Malaysia Leads Drive to Unlock Potential of Islamic Capital Market: Key Drivers in Place

The Securities Commission Malaysia (SC) continues to play a pivotal role in developing and unlocking the growth potential of the domestic and global Islamic capital markets, as a viable and attractive alternative to the conventional markets.

SC Deputy Chief Executive Datin Zarinah Anwar, in her keynote presentation at the 3rd Annual Islamic Finance Summit held in London this week, spoke on the drivers and challenges in achieving this vision.

“Malaysia has benefited from having in place key factors to develop the Islamic capital market, namely a clear strategic direction from the Capital Market Masterplan, and systemic frameworks – legal, accounting, tax and Syariah – underpinned by strong government support. The Asian experience has shown that these drivers are important ingredients for success,” she said.

A successful and sizeable Islamic capital market in turn contributes to the broadening and deepening of the overall Islamic financial market in Malaysia, which growth the Financial Sector Masterplan also complements.

Malaysia is the first sovereign to issue a global Islamic bond and is regarded as a benchmark by other issues. The Labuan Financial Exchange has a few global Islamic securities listings already, with the Qatar Global Islamic bond expected to list next, and half of the world’s Islamic capital market funds (estimated at around
USD1.65 billion) are located in Malaysia.

In recognition of SC’s pioneering efforts and achievements in this area, the International Organisation of Securities Commissions (IOSCO) has entrusted to SC the role of chairing the Islamic Capital Market Task Force. The Task Force is undertaking a fact-finding study to assess the state and development of the Islamic capital market globally, identify any regulatory gaps in the area and enhance the level of knowledge of IOSCO member jurisdictions of financial products and activities based on Islamic principles offered across the globe. The Task Force comprises key capital market regulators from developed and developing markets, namely the US, UK, Australia, Italy, Thailand, Indonesia, Jordan, Turkey and Nigeria.

While Malaysia’s Islamic financial market is growing rapidly, Datin Zarinah highlighted that more needs to be done to enhance the global competitiveness of Islamic financial products to become a vital complement to the conventional system.

“The Islamic financial market can be positioned in the global marketplace as a vibrant complement to the conventional system, and as an integral component in contributing to the broadening and deepening of the global financial system,” she said.

In focusing on one of the challenges which is the present narrow investor base, Datin Zarinah stated, “It has been said, ‘Islamic finance is a problem of “billions of funds with nowhere to invest’. It is estimated that there are funds worth at least USD1.3 trillion belonging to Muslims in Middle East countries that are not being invested in Islamic products.”

Datin Zarinah added that product and market competitiveness is the key to global positioning for Islamic products. “To widen the investor base, there must be greater product innovation occurring at a faster pace. There needs to be greater collaboration, resources and the will to tap into unutilised funds,” she said. Products must also be more innovative to respond to rapidly changing market demands due to globalisation, liberalisation and technological innovations.

She also stressed that in addressing these challenges, there is a need to ensure that Islamic products do not operate at a competitive disadvantage to conventional products, to create deep markets to enhance regional and international liquidity pools, and for the establishment of facilitative and sound legal, accounting and tax frameworks. In addition, disclosure and transparency standards should be benchmarked to international best practices.

Datin Zarinah also touched on the need to enhance investor awareness on the availability of Islamic products by bringing the market to the people. Several ways to do so would be by demystifying Islamic financial terms to make them more understandable, to further build on the reputation of ethical and socially responsible principles underpinning Islamic products and by providing more data on Islamic finance by centralising data gathering and dissemination among countries.

Malaysia also actively participates in efforts to harmonise and standardise Syariah interpretations. Currently Malaysian Syariah scholars act as advisers to international organizations and Islamic financial institutions such as the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), the International Islamic Financial Market (IIFM), the Islamic Development Bank (IDB) and the Dow Jones Islamic Market.

16 January 2004