Address by
Zainal Izlan Zainal Abidin
Executive Director, Islamic Capital Market
Securities Commission Malaysia
KLIFF 2011
Wednesday 5 October 2011
Istana Hotel, Kuala Lumpur

Encik Abdul Aziz Abd Jalal, Director, KLIFF 2011

Senior industry representatives

Honourable Shariah scholars

Ladies and gentlemen

Assalamualaikum and a very good morning


First of all, I wish to congratulate the organisers for yet another successful KLIFF, which has now progressed into its 8th year. I would also like to express my sincere appreciation to CERT for inviting me to speak here today. I am indeed very honoured to be given this opportunity to share my thoughts with such an esteemed audience on the subject of Islamic capital market, an area which the Securities Commission has given significant attention to, not only from a regulatory perspective but also in terms of its development.

Overview and Update on Islamic Capital Market


Islamic capital market is a trillion ringgit industry in Malaysia. Having grown at an average rate of 13.6% per annum over the ten-year period between 2000 and 2010, the size of Malaysia’s Islamic capital market, or ICM, stood at RM1.05 trillion as at the end of 2010, compared to just RM294 billion as at end-2000.


During this period, the market capitalisation of Shariah-compliant companies and the value of sukuk outstanding in Malaysia increased at average rates of 11.5% and 22.2% per annum respectively. A similar trend was also observed at the global level, with Islamic finance as a whole registering an average growth rate of almost 15% per annum.


The sukuk market has continued to expand impressively in 2011. The total value of sukuk issued globally from January to August amounted to USD55 billion, representing a 105% increase over the corresponding period in 2010. Malaysia remains at the forefront of the sukuk market, accounting for 67% or USD37 billion of the total sukuk issued. Malaysia is also the domicile for 60% of the USD165 billion total sukuk outstanding globally as at August 2011.


One of the notable issuances this year is the third Malaysian sovereign sukuk, structured based on the principle of wakala. The overwhelming response to the USD2 billion issue from both international and domestic investors, as reflected by their geographical diversity, underlines the healthy expansion of cross-border Islamic finance transactions.


The range of sukuk globally has also been enriched this year by the use for the first time of several currencies, including the Iranian Rial, Jordanian Dinar and Yemeni Rial, which bodes well for future broadening of the global sukuk market. The sukuk market will be further enhanced by the proposed issuance of a Renminbi-denominated, or Dim Sum, sukuk by Khazanah Nasional Berhad.


One of the growth drivers of the Islamic capital market is the greater awareness of and demand for Shariah-compliant investment and savings products and services, which has been catalysed largely by rising income and wealth among the Muslim communities, as well as by demand or preferences of Islamic-based or similar institutions.


Another key driver is the ability of ICM stakeholders to develop and offer an expanding range of Shariah-compliant products and services on a sustained basis to the extent they are able to cater to a wider investor base.

Overview and Update on Islamic Capital Market


Malaysia continues to enjoy a leadership role as an international centre for Islamic capital market activities. Malaysia has successfully developed various capabilities and capacities in virtually all segments and aspects of the Islamic capital market. The key value proposition of Malaysia’s ICM is its comprehensiveness.


Malaysia’s Islamic capital market has a significant number of players offering a variety of ICM products and services. 16 full-fledged Islamic fund management companies are currently licensed by the Securities Commission, operating both domestic and international businesses in terms of their investor base as well as their investment assets. In addition, more than 30 fund management companies in Malaysia offer Islamic fund management capabilities alongside their conventional business.


Malaysia is also home to seven companies that offer Islamic stockbroking services, including one full-fledged Islamic stockbroker. Malaysia also has a strong representation of Islamic banks and takaful operators that play a synergistic role with their Islamic capital market counterparts.


Other than the players and products, the comprehensiveness of Malaysia’s Islamic capital market is reflected by the presence of other capabilities and services such as Shariah research, academic institutions offering Islamic finance programmes, and Shariah advisory and consultancy, to name a few.


Equally critical is the availability of an established and conducive legal, regulatory and tax framework that facilitates the development and growth of Islamic capital market in this country.


I will be remiss if I do not also mention the importance of the Shariah governance framework as a key constituent of the comprehensive infrastructure of Malaysia’s ICM. The centralised decision-making at the Shariah Advisory Council provides consistency and certainty in Shariah rulings and interpretation that enable industry players to operate on a common Shariah platform.


Furthermore, the Shariah Advisory Councils of the Securities Commission and Bank Negara Malaysia have been empowered to make rulings on any Shariah matter relating to Islamic finance referred to them by the courts. The binding effect of such rulings addresses the issue of uncertainty in respect of dispute resolution on contracts and transactions based on Shariah.

Sustainability of Growth of Islamic Capital Market


Growth in the emerging economies of Muslim-majority nations bodes well for the development of Islamic capital market. As the proportion of the population with surplus disposable income in these countries grows, so will demand for Shariah-compliant investment products and services. And Malaysia being a leading ICM centre is well placed to capitalize on this potentially significant demand, especially in the provision of fund management services.


Continuous product innovation is a critical component for sustained future expansion of the ICM. The past decade was marked by rapid product development arising largely from adaptation of conventional capital market products, which served the industry well and facilitated the growth of ICM at its infancy stage, as investors and other stakeholders are already familiar with the main features of these products, given that they share similar characteristics to their more widely-used conventional equivalents.


Nevertheless, moving forward, there is a need for more product innovation – as opposed to adaptation – if the industry is to enjoy similar pace of expansion to that recorded during the past decade. Such innovation will encourage further demand as well as attract a wider range of investors towards the Islamic capital market as it creates more distinct differentiation between Islamic and conventional capital market products


Product innovation that is closely aligned to the principles of Shariah, such as equitable risk sharing, and based on real and productive economic activities, will cater to investors who seek investment vehicles or structures that offer a more direct risk-return relationship. Product innovation and expansion will also catalyse the development of certain segments of the Islamic capital market, such as private equity and venture capital.


Efforts for greater product innovation, however, require similarly concerted efforts on building better awareness and acceptance of such ICM instruments as they typically offer different characteristics in terms of risk-return profile as well as pricing and yield structures from most products that are currently available commercially in the market. From the investors’ perspective, in addition to being conversant with these more innovative instruments, they should also set reasonable expectations in terms of the timing and quantum of returns when investing in such products.


For the Islamic capital market globally to achieve sustained growth, its value proposition must transcend religious considerations. In this regard, performance – or more accurately, investment return – is a key consideration. Using the performance of the Dow Jones Islamic Market, or DJIM, Indexes as a proxy for the performance of Shariah-compliant equities, it is worthwhile to note that seven of the eight DJIM Global Indexes have outperformed their conventional counterparts over 1, 3, 5 and 10 years for the periods to August 2011.


There have also been comparisons drawn between Shariah investing and Socially Responsible Investing, or SRI. SRI is an investing approach that has enjoyed growing traction in recent years across the globe.


In the US alone, the size of SRI assets under management was estimated to be slightly above USD3 trillion as at end-2010, having grown by more than 13% from 2007 to 2010. Similarly, SRI mutual funds also registered strong growth in the US – from only 55 such funds with USD12 billion in assets in 1995, the number ballooned to 250 in 2010 with assets of USD316 billion. Shariah investing, therefore, is potentially in an enviable position to benefit from its similarities with SRI.


A key challenge in the Islamic capital market that is often highlighted is market liquidity, or lack of it. This challenge is largely due to a shortage of investable instruments in the Shariah-compliant space. Therefore, to enhance market liquidity, more issuers and issuances of ICM instruments is essential. Greater diversity and variety of issuers and issuances will add depth and breadth to the Islamic capital market. Investors will have more options in terms of the quality of issuers as well as the specificities of the issuances, ranging from tenor or duration of the instruments, their expected yields or returns, and the underlying Shariah principles used in structuring the instruments, among others.


Another challenge to the industry relates to scale. A recent industry report on Islamic funds globally reveals that only a minority of Islamic fund managers are estimated to have assets under management exceeding the break-even size. A significant expansion of the investor base is therefore imperative for the long term commercial viability of the Islamic fund managers. In this respect, greater mobilisation of institutional funds, such as pension funds, sovereign wealth funds, waqf and takaful funds, into the Islamic capital market is a critical success factor.


One of the strategies identified in the Capital Market Masterplan 2 to spur further growth of the Islamic capital market is building scale in the various segments of ICM. Scale, or size, in the context of ICM will typically be achieved through expansion of product offerings, broadening of investor or customer base, and the centralisation of functions. This may in turn require collaboration or partnerships among industry players.

Outlook for Islamic Capital Market


Under the Capital Market Masterplan 2, the size of Malaysia’s Islamic capital market is projected to expand at an average rate of 10.6% per annum over the ten-year period to 2020, to reach RM2.9 trillion by 2020.


The strategies to achieve this growth projection are premised primarily on widening the Islamic capital market’s international base, which involves – among others – increasing and enhancing cross-border transactions.


The growing interest in Islamic capital market across many jurisdictions today provides the underlying foundation upon which cross-border transactions and intermediation can be built and proliferate. The opportunity to offer Shariah-compliant products and instruments to an international – as opposed to only a domestic – audience, apart from expanding the market reach, also enhances capacity building and scale efficiencies, which in turn enables the product issuer to achieve competitive advantage and encourages greater product innovation.


To foster greater collaboration and cross border activities in Islamic capital market, the SC has to-date entered into two Mutual Recognition Agreements, or MRAs, with the capital market regulators in Dubai and Hong Kong. These MRAs facilitate the cross border offering of Islamic collective investment schemes between Malaysia and the respective jurisdictions through reduced regulatory requirements when certain conditions are met.


The SC therefore encourages Malaysian industry players to capitalise on the bridges that have been built with these jurisdictions to expand the potential market for their product offerings. The SC, on its part, will continue to seek other potential collaborative arrangements that can facilitate the business development and expansion of its industry players.


At the same time, a growing number of large, multinational financial institutions which traditionally operate within the conventional space are now allocating significant resources towards Islamic capital market activities. Their participation, together with that of existing players, will create higher level and broader range of activities that will drive further expansion of the Islamic capital market across jurisdictions they operate in.


International organisations also have a major role to play in facilitating cross-border transactions in Islamic capital market. The Islamic Financial Services Board (IFSB), for instance, assumes that role in its capacity as an international standard-setting organisation for the Islamic financial services industry. Work undertaken and standards developed by the IFSB serve to provide some level of uniformity across jurisdictions, thus promoting consistency and familiarity, as well as potentially reducing costs, for industry players to venture into other jurisdictions.



Islamic capital market has tremendous potential for further growth, driven – among others – by product innovation and development, as well as expansion of markets and investor base on one hand, and further strengthening of the supporting infrastructure, thus generating greater level of confidence, on the other. The effectiveness of these growth drivers, nevertheless, is premised on the industry achieving further internationalisation that is well-entrenched and sustainable.


Further internationalisation of Islamic capital market, in turn, requires concerted and conscientious efforts and collaboration among the interested parties across the various jurisdictions to create an enabling environment within which cross-border transactions can truly flourish. It is therefore incumbent upon all of us, as stakeholders in the Islamic finance industry in general, and Islamic capital market in particular, to make our respective contributions towards realisation of this common objective.


Thank You.