Keynote Address by
YBhg Dato’ Dr Nik Ramlah Mahmood
Managing Director, Securities Commission Malaysia


IFN 2011 Issuers & Investors Asia Forum

Monday 17 October 2011
KL Convention Centre, Kuala Lumpur

“Islamic Capital Market – Gearing for the Next Phase of Growth”


Distinguished guests,

Ladies and gentlemen,

Assalamualaikum and a very good morning.



Allow me to start by expressing my appreciation to the organizers for inviting me to speak at this Forum today.


I am therefore honoured to have this opportunity to share my thoughts with you today – on gearing for the next phase of growth for the Islamic capital market.

Facts & Figures on Islamic Finance and ICM


The Islamic finance industry in Malaysia has grown rapidly in the last 10 years, accounting for 22% of the total financial assets currently, as compared to 6.9% in 2000. At the global level, the value of Islamic financial assets is estimated to expand to US$4 trillion over the next few years from the current level of US$1.2 trillion1.


The Islamic capital market has contributed significantly to the growth of the overall Islamic finance industry in Malaysia. As at end-2010, the size of Malaysia’s ICM stood at RM1.05 trillion, or 52% of the size of the overall Malaysian capital market, as compared to only RM294 billion as at end-2000. It has registered an average annual growth rate of 13.6% over the last 10 years2.


This is represented by the market capitalization of Shariah-compliant companies listed on Bursa Malaysia which has grown to RM756 billion in 2010 from RM254 billion in 2000, and the value of sukuk outstanding which has increased to RM294 billion in 2010 from RM40 billion in 2000. In addition, the net asset value of shariah-compliant unit trust funds in Malaysia has grown to RM24 billion from just RM1.7 billion during the 10 years up to end-20103.


Malaysia accounts for almost two-thirds of total sukuk outstanding globally as at end-2010. In addition, Malaysia continues to be a pioneer in creating innovative sukuk structures. For example, Malaysia’s sovereign global sukuk offering in July this year is the world’s first sovereign US-dollar Global Sukuk structured based on the principle of Wakala. The oversubscription rate of 4.5 times for this US$2 billion sukuk issuance also signifies the wide international acceptance of Malaysia’s Islamic capital market products.

Next phase of growth

Ladies and gentlemen,


The Islamic capital market will clearly sustain its growth momentum over the next decade. Question is how its profile and complexion will evolve over this period.


The Securities Commission believes that the next phase of growth for the Islamic capital market will be characterised primarily by greater internationalization. Growth in the number of jurisdictions and industry participants that embrace Islamic finance will be a major factor in stimulating more cross-border transactions and activities. So will further development of standards and guidelines by international organizations, such as the Islamic Financial Services Board (IFSB) and the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), as well as greater harmonization of Shariah rulings and interpretations, which will provide a more common platform for industry players to operate across jurisdictions.


With these growth drivers, greater internationalization of Islamic capital market will manifest in a number of key areas. First, product and service development. We are already witnessing increased level of cross-border activities involving ICM products and services in recent years – these include fund managers managing international mandates for investors outside the managers’ home countries, diverse international representation of investors in sukuk issuances, and the offering of Shariah-compliant funds out of international centres such as Luxembourg, among others.


Looking ahead, an increasing number and broader range of similar cross-border activities can be expected to feature more prominently in the Islamic capital market landscape. In addition, there will be more concerted efforts towards the Shariah-based, as opposed to Shariah-compliant, approach involving greater innovation of investment products that are structured based on more equitable risk-sharing arrangements and on productive, real economic activities.


The Shariah-based approach is also about the channeling of savings into investments that create businesses and jobs, which in turn will benefit the real economy. Financing in the form of (participatory contracts) of mudharabah or musharakah will facilitate more equitable risk sharing.


The growing availability of such investment instruments and vehicles in the future will drive greater internationalization of the Islamic capital market as they will serve to widen the investor base.


In tandem with the projected expansion in product development, product distribution channels will become more extensive, transcending national borders in order to bring the Islamic capital market products to the targeted investor base. In this regard, there will be increased cross-border collaboration among industry players as they leverage on each other’s strengths and competitive advantages for mutual benefit.


As the various countries intensify efforts to develop their respective Islamic capital markets, greater collaboration among these jurisdictions will facilitate cross-border initiatives to strengthen Shariah governance frameworks, which is essential to support the expansion in international product and service offerings. Similarly, we foresee more international collaboration in Shariah research in order to achieve cross-jurisdictional benefits, primarily to facilitate business expansion and secondarily for cost efficiencies.


Another area that will benefit from greater internationalization is the provision of legal, Shariah and other advisory and intermediation services. As more Islamic capital market instruments go cross-border, there will be greater involvement of these service providers from multiple jurisdictions to facilitate the structuring and offering of the products from both technical and Shariah perspectives, to ensure the respective local laws and regulations are observed, and to benefit from on-the-ground intelligence.

Capital Market Masterplan 2 & Budget 2012

Ladies and gentlemen,


Under the Capital Market Masterplan 2 (or CMP2), the size of Malaysia’s Islamic capital market is projected to reach almost RM3 trillion by 2020 with an average growth rate of 10.6% per annum over the 10-year period. This growth projection is expected to be achieved primarily through the widening of the Islamic capital market’s international base, which would also generate scale efficiencies.


Some of the growth strategies for the Islamic capital market that have been identified under the CMP2 are consistent with and supportive of the outlook that I have just mentioned earlier. These include strengthening the service and operational infrastructure, promoting the Shariah-based approach, and increasing international collaboration on Shariah research and product development. Some of the other strategies, on the other hand, are intended to address existing and potential challenges in the Islamic capital market.


One of the growth strategies identified in the CMP2 is to build scale in the various segments of the ICM. While the expansion of these segments over the past decade has been strong, the growth was achieved from a low base. As such, the product issuers and service providers in the Islamic capital market still operate at a scale that is generally small, especially relative to their conventional counterparts. This is a particularly critical challenge for Islamic fund managers globally as a recent industry report on Islamic funds worldwide shows that only 30% of these managers have more than US$100 million in assets under management while almost 40% are managing less than US$25 million4. Product and service expansion leading to greater internationalization of the Islamic capital market will provide a broader avenue for Islamic fund managers to expand the reach of their operations, thus enabling them to secure more mandates to increase the size of assets under their management.

Ladies and Gentlemen,


Initiatives to strengthen Malaysia’s position as an international Islamic financial centre received a boost when two incentives for the sukuk market were announced in the recent 2012 Budget.


Tax deduction on expenses incurred for issuance of sukuk wakala will be given for a three-year period commencing from 2012, while income tax exemption given for non-ringgit sukuk issuance and transactions is extended for another three years until 2014. These measures reaffirm the government’s continuing commitment to the country’s leading and pioneering global role in Islamic finance, and will contribute towards further internationalisation of the Islamic capital market.


Wakala is one of the sukuk structures that is widely accepted globally, therefore the incentive will encourage more issuances under this structure which in turn can be marketed to a truly global audience.


The incentive for non-ringgit issuance reflects the government’s efforts to strengthen Malaysia’s position as a multi-currency platform for sukuk issuances. This extension will further encourage international and local issuers, to use Malaysia to undertake Islamic fund-raising activities.

Challenges faced

Ladies and gentlemen,


It is instructive to note that the impressive development of the Islamic Capital Market since its infancy years in the 1980s has been achieved amidst numerous challenges, some of which remain significant today.


In spite of having made great strides, issuers of Islamic capital market products continue to face challenges in relation to product innovation, development and structuring. In this regard, significant issues include harmonization of Shariah interpretation, distribution channels, documentation, skill sets, and legal, regulatory as well as tax frameworks.


In respect of achieving greater international harmonization in the interpretation of Shariah principles, while the areas of differences in opinion are not substantial, there are still consequent limitations in the ability of an issuer to offer a truly global Islamic product, which in turn have implications on the issuer’s product development strategy and initiatives. In this regard, the presence of international Shariah advisers who sit on various Shariah boards of Islamic financial institutions across different jurisdictions can serve to bridge the gap through constructive discussions during the course of discharging their duties. Furthermore, the sharing of the rationale for Shariah rulings or interpretation across jurisdictions can also create better awareness, and hopefully appreciation, within the industry.


I have touched earlier on the need for extensive product distribution channels to broaden and deepen the investor base for Islamic capital market products. Product issuers and service providers must seek to put their Islamic funds and other products on global or at least regional distribution platforms in order to secure greater demand which in turn would enhance their product innovation and development capability.


Facilitation for such distribution platforms includes the establishment of regulatory arrangement that will enable accessibility and offering of products across jurisdictions. In this regard, the SC have entered into two Mutual Recognition Agreements (MRAs), with the Dubai Financial Services Authority and the Hong Kong Securities and Futures Commission, to facilitate the cross offering of Islamic collective investment schemes.


There is also a need to address the elements of uncertainty and disparity in the legal, regulatory and tax frameworks for Islamic capital market transactions, particularly in cross-border situations. Malaysia has established relevant frameworks that put Islamic financial products effectively on the same playing field as their conventional counterparts. However, for Islamic capital market to progress further internationally, more jurisdictions would need to move in a similar direction.


Another challenge facing the Islamic capital market globally is the acute shortage of human capital with the relevant skill sets which, in turn, has hampered the pace of innovation and expansion of product range. Furthermore, arising from the shortage, there is typically a premium to be paid to hire experienced Islamic finance professionals, thus increasing the operational costs of industry players. To help mitigate the situation, several academic institutions in Malaysia are now already offering programmes leading to qualifications in Islamic finance.


Ladies and gentlemen,


Greater internationalisation will be a key element of the Islamic capital market as it continues to chart further progress in the coming decade. Greater internationalization will also be able to address, at least partially, the challenges that I have just highlighted. In addition, greater internationalization will provide Malaysia the opportunity to strengthen its position as a hub for Islamic capital market activities.


The outlook for the Islamic capital market remains very promising. New markets, enhanced integration and liberalization of economies and financial markets are the themes that will help drive further internationalization of the Islamic capital market. These, coupled with coordinated and concerted efforts by all stakeholders including regulators and market players, will put the Islamic capital market in a position of strength.


In conclusion, I would like to reiterate that the orderly development of Malaysia’s Islamic capital market remains a key priority for the SC. With the broad range of strategies being put in place to support the widening of its international base, I believe we would be in for exciting times ahead and ready to gear up for the next phase of growth.

Thank you.


“JEF 2011 Debates The Future Needs of Islamic Finance”, Global Islamic Finance Magazine (2011)






Ernst & Young Islamic Funds & Investments Report 2011