Address by
Zainal Izlan Zainal Abidin
Executive Director, Islamic Capital Market
Securities Commission Malaysia
KLIFF 2012
Wednesday 17 October 2012
Inter Continental Hotel, Kuala Lumpur

Encik Abdul Aziz Abd Jalal, Director, KLIFF 2012
Distinguished industry representatives
Honourable Shariah scholars
Ladies and gentlemen

Assalamualaikum and a very good morning



First of all, I would like to thank the organizers for inviting me to speak here today. I am truly honored to be part of this year’s edition of the Kuala Lumpur Islamic Finance Forum, KLIFF, which has proven to be a successful platform for the gathering of prominent leaders in Islamic Finance from across the globe to exchange views and deliberate on relevant and contemporary industry issues.


It has been a very busy year thus far in the Islamic capital market space both in Malaysia and internationally, and it is my pleasure to provide an update on some of the work being done by the Securities Commission Malaysia as well as to share with you some of my thoughts on the outlook for the Islamic capital market.

Overview and Update on Islamic Capital Market


The Malaysian Capital Market Masterplan 2, or CMP2, released in April last year among others highlighted the solid growth of the Islamic capital market over the ten-year period to 2010 of 13.6% per annum. Since then, the growth momentum has been sustained – the size of Malaysia’s Islamic capital market increased by 10% to RM1.2 trillion as at end-2011, spurred especially by the strong performance of the Sukuk segment. Total value of Sukuk outstanding rose by 18.7% year-on-year to RM349 billion at end-2011. In comparison, the market capitalisation of Shariah-compliant equities grew by 6.6% to RM806 billion over the same period.


The year 2012 thus far has witnessed similarly encouraging performance of the Islamic capital market. The Sukuk segment looks set to register another record year in terms of total issuance value, contributed in part by the largest issuance to-date of RM30.6 billion by PLUS Berhad. Total issuance of sukuk in Malaysia amounted to RM219.4 billion during the first eight months of 2012, versus RM120.7 billion in the corresponding period of 2011. Meanwhile, the listings of Felda Global Ventures and IHH Healthcare, which collectively raised almost RM16 billion through their IPOs, have helped to bolster the Islamic equity segment this year. Both companies had applied to the Shariah Advisory Council of the SC for determination of their Shariah-compliant status prior to their respective listings.


The healthy growth of the Islamic capital market is occurring not only in Malaysia but also on the global front. The total issuance value of sukuk globally reached USD93 billion in the first eight months of 2012, (of which Malaysia accounted for 74%) exceeding the amount recorded for the full year of 2011. In the equity segment, the market capitalization of the Dow Jones Islamic Market World Index, a rough estimate of the size of Shariah-compliant equities globally based on Dow Jones’ index methodology and Shariah screening criteria, has risen to USD17.7 trillion as at end-August from USD16.5 trillion at end-2011.

SC’s Recent Initiatives on Islamic Capital Market


The development of Malaysia’s Islamic capital market over the years has been facilitated by the presence of an enabling environment and ecosystem that are regularly reviewed and continually enhanced.


In this regard, the SC continues to play a central role in identifying and implementing initiatives to promote further development of the Islamic capital market. Some of the recent initiatives that we have embarked on, in line with the growth strategies described in the CMP2, include the following:


First – establishing the framework for issuance of retail bonds and sukuk. The introduction of retail bonds and sukuk will help to broaden the range of investment products available to the public by allowing retail investors access to a relatively low-risk instrument, thus also facilitating diversification for risk management. Furthermore, retail sukuk will present investors with another Shariah-compliant investment option, and issuers with an opportunity to reach a wider investor base.


In order to incentivise the participation of individual investors, the Government has proposed in the recent 2013 Budget that stamp duty exemption be given on instruments relating to transactions on retail sukuk and bonds. For the issuers, double deduction on additional expenses incurred for the issuance of retail sukuk and bonds has also been proposed in order to enhance the cost competitiveness for domestic and foreign issuers to raise capital in Malaysia.


Second – revising the Shariah screening methodology for listed equity securities. The adoption of a two-tier quantitative approach, which entails the streamlining of existing business activity benchmarks and the inclusion of new financial ratio benchmarks, is aimed at enhancing the robustness of the screening process. The revised methodology is expected to contribute towards increased competitiveness and therefore further development of Malaysia’s Islamic equity and fund management segments, at both domestic and international levels.


Third – launching the Private Retirement Scheme, PRS. This voluntary scheme, intended to complement the EPF, will enable contributors to select the fund managers or providers as well as the types of funds to channel their contributions to. A PRS provider is required to offer a minimum of three core or ‘default option’ funds under a scheme, to cater to the different contributor risk profiles, and can offer a maximum of seven. Nevertheless, to encourage the offering of Shariah-compliant funds, the guidelines allow a provider that intends to offer both conventional and Shariah-compliant options to offer up to 10 funds. The PRS is expected to facilitate the development of Islamic fund management and promote product innovation as it presents the fund managers with an opportunity to serve another market segment and to broaden their distribution channels.


Fourth – formulating the legal framework for business trusts. This investment vehicle, an alternative to the company structure, allows investors to participate more directly into the business or assets of the trust, and at the same time enables the manager to attract investors with a different risk-return profile. Furthermore, providing the platform for the establishment of an Islamic business trust is consistent with the SC’s aim of encouraging the development of more risk-sharing Shariah-based investment products.


To encourage the development of business trusts, the government has proposed in the 2013 Budget, that a business trust be given the same tax treatment as a company, as well as stamp duty and real property gains tax exemptions for the transfer of any asset, business and real property at its early stage of establishment.

International Collaboration


As stated in the CMP2, widening the Islamic capital market’s international base is a key growth strategy for the SC over the next ten years. This strategy has been identified in recognition of the growing cross-border economic, financial and investment linkages, which in turn necessitates a coordinated and collaborative approach across jurisdictions to achieve a certain level of harmonization in standards and practices to facilitate international transactions and activities that will drive further growth of the Islamic capital market globally.


Last month, the SC in collaboration with two important standard-setting bodies, the Islamic Financial Services Board (IFSB) and the International Organization of Securities Commissions (IOSCO), organised a Roundtable attended by representatives from 16 jurisdictions, to deliberate on the need to enhance disclosure requirements for Islamic capital market products with the primary objective of accelerating the connectivity and internationalization of the industry.


The OIC grouping represents a captive market for the development of Islamic finance. Efforts to promote greater cross-border activities in the Islamic finance space should leverage on the point that the OIC member countries collectively can and should be a key growth driver of Islamic finance. In relation to this, the SC was recently selected to chair the Islamic Finance Task Force under the Capital Market Regulators Forum of the Standing Committee for Economic and Commercial Cooperation for the OIC. The main objective of this Task Force is to identify areas for cooperation among member countries to develop Islamic finance globally, and to establish relevant strategies and policy recommendations.


International collaboration is also required in the area of capacity building and thought leadership to further develop competitiveness and innovation. As some of you may be aware, the SC has an ongoing collaboration with the Oxford Centre for Islamic Studies (OCIS) that is entering into its fourth year. The flagship programme under this collaboration is the annual SC-OCIS Roundtable series which is a thought leadership platform for distinguished market practitioners, academicians, scholars, regulators and other stakeholders to discuss and exchange views on issues pertinent to the global development of Islamic finance.


To further enhance this collaboration, the SC and OCIS this year established the SC-OCIS Scholar-in-Residence programme. The primary objective of this programme is to facilitate applied research on contemporary issues with respect to global Islamic finance. It is our hope that it will encourage focused research work that will lead to findings that can be readily applied into the industry and at the same time promote broader harmonization of Islamic finance practices across jurisdictions, thus facilitating greater cross-border transactions and activities.

Outlook for Islamic Capital Market


Pease allow me now to briefly share with you my thoughts on the outlook for the Islamic capital market and its role in the global economic and financial markets.


Islamic finance, based on principles and values that are universally-accepted, offers a viable alternative to conventional finance, which has been widely affected by the recent global financial crisis and the current economic turmoil in some of the industrialised nations. As a result, we have witnessed remarkable interest towards Islamic finance among diverse groups of stakeholders, including large conventional-based multinational institutions – not only to offer Islamic financial services, but also to issue as well as subscribe to Shariah-compliant products.


As more jurisdictions and players participate in the industry, the Islamic capital market is expected to contribute to more efficient mobilisation and allocation of funds across regions, thus strengthening international financial and economic linkages between jurisdictions and bringing mutual benefits to all stakeholders.


The Sukuk segment plays a key role in the internationalisation of the Islamic capital market as it is an important avenue for international fund raising and investment activities, generating significant cross-border flows. In addition, as a portfolio investment instrument, sukuk – given its strong potential for further growth in issuance – also augurs well for the Islamic fund management industry as it helps to broaden and deepen the product range in which fund managers can invest.


Similarly, the huge universe of Shariah-compliant equity securities, as reflected from the market capitalization of the Dow Jones Islamic Market World Index mentioned earlier of USD17.7 trillion, offers tremendous opportunity for the development of innovative and competitive Islamic fund and investment products that can be marketed globally.


Providing underlying support for the development of these products is the growing affluence of population in the emerging economies which include some of the highly-populated Muslim-majority countries that will drive demand for more Shariah-compliant investments.


For an industry that is still relatively young, the Islamic capital market, perhaps not surprisingly, is faced with a number of significant challenges, most of which have been widely acknowledged but some have intensified in recent years due to the current operating global landscape. These challenges (or needs) are primarily in terms of:

  • Establishing appropriate institutional, legal and regulatory frameworks;

  • Achieving economies of scale;

  • Broadening and deepening the range of ICM products and services;

  • Enhancing capabilities, for example in product structuring & distribution, and Shariah advisory & research; and

  • Addressing divergence in Shariah interpretations.


Overcoming these challenges requires concerted effort and commitment on the part of all stakeholders. Among others, it requires a government-led or top-down approach in building a conducive ecosystem for the Islamic capital market, including the supporting infrastructure. In addition, collaborations – including cross-border ones – need to be formed among industry players as well as with regulators to effectively deal with some of these challenges.


There should also be joint research on product development to accelerate the pace of product introduction and to enhance the marketability of these products across jurisdictions. At the same time, capacity building and thought leadership initiatives that will drive innovation must be implemented. Furthermore, information and knowledge sharing across jurisdictions and across stakeholder groups is crucial in enhancing communication on and appreciation of industry issues.


While the Islamic capital market has enjoyed a relatively long period of sustained growth, a number of key imperatives are required to catalyse its further development and to take it to the next level:

  • ICM products must be universally appealing and must be integrated into the global financial system in order to achieve mainstream acceptability.
  • Emergence of more Islamic finance hubs or centres globally is essential to facilitate more cross-border ICM transactions and activities.
  • Concerns on investor protection, dispute resolution, legal recourse and the likes in respect of Islamic capital market products must be satisfactorily addressed.
  • Closer cross-border collaboration among stakeholders, including on market supervision, Shariah governance, product innovation & development, must be established and enhanced.
  • Greater use of Islamic capital market instruments for international trade and investment activities needs to be promoted and encouraged to facilitate the ‘mainstreaming’ of these instruments.
  • Establishing stronger linkages between the Islamic capital market and the non-financial halal industries will significantly broaden the playing field for ICM products and services.
  • Sustained and effective human capital development strategy is required to address the acute shortage of talent in the industry.



In view of both exogenous and intrinsic factors currently in play, the Islamic finance industry is well placed to seize the opportunities available today to make significant headway towards mainstream finance. With less than 1% global market share presently, it is crucial for Islamic finance to grow exponentially in order to achieve the scale that will enable it to be more competitive and therefore to offer a much more compelling value proposition at the global level.


The Islamic capital market, as a key component of Islamic finance, has a big role to play in contributing towards this growth objective. Greater cross-border linkages and connectivity, growing need for both fundraising and investment alternatives, and an increasingly conducive and enabling environment, collectively provide the base upon which the Islamic capital market can build its next phase of growth.


Thank you.