Introduction

1. First of all, please allow me to express my sincere appreciation to the EU-Malaysia Chamber of Commerce & Industry for inviting me to speak here today. It is an honour to be part of this important gathering to explore new opportunities in Islamic finance. The Securities Commission Malaysia has invested a significant amount of efforts and resources to develop the Islamic capital market, and I am therefore especially pleased to be able to share my thoughts on this subject with you. 
2. I will address three main areas this morning – first, Malaysia’s experience in building and developing a comprehensive Islamic capital market; second, the major elements necessary to ensure its relevance and sustainability in this continuously evolving global financial market; and third, its overall growth potential where I will also highlight the value proposition of several segments within the Islamic capital market. 

1. The development of the Islamic capital market, or ICM, in Malaysia has been a remarkable one. From its humble beginnings, when fund management companies secured institutional mandates for Shariah-compliant portfolios and unit trust managers launched Shariah-compliant unit trust funds for retail investors, Malaysia’s ICM has since grown by leaps and bounds and, today, is a trillion ringgit industry. Having expanded at an average rate of 13.6% per annum over the ten-year period between 2000 and 2010 that marked Malaysia’s first Capital Market Masterplan, the size of Malaysia’s ICM stood at RM1.05 trillion as at the end of 2010, compared to just RM294 billion as at end-2000. 
2. 2011 continued to be a good year for the ICM globally, especially the sukuk segment. The total value of sukuk issued globally in 2011 amounted to US$92 billion, representing a 68% increase, year on year. Malaysia remains at the forefront of the sukuk market, accounting for 73% or US$67 billion of the total sukuk issued. Malaysia is also the domicile for 68% of the US$210 billion total sukuk outstanding globally as at end-2011. 
3. In terms of Shariah-compliant equities, while there is no definitive source on the value globally, if we use the Dow Jones Islamic Market World Index as a basis, there were 2,599 component stocks from 54 countries with total market capitalisation of US$16.5 trillion as at end-2011, so we are looking at something big. 

1. The key value proposition of Malaysia’s ICM is its comprehensiveness. Malaysia has successfully developed various capabilities and an extensive range of ICM products and services at both domestic and international levels. 
2. In this regard, a facilitative and sound regulatory framework in Malaysia for the ICM, that has been developed and continually enhanced over the years, serves as the foundation that is essential for its orderly development. This framework involves a two-tier approach where the universal or general regulatory guidelines that apply to all capital market products and services are supplemented by additional guidelines specific for ICM products and services. This approach ensures that investors in Malaysia’s ICM receive the same degree of clarity, certainty and protection as investors in the conventional market. Apart from serving its regulatory purpose, the presence of such framework has also facilitated product development efforts by market participants. 
3. Malaysia’s ICM has also benefited from its robust Shariah governance framework. The national level Shariah Advisory Council of the Securities Commission Malaysia, established under an Act of Parliament and whose members are appointed by His Royal Highness the King of Malaysia, serves as the highest authority that issues Shariah rulings pertaining to the ICM in the country. This provision ensures greater certainty and consistency for industry participants on Shariah-related matters and allows them to operate on a common Shariah platform. 
4. Furthermore, issuers or offerors of ICM products in Malaysia are required to appoint Shariah advisers or committees, that are registered with the SC, to advise them on the Shariah aspects of the products as well as to provide certification on the products’ compliance with the Shariah principles. 10. Complementing the regulatory and Shariah governance framework is a facilitative legal and tax framework. The Shariah Advisory Council of the SC has been empowered to make rulings on any Shariah matter relating to the ICM referred to it 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. The Shariah Advisory Council of Bank Negara Malaysia also has similar powers in respect of Islamic banking and takaful. 
5. In addition, the Malaysian government has undertaken the approach to create a tax-neutral environment that provides for a level-playing field between Islamic and conventional capital market products. To further spur the growth of ICM activities in Malaysia, tax incentives for issuers, intermediaries and investors are also introduced from time to time. 
6. Apart from the comprehensive framework, Malaysia’s ICM is characterised by the diversity of its market participants offering an extensive range of ICM products and services. 16 full-fledged Islamic fund management companies are currently licensed by the SC, 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. 
7. Malaysia also offers a selection of investment banks that possess structuring and advisory capabilities for ICM products such as sukuk, and is home to seven companies that provide Islamic stockbroking services, including one full-fledged Islamic stockbroker. Furthermore, Malaysia has an extensive representation of Islamic banks and takaful operators that play a synergistic role with their ICM counterparts. 
8. Malaysia’s ICM ecosystem is also enhanced by the presence of other related capabilities and services such as Shariah research, academic institutions offering Islamic finance programmes, and Shariah and legal advisory and consultancy, to name a few. 
9. While I have highlighted the major components that make up the comprehensive Islamic capital market in Malaysia, the impressive development that we have witnessed in this industry, especially in the past 10 to 15 years, would not have been possible without the unwavering commitment of the government to position Malaysia as an international hub for Islamic finance. 
10. In addition to facilitating the establishment of the relevant infrastructure and incentivising Islamic finance activities and transactions, the government also actively promotes and profiles Malaysia’s Islamic finance capabilities, as well as via the Malaysia International Islamic Financial Centre, or MIFC, initiative which is represented by the country’s regulators, government ministries and agencies, industry players and other relevant organisations, with the primary aim of attracting international institutions to use Malaysia as a platform for their Islamic finance activities. 

1. While the global Islamic finance industry has expanded significantly over the past decade at an average rate of about 15% per annum, what are the key elements to ensure its relevance and sustainability in this coming decade, especially in light of the present global economic and financial landscape? 18. Most importantly, for the ICM to flourish further and sustain its long-term growth, it must be able to offer a more distinctive value proposition that is universal and all-encompassing. 
2. Product innovation is a critical component of that value proposition. The past decade was marked by rapid product development arising largely from adaptation of conventional capital market products, which was instrumental in facilitating growth of the ICM at its infancy stage. 
3. However, adaptation has resulted in direct comparisons being made between conventional and Islamic products in terms of risk-return profiles, cost structures and legal, tax as well as regulatory considerations. Often and not unexpectedly, such comparison would result in Islamic products being seen as less attractive. 
4. Greater product innovation that is closely aligned to the principles of Shariah, such as equitable risk sharing and being based on real and productive economic activities, therefore will encourage further demand as well as attract a wider range of investors towards the ICM as it creates more distinct differentiation between Islamic and conventional capital market products, thus also providing diversification benefits. Such product innovation will also catalyse the development of certain segments of the ICM, such as private equity and venture capital. 
5. Good investment performance is also a universal value proposition. In this regard, Shariah-compliant investments are able to offer competitive returns relative to conventional ones. To illustrate, using the performance of the Dow Jones Islamic Market, or DJIM, Indexes as a proxy for the performance of Shariah-compliant equities, seven of the eight broad-market DJIM Global Indexes outperformed their conventional counterparts over 1, 3, 5 and 10 year-periods up to December 2011. This performance data dispels a common misperception that Shariah screening on equity investments would result in Islamic funds underperforming conventional funds.

1. Of late, there is growing inclination for investors to invest according to their closely-held beliefs and values. Ethical or socially responsible investment is no longer a specialist discipline that is of interest to only a small group of investors. More and more investors view it as the basis for a forward looking investment strategy that incorporates a focus on value preservation. Similarly Shariah stipulates that capital should be allocated to those who create value for the investors in their business affairs and promote environmental protection, social good and corporate governance excellence as part of their value proposition. 
2. In this respect, the strong growth in socially responsible investing, with assets under management estimated to be slightly above USD3 trillion as at end-2010 in the US alone, augurs well for the long term growth of Shariah-compliant investment in view of their similarities. 
3. Sustainable development of the Islamic capital market also requires addressing cross-border legal, regulatory and tax challenges. To encourage expansion of Islamic capital market activities, there is a need to broaden and enhance the legal regulatory and tax framework in the various jurisdictions to address the elements of uncertainty and disparity for Islamic capital market transactions. An important consideration in this regard is the development and availability of clear and consistent documentation that will provide a sound basis for resolving disputes and facilitating the flow of funds and ownership transfers of underlying assets. 
4. Another key element to ensure sustainability of the Islamic capital market is the deepening and broadening of market liquidity. 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, such as their duration, expected yields or returns, and the underlying Shariah principles used in structuring the instruments. 

1. 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. 
2. 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. 
3. There has been growing acceptance of Islamic finance not only in Muslim-majority countries but also in certain predominantly non-Muslim jurisdictions. This development provides the opportunity for Islamic capital market players, among others, to expand their distribution channels, undertake more product innovation efforts and enhance scale efficiencies. 
4. 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. 

1. So where will the main opportunities lie in terms of Islamic capital market products and services? 
2. The Islamic funds segment provides tremendous growth opportunity for cross-border activities. Islamic collective investment schemes, with total net asset value of USD50-60 billion, presently account for a very small percentage of total funds available worldwide, thus offering fund providers, especially those with specific capabilities in Islamic fund management, the early-mover advantage to launch Shariah-compliant mutual funds, exchange traded funds, real estate investment trusts and the likes in multiple jurisdictions. 
3. Here I would like to mention just three of the main value propositions for Islamic funds. First, diversification. By virtue of Shariah exclusion of certain sectors, the main one being financial services, the sector profile of Islamic funds are typically different from that of conventional funds, thus providing diversification for investors who have the option to invest in both categories. 
4. Second is financial inclusion. There are segments of the population in jurisdictions that do not offer ICM products and services who choose not to invest because they do not want to participate in conventional products. By offering Islamic funds, these investors will now be able to be part of the overall financial system. 35. Third, growing affluence in Muslim-majority countries. In view of relatively stronger economic growth in emerging markets as well as greater pool of petro-dollars in the GCC, there is growing demand for Shariah-compliant investment products. 
5. There are two recent manifestations of these opportunities involving Malaysian market players. First, the establishment by CIMB-Principal Islamic Asset Management, a licensed Islamic fund management company in Malaysia, of an Islamic fund platform in Dublin that will enable it to launch funds for the EU and other markets. Second, a partnership between Saturna, also a licensed Islamic fund management company in Malaysia, with Crescent Wealth, an Islamic fund management company in Australia, where Saturna will manage an international Shariah-compliant equity portfolio for Crescent Wealth. 
6. In the past few years, the Securities Commission has also entered into two mutual recognition agreements with its counterparts in Dubai and Hong Kong on the cross-offering of Islamic collective investment schemes to enable and facilitate the market players in the respective jurisdictions to broaden their business reach. 
7. With 801 issuances by 113 issuers with a total issuance value of USD92 billion across the globe in 2011, sukuk has increasingly proven to be a viable capital raising instrument not only for Islamic issuers but also for conventional institutions. In fact, tracing back the history of the sukuk market in Malaysia, Tesco, Toyota, AEON and Shell are among the corporate sukuk issuers. 
8. There are a number of key drivers of the growth in the sukuk market – I will briefly mention four of them. First, broader investor base as both Islamic and conventional investors are able to subscribe to sukuk. As a result, companies will have access to a wider pool of investors when they issue sukuk as opposed to conventional bond. 
9. Second, arising from the broader investor base, the issuers may be able to secure lower cost of funding. In Malaysia, this has generally been the case in recent years as growing demand from investors seeking limited supply of Shariah-compliant instruments serves to benefit the issuers. 
10. Third, the inherent sukuk structure. As an instrument that complies with Shariah principles, sukuk must be structured based on or backed by an underlying asset, thus providing greater level of comfort as well as diversification benefits to investors. 
11. Fourth, and specifically in the Malaysian context, tax and other incentives for sukuk issuers, investors and intermediaries – which have spurred the expansion of the sukuk market in this country. The incentives for sukuk issuers include tax deduction on issuance costs, stamp duty exemptions and flexibility to swap issuance proceeds into foreign currencies. 

1. Greater internationalisation will be a key element of the Islamic capital market as it continues to chart further progress in the coming decade. Greater internationalisation will also be able to address, at least partially, the challenges that have remained persistent. In addition, greater internationalisation will provide Malaysia the opportunity to strengthen its position as a hub for Islamic capital market activities. 
2. Greater internationalisation, 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. Achieving that, ladies and gentlemen, would firmly and undeniably put Islamic finance on the mainstream. 
3. Thank you.