“Strengthening the Capital Market Framework and Improving Market Liquidity: Continuing Efforts and Challenges Ahead”
Y. Bhg. Datuk Ali Abdul Kadir
Chairman, Securities Commission
Maybank Group Executive Talk series
28 January 2003
Good evening ladies and gentlemen,
First of all, I would like to express my appreciation to Datuk Amirsham Aziz for his kind invitation to address you here today.
The Maybank Group has had a long history in the Malaysian capital market and has been one of the stalwarts of our corporate sector from the very beginning. So, it is indeed a pleasure to be able to speak to you here today on the topic of “Strengthening the Capital Market Framework and Improving Market Liquidity: Continuing efforts and challenges ahead”.
A Changing Financial Landscape
It is a good time to devote some thought and discussion to the challenges being faced by the capital market today, and how it should be responding to these challenges.
As you are well aware, the global market environment has experienced unparalleled challenges over the last few years.
I say “unparalleled” because never before has such litany of broad-based crises: from the East Asian crisis, to September 11th, to Enron and WorldCom, to the threat of war; never before have such a confluence of events occurred at a time where global markets have been so integrated and, by implication, interdependent on each other.
Few, if any, global markets have been able to escape from the impact and pressures arising from these developments.
Lessons of the Past
We have recognised that a sound capital market is based on a combination of many elements, including sound regulation and enforcement, effective market discipline, professional and ethical management, and efficient market infrastructure and processes.
Another valuable lesson learnt from the Asian crisis in 1997-98 is that we must continue to deepen our bond and equity markets to achieve more liquidity, consequently diversifying the sources of funding within the financial system.
In a sense, the crisis was a valuable experience in that many of the reforms only now being undertaken in other developed markets have already been put in place here, following the previous crisis.
As a result, the costs and impact of these reforms have largely been spread out already: the consolidation of the financial services industry being one of these key areas of transformation. In 1997-98, for example, the stockbrokers were badly hit by the stock market downturn. This created a lot of uncertainty and even the suspensions and revocation of the licenses of some financially distressed intermediaries. Now, however, we are better positioned to weather the current challenging global environment, than we were previously.
In addition, the consolidation of the stockbroking industry has led to the creation of 6 Universal Brokers, who can now provide a whole range of capital market services under one roof. Universal Brokers, together with Investment Banks, add diversity to the range of intermediaries in the capital market. Both playing important roles in enhancing the overall competitiveness of the capital market intermediation services in Malaysia.
The release of a host of measures to improve corporate governance and financial reporting over the last few years, such as the Finance Committee’s Report on Corporate Governance (1999) and the Malaysian Code on Corporate Governance (2000) also represent important milestones in the development of a culture of good corporate governance in Malaysia.
All listed companies are now required to disclose their level of compliance with the Code in their annual reports. The Code also sets the tone for companies to inculcate best practices for corporate governance in their organisations.
It is worth noting that many of these measures are only now being considered in other markets, and even then only in the aftermath of Enron et al.
For instance, the Malaysian financial reporting framework already requires that reporting responsibilities cover directors and chief executive officers as well. A natural outcome of this is that directors and financial officers would be expected to be suitably diligent in ensuring the proper preparation of their financial statements.
We have also noted that the European Commission had, in November last year, proposed for European companies to report quarterly results. In comparison, quarterly reporting has been in place in Malaysia as far back as 1999.
The crisis also provided the impetus for enhanced lines of communication and information across all levels of government and industry, and we have seen significant enhancements in this area. The SC, for one, conducts regular dialogues with all its constituent industry groups and also has mechanisms for ensuring that there is independent feedback on its work from both local and international market participants. Therefore, the overall result is that we now have a much better environment in which to strategise and plan our responses.
Significant progress made in the capital market
Ladies and gentlemen,
I believe the Malaysian capital market is currently at a significant juncture in its development track.
Thanks to the holistic planning of the Government over the last three decades, the capital market has been a key driver of growth over the years. And capital-raising activity has matured hand-in-hand with national growth. Funds raised in the capital market accounted for 15% of GDP as at end of third quarter 2002, compared to 9% a decade ago.
Of note, issuance in the bond market has been pretty significant over the recent years given the conducive interest rate environment, enhanced regulation and increased corporate restructuring activity post-crisis. We have seen a 17% increase in new issues of private debt securities from end-1999 to Q3-2002. The size of the PDS market, which was smaller than the MGS market in 1997, now far exceeds MGS.
Today, even despite the 1997-98 crisis, Malaysia is the largest equity and bond market in ASEAN, and this is testament to the successful partnership between the government and private sector in developing our capital market.
As we all know, however, a major source of current global uncertainty is the threat of war and its implications on global recovery. And, of course, we are all continuously monitoring both domestic and international capital market developments to ensure we are well positioned to weather these challenges.
Despite the generally gloomy global sentiment, however, Malaysia can still provide many opportunities for investors. Generally, there has been an improvement in perceptions of Malaysia’s outlook, as reflected by the upgrade for Malaysia in Dow Jones’ survey of fund managers on their portfolio recommendations, as well as upgrade for Malaysia’s sovereign long-term foreign currency rating by Standard & Poor’s and Moody’s in 2002.
Also, there has been greater appreciation for government and corporate efforts in improving the state of corporate governance in the country. Institutional investors and independent consultants have been generally very positive about the quality of regulation and financial reporting in Malaysia.
Nevertheless, we are keenly aware that competition for capital flows within the region is likely to become more intense given these uncertainties. This is particularly so within a globally-risk-adverse environment where liquidity is at a premium.
At this point, I am happy to note that the investment management industry has continued to grow at a steady pace despite challenges in the past few years. For instance, the net asset value of unit trusts has increased from RM14.4 billion in 1992 to RM52.7 billion in the third quarter of 2002. This is a testament to the hard work of industry players, as well as the systematic development and pragmatic deregulation of this sector, in conjunction with the growth of national savings and increased investor awareness.
In addition, it is interesting to note that there is also a growing demand for socially-responsible investments. Here, I must take this opportunity to commend Mayban Management for its innovativeness in launching the Ethical Trust Fund, the first unit trust fund that embraces the concept of socially responsible and ethical investment.
To summarise, our capital market has made substantial progress over the years and has played a major role in financing economic activities. The private sector has also displayed increasing innovation and this has been recognised by the market. Undoubtedly, we would continue to strengthen our resources and capabilities to address challenges.
Continuing efforts going forward
Ladies and gentlemen,
For this evening, I will touch on some key continuing efforts going forward.
Developing Islamic capital market
This is indeed an exciting time for the Islamic capital market. Globally, it is estimated that there is US$180 billion investible funds in Islamic instruments, with an estimated annual growth rate of 15%.
I am pleased to note the significant progress of the Islamic capital market in Malaysia, which has been one of the SC’s priority areas of work over the years. A decade ago, Islamic PDS issuance was only 0.6% of total PDS issuance. Since then, it has grown to 39% as at November 2002. This is equivalent to a compounded annual growth rate of 86%.
The Islamic fund management industry, for one, has seen substantial growth. Islamic unit trusts experienced a compounded annual growth rate of 21% from 1995 to 2002 compared to a 2% growth rate of conventional unit trusts over the same period. The prospects for Islamic unit trusts appear to be positive.
At this point, I would like to congratulate Maybank for its strong efforts in developing Islamic financial services in Malaysia, including its work in promoting greater public awareness of the availability of these services.
Ladies and gentlemen,
The Prime Minister has reiterated in Budget 2003 that the government will accelerate efforts to further develop the Islamic capital market. We are, of course, also in the process of implementing measures for further developing this area, as outlined in the Capital Market Masterplan (CMP), where we had also identified the need to capitalise on Malaysia’s comparative advantage in this area.
We do see many opportunities available to not only domestic but also international investors looking for Syariah-compliant investments. Tax incentives for debt instruments that adopt principles of mudarabah, musyarakah and ijarah, are merely some examples of the government’s initiatives to promote innovation in this field and attract investors seeking Syariah-compliant instruments.
I am also pleased to note that our progress in this area of Islamic financing has gained a good degree of international recognition. Malaysia’s global Sukuk, for instance, has since been awarded numerous awards by various industry polls and financial media. This is exactly what we had hoped for when we formulated the CMP recommendation in early 2001 that proposed for the government and government-related entities to issue Islamic debt securities in the global market.
In part thanks to such efforts, even the wider international community is recognising the growing importance of the Islamic capital market. In May last year, the SC had the privilege of being appointed by the International Organisation of Securities Commission, or IOSCO, to chair its Task Force on Islamic Capital Markets. We hosted the inaugural meeting of the Task Force in November last year.
This is noteworthy in that it is the first time a secular-based international grouping of its stature has dedicated a task force to look at Islamic capital market development. This is a significant acknowledgement of Malaysia’s leading role in Islamic capital market development and certainly augurs well for the development of an international Islamic financial centre in Malaysia. We will continue to build on our efforts to ensure Malaysia remains at the forefront of global Islamic capital market development.
Strengthening investor confidence
Ladies and gentlemen,
High levels of investor confidence would undoubtedly be a main driver of market liquidity. In this respect, measures are already being undertaken in various areas as part of the broader developmental strategy for the capital market.
To ensure that the Malaysian exchanges are well positioned to respond to challenging market dynamics, the KLSE will be demutualised and is expected to be listed by 2003. The demutualisation of KLSE is a significant milestone in the history of the exchange as it converts from a mutual-owned structure to a for-profit entity. The shareholder-based structure will give the exchange a natural impetus to create value for its stakeholders. It will also afford the exchange greater flexibility to undertake various commercially-oriented strategies, including in the marketing of its services and products, in order to enhance its competitiveness in the global market.
Corporate governance and the financial reporting framework
Additionally, given the comprehensive planning and measures taken in recent years, Malaysia’s financial reporting framework is-in many instances-already ahead of many other capital markets, both within the region and beyond.
In relation to the actual practice and enforcement of good corporate governance, however, I would like to stress that the SC’s enforcement objectives are clear: our primary obligation in this regard is to carry out due and proper enforcement without fear or favour, to the full extent we are authorised to do so under the law, to ensure that investor protection is safeguarded at all times.
I would like to add, however, that effective corporate governance is not a solo effort by the regulators. You would probably have heard this before as this is a point that I have made many times, because I believe that a good point is worth repeating!
Corporate directors and management, in particular, have a responsibility to ensure that they act in the best interests of their shareholders. But being ethical does not necessarily equate to merely being compliant with the letter of the law. True ethical behaviour would mean that companies should constantly look beyond the minimum of what they are required by the rules to do, and ask themselves the question: “what should I, as a good corporate citizen, be doing?”
There was an interesting article in the local press recently that highlighted the possible role of the corporate itself in disclosing that it is under investigation by the SC. This is exactly the kind of accountability and shareholder-oriented culture I am talking about.
As you may understand, the SC is limited in the amount of information that it can disclose to the public during the course of our investigations. However, there is nothing to stop the company itself from being transparent to its shareholders and providing them with full information, so that they can be duly informed of relevant developments. It is my hope that we can eventually progress to this level of accountability as we continue to work together in developing our corporate governance framework.
So, while the public response to domestic initiatives has been largely positive, we cannot afford to be complacent. Global competitive pressures and challenging market conditions mean that, all other things being equal, capital markets characterised by transparent and well-governed companies will have a competitive advantage in investors’ radar screens.
We will continue to work with the industry to build on the efforts to enhance corporate governance and shareholder value recognition as well as to strengthen auditor independence in Malaysia.
What I hope to see is greater market discipline because traditionally, there has been more emphasis on self-discipline on the part of company directors, and regulatory discipline on the part of the authorities. To achieve greater market discipline, I would urge institutional investors to play a more proactive role in ensuring higher standards of corporate governance are practiced.
Continued engagement with market stakeholders
Ladies and gentlemen
Despite efforts to strengthen the capital market, a crucial aspect remains, that is, engagement with industry players, opinion leaders and the media to ensure they are well-informed about developments in the Malaysian capital market.
Often, from our experience in dealing with the industry and media, negative opinions on Malaysia do not arise from what we have actually done or not done but from incorrect or insufficient information received from various sources. For instance, in October last year, we actively sought to provide CalPERS with more detailed and updated information about the progress of Malaysia’s capital market developments. This was done in order to present them with a clearer view on the Malaysian market environment.
Engaging with market stakeholders is something that the SC has been working diligently to address. In the interests of ensuring accurate communication and promotion of the Malaysian capital market, we have either conducted or been involved in multiple roadshows, closed-door sessions and other forms engagement with stakeholders and opinion-leaders over the past year alone.
Going forward, I hope for even close cooperation between industry leaders with the SC in consistently promoting good investor relations that will ultimately benefit the market and economy.
Ladies and gentlemen,
Let me conclude. This is a challenging and exciting period for us to be in now. Certainly, we would not rest on our laurels but constantly ensure that we remain abreast of global developments and are not caught lagging behind. In a globalised environment, the domestic market has to apply global standards and best practices in its operations in order to remain competitive.
In fact, I am pleased to note that the constant consultations with market players is starting to bear fruit with the private sector taking the lead in developing and promoting the Malaysian capital market in various aspects. On this score, I hope that the Maybank Group will continue to be an active partner with us as we move ahead with the development of the capital market.
Once again, I am honoured to be in your company this evening and thank you for inviting me. I would like to open the floor now for any questions you may wish to ask.