMusliminvestors.

TheIslamicBankingAct(1983)andtheTakafulAct(1984)establishedthelawsthatwouldgovernIslamicbankingandinsuranceinMalaysia,layingthefoundationsforthebroaderdevelopmentofMalaysia’sIslamicfinancialcenter.

TheIslamiccapitalmarketsweregivenamajorpushwiththeestablishmentoftheSCin1993,whichwasgivenamandatetosuperviseanddevelopthem.Throughthe1990s,theSCworkedwithIslamicjuristsandmarketpractitionerstoidentifypubliclylistedcompaniesthatadheredtoIslamicprinciples(buildingoffofearlierworkbytheBNM),aswellastodevelopaseriesofguidelinesrelatedtothedevelopmentofIslamicfinancialreportingandaccountingprinciples,investorguidance,andsoon.By1997,25percentofcorporatebondsissuedwereShariah-compliant,andIslamicunittrustsaccountedfor12percentoftheindustry’sassetsundermanagement.MorethanhalfofthecompanieslistedonMalaysia’sstockexchangewerelistedasincompliancewithIslamicprinciples.Finally,bythelate1990s,fourconventionalstockbrokerageshadIslamicwindowsandonenewIslamicstockbrokeragehadbeenestablished.TheOpportunity:IdentifyingaCompetitiveAdvantageObservingthatmarkets“areincreasinglyfocusingonnicheandvalue-addedmarketsegments,”theCMPidentifiedtheIslamiccapitalmarketasanareawhereMalaysiahadapotentialinternationallycompetitiveadvantage.47

Thisassessmentwasbasedonthefollowingobservations:

! Asaresultofstrongeconomicgrowth,Malaysia’spopulation,whichwasroughly60percentMuslim,wascharacterizedbyrisingaffluenceandahighsavingsrate,whichprovidedthecountrywithastrongdomesticbaseonwhichtoestablishIslamiccapitalmarkets.

! MalaysiaislocatedinthemostpopulousMuslimregionintheworld(therearetwiceasmanyMuslimsinSouthandSoutheastAsiaasintheMiddleEastandNorthAfrica),whichmeantithadalargepoolofprospectivecustomersinthenear-abroad.

! Furtherabroad,risingoilpriceswereleadingtoanincreaseinMuslim-controlledwealthintheMiddleEast.

! Finally,Malaysia’sdevelopmentofitsdomesticIslamiccapitalmarketgaveitacriticalmassofexistingfundsandexpertise,nottomentionalargepooloffinancialservicesprofessionalswhowerebothMuslimandEnglish-speaking.



22

Developinga“viableparallelmarketforfinancingandinvestment”wouldbeamajorchallenge,theCMPnoted,as“thecurrentrangeofavailableandliquidIslamic-basedproductsissmallincomparisonwiththebroaderconventionalcapitalmarket.”48However,thelimitedsupply,incombinationwiththeestimated“latent”demand,presentedanattractiveopportunityfor“localindustryplayerstoestablishtheirnicheinthebusiness,aswellasparticipateinalargeglobalmarketwithrelativelyfewplayers.49Intheearly2000s,MusliminvestorshadanestimatedUS$800billioninvestedgloballyinconventionalbanks.BuildingontheMomentumofthePreviousDecadeTheCMPissued13recommendationsdesignedtobuildonthemomentumofthepreviousdecade.ThisincludedfurtherstrengtheningthefinancialreportingandaccountingtreatmentsofIslamicsecuritiesandinvestmentproducts,whichledtothedevelopmentoftheworld’sfirstIslamicaccountingstandards.TheCMPalsocalledfornewregulationsonIslamicbondsandunittrusts.

TheseeffortswerecomplementedbychangestotheMalaysiantaxcodein2003,whichprovidedtaxincentivestofurtherdeveloptheIslamicbondmarket.

Ontheinternationalfront,theMalaysiangovernmentestablishedtheMalaysiaInternationalIslamicFinancialCenter(MIFC),whichwasdesignedtostrengthenlinkagesbetweenKualaLumpurandotherIslamicfinancecenters.ThecenterfocusesonIslamicbondorigination,Islamicwealthmanagement,internationalIslamicbankingandinsurance,andeducationandtraining.50In2007and2009,Malaysiaenteredintomutual-recognitionagreements(MRA)withtheUAEandHongKongonthecross-bordermarketinganddistributionofIslamicfunds.51

TheMalaysianIslamicfinancialsector’sshareofnationalGDPincreasedfrom0.3percentin2000to2.1percentin2009.52Malaysia’sIslamiccapitalmarketsgrewatanannualrateof13.6percentfrom2000to2010,triplinginsize—theyarenowthelargestintheworld.53AnumberofinternationalissuershaveraisedfundsinMalaysia’sIslamicbondmarket,includingtheInternationalFinanceCorporation,theGulfInvestmentCouncil(basedinKuwait),andtheNobleGroupinHongKong.54

Cultivating Human Capital Asfinancialsectorsdevelop,theyrequireworkerswithmorespecializedskillssets.Inmanycountries,insufficienthumancapitalremainsthebiggestobstacletofurthercapital-marketdevelopment:“Oneofthemostpressingchallengesconfrontingemergingmarketsisthelimitedavailabilityoffinancialsector

48SecuritiesCommissionofMalaysia,2001,p.53.49SecuritiesCommissionofMalaysia,2001,p.53.50SecuritiesCommissionofMalaysia,2014,p.68.51SecuritiesCommissionofMalaysia,2014,p.68.52OECD,p.217.53OECD,p.217.54SecuritiesCommissionofMalaysia,2014,p.65.


23

skillsandtheurgentneedtodevelophumancapitalbyestablishingabaseofcapableprofessionalssuchasbankers,accountants,lawyers,appraisers,analysts,andinsolvencyexperts.”55

TheCMPincludedafocuson“thedevelopmentofhumancapitalthroughtheintroductionofinstitutionalarrangementstoprovidecomprehensiveeducationandlearningprogramsforthefinancialservicesindustry.”56Programswereestablishedwiththegoalofdevelopingdifferentskillssets,rangingfromentryleveltomiddlemanagementtotheexecutivelevel.TheseincludedtheFinancialSectorTalentEnrichmentProgram;theInternationalCenterforLeadershipinFinance(ICLIF),establishedin2003;andINCEIF,theglobaluniversityofIslamicFinance.

ConclusionOverthe2001-2010periodcoveredbytheCMP,Malaysiaachievednotablesuccessesinbroadeninganddeepeningitscapitalmarkets.Italsohasfallenshortinkeyareas,however,andinthepastseveralmonthshasbeenmarredbypotentiallyseriousfailures.

AmongthenoteworthysuccessesthatMalaysiahascontinuedtoachieveinfurtherdevelopingitscapitalmarketsoverthisten-yearperiodarethedevelopmentofthecorporatebondmarketandsolidificationofMalaysia’sstatusasagloballeaderinIslamicfinance.OverthedecadesincetheSCinitiatedreforms,thecorporatebondmarketgrewsteadily.Today,Malaysia’scorporatebondmarketismuchlargerthanthoseofmostotheremerging-marketcountriesandiscomparableinsizetothoseinmanydevelopedcountries.57TheIslamicbondmarkethasbeenakeydriverofthisgrowth:Today,about60percentofMalaysia’sbondissuanceisShariah-compliant,andMalaysia’smarketnowaccountsfor60percentofIslamicbondsissuedworldwide.58

Effortstoenhancetheuseoftheequitymarkethaveyieldedmoremixedresults.ThenumberofcompanieslistedonBursaMalaysiahasdeclinedslightlyduringthepastdecade.Althoughthemarket’scapitalizationhadbeenrisingsteadilysincetheglobalfinancialcrisis,ithasfallensubstantiallyoverthepastyear.

Moreover,theIMFandWorldBankobservedintheirmostrecentfinancialsectorassessment,publishedin2013,thatthelegalbasisfortheSC’sindependenceneedstobebolstered.TheyalsoexpressedconcernthattheMalaysiangovernmentremainsa“majorplayerinthefinancialsystem”andexercises“substantialdefactoownershipinthefinancialsector,”largelythroughtheequityholdingsofgovernment-linkedinvestmentcompanies(GLICs),suchasthestate-ownedpensionfund,EPF.59

Theongoingpoliticalcrisis,sparkedbyallegationsofcorruptionatoneofMalaysia’ssovereignwealthfunds,hasmorerecentlyhighlightedthedangersoffailingtoputinplaceandfostertherequisite

55Carmichael,p.199.56Aziz,p.3.57WorldBankandIMF,2013a,p.4.58WorldBankandIMF,2013a,p.4.59WorldBankandIMF,2013d,p.6.


24

institutionalgovernancestructuresatkeymarketinstitutions.Italsohighlightstheimportanceofanecosystempromotinggoodgovernance,includinganindependentjudiciaryandintegrityinthecivilservice.60WhileMalaysiahascontinuedtomakerealprogressinbroadeninganddeepeningitscapitalmarketsoverthepastfifteenyears,institutionalweaknessesunfortunatelythreatentounderminethatprogress.Regulatoryandtechnicalreformsareessentialtocapital-marketdevelopment,butinstitutionalintegrityiscriticalinthelongrun.

601MalaysiaDevelopmentBerhad(1MDB),setuptoattractforeigninvestmentthatwoulddrivelong-termeconomicdevelopment,isaccusedoffunnelingover$675million,possiblyfromtheMiddleEast,tothepersonalbankaccountsofNajibRazak,Malaysia’sprimeministerandfinanceminister.Atthesametime,1MDBaccumulatedasignificantamountofdebt.Thepoliticalcrisishasexacerbatedtheeconomicdownturnnowunderway(Malaysia,anetcommoditiesexporter,hasbeenhithardbythedownturninoilprices),andhasalsosparkedstreetprotestsandraisedthepossibilityofwidersocialunrest.


25

SourcesBinIbrahim,Muhammad,andAdrianWong.2006.“TheCorporateBondMarketinMalaysia.”

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Appendix 1.1: Malaysia Financial Sector

MalaysiaFinancialSectorAssetstoGDP(%) CentralBankAssetstoGDP(%)

Source:WorldBankGlobalFinancialDevelopmentDatabase

Source:IMFInternationalFinancialStatisticsDatabase

DepositMoneyBanksAssetstoGDP(%)

InsuranceCompanyAssetstoGDP(%)

Source:IMFInternationalFinancialStatisticsDatabase


MutualFundAssetstoGDP(%)

PensionFundAssetstoGDP(%)




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Appendix 1.2: Malaysia Outstanding Debt Securities

OutstandingDomesticPublicDebtSecuritiestoGDP(%)

OutstandingIntlPublicDebtSecuritiestoGDP(%)

Source:BIS,viaWorldBankGlobalFinancialDevelopmentDatabase


OutstandingDomesticPrivateDebtSecuritiestoGDP(%)

OutstandingIntlPrivateDebtSecuritiestoGDP(%)



MalaysiaOutstandingDebtSecuritiestoGDP(%)

MalaysiaOutstandingDebtSecuritiesComposition




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Appendix 1.3: Malaysia Stock Market

StockMarketCapitalizationtoGDP(%)

MarketCapitalizationExcludingTop10Companies

toTotalMarketCapitalization(%)

Source:Standard&Poor’s,viaWorldBank’sGlobalFinancialDevelopmentDatabase

Source:WorldFederationofExchanges,viaWorldBank’sGlobalFinancialDevelopmentDatabase

NumberofListedDomesticCompanies(Total)

NumberofListedCompaniesper1,000,000People

Source:Standard&Poor’s,viaWorldBank’sWorldDevelopmentIndicatorsDatabase


StockMarketTotalValueTradedtoGDP(%)

ValueTradedexcludingTop10TradedCompaniestoTotalValueTraded(%)

Source:BIS,viaWorldBank’sGlobalFinancialDevelopmentDatabase

Source:WorldFederationofExchanges,viaWorldBank’sGlobalFinancialDevelopmentDatabase


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Appendix 1.3: Malaysia Stock Market (continued)

StockMarketTurnoverRatio(%)

StockPriceVolatility


Source:Bloomberg,viaWorldBank’sGlobalFinancialDevelopmentDatabase


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Appendix 2: CMP Development Timeline

1999 August6 TheCMPisannounced.

September TheCapitalMarketStrategicCommittee(CMSC)isestablished.

October TheCMPwebsiteislaunchedbytheSC.

2000 February SChostsacolloquiumoncorporatebondmarketdevelopment.

March SCinvitespubliccommentonelectroniccommerceconsultationpaper.

AprilSCpresentsframeworkforstockbrokingindustryconsolidationandreductionintransactioncosts.

May SCissuesnewguidelinesonprospectuscontents.

May SCissuesCodeofConductformarketinstitutions.

June SCannouncescommitmenttoashortersettlementcyclebyend-2000.

JuneSCannouncesmodificationstotheframeworkforstockbrokerageconsolidation.

October TheCMPispresentedtotheministeroffinance.

December TheCMPisapprovedbytheministeroffinance.

2001 February22 TheCMPisreleasedandputintoeffect.


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Appendix 3: Committee Members

CapitalMarketAdvisoryCouncilMembers

Member Sector/Industry Type DatukAliAbdulKadirChairman,SecuritiesCommission

Government

DatinZarinahAnwarDeputyChiefExecutive,SecuritiesCommission Government

TanSriDato’FrancisYeohManagingDirector,YTLCorporationBhd Infrastructure

RajaDatukArshadRajaTunUdaExecutiveChairman,PricewaterhouseCoopers Accounting

DatukMohaiyaniShamsudinManagingDirector,MohaiyaniSecuritiesSdnBhd Stockbroking

Dato’AbdulAzimMohdZabidiChairman,BankSimpananNasional DepositoryInstitution(government-owned)

Dato’AzmanYahyaChairman,PengurusanDanahartaNasionalBhd FinancialCompanySpecializinginNPLs

Dato’MegatNajmuddinMegatKhasChairman,PernasInternationalHoldingsBhd

Conglomerate

Dato’Dr.AbdulHalimHajiIsmailExecutiveChairman,BIMBSecuritiesSdnBhd Stockbroking

Dato’SeriHwangSingLueManagingDirector,Hwang-DBSSecuritiesBhd

Stockbroking

Dr.R.ThillainathanFinanceDirector,GentingBhd

Conglomerate

JeyaratnamTomotharamPillaiChiefExecutiveOfficer,AllianceMerchantBankBhd

DepositoryInstitution

IskanderIsmailExecutiveDirector,AmanahSSCMManagementBhd FundManagement

HamzahMahmoodChiefExecutiveOfficer,MaybanSecuritiesSdnBhd

Bank

ChokKweeBeeExecutiveDirector,BIWaldenManagementSdnBhd VentureCapital

StephenM.TaranManagingDirector,CorporateBondResearchSalomonSmithBarney,NewYork

U.S.InvestmentBank

DaisukeTakeuchiHeadofAsiaOceania,NomuraCo.Ltd.,Japan

JapaneseFinancialHoldingCompany

CapitalMarketStrategicCommitteeMembers

1. DatukAliAbdulKadirChairman,SecuritiesCommission

2. YBhgTanSriDatoFrancisYeohManagingDirector,YTLCorporationBhd

3. YBhgDatoAzlanHashimExecutiveChairman,KualaLumpurStockExchange

4. YBhgDatoMegatNajmuddinMegatKhasChairman,Asian-PacHoldingsBhdandChairman,FederationofPublicListedCompanies

5. DatukMohaiyaniShamsudinManagingDirector,MohaiyaniSecuritiesSdnBhdandChairpersonoftheAssociationofStockbrokingCompaniesinMalaysia

6. Mr.Jeyaratnama/lTamotharamPillaiChiefExecutive,AmanahMerchantBankBerhad

7. Mr.StephenTaranManagingDirector,CorporateBondResearch,SalomonSmithBarney(M)SdnBhd


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About the Author JimWoodsomeisaseniorprogramresearchanalystwiththeMilkenInstituteCenterforFinancialMarkets,whereheconductsresearchandhelpsmanageinitiativesrelatedtothecenter’sCapitalMarketsforDevelopmentprogram.

About the Center for Financial MarketsBasedinWashington,D.C.,theMilkenInstituteCenterforFinancialMarketspromotesfinancialmarketunderstandingandworkstoexpandaccesstocapital,strengthen—anddeepen—financialmarkets,anddevelopinnovativefinancialsolutionstothemostpressingglobalchallenges. About the Milken Institute TheMilkenInstituteisanonprofit,nonpartisanthinktankdeterminedtoincreaseglobalprosperitybyadvancingcollaborativesolutionsthatwidenaccesstocapital,createjobsandimprovehealth.Wedothisthroughindependent,data-drivenresearch,action-orientedmeetingsandmeaningfulpolicyinitiatives.©2016MilkenInstituteThisworkismadeavailableunderthetermsoftheCreativeCommonsAttribution-NonCommercial-NoDerivs3.0UnportedLicense,availableatcreativecommons.org/licenses/by-nc-nd/3.0/