The total Malaysian Islamic capital market (ICM) is projected
to reach almost three trillion ringgit, RM2.88 trillion to be precise,
in the year 2020, with the sukuk market set to break the one
trillion-ringgit barrier to account for RM1.33 trillion worth of
issuances and the market capitalization of Shariah-compliant companies
accounting for RM1.55 trillion. (source)
The fact that the compound annual
growth rate (CAGR) for the ICM for the decade 2010-2020 is projected at a
healthy double digit 10.6 percent compared with 13.6 percent for the
previous decade suggests that the growth prospects for the most
developed Islamic capital markets in the world is indeed sustainable and
exciting.
These projections by the Securities Commission
Malaysia, the securities regulator, and as detailed in the Capital
Markets Master Plan 2 (CMP2), augurs well for the development of the
Malaysian and regional ICM.
But as the reported postponement a few
days ago of the planned debut dim sum renminbi sukuk offering by
Khazanah Nasional Berhad, the Malaysian sovereign wealth fund, because
of the volatility and uncertainty in the global financial markets,
suggest, the growth prospects for the Malaysian ICM will be to a certain
extent tempered by extraneous factors which will be out of the control
of potential Malaysian issuers and which would impact on market
sentiments and confidence, which in turn will affect pricing and yields
and the decision to go to the markets to raise funds.
However,
sovereign Malaysia has been setting the pace with its third
international sovereign sukuk offering in July this year, a dual tranche
$2 billion Wakala (agency) sukuk issued by the Wakala Global Sukuk
Berhad on behalf of the Malaysian government, who is also the obligor.
This together with the spate of corporate issuances augurs well for the
Malaysian market where a yield curve for
sovereign sukuk is fast
emerging given that the $2 billion offering is the third Malaysian
sovereign global sukuk offering in the last 11 years.
According to
the Securities Commission Malaysia estimates, as published in its
latest ICM Bulletin Second Quarter 2011, the compound annual growth rate
(CAGR) for the sukuk market is projected at a robust 16.3 percent for
the 2010-2020 period compared with 22.2 percent for the 2000-2010
decade. During 2010 the Malaysian sukuk market totaled RM294 billion and
this is projected to quadruple to RM1.33 trillion by the year 2020.
The
poor relation of the Malaysian Islamic Capital market (ICM), however,
will remain the Islamic unit trust and mutual funds industry which is
expected to increase from RM24 billion in 2010 to RM158 billion in net
asset value (NAV), with CAGT declining from 303 percent for the
2000-2010 period to 20.7 percent for the 2010-2020 decade.
The
driving factors for the Securities Commission’s optimism are manifold.
Malaysia, stresses the securities regulator, already has the advantage
of having a capital market where the majority of assets are
Shariah-compliant, which therefore attracts participation of both
Shariah and conventional investors. “The broad customer demand and
liquidity provide positive reinforcement while Islamic products and
services also benefit from the advantages of the broader investor
protection
framework with the additional assurance of greater consistency and clarity in Shariah governance,” added the commission.
Greater
internationalization of the capital market is a critical aspect of the
strategy to strengthen Malaysia’s positioning as a global ICM hub. This
will be complemented by strategies to strengthen the distinctive value
propositions offered by Malaysia for a broad range of Islamic
intermediation activities.
Khazanah Nasional itself last year
originated its first cross-border sukuk with a 1.5 billion Singapore
dollars issuance in neighboring Singapore to part finance the
acquisition of the Parkway Healthcare company. Khazanah’s postponed dim
sum sukuk in Hong Kong would have been a further example of the strategy
of Malaysian government-linked companies to invest in sukuk issuances
and other asset classes in markets other than domestic ones to
capitalize on diversified opportunities for better returns for
investments.
At the same time, according to the SC, “there is a
need to strengthen the capacity of (Malaysian issuers) to structure
multi-currency and cross-border transactions, and to build greater scale
to enable Malaysian intermediaries to make further inroads into the
international market.”
This together with the encouragement of the
Malaysian government for local government-linked issuers to invest up
to 20 percent of their portfolios in sukuk, is bound to impact on the
cross-border activities of the Malaysian issuers. Not surprisingly, the
Khazanah Nasional dim sum sukuk when it eventually does get launch, may
start a trend of much greater exposure of Malaysian investors and
issuers to the international sukuk market.
In the equities sector,
the SC is collaborating with industry players to expand the range of
Shariah-compliant stockbroking and portfolio products and services. At
the current stage of development, there is also a need to strengthen the
service and operational infrastructure so that domestic Islamic
products and services can be effectively marketed to global customers.
This,
says, the SC, requires a widening of international distribution
channels coupled with intensified profiling of Malaysia’s ICM. There is
also a need to accelerate the building of critical mass for the onshore
portfolio management. The development of a significant Islamic fund
management industry is critical to build domestic take-up capabilities
for innovative domestic and international Islamic products. In this
regard, widening the range of Shariah-compliant products — in the form
of collective investment schemes, indices, ETFs and REITs — and the
diversity of their investments by sector and by geography, can attract
more domestic and international investors.
Mutual regulatory arrangements to facilitate cross-border distribution will be expanded.
Malaysian
Islamic asset management companies such as CIMB Principal Islamic Asset
Management and AmInvestment Islamic are already taking up this
challenge and positioning themselves through venturing abroad and are in
the process of launching funds aimed at inter alia GCC and other
investors.
One important development in the SC’s efforts to
further facilitate internationalization of the Malaysian ICM, is the
shift of the Malaysian ICM industry from a Shariah-compliant approach to
a Shariah-based approach where the underlying structures of products
such as Mudarabah and Musharakah would originate from risk-sharing
principles and offer significantly different pricing and returns
characteristics. This, as opposed to the debt-based Islamic private debt
securities, which are popular in the Malaysian market but are not
accepted by the Middle Eastern markets because of differences in Shariah
opinions.
In fact, the Malaysian government has even extended tax
incentives to Malaysian structurers and issuers to launch asset-backed
sukuk which are eminently acceptable to Middle East and other investors.
Apart from Mudarabah and Musharaka sukuk, Wakala (agency) sukuk are now
becoming popular.
Malaysia recognizes the need to focus on
product innovation to develop a comprehensive array of Shariah-based
products for the industry. Toward this end, the government of Mohd Najib
Abdul Razak has introduced amended versions of the Central Bank Act
2009 and the Capital Markets Act 2010 to further evolve the development
of the Shariah legal, regulatory and governance framework for the
Islamic finance industry.
“The shift to a Shariah-based approach,”
however, warns the SC, “will require a higher level of risk tolerance
and acceptance of the longer gestation arising from participating in
business ventures with more direct linkages between risk and returns.”
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