- I am delighted to be invited to speak at the BNP Paribas – INCEIF Centre for Islamic Wealth Management Symposium.
The Malaysian Capital Market in 20131
- In 2013 not surprisingly, the Malaysian capital market continued to demonstrate growth and resilience. This is a clear testimony to our collective efforts over the years to deepen the market and widen the investor base, to increase market breadth and to ensure vigilance through effective supervision and enforcement. In 2013, as part of our growth strategy, the SC continued to facilitate greater product diversity, enabling access to a broader segment of investors and issuers through products like PRS and retail sukuk. While fulfilling the investment and financing needs of the real economy we also continue to focus on the need to ensure accessibility and inclusiveness.
- Thus, despite the volatile global environment last year, the Malaysian capital market showed considerable resilience – the stock market provided steady returns to investors, emerging as one of the top- performing major markets in Asia. The benchmark equity index rose by 10.5%, which helped boost market capitalisation to a record high of RM1.7 trillion. Efforts to encourage greater investments by institutional funds into small and mid-cap stocks, contributed towards the significant gains recorded by the domestic small-cap index which was up by almost 37% at year-end. Foreign investors meanwhile remained net buyers in terms of value at year end (+RM2.46 billion) while domestic institutional investors acted as a strong counter weight to foreign trading.
- The Malaysian bond market, at RM1 trillion, is the third-largest in Asia relative to the size of the economy. The depth of the market provided absorptive capacity for portfolios to be rebalanced across maturities in an orderly manner. Over time we have seen issuances of longer duration bonds which is consistent with global expectations and the growing importance of the capital market in providing long-term financing.
- Fund raising activity in 2013 remained robust and continued to support the financing needs of the domestic economy. The equity and debt capital markets including the sukuk market continued to be an important source of financing for Malaysian businesses, with RM94 billion raised through initial public offerings (IPOs) and corporate bonds and sukuk during the year. Over the 2-year period 2012-2013, RM240 billion was raised via the equity and corporate bond and sukuk market. Assets under management (AUM) grew by 16.5% to RM588 billion in 2013, demonstrating the importance of the investment management industry in mobilising domestic capital. Unit trust funds remain the main instrument for unlocking latent retail capital; net asset value of unit trust funds amounted to RM336 billion, equivalent to one fifth of stock market capitalisation.
Continued growth of the Malaysian Islamic Capital Market
- The Islamic capital market (ICM) which grew by 8.8% in 2013 and is now worth RM1.5 trillion continue to be an integral component of the Malaysian capital market, accounting for 56% of the overall market. 71% of our PLCs are designated as Shariah compliant. We also maintained our position as the largest sukuk issuer in the world, accounting for 69% of global sukuk issuance.
- Better wealth creation and investment opportunities for investors have also been made available by increasing the number of full-fledged Islamic fund management companies. Our Islamic fund management industry, with RM97.5 billion in asset under management is managed by 19 asset management companies licensed to exclusively manage Shariah compliant funds. Of the total assets under management, RM42 billion are in the form of Shariah compliant unit trust funds which grew by 21% in 2013. Of particular relevance to the Islamic wealth management industry is the fact that in 2013 we have 52 Islamic wholesale funds with almost 15 billion units in circulation with total NAV of 16.43 billion. This represents almost 28% of the NAV of all wholesale funds in Malaysia.
- While it is clear that our ICM has supported domestic growth by offering a multitude of financing and investment opportunities to domestic businesses and investors, the ICM also continue to leverage on our core strengths to make very significant strides in the international arena and is now increasingly more integrated with the international market. In this regard, a milestone of sorts was achieved with the introduction of the revised screening methodology of listed stocks. The 2-tier quantitative approach introduced in 2013 further align our screening process with international practices thus paving the way for greater inflow of foreign Islamic funds into the domestic markets. By incorporating a two-tier quantitative benchmark approach comprising business activity and financial ratio benchmarks, the adoption of the revised methodology is envisaged to further enhance the attractiveness of the Malaysian Islamic equity market and fund management segments to international investors. With this in place, the wealth management industry should gain more traction with a wider market, especially from investors looking for Shariah compliant wealth management solution.
- To ensure greater understanding, appreciation and acceptance of our standards and rulings we collaborated with global regulators to help facilitate standardisation of disclosure. In view of growing cross-border transactions, we continue to pursue cross-border linkages to ensure the further integration of our market with the international markets. Hence today we have an ICM that not only supports domestic growth but also facilitate expansion of global intermediation. The latter can be seen for instance in the introduction of UCITS funds, the offering of foreign currency sukuk by local issuers and the issuance of RM sukuk by foreign corporations. Reflecting the increasingly international profile of our ICM, in 2013, the SC approved 3 foreign issuers to issue RM- denominated sukuk and 13 foreign issuers to issue foreign currency denominated sukuk in Malaysian market.
Harnessing the strength of our capital market for the Islamic wealth management industry
- The journey towards becoming a centre for Islamic wealth management is neither easy nor quick. For one, we have to compete with established financial centres both in the region and beyond. This is not to say that this aspiration is beyond our reach. In my view we can make this a reality because our capital market offers numerous value propositions some of which are unique to Malaysia.
A well-regulated capital market with depth diversity and breath
- First we have a capital market that has depth, diversity, breadth and resilience. The numbers I have cited earlier provide clear proof of this. Whether it be in the area of debt or equity market or fund management, growth and resilience have been the hallmark of our market since the aftermath of the Asian financial crisis. We also have a market that is internationally recognised as well-regulated with well- established investor protection regime and robust regulatory framework which are benchmarked against international standards. We have been independently assessed as being highly compliant with IOSCO Objectives and Principles of Regulation in the WB-IMF FSAP assessment in 2012. In fact, our capital market achieved ‘fully implemented’ for 34 out of 37 principles assessed, giving us highest scoring of 92% among all post GFC – FSAPs. We have also been consistently ranked fourth for investor protection in the World Bank Doing Business Report. While the World Bank CG Report on Observance of Standards and Codes recognised us as a regional leader in quality of CG standards, acknowledging the substantial improvement in our legal and regulatory framework for CG. Among emerging markets, the SC is an early signatory of the IOSCO Multilateral Memorandum of Understanding (MMOU), the international benchmark for cross-border cooperation critical to combating violations of capital market laws. This reflects international recognition of our capacity for cross-border enforcement.
- The strength of our capital market is further underscored by the fact that Malaysia is the first emerging market and the second ASEAN country to be recognised as an approved investment destination under China’s Qualified Domestic Institutional Investor (QDII) scheme in June 2010. The QDII programme allows Chinese nationals to invest in overseas markets through approved institutions such as securities companies, fund management companies, commercial banks, trust companies and insurance companies. Approved institutions regulated by the Chinese banking regulator and securities regulator can invest funds pooled from their clients into Malaysian securities including equities, fixed income products and collective investment schemes approved by the SC. These institutions may also engage the services of licensed Malaysian fund managers to assist with QDII investments. This is yet another unique strength that can be effectively capitalised by our industry in positioning Malaysia as an Islamic wealth management centre.
The ASEAN Connectivity
- Our second value proposition is the ASEAN connectivity. As you may be aware efforts are underway among ASEAN capital market regulators to promote greater regional activity and investment. Towards creating an enabling environment for regional integration we have pursued numerous initiatives for the harmonisation or mutual recognition of frameworks. The exchanges have established the ASEAN Trading Link and efforts to promote new products and building ASEAN as an asset class have begun in earnest. Market-based initiatives to promote greater regional cross-border flows are being pursued to facilitate cross-border fund raising, product distribution and investments (through trading links). Specific initiatives include corporate governance ranking for ASEAN PLCs and the framework for the cross-border offering of collective investment schemes. An MOU relating to the latter was signed by SC Malaysia, MAS Singapore and SEC Thailand last year and is targeted for implementation later this year. This framework enables fund managers operating in a member jurisdiction to offer collective investment schemes constituted and approved in that jurisdiction to investors in other member jurisdiction under a streamlined authorisation process. Clearly this arrangement will enlarge investment opportunities for investors by providing them with a more diverse range of investment while expanding opportunities for CIS operations.
Strong intermediation capabilities
- Our third value proposition is our strong intermediation capabilities. While the challenge of building talent persists, it is a fact that the Malaysian capital market in general and our ICM in particular offers strong intermediation capabilities. The presence of large domestic intermediaries with regional footprint as well as numerous global intermediaries, provides Malaysia with yet another competitive advantage. I have earlier mentioned that we have 19 fund managers licensed to exclusively carry out Islamic fund management activities. We also have investment banks and stockbroking companies licensed to carry out a broad spectrum of capital market activities and a whole host of advisory companies licensed to carry out activities like corporate finance, investment advisory, financial planning etc. Given the headstart that our ICM has over other markets, clearly the depth of expertise in areas like structuring, advisory, Shariah, legal and accounting is also an important strength.
A capital market well positioned to facilitate socially responsible investments (SRI)
- I mentioned earlier that shifts in investor demographics (including that of HNWIs) have resulted in growing concern over environmental and social impact of business, heightened awareness of the need for equitable distribution of wealth and greater demands for stronger governance and ethics from businesses. Our capital market is well- positioned to capitalise on these changing trends and facilitate socially responsible investing. In fact our focus on socially responsible investment complements our strong position in Islamic finance. In this regard the SC aims to facilitate the flow of SRI funds into the capital market by nurturing a market eco-system that promotes sustainability.
- This is being pursued through our “5-i” approach where we focus on investors, issuers, instruments, internal culture and information architecture. While currently dedicated pool of SRI funds in our market is small, our deep pool of institutional liquidity can be a major driver for adoption of SRI strategies to make Malaysia a centre not only for Islamic finance but also for sustainable investments. In this respect, a framework for SRI sukuk is being finalised by the SC and is expected to be launched by the third quarter of this year. The SRI sukuk is the ICM’s response to the rising trend of green bonds and social impact bonds that have been introduced globally to finance a wide range of sustainable activities such as those addressing the needs of the country like infrastructure and small businesses.
The worlds’ most comprehensive and innovative ICM
- As I have mentioned, the continuing vibrant growth of the Malaysia ICM in terms of increasing size and diversity of products offered, has not only ensured that Malaysia remains relevant and sustainable in this evolving global financial market but has also made Malaysia the most innovative and comprehensive ICM in the world.
- The key value proposition of Malaysia’s ICM is its achievement in developing various capabilities and most importantly that these orderly development have been set on a foundation of facilitative and sound regulatory framework that have been developed and continually enhanced over the years. Apart from meeting the regulatory needs, the framework also facilitate product development by the industry.
- The establishment of the Shariah Advisory Council (SAC) at the Securities Commission Malaysia in 1993, continue to be the most important catalyst for the development of the ICM in Malaysia. Many a time, the SAC has made pronouncements that not only encourage innovation in the industry but itself being proactive in facilitating new products especially those relating to risk management. The guidelines mooted out of pronouncements such as those on unit trusts, REITS and Islamic securities for example, not only ensure that the products are true-to-label but also enable greater consistency and certainty for industry participants on Shariah issues.
- Furthermore, to enable wider global acceptability of products; product originators and fund managers for example, are allowed to tap expertise not just from local Shariah experts but also from other jurisdictions. Our Guidelines allow the registration of local as well as foreign Shariah advisers.
- The ability to tap international Shariah resources is not the only incentive to encourage the industry to develop or structure new and innovative products based on globally accepted Shariah structures. In addition, the Malaysian Government has also made available several tax incentives especially for products based on widely accepted structures in order to draw interests from foreign investors.
- To further spur the growth of ICM activities, the Government has undertaken the approach to create a tax neutral environment that provides a level playing field between Islamic and conventional capital markets. Other tax incentives for issuers, intermediaries and investors are also introduced from time to time.
- I mentioned earlier of the strong intermediation capabilities that we have in Malaysia. Malaysia’s ICM is characterised by the diversity of market participants offering an extensive range of ICM products and services, with many operating both domestic and international businesses in terms of their investor base as well as their investment assets. In addition, the Malaysian eco-system for Islamic finance, which include other service providers such as banking and takaful, provide the breadth of services necessary to a vibrant and successful ICM.
- In ensuring that the ICM sustain its long-term growth, it must be able to offer a more distinctive value proposition that is all encompassing. And product innovation is a critical component of this value proposition. We are witnessing today, shifts from products that resemble replications (from conventional) to those that are closely aligned to the maqasid al Shariah; such as those with more equitable risk-sharing based on real economic activities, as well more ethical in nature. The maqasid sets the needs for the creation of value through business affairs through corporate governance excellence that promote environmental protection, public good and sustainability. The SRI sukuk that I mentioned is one of them. Such innovations will certainly also spur the growth of segments such as PE and VC.
- The ICM offers three main value propositions for investors. First is the greater diversification opportunities since the sector-profiles are typically different from conventional. Second, it has enabled financial inclusion to those who have been avoiding conventional investments due to religious considerations. And third, in view of the growing affluence in Muslim-majority countries, ICM has created the opportunity for meeting this investment demand.
- As a result of all the above, there is now a sufficiently wide array of Shariah products and opportunities to fulfil the needs of not just the HNWI and also those looking for faith-based investing. Malaysia ICM not just is able to offer a comprehensive infrastructure but also the competitiveness and innovativeness of product solutions. Clearly, we are well on our journey towards becoming an Islamic Wealth Management Centre.
Thank you.
