Speech by

YBhg Dato’ Zarinah Anwar, Chairman, Securities Commission

at the

Islamic Finance Asia Summit 2008
“Building Linkages and Promoting Cross-Border Activities”
23 June 2008, Westin Hotel, Kuala Lumpur

Distinguished guests, ladies and gentlemen

Good morning

1. I am delighted to have been invited to speak at this Summit . Allow me to take this opportunity to congratulate Euromoney for organising this annual event. It presents an excellent opportunity for policymakers, industry players and investors to share perspectives of a fast-growing segment of the global marketplace that is increasingly transcending religious, political and geographical boundaries.

Global growth opportunities


The emergence of the Islamic finance industry is a phenomenon that has generated great interest in the financial world. Clearly, demand for shariah-compliant products is expanding and, closely associated with this, there is growing ambition on the part of financial institutions and intermediaries, including those with big balance sheets and extensive international presence, to expand their portfolio of products and services to incorporate Islamic products in their suite.

3. One such example is the burgeoning global market interest in Sukuk, many of which are increasingly being issued and transacted within as well as outside the Muslim world. It is also heartening to see leading corporations from many Muslim majority countries increasingly making their presence felt in the global Islamic capital market with landmark sukuk issuances.
4. Although the Islamic finance sector remains just a fraction of global assets, the industry has enormous potential. This fact is underlined by the entry of some of the world’s largest banking, investment banking, fund management and insurance groups which have invested significantly to build their capacity and expertise to advise, structure, originate and distribute Shariah-compliant products. They also draw significant comfort that these products are not confined to Muslim customers, but have universal appeal to all issuers and investors. The potential business opportunities from augmenting financial engineering blended with socially and ethically responsible financing to cater to investors has certainly not gone unnoticed in the boardrooms of the global financial institutions.

‘s journey to being an international Islamic capital market


Let me take a moment to share with you some perspectives on our efforts in Malaysia to develop a vibrant Islamic capital market. We have benefited significantly from the early foresight shown by our policymakers in identifying Islamic finance as an essential component of our financial system to meet the needs of Malaysia ‘s large Muslim population. Through their leadership and commitment, key policy initiatives have been put in place and rigorously pursued to create the necessary infrastructure in the form of a strong regulatory framework, the enabling of the widespread participation of domestic and international intermediaries and the creation and expansion of the range of products.

These efforts were critical in laying a strong foundation for the growth of Malaysia ‘s Islamic capital market, as reflected by the full complement of infrastructure, institutions, intermediaries and investors; all contributing to market depth and breadth.

6. Significant resources have also been invested in establishing a pioneering and innovative culture in the Islamic capital market. A diverse range of products and services have been successfully launched including a national shariah screening system for equities, sukuk structures and the wide range of Shariah-compliant investment products such as unit trusts, ETFs, REITs, as well as structured products and derivatives.
7. Malaysia ‘s success also underscores the potential for the Islamic capital market to become a significant part of the global capital market. After more than two decades, Shariah-compliant products now account for a significant portion of Malaysia ‘s capital market. For example, 86% of the listed securities on Bursa Malaysia are Shariah-compliant, this represents 63% of Bursa ‘s total market capitalization. Similarly, our Sukuk market has experienced unprecedented growth; 76% of bonds approved by the Securities Commission in 2007 were Sukuk. Additionally we have two Islamic REITs now listed with the Exchange. The number of Islamic investment funds reached 134 in 2007, up from just 7 ten years earlier. The NAV of Shariah-based unit trust funds for the last 10 years grew at a compounded annual growth rate of 40%, outpacing our total industry growth of about 18% over the same period.
8. Our earlier efforts in gradually liberalising capital market intermediation services pursuant to the Capital Market Masterplan have also brought positive changes to the demography and landscape of our capital market. We have now well recognised foreign names in our broking, fund management as well as investment advisory industries. Several of our intermediaries have also been actively looking into business opportunities in the region by establishing operations either directly or through partnerships with local intermediaries. Furthermore with the liberalisation of rules relating to investment abroad, our fund managers are now able to offer investment opportunities from across the globe to Malaysian investors.
9. It is a natural part of our journey that we should now seek to build on these strengths and achievements to expand outwards to develop Malaysia as an international Islamic capital market. This internationalisation of Malaysia ‘s Islamic capital market requires us first to create a fully liberalised environment to facilitate the intermediation of cross-border transactions. We have implemented this through our MIFC strategies and are following up through offering a range of tax and other incentives and through intensifying our international marketing efforts to attract international players.

Fostering greater collaboration and linkages with other Islamic capital
market player

Ladies and gentlemen

10. The other natural objective of our strategy is to build the connectivity of our market with other Islamic markets whether in the global centres, the MENA (Middle East and North Africa) region as well as the Far East . Indeed, the importance of global linkages should not be underestimated. The potential for recycling capital flows that arise from excess savings among members of the Organisation of Islamic Countries to those members with deficit allows us the opportunity to promote the growth of our capital markets as well as to improve the welfare of our communities. There is the potential to explore many possible win-win strategies here that can generate more profits and economic development at the same time.

But considerable effort is required to identify business opportunities between the Islamic nations and their intermediaries. The support and participation of the leading global firms are needed to weld the linkages that facilitate cross-border product origination and distribution. Malaysia has put in substantial effort to catalyse these linkages through listing several of our sukuk in Bahrain, Luxembourg, the Dubai International Financial Centre and Hong Kong. Our market development has similarly been assisted by the GCC countries listing their sukuk in Labuan . We have inked a mutual recognition agreement with the Dubai Financial Services Authority (DFSA) to promote the cross-border distribution and marketing of Islamic funds and we are also actively exploring opportunities to establish similar arrangements with other centres in the Middle East as well as the Far East.

12. We believe that the Securities Commission being a signatory to the IOSCO Multilateral MOU as well as our close working relationship with fellow securities regulators worldwide will be able to strengthen the areas of supervision and enforcement of securities laws to ensure that investors can have the comfort of a strong investor protection regime that would cover cross-border investments. This, together with the facilitative and liberalised regulatory environment that we have put in place, can provide a strong platform upon which market players can develop international linkages, promote cross border opportunities and help efficiently re-cycle funds from capital exporting to capital importing countries.
13. It must however be recognised that in promoting international linkages and promoting cross border activities, regulators can at best, provide the enabling environment and help remove regulatory and related roadblocks. Overall, a thriving global Islamic market needs many active players who have the foresight and courage to venture beyond traditional comfort zones. Just as we welcome foreign intermediaries to our shores, we are also keen to see more Malaysian intermediaries going abroad and working closely with international and other domestic intermediaries in various markets to seek opportunities to collaborate and to promote innovative cross-border products to create more growth momentum and business opportunities.

Cross border offerings, dual listing of products and companies, the creation of regional or global Islamic funds, including venture capital and private equity funds, the exchange of shariah and technical expertise as well as joint training and marketing programmes are just some of the initiatives that can be pursued. In the pursuit of these initiatives, we hope that Malaysian intermediaries will be able to see beyond the immediate challenges and cost issues and set their sights on the vast opportunities in the horizon. We firmly believe that building our market requires us to collaborate with others to also build their markets. As a regulator we will create a facilitative regulatory environment to pave the way for the realisation of such opportunities but intermediaries themselves will have to run the last mile.

Challenges moving forward

Ladies and gentlemen

15. There is a Malay saying which basically reminds us not to explore the high seas with a small fishing line. While the global Islamic capital market offers many opportunities, it also demands that our products, services and practices be benchmarked internationally. To be a significant player in the increasingly competitive global marketplace, the challenge is to be on par with the best in class. In this regard, Islamic financial services and products are generally well suited to meet the demands of the modern world in terms of its emphasis on transparent, ethical and socially responsible practices and its prudent approach to managing risks. Consistent with this philosophy, it is critical to adopt international standards and best practices on disclosure, accounting, governance and supervision so that investors in the international marketplace would feel reassured that they are purchasing products of excellent quality with the highest standards of investor protection. These traits would broaden the market for Islamic products and enhance their global competitiveness.
16. In addition, the aligning of national regulatory standards and approaches will facilitate greater integration of Islamic capital markets and strengthen its ability to compete for capital and order flows; thereby laying the groundwork to deepen liquidity and to enlarge its size. It will also reduce the cost of operating in individual domestic markets and will facilitate greater cooperation for the promotion of cross-border efforts.

Developing a common framework for governing, supervising, and regulating Islamic capital markets is indeed a major challenge for all of us. It cannot be unilaterally pursued by any one regulator. Towards this end, IOSCO has established a taskforce that is currently assessing the compatibility of Islamic capital market products with IOSCO’s principles of securities regulation. This is in fact the second Islamic capital market-related initiative by IOSCO over the last four years- a clear reflection of the world body’s recognition of the increasing significance of Islamic finance in the global financial markets. In addition, countries will also benefit from the efforts of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB) to formulate appropriate Islamic prudential standards, accounting standards and guiding principles to harmonise Shariah compliance standards and to promote the soundness of the Islamic financial services industry as a whole.

18. One area that continues to demand attention and more effective harnessing of efforts is the pressing need to overcome the shortage of qualified Shariah and Islamic finance experts and the need for greater scholarly and applied research in Islamic finance. Clearly there is a need for more coordinated and concerted efforts amongst regulators, industry and academia from the various jurisdictions to respond to this challenge.
19. Finally I would like to touch on an area that I believe requires greater exploration on how best to leverage on a core Islamic product – namely Islamic equities. The Islamic equity perhaps best embodies the Islamic principle of equitable risk-sharing. However, past efforts on Islamic equities have been focussed mainly on establishing systems to determine shariah-compliance. No doubt this has spawned the development of Islamic equity funds and has enabled investors seeking shariah-compliant investments a means to access the equity market, either directly or indirectly. But the Islamic equity market has not developed very much beyond this. There is therefore a need to expand the focus on the entire value chain of the Islamic equities market. Only then can the brand value of Islamic equities be fully and effectively tapped. To illustrate this point, we can observe that while there are many Shariah compliant stocks, we would be hard pressed to identify a truly leading global Islamic company, branded and marketed as such. Compliance requires only meeting minimum standards but valuation premiums can be generated through creating a distinctive Islamic approach to creating shareholder wealth. What is the notion of a global Islamic corporation? Are there specific aspects of governance, transparency, corporate responsibility or ethical conduct that can be ascribed to such companies? Can Islamic venture capital or private equity play a role in nurturing and creating Islamic corporations? I believe that there are substantial opportunities for the large public-listed companies to promote their Islamic brand as well as to cross-list their companies across Islamic equity markets.


Ladies and gentlemen

20. In conclusion, it is clear that future challenges can be met through further enhancing the level of international collaboration between regulators and the private sector as well as tapping the participation of leading global financial institutions. There is also a need for a more holistic approach that links capital market development more closely with economic development – for example through greater emphasis on the provision of social amenities and the channelling of greater resources into infrastructure development and projects that offer opportunities for greater economic development. The growth of the global Islamic capital market will benefit from the development of the lesser developed Islamic countries. At the same time, cross border collaboration in the financing of infrastructure development can stimulate the development of the Islamic capital market by providing deal pipelines for equity and debt instruments.
21. The windows of opportunity are there and I believe the current growth momentum is capable of being capitalised.
On that note, let me conclude by offering my best wishes for a successful Summit

Thank you