Keynote Address by

YBhg Dato’ Zarinah Anwar,
Chairman, Securities Commission Malaysia

at the

Malaysian Islamic Finance (MIF) Issuers & Investors Forum 2008
Malaysia ‘s Islamic Capital Market – Evolving from meeting the needs of Muslim savers to becoming a global hub

12 August 2008
Mandarin Oriental, Kuala Lumpur


Distinguished guests, ladies & gentlemen.

1. The Islamic capital market continues to entice interest and enthusiasm from the global financial community. For many, the stage of awareness and understanding is over. They have begun to scan the globe to quickly seize new investment and business opportunities. Malaysia’s comprehensive Islamic capital market offers many such opportunities, both to domestic and global investors alike.
2. Malaysia’s success in building a comprehensive Islamic capital market can be attributed to the foresight and pioneering efforts of our policy-makers, finance professionals and Shariah scholars who saw a need at the time, to create effective institutions and instruments to mobilize savings to serve the needs of Malaysia’s Muslim community and to ensure that these savings could be effectively utilized to promote economic growth.
3. From humble beginnings with the establishment of Tabung Haji or the Pilgrims’ Fund Board in 1969 and the first Islamic bank in 1981, there has been a natural progression in development which has led to the emergence of a distinct and vibrant Islamic financial market and the availability of a full range of Islamic banking, takaful and capital market products and services.
4. Malaysia’s Islamic capital market has now achieved the necessary critical mass. The leadership and support provided by the government through the facilitation of policies and incentives has ensured the effective translation of vision and aspirations into reality over a relatively short period of time. Our Islamic capital market has thrived to the extent that it now accounts for a highly significant portion of the overall Malaysian capital market.

Islamic equities and sukuk

5. In this regard, one of Malaysia’s traditional strengths is its diverse range of listed companies – with probably the best offering of small and medium sized companies in ASEAN and the Middle East. In addition, they operate in diverse industries, with companies which are asset-based such as plantations, resources, properties as well as in a broad range of manufacturing, service industry and technology-based industry. From this large pool of companies trading at attractive valuations, we see many continuously strengthening their corporate governance practices and increasingly focused on managing their capital efficiently to generate greater shareholder value. This has resulted in a steady stream of income flow from dividends and capital repayments as well as in terms of capital appreciation over the past decade.
6. These features, coupled with the fact that 85% of the listed securities on Bursa Malaysia accounting for 65.6% of total market capitalisation, are Shariah-compliant, implies that Malaysia has an attractive Islamic equity value proposition. This is re-affirmed by the fact that more and more companies going for IPO are voluntarily seeking to have their Shariah compliant status determined by our Shariah Advisory Council before they go for listing. This is a clear recognition of the premium that Shariah compliant status confers on these companies.
7. Islamic equities best embodies the Islamic principle of equitable risk-sharing. It is perhaps timely for corporate leaders as well as fund managers to review the possibilities of maximising the potential brand value of Islamic industries. One possibility may be to shape a value-added definition of an Islamic corporation either as defined by specific aspects of corporate governance, ethical conduct and particularly through their contribution to the development and well-being of society. The creation of valuation premiums through defining a distinctive Islamic approach in generating shareholder value and the eventual ability to trade the shares of these companies across different Islamic stock markets certainly represents an exciting prospect.
8. Malaysia , as most would be aware, pioneered the development of the global sukuk market with the launch of the first sovereign 5 year global sukuk in 2002. Since then our sukuk market has experienced unprecedented growth with Malaysia firmly established as one of the largest issuers of sukuk over the years. Last year, 76% of bonds approved by the Securities Commission were sukuk. Challenging market conditions this year has naturally had an impact on the issuance of bonds but nonetheless the first six months saw the approval of 22 sukuk issues totaling RM17.7 billion, accounting for 31% of total bonds approved during the period.
9. There are several reasons why sukuk issuances from Malaysia whether denominated in Ringgit or US Dollar, will continue to attract international investors and issuers. First, Malaysia has a strong base of domestic investors to anchor the distribution of a major sukuk issue. Second, sukuk pricing for Malaysian-originated issues are highly competitive and there is also strong availability of expertise as well as an established regulatory framework which meets both Shariah and legal requirements.
Ladies and gentlemen

Islamic unit trusts and fund management

10. The investment management industry is the fastest growing segment of our capital market with cumulative growth rates of 24 percent per annum. This growth is expected to strengthen even further on the back of various deregulatory and liberalization measures which we have introduced including the establishment of a more facilitative regime for investment product approvals, the easing of restrictions on investments abroad and liberalized rules for the establishment of foreign fund management companies. We are also making available a range of tax and other incentives for Islamic fund management companies establishing operations in Malaysia, and this has already generated strong interest from leading fund management companies and international firms. Recently we announced the first batch of Islamic fund management licences to Kuwait Finance House, DBS Bank and CIMB Principal, and we hope to announce the next batch of licensees shortly.

I am heartened by the strong response we have had and the quality of the names that have been engaging with us. Many of these firms are looking towards making Malaysia their global centres of excellence when it comes to Islamic fund management. I believe the presence of the international Islamic fund management companies together with the five global fund management companies already established under an earlier liberalization scheme, as well as some of our own major firms will help drive the growth and vibrancy of the industry in Malaysia.

12. Our expertise in manufacturing Islamic funds lends itself to providing a strong complement to the development of the Islamic fund management industry. The industry is still growing at considerable pace and demand for unit trust products continue to be strong. Shariah compliant unit trust funds chalked up sales totalling RM2.96 billion this year, a growth of 84% compared to last year. The robust growth in this market segment is really significant when compared to the 11% growth in net sales for conventional products over the same period.
13. The strong growth is a reflection of the increasing innovation capabilities in the Malaysian industry; with many of the recent product offerings providing features of capital protection with only a portion is invested in structured products like swaps, options and hedging instruments for a wide range of underlying assets including currencies as well as commodities. This development seems to suggest that irrespective of overall market conditions, there are opportunities for market intermediaries to innovate and cater to investors’ appetite for products with sufficient risk mitigation features. We have also approved products for offering in other regional markets; indicating new areas of growth to increase market share. Therefore, the challenge is for intermediaries to be innovative in their Shariah product offerings with more structured features capturing the entire horizon of investibles in line with changing appetites of investors. The exploration of new greenfield markets capitalizing on Malaysia’s lead position in product development would certainly be another area of growth.
14. In addition, Malaysia offers a strong overall Islamic finance and Shariah framework that provides a core foundation for fund management companies to use as a base to establish their Islamic fund management businesses. We have established a mutual recognition arrangement with the DFSA and are working with other jurisdictions to allow greater cross border offering of Islamic funds. I am confident therefore that given our unique geographical position and expertise in Islamic finance and with the support of market players such as your selves, we will be able to successfully position Malaysia as a centre for Islamic fund management and a gateway to the region for the mobilisation and management of Islamic funds.

Shariah governance and investor protection

15. Of course, to meet the topmost requirement of investors seeking Shariah-compliant products, Malaysia offers a consistent, reliable and robust Shariah-compliance framework. The thinking and opinions of our Shariah scholars are well researched and relatively well documented.
16. Certainty, consistency and clarity of the rulings are facilitated through the establishment of a single forum, a national Shariah Advisory Council (SAC) for the Islamic capital market which has been established by the SC since 1996. Membership of this Council comprises highly qualified Malaysian individuals with wide international exposure as well as international scholars from within the region . The SAC is established pursuant to the Securities Commission Act, and serves as the sole authority for the issuance of rulings and guidelines on the Islamic capital market.
17. Given the rapid pace of innovation and the deepening of international collaboration among Shariah scholars around the world, the work of the SAC continues to be extremely important. Indeed, there is as much international interest in our rulings as we have in those of fellow scholars from other countries. The Resolutions of the Malaysian SAC have already been published twice and translated into several languages.
18. With increased product diversification, complexity and sophistication, risks to investors can increase correspondingly. It is therefore essential that steps are taken to enhance investor protection through efforts by industry to invest in compliance, risk management and corporate governance to enable them to discharge their responsibilities to investors appropriately. At the same time resources have to be invested to enhance investor education to improve investor knowledge in the products they invest and enable them to better manage the risks of investment.
19. In this regard, 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 an investor in the conventional market. We emphasise a common regulatory approach based on IOSCO’s objectives and principles of regulation. The requirements for disclosure, transparency and governance apply equally to both 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 the investor of a conventional product.
Ladies and gentlemen


20. Undoubtedly, the Islamic capital market is the segment of our market that provides us the most potential for a sustainable competitive advantage. It is the most liberalized sector of the Malaysian capital market; has been a trailblazer in innovation, recording numerous world firsts in regulatory and product development since 2002, achieved tremendous growth and propelled us on to the global stage.
21. But there is still so much more that Malaysia can do to enhance the value proposition of our Islamic capital market to both domestic and global investors. Energy and resources need to be continuously invested to enhance capabilities and competitiveness to attract more players and to strengthen our distribution capabilities by addressing bottlenecks and inefficiencies in the intermediation process, while at the same time, pursuing linkages with other markets to enable greater cross border flows. From our perspective, while Malaysia has the products, the delivery channels particularly in reaching investors across our borders are still not fully developed. Similarly, Malaysia would benefit from the listing of international Islamic products ranging from equities, sukuk as well as the increased availability of fund products from other Islamic centres.
22. Therefore even as we pursue developmental initiatives to widen access of our markets to regional and global issuers and investors, it is equally important for our domestic intermediaries to increase their visibility abroad and to enhance their focus on regional and global expansion. It is heartening to note that in this regard a number of Malaysian intermediaries have already taken steps to forge strategic alliances with intermediaries in other jurisdictions and are venturing into regional markets, enabling them to acquire skills and expertise on new products and overseas investments. Their ability to partner with other players and leverage off each other’s strengths in product manufacturing and distribution will inevitably expedite the growth of Islamic markets and intermediaries.
23. Malaysia is committed to working closely with other centres to create an Islamic capital market network which will be able to provide the necessary linkages to optimize opportunities to unlock Islamic savings through effective intermediation, and to create opportunities to stimulate cross border investment flows.
24. On that note, ladies and gentlemen, I wish you a productive and insightful conference.
Thank you.