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Tuesday, March 11, 2008

Malaysia’s Islamic Capital Market Malaysia’s ICM: A success story

A series of wide-ranging initiatives in developing Malaysia’s Islamic capital market (ICM) over recent years have helped to position the country as a leading global market in Islamic finance. Notably, the approach of developing both the conventional and Islamic financial markets as complementary markets has seen the emergence of a strong market segment that successfully integrates the principles of Islamic investment with the practical demands of a modern market environment.

Located at the epicentre of the most populous Islamic community in the world, and with close ties to the global Islamic financial community, Malaysia’s ICM together with its well-established Islamic banking system fills a vital niche for both Muslim and non-Muslim capital seekers and providers. It enjoys the modern infrastructure of its established conventional market, while also employing clearly-defined principles and guidelines in a comprehensive framework that provides a level of certainty and choice to investors, equalled by no other Islamic market in the world.
The development of the ICM has been guided by the long-term strategy outlined in the country’s Capital Market Masterplan to establish Malaysia as an international centre for ICM activities.

The market offers a deep pool of Syariah-approved equity securities with accompanying benchmark indices, Islamic bonds and Islamic unit trusts. Other conventional products such as warrants, call warrants, crude palm oil futures contracts, index futures contracts and asset backed-securities are also deemed to be Syariah-approved.

(click graph to enlarge) Currently, approximately 80% of the total 889 securities listed on the KLSE are Syariah-compliant, with a combined market capitalisation of RM343 billion (US$90 billion). Of the top 10 largest counters on the bourse, five are Syariah-compliant. The growing popularity of such securities has led to the introduction of an official KLSE Syariah Index in 1999.

The Islamic unit trust industry has also experienced significant growth in recent years, with the increasing number of Syariah-approved products: the number of Islamic unit trust funds has grown at a compounded annual growth rate (CAGR) of 41%, while the net asset value (NAV) has grown at a CAGR of 48% since 1993.

“The progressive Islamic bond and equity markets in Malaysia can be an example for other Islamic countries.”Rushdi Siddiqui, Director,Islamic Index Group, Dow Jones Indices (June 2003)
Issuance of Islamic corporate bonds, which accounted for only 6% of total corporate bonds in 1999, expanded to 35% in 2000 and subsequently to 52% of total corporate bonds issued in 2002. As at August 2003, RM7 billion (US$1.8 billion) worth of Islamic papers have been launched compared to RM13.8 billion (US$3.6 billion) that was issued last year.
On the international front, Malaysia’s widely-publicised US$600 million five-year sovereign Sukuk, the first international sovereign Islamic bond ever issued by any government in the world, was launched to overwhelming demand in June 2002.

Malaysia’s pioneering work gained further international recognition when the SC was chosen by the International Organisation of Securities Commissions (IOSCO) to chair its inaugural task force on Islamic capital markets, which comprises 11 member countries including the US, UK and South Africa.

Malaysian scholars, regulators and professionals actively participate in relevant international standard-setting organisations such as the Accounting and Auditing Organisation for Islamic Financial Institutions and the Islamic Development Bank.

The establishment of the Islamic Financial services Board in Kuala Lumpur last November was also a significant milestone in this regard. With the ICM increasingly becoming a significant component of global capital markets, Malaysia’s commitment to remaining at the forefront of international developmental initiatives should see continued investor confidence in its future growth.

Key highlights of Malaysia’s Islamic capital market:
1990 Issuance of first Islamic corporate bond by Shell MDS Sdn Bhd1993 Launch of first Islamic equity unit trust fund by Arab Malaysian Unit Trust Bhd
1994 Establishment of the first full fledged Islamic stockbroking company, BIMB Securities Sdn Bhd
1995 Establishment of the Islamic Capital Market Unit within the SC
1996 Establishment of the Syariah Advisory Council (SAC) by the SC to advise on Syariah compliance matters for Islamic capital market activities. Launch of the country’s first Islamic equity index by Rashid Hussain Bhd
1997 Khazanah Nasional Berhad, an investment arm of the Ministry of Finance, launched the Islamic zero-coupon bond function as a benchmark for the Islamic bond market. Introduction of an official list of Syariah-approved securities traded on the KLSE by the SC (The list is updated twice a year, in April and October)
1999 Launch of the country’s second Islamic equity index, the KLSE Syariah index
2000 Launch of the first Islamic bond fund by RHB Unit Trust Management Bhd Establishment of Labuan International Financial Exchange (LFX) to, among other things, facilitate the listing and trading of offshore Islamic and conventional instruments
2001 Launch of the Capital Market Masterplan (one of its six objectives is to establish Malaysia as an international Islamic capital market centre)Issuance of the first Islamic accounting standard MASB I-1 on Presentation of Financial Statements of Islamic Financial Institutions by the Malaysian Accounting Standards Board (MASB)
2002 Issuance of the world’s first global Islamic bond by Kumpulan Guthrie Bhd Issuance of the world’s first global sovereign Islamic bond by the Malaysian governmentLaunch of the first Syariah index fund by MBF Unit Trust Management Bhd Release of two practice notes, PN 18 and 19 by the SC, relating to Syariah-based unit trust schemes to enhance quality of management and administration of Islamic investment funds and unit trusts. Announcement of a tax deduction for expenses incurred on issuance of Islamic corporate bonds, based on principles of mudharabah, musharakah and ijarah, which are acceptable to Middle East investors, for five years commencing 20032003 In Budget 2004, the government proposed a measure to increase financing through the use of Islamic corporate bonds with a more comprehensive tax treatment similar to conventional bonds. It was also proposed that a tax deduction for expenses incurred on the issuance of Islamic bonds, based on the Islamic principle of Istisna` for five years commencing 2003Understanding Islamic investments The Islamic Capital Market (ICM) generally refers to capital market activities that are carried out in a Syariah-compliant manner, which do not go against the teachings of Islam. These activities are free from prohibitions in Islam:
Usury, such as activities of financial institutions like commercial and merchant banks and finance companies
Gambling,Forbidden products, such as liquor, pork and meat not slaughtered according to Islamic rites
Ambiguity, such as the conventional insurance business.
Although ICM activities follow the Syariah framework, Islamic investment products have a much broader appeal beyond Muslim investors alone. Islamic securities may simultaneously appeal to two very different sets of investors: those investing strictly for religious reasons, and conventional investors looking for a liquid, attractively-priced instruments offering good returns.
Islamic investment is often evaluated in parallel with the concept of ethical investment, as both are structured based on a screening process; ethical investment focuses on social and humanitarian values, while Islamic investments are based on religious values.“It is understood that the size of Islamic funds is currently worth between US$200–500 billion managed by more than 200 Islamic institutions in 75 countries… and which is predicted to register a growth of between 10–15% annually. ”Sir Howard Davies, Former Chairman,UK Financial Services Authority (March 2003)

Article taken from the securities commission (Malaysia) website.

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