International Islamic Capital Market Forum

3 September 2014 | By : Dato Dr. Nik Ramlah Mahmood, Deputy Chief Executive, Securities Commission Malaysia

Welcome Remarks

byYBhg Dato’ Dr Nik Ramlah MahmoodDeputy Chief Executive, Securities Commission Malaysia
at the International Islamic Capital Market Forum
in conjunction with Global Islamic Finance Forum 2014

Wednesday 3 September 2014

Sasana Kijang, Kuala Lumpur

“Malaysia’s Islamic Capital Market – Moving to a New Frontier

It is my pleasure to welcome all of you to this year’s edition of the International Islamic Capital Market Forum (IICMF). The IICMF series, which started in 2008, is an important programme on the Securities Commission Malaysia’s calendar. The Forum has as its primary objective profiling and enhancing awareness on the development of the Islamic capital market through discourse and discussions on topical and contemporary issues relating to ICM products and services in the market.
I am delighted to see such an encouraging turnout for today’s Forum, the eighth in the series, which will be on the theme “Malaysia’s Islamic Capital Market – Moving to a New Frontier”. This Forum focuses on several new areas that can potentially serve as significant catalysts in driving the Islamic capital market into the next phase of growth and development.
The prospects for Islamic finance in 2014 remain positive. According to an industry report¹, the size of global Islamic finance assets is projected to surpass the US$2 trillion mark and the industry is expected to continue to chart positive growth across all sectors. Within the Islamic capital market segment, the global sukuk market is set to maintain its upward trajectory, spurred by a number of sovereign issuances expected to take place this year. In June, the UK became the first western country to issue a sovereign sukuk while Senegal priced its maiden sovereign sukuk in July. According to media report, other sovereigns including Luxembourg, Oman, South Africa and Tunisia are also expected to make debut issuances this year.
In the area of Islamic funds, the launch this year of two Malaysia-based Islamic funds in Hong Kong represents a significant development as this reflects the growing international interest on other ICM products in international financial centres. The two Islamic funds – an equity fund and a balanced fund – are being offered under the mutual recognition agreement between the Hong Kong Securities and Futures Commission and the SC on the cross offering of Islamic collective investment schemes. Such arrangements, bilateral and multilateral, serve to broaden the market reach and help to build scale for Islamic funds.
While Islamic finance has been gaining greater traction across the globe, there is a need for differentiated initiatives to cater for jurisdictions with varying levels of domestic development of the industry. Therefore a gradual approach may be required for certain jurisdictions while a more comprehensive, more assertive, approach can be adopted in markets where the ecosystem for Islamic finance is relatively developed. In the latter, continuous efforts to enhance product and service range as well as to seek new growth areas become more critical not only to ensure sustained development of the industry but also to promote greater connectivity and linkages between these markets and jurisdictions.

ICM Developments in Malaysia

Malaysia continuously pursues various initiatives to develop the different segments of the Islamic finance industry. Allow me to share with you some of the recent developments in respect of the Islamic capital market.
The Sukuk market remains vibrant as it continues to generate greater interest from both the investors and the issuers. In order to further broaden the participation in this market, the SC last week released the framework for the issuance of Sustainable and Responsible Investment sukuk, or SRI sukuk. The framework represents part of the SC’s agenda to develop the SRI sector which has grown to become very significant globally, especially in the more developed countries. For example, the size of investment funds being managed according to SRI criteria globally stood at USD11.2 trillion with 97% of these assets being domiciled in Europe, the US and Canada². The principles underlying SRI have been observed to be not dissimilar with those underlying Islamic finance, hence the SC believes the SRI sukuk initiative is timely in bringing together the growing SRI sector and Malaysia’s well-developed Islamic finance industry.
Malaysia also recently announced the removal of mandatory credit rating requirements effective 2017. This move is hoped to enable more small and medium corporations to gain access to the bond and sukuk market thus broadening the range of issuers and investors, as well as deepening the market and enhancing market liquidity, while at the same time aligning the practices with other international markets. This measure is anticipated to further enhance the vibrancy in the Malaysian sukuk market which currently accounts for 69% of sukuk outstanding globally³.
On the regional front, one of the initiatives undertaken by the ASEAN Capital Market Forum (ACMF) as part of the regional capital market integration plan is the ASEAN collective investment scheme (CIS) Framework. Last week, the ACMF announced that the ASEAN Framework for cross-border offering of CIS is now operational in Malaysia, Singapore and Thailand. This Framework enables fund managers operating in a member jurisdiction to offer CIS including Islamic CIS across other member jurisdictions under a streamlined authorisation process. This multilateral arrangement facilitates broader distribution of Islamic funds across the member countries. Malaysia, having the largest Islamic unit trust fund market in ASEAN with total NAV of USD14.3 billion⁴, can potentially offer some of these funds in the other member countries while fund managers in the other countries can tap on the large investor base in Malaysia for Islamic fund products.

Moving to a new frontier

Today, the Islamic capital market serves multiple roles in the economy and society of various jurisdictions, ranging from serving the needs and requirements of a Muslim community to being an integral component of a country’s financial system. In view of the growing acceptance of its value proposition, the Islamic capital market has significant potential to expand into new frontiers where non-commercial considerations rank highly in determining the desired outcomes. These considerations may also contribute towards achieving halalal thoyyiban or holistic compliance and greater fulfillment of the objectives of Shariah (maqasid al-Shariah) for the Islamic capital market. Within this context, I would like to highlight three areas that have the potential to be new catalysts for growth of the Islamic capital market.

Responsible Innovation

The first area is Responsible Innovation which, among others, includes Sustainable and Responsible Investing. Responsible Innovation is an approach that takes into account various environmental, social and economic concerns throughout the innovation process with a view to creating value for the society while respecting the environments.
With the increasing concern over environmental and social impact of business and the greater demand for stronger governance and ethics on corporations, the Islamic capital market is well positioned to benefit from the pursuit of Responsible Innovation to address these issues, as its underlying principles clearly resonate with the objectives of Responsible Innovation.
The SC’s new SRI sukuk framework for example will facilitate and encourage the issuance of sukuk to raise financing for Shariah-compliant projects that fulfill the Responsible Innovation criteria and enable investors to participate in such projects, thus potentially growing the size and improving the depth and liquidity of the Islamic capital market.

Halal Industry

The second area is the halal industry. Through years of creating awareness and promoting the development of halal industry, the industry has now emerged as one of the fastest growing business sectors in the world. The global halal market is estimated to be worth more than USD2.3 trillion and the value of the halal food sector is reaching USD700 billion annually⁵. The non-food sector is much bigger, and includes chemicals, healthcare, cosmetics, personal care and pharmaceuticals.
The Islamic capital market can play a greater role in connecting and supporting the value chain within both the food and the non-food halal sectors through efficient and effective intermediation of fundraising and investment activities. To some extent, linkage between the Islamic capital market and the halal industry in Malaysia has been established through the Shariah screening process for listed companies as the screening criteria include financial ratio benchmarks that may influence companies that are involved in the halal industry to undertake Shariah-compliant financing and investing.

Waqf

The Islamic economic system is based on the components of siyasi (politics), tijari (trade) and ijtima`i (socio-economy). One of the thrusts of ijtima`i is waqf and therefore the third area is waqf development as it can play a meaningful role in providing social safety nets to society. Presently the development of waqf assets in Malaysia has been limited largely for religious purposes. However contemporary solutions that leverage on Islamic finance can facilitate and accelerate the development of waqf assets on a larger scale and to achieve various social and economic outcomes. At the fifth annual Islamic Finance Roundtable jointly organised by the SC and the Oxford Centre for Islamic Studies held in March this year on the theme “Harnessing Waqf into a Bankable Social Financing & Investment Asset Class”, various key issues surrounding the development of waqf assets and its potential were discussed. The Roundtable generally acknowledged that hitherto the development of waqf assets has been hampered primarily by issues relating to the three C’s of Capital, Capability and Confidence. The SC is currently undertaking efforts to address the three C’s within the context of Islamic capital market products and services in ways that would support the sustainability of waqf development.

Conclusion

The Islamic capital market has developed to become a viable alternative to its conventional counterpart as an avenue for fundraising and investment. Apart from its ability to attract broader participation by virtue of its compliance with Shariah requirements, the Islamic capital market operates based on principles that not only are universally accepted but, of late, are being increasingly prioritised. While this development augurs well for the future of the Islamic capital market, it also demands that product and service innovation initiatives, moving forward, be focused on promoting and achieving a delicate balance between commercial viability on the one hand, and sustainability and social equity on the other. In this regard, the SC aims to nurture a facilitative ecosystem that will enable the Islamic capital market to serve this objective in moving towards the new frontier.
On that note, I thank you for your attention and wish all of you a productive Forum ahead.

¹ Islamic Finance Outlook 2014, KFH Research Ltd, January 2014

² International Finance Corporation, 2011

³ IFIS

⁴ As at 30 Jun 2014 RM45.2 billion

⁵ World Halal Forum 2013