Keynote Address
Y Bhg Dato’ Sri Zarinah Anwar
Chairman, Securities Commission Malaysia


Islamic Finance Asia Summit
28 April 2009
The Westin, Kuala Lumpur


Dr Mohd Needal Al Chaar, Secretary General AAOIFI
Ladies and gentlemen
Good morning


1. I would like to thank Euromoney for inviting me to address this summit, which brings together various experts who share a deep interest in Islamic finance. I believe the timing of this summit could not have been more appropriate as the tumultuous changes in the global financial markets require us to re-examine our approach and philosophies on the regulation of the markets.
2. The relentless pursuit of greed will always sow the seeds of regret. The origins of the current crisis can be traced to an industry that sought outlandish rewards and marketed high-risk products as high-yielding investment strategies.
3. In this regard, the financial institutions were in effect originating debt instruments with high interest rates attached for persons who simply could not afford to pay back loans and distributing them to clients who did not understand that high yields meant high risks. Once the speculative frenzy got underway, the property mortgages were no longer a prudent investment for an individual but an asset price bubble that would ensnarl them in a debt trap.
4. As the global community pauses to reassess and take stock of the massive challenges in revitalising the economy and the financial markets, there are many who see Islamic finance as a beacon of light in the current gloom.
5. In this regard, many observations have been made to the effect that the application of Shariah principles could have prevented the excesses that led to the global crisis in that Islamic finance provides strict governance against potential risks from excessive leverage or speculative activities. Islamic finance also places emphasis on maintaining a close link between financial flow and productive activities and spurns highly speculative activities that do not have a fundamental underlying economic basis.
6. As Prof Mervyn Lewis, a respected Australian economist and the first SC-University of Malaya visiting scholar, puts it in his speech recently the crisis could have been avoided “if greed can be tempered internally by self-restraint, if speculation and risky trading is forbidden and if usury is banned and financing is based on concrete assets.”
7. Islamic finance offers a value proposition that is based on socially responsible and ethical practices that emphasise sound risk management principles. It is not just about doing away with interest rates or having zero interest rates. It is about dealing in real transactions and sharing profits and risks. From a regulators’ perspective, it is important that we take cognisance of the lessons from the recent events. I believe the principles of Islamic finance are likely to gain increasing traction and legitimacy in global capital markets. In this regard, it has been observed that “the crisis such as the mortgage one would technically be unthinkable in the Islamic capital markets because it would be against Shariah principles to sell a debt against a debt”. 
8. Although Islamic finance has escaped the full brunt of the financial global crisis by avoiding exposure to toxic assets, the activities in Islamic finance have slowed down in tandem with the slowdown in the conventional market and risk aversion among investors.

Malaysian regulatory philosophy and approach

9. In Malaysia, Islamic finance has evolved to provide a diverse range of viable investment and financing alternatives that are accepted by Muslim and non-Muslim investors, both domestic as well as international. This wide acceptability underscores the fact that Islamic finance is relevant and dynamic and its values are universal.
10. Our Islamic financial services industry is a core segment that fits seamlessly within our capital markets, with the additional requirements that underpin the qualities that have made it increasingly appealing to a broader audience. A key aspect of Malaysia’s regulatory approach is to ensure that investors in Malaysia’s Islamic capital market receive the same degree of clarity, certainty and protection as investors in the conventional market. We emphasise a common regulatory approach to regulating our Islamic capital market based on IOSCO’s objectives and principles of regulation.
11. The requirements for disclosure, transparency and governance apply equally to Islamic and conventional products, thus ensuring that an investor in an Islamic product receives the same legal and regulatory protection and recourse that would be available to an investor of a conventional product. In effect therefore, conformity to Shariah is achieved within a single regulatory paradigm with additional governance and disclosure requirements. We have to ensure that these products and services are indeed true to label and that trust in Islamic products is safeguarded. Therefore a key aspect of regulating Shariah is related to the disclosure and compliance aspects of securities regulation. Where existing frameworks do not or cannot offer parity of treatment, then these needs to be either amended or enhanced by the introduction of specific guidelines.
12. We are pleased to note that the validity of Malaysia’s regulatory approach has been re-affirmed by its use as benchmarks by other jurisdictions in developing their own Islamic capital markets. We will continue to review and enhance our legal and regulatory framework to take into consideration the latest market, products and Shariah issues to ensure that they remain relevant and appropriate to facilitating innovation while continuing to meet regulatory objectives.
13. The establishment of a single Shariah Advisory Council plays a pivotal role in the development of the Islamic financial services industry. This approach was taken in recognition of the importance of providing consistency and clarity with respect to Shariah compliance. This is possibly the single most important catalyst for the rapid growth of the Islamic capital market in Malaysia. Our SAC has developed a well-deserved reputation for responding to the developmental needs from the industry by undertaking the necessary in-depth research and discussion to make pronouncements on innovations that are industry-led.

Development of the Malaysian Islamic Capital Market

14. Malaysia is probably among the few markets in the world where the Islamic capital market is dominant. About 87% of the listed securities on Bursa Malaysia accounting for approximately 65% of total market capitalisation are Shariah-compliant. This suggests that Malaysia offers an attractive Islamic equity value proposition. Investors seeking Shariah-compliant equities in Malaysia will find the widest offering of small- and medium-sized companies in ASEAN and the Middle East, operating in diverse industries from plantations, resources and properties to manufacturing, services and technology.
15. The strength of our ICM creates a brand differentiation and offers us a sustainable competitive advantage. Malaysia was a pioneer in the global sukuk market. This market has experienced high growth and we remain firmly established as one of the largest issuers of sukuk globally. In 2008, about 60% of the world’s issuance of sukuk originated from Malaysia. The growth trend in sukuk issues is likely to continue in 2009. In the first quarter of 2009, sukuk issuances totalled RM6.4 billion with three large issues of between RM1 to RM2.5 billion.
16. Latest projections suggest that there could be a revival in the global sukuk market this year following a sharp drop last year, with at least USD10 billion of sukuk expected to be issued. The demand is reflected in the oversubscription of the US dollar-denominated sovereign sukuk issued by Indonesia recently. The sukuk received USD4.7 billion worth of subscriptions, seven times higher than the USD650 million of sukuk offered by the Indonesian government. In addition, the first issuance of an Islamic corporate debt in Europe worth EUR1 billion (USD1.3 billion) is also expected to be launched in June by a French financial institution.
17. Ladies and gentlemen, allow me to touch briefly on the Malaysian investment management industry which is expected to grow further in 2009. The industry is the fastest growing segment in our capital market, expanding at 24% annually and the share of Shariah assets have continued to rise. Malaysia is home to more Islamic funds than anywhere else in the world and largest after Saudi Arabia in asset terms1. Islamic funds currently account for 12% of the total net asset value of the country’s unit trust industry. In fact, Islamic unit trust funds showed more resilience than the conventional funds in their performance last year.
18. We recently fully liberalised our Islamic fund management industry as well as made available a wide range of tax and other incentives to attract international players. There has been strong interest from leading international fund management companies to establish operations in Malaysia. In addition, the Malaysian Islamic capital market has a pioneering and innovative culture and a track record for commercializing product innovation2. It is innovation that has underpinned our growth over the past decade, with the rapid pace of product and regulatory innovation leading to the creation of a full value chain of end-to-end Shariah compliant services.
19. Today we have a diversified array of products ranging from shariah-compliant equities, sukuk, unit trust funds, Islamic ETFs, REITS, structured products and derivatives. Many recent product offerings provide features such as capital protection, with a portion invested in structured products like swaps, options and hedging instruments for a wide range of underlying assets ranging from currencies to commodities.
20. There will always be opportunities for Islamic capital market intermediaries to evolve and innovate by creating products to cater to the different profile of investors. Given the current market turbulence, it is not surprising there is an increasing need for in-built risk mitigation features in products. Therefore, the challenge is for issuers and intermediaries to make the quantum leap from adaptation to innovation in their Shariah product offerings.
21. As Malaysia’s Islamic capital market strives for maturity and sophistication, two points become evident. First, the role of the private sector is critical in leading the growth of the capital market. As regulators, we will seek to facilitate higher levels of market participation. Indeed, the widespread availability of high-quality intermediation services is critical to the next phase of growth for Islamic finance.
22. Second, there is a need to strengthen the international dimension of the Islamic capital market. Malaysia’s thriving Islamic finance sector needs to be open and connected, and explore as well as provide opportunities for tie-ups with other thriving centres around the world.
23. The government’s decision last week to allow up to five international law firms with expertise in international Islamic finance to practice in Malaysia. The availability of the new Islamic Bank licences announced yesterday will help Malaysia in pursuit of its ambition to be a global Islamic financial hub.

Strengthening linkages with GCC and other markets

24. Increasing co-operation and linkages between the Gulf Cooperation Council (GCC) states and the various other markets is critical to building a thriving global Islamic financial market. Our efforts in gradually liberalising capital market intermediation services, as set out in the 10-year Capital Market Masterplan, have brought positive changes to the demography and landscape of our capital market.
25. We now seek to establish linkages with other markets at several levels. First, we have increasingly opened our doors to foreign players in our broking, fund management as well as advisory industries. Similarly, our intermediaries are also looking into expanding into the region, either individually or through partnerships.
26. Secondly, we welcome foreign companies to raise funds or to list products in Malaysia For example, sukuk issuances, denominated in ringgit or foreign currencies (US Dollar), in Malaysia will benefit from the strong base of Malaysian investors to anchor the distribution of a major issue. In addition, there is a strong pool of expertise to help structure the transaction as well as an established and tested regulatory framework that caters to both Shariah and legal requirements.
27. In venturing into greater cross-border flows, we are mindful of the challenges in maintaining a strong investor protection regime across borders. The promotion of a thriving global market for Islamic products is therefore dependent on strong cooperation among regulators to ensure that we can maintain high level of investor protection across borders. This requires that the evolution of an international Islamic securities regulatory and supervisory framework is compatible with international best practices even as regulations are fine-tuned to cater for the specific characteristics of Islamic structures and processes. Towards this end, the SC is a signatory to the IOSCO Multilateral MOU and has established close working ties with fellow securities regulators worldwide to ensure cross-border supervision and enforcement efforts.
28. Specifically in relation to Shariah regulation, there is also a need to promote greater internationalisation and convergence of Shariah practices to facilitate more cross-border transactions. Malaysia, for example, has started to facilitate the registration of foreign Shariah scholars. We have also appointed international Shariah scholars on our Shariah Advisory Council and have encouraged local scholars to sit on other similar councils internationally.
29. In addition, we have published the resolutions of our SAC on Islamic capital market issues in several languages to facilitate greater cross-border discussion and deepen understanding of Shariah interpretations across borders. Last year, we introduced the International Islamic Capital Market Forum series specifically focussed on issues relating to product development.
30. We are committed to working closely with other centres to create a global Islamic capital market network that can provide the linkages necessary to unlock Islamic savings through effective intermediation processes. Partnering other markets in developing the technological experience and expertise to facilitate this is critical. In this regard, the Bursa Malaysia is working with the Korean Exchange to develop the technology platform for Commodity Murabahah.

Conclusions: The value proposition of Islamic Finance

31. Notwithstanding the achievements in Islamic capital market, regulators and industry players should continue to work together to overcome the various challenges facing the industry. These include creating a wider choice of products, developing human capital, ensuring consistency in the interpretation of Shariah and the availability of information on Islamic finance.
32. The current global financial crisis has, if anything, demonstrated the need for markets to be founded on sound business principles. There is therefore already existing alignment between international regulatory and Shariah principles. Specifically, Shariah principles require that financial transactions be underpinned by an underlying asset and prohibit excessive leverage and speculative financial activities thereby shielding market participants from disproportionate risk exposures.
33. In this respect, money proffered must be from an exchange or trading transaction and backed by collateral. If financial instruments are traded, they generally have to sell for face value and on cash basis, which deters debt repackaging. The soundness of this simple Islamic finance tenet is already being validated as we begin to understand more explicitly some of the risks arising from selling a debt against a debt from the sophisticated and highly leveraged products.
34. In conclusion, Islamic finance has much in common with the objectives of regulation of the financial system and offers much in terms of promoting financial stability through its inherent prudent and socially-conscious orientation. This will pave the way for the Islamic financial services industry to eventually evolve as an integral component of the international financial system and to contribute to society in a meaningful and productive manner. The Islamic financial system will bring benefit not just among Muslims but to the rest of humanity, Insyaallah.

Thank you

1 The Cerulli Report, November 2008
2 With many firsts –
  (i) First sovereign 5 year global sukuk of US$600 million in 2002 (Govt. of Malaysia);
  (ii) First global sukuk of USD150 million issued by Guthrie Berhad in 2001;
  (iii) First Islamic residential mortgage backed securities issued by Cagamas Berhad in 2005;
  (iv) First Islamic Ringgit bond issuance of RM500 million by a multilateral financial institution in 2005 ( International Finance Corporation);
  (v) First listed Islamic Real Estate Investment Trust in 2006; and
  (vi) First Islamic structured product in 2007
  And, with landmark issues such as –
  (i) Largest sukuk funding programme of RM60 billion by Cagamas;
  (ii) Largest corporate sukuk of RM15.4 billion by Binariang GSM;
  (iii) Largest exchangeable sukuk of USD850 million by Khazanah;
  (iv) RM3 billion Islamic stapled income securities by Telekom and Hijrah Pertama; and
  (v) First Asian Islamic ETF launched by i-Valuecap Management in 2008