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The Asian Market: Malaysia’s Experience

5 th CVM Seminar : Financial and Capital Markets in the Islamic World Opportunities and Challenges 8 December 2008. The Asian Market: Malaysia’s Experience. Nik Ramlah Mahmood Securities Commission Malaysia. The Development of Malaysia’s Islamic Capital Market –

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The Asian Market: Malaysia’s Experience

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  1. 5th CVM Seminar : Financial and Capital Markets in the Islamic World Opportunities and Challenges8 December 2008 The Asian Market: Malaysia’s Experience Nik Ramlah Mahmood Securities 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… Total value of capital market (nov-2008) USD327 billion Total value of capital market (1990) USD61.5 billion Bonds USD145 bn (44%) Equity USD182 bn (56%) Equity USD40.6 bn (66%) Bonds USD20.9 bn (34%)

  4. …with Islamic securities forming a substantial portion Total value of capital market (Nov-2008): USD327 billion Islamic capital market value (Nov 2008): USD171 billion Islamic Bonds/ sukuk US$54 bn (32%) Bonds USD145 bn (44%) Equity USD182 bn (56%) Islamic equity US$117 bn (68%)

  5. Islamic finance in Malaysia is relatively well diversified… • 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 market 2007 : Capital Market Services Act 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 Capital Market Masterplan • Strong leadership and proactive role of government • Close collaboration with private sector • Progress of implementation closely monitored Financial Sector Masterplan 9th Malaysia Plan Malaysia International Islamic Financial Centre (MIFC)

  9. The Capital Market Masterplan (CMP) Launched in 2001, the CMP provides a blueprint for long-term strategic development of the Malaysian capital market with 152 recommendations covering 11 areas : • Equity market • Bond market • Derivatives market • Stockbroking industry • Market institutions • Investment management • Regulatory framework • Corporate governance • Islamic capital market • Technology & e-commerce • Training & education 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. …with universal principles of securities regulation applied to Malaysian Islamic capital market • 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 • 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 General regulatory requirements applicable to both conventional and Islamic products Bonds - Trust deed, mandatory rating, eligible persons, etc Unit Trust - Investment committees, trustees, management company, etc. REITs - At least 75% investment in real estate Tier 2 Shariah - specific requirements applicable to Islamic products 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 requirements Islamic REITs - Tenants’ activities and rental income must comply with Shariah requirements

  13. …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 13

  14. Products Services …facilitates the offering of a comprehensive range of products and services Islamic REITs Islamic unit trusts Sukuk Shariah compliant futures contracts Shariah compliant stocks Islamic structured products Islamic stockbroking Islamic ETFs Corporate finance / Advisory Islamic fund management Islamic banking & takaful

  15. Malaysia has built a reputation as a centre of innovation… (USD1 = RM3.5)

  16. …with landmark Islamic issues

  17. Malaysia – An International Islamic Capital Market Hub

  18. Malaysia : An international investment hub… Competitive cost structure Conducive lifestyle Vibrant economy Malaysia Islamic finance niche Efficient business environment Deep, broad-based capital market

  19. …Malaysia’s real GDP shows moderate growth Diversified and flexible economic structure Stable growth at 5% – 5.5% in 2008 Low inflation of 2.0% @ Dec 2007 (2008: 5.5 – 6%) Strong domestic demand conditions Sound Economic Fundamentals …high foreign exchange reserves and low external debt provide one of the strongest external positions globally Low external debt (end-June ’08: 34% of GNI) Low unemployment (3.5% in Q2 2008) High gross national savings (38.4% of GNI) High international reserves (USD100 b @ November ‘08) Malaysia…positive economic conditions with moderate outlook… …slowdown in economic growth due to global environment, with stable and resilient banking system… Malaysia’s Credit Rating: A- (S&P), A3 (Moody’s)

  20. Most attractive India China Malaysia Thailand Brazil Indonesia Chile Philippines Bulgaria Mexico ...and an attractive business & investment destination Ranked 3rd for regulating directors Ranked 4th in investor protection Ranked 3rd for most attractive outsourcing centre Most protected Most New Zealand New Zealand Singapore Singapore Malaysia Hong Kong Canada Malaysia United States United States Cambodia Israel Israel Canada Source: World Bank 2008 Source: World Bank 2008 Source: A T Kearney 2007 Hong Kong Ireland South Africa United Kingdom Mauritius South Africa 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

  21. Year M-cap of Islamic Equities (RM bln) % of M-cap Islamic equities 2001 303.2 (USD86.6) 65.2 2002 290.5 60.3 2003 383.9 59.9 2004 448.2 62.1 2005 439.8 63.3 2006 548.4 64.6 2007 705.1 63.7 2008+ 416.47 (USD119) 63.5 Shariah-compliant securities on Bursa Malaysia Number of Shariah-compliant securities-Nov 2008 855 securities % to total listed securities 87% Equity market indices 31 Oct 2008 30 Nov 2008 % change KL Composite Index (KLCI) 863.61 866.14 0.29% FBM EMAS Shariah 5843.46 5900.37 0.97% FBM Hijrah Shariah 6565.90 6594.18 0.43% A large Shariah-compliant equities market… Shariah-compliant Securities by market sector Shariah-compliant Securities Trading/Services 20% Construction 6% Properties 9% Plantation 4% Industrial Products 33% Technology 12% Others 1% Consumer Products 15% +As at end-Nov 2008 Source: Securities Commission * The SAC of SC releases the updated Shariah-compliant securities list twice a year in May and November

  22. …makes Malaysia an attractive Primary Listing Destination Kuala Lumpur Composite Index • 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 KLCI record high: 1516.22 on 11th Jan 2008 Oct-08* Gives excellent market coverage, peer comparisons, sector premiums

  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. PE Valuations KLCI Sectoral PE Valuations (end-Q3 2008)‏ Regional PE Valuations (end-Q3 2008)‏

  25. Direct listing requirements for foreign companies 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)‏ Operating history At least 3-5 full financial years • Tech-based companies: None • Tech incubators: At least 12 months in operations • Others: 3 years operating revenue 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 Market Capitalisation/ Profit Test • Market capitalisation of at least RM500 mil (USD142.9 m) • PAT of at least RM30 mil (USD8.6 m) for latest FY N/A IPC test • Must 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) 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 10x oversubscribed Despite financial volatility due to continued uncertainties, many large issuances in 2007 and 1H 2008 were made signifying large demand for sukuk 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

  28. Sukuk - Primary Market Activity in 2008 Sukuk approved based on various Shariah principles Corporate Approval 2007 • 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 Jan – Sep 2008 Corporate Issuance

  29. A fast growing Islamic fund management industry – Islamic REITs & ETFs • 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) Lower income tax for investors Tax transparency introduced. SC issued new Guidelines. M’sian Govt waived RPGT and stamp duty. ETFs: • 1st Islamic ETF in Asia (Jan 2008) • RM840 million (USD240 m) MyETF Dow Jones Islamic Market Malaysia Titans 25 • Listed on Bursa Malaysia

  30. Islamic fund management – Islamic unit trusts NAV of Islamic Funds vs. Total Industry No. of Islamic Funds vs. Total Industry Islamic unit trust funds (USD5 b) (USD42.5 b) Source: Securities Commission

  31. Islamic fund management companies Liberal shareholding structure • 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 Facilitative cross border investment policy Greater access to institutional funds Competitive operating environment

  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. Company name RM billion 1. Sime Darby 35.15 2. MISC 31.76 3. Tenaga Nasional 25.57 4. Petronas Gas 19.19 5. IOI Corporation 19.10 6. TM International 14.19 7. Telekom Malaysia 13.90 8. Plus Expressway 13.45 9. Digi.com 13.41 10. PPB Group 10.14 Islamic equity market: Sizable component of the capital market Top 3 Shariah-compliant companies by sector and market capitalization Top 10 Shariah-compliant companies by market capitalization Plantation Company name RM billion 1. IOI Corporation 19.10 2. Kuala Lumpur Kepong 8.91 3. Batu Kawan 3.27 Construction Company name RM billion 1. YTL Corporation 10.78 2. Gamuda 3.39 3. IJM Corporation 2.16 Properties Company name RM billion 1. SP Setia 2.76 2. KLCC Property 2.56 3. IOI Property 2.04 Oil & Gas Company name RM billion 1. Petronas Gas 19.19 2. Shell 2.64 3. SapuraCrest 0.87 • Source: Bursa Malaysia

  35. Dual Listing Foreign-owned with listings on Bursa Companies with Foreign-based Operations listed on Bursa Gefung Holdings Sino Hua-An International Key West Some existing foreign cross listings Bursa and Copenhagen SE Bursa and Tokyo SE Bursa and HKEX <-----------------Bursa and London SE-------------------->

  36. Selected notable sukuk issuance

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