Keynote Address on Leveraging Islamic Finance to Develop a Sustainable Capital Market: The Malaysian Experience - “Facilitating Development of a Sustainable Capital Market through Regulatory Innovation”
By Datuk Zainal Izlan Zainal Abidin, Deputy Chief Executive, Securities Commission Malaysia
Leveraging Islamic Finance to Develop a Sustainable Capital Market: The Malaysian Experience
DCE’s Keynote Address:
“Facilitating Development of a Sustainable Capital Market through Regulatory Innovation”
South Africa: 1 December, 3.30pm – 5.10pm (KL time)
Nigeria: 3 December, 3.30pm – 5.10pm (KL time)

Good morning, esteemed speakers and panelists, ladies and gentlemen.

1. Allow me to start by expressing my sincere gratitude to Capital Markets Malaysia and the World Bank Group for jointly organising this timely event. I also appreciate the time taken by all of you, the participants, who have dialed in this morning. It is indeed my privilege to be able to share the Securities Commission Malaysia (SC)’s journey in harnessing its experience in the Islamic capital market, to advance Malaysia’s sustainable finance agenda.
2. The alignment between the principles of Islamic finance and those of sustainable and responsible investment (or SRI) have been increasingly well recognised - both advocate the values of social responsibility, inclusiveness, equitable sharing of risks and shared benefits for society, among others. A joint report by the CFA Institute and the Principles for Responsible Investment (PRI) states that “Islamic finance and ESG investing are complementary capital-raising and investment approaches with many shared principles”.
3. SC Malaysia has long held the view that by harnessing synergies between the Islamic capital market and SRI, the Malaysian capital market will be able to provide an attractive proposition to both conventional and Shariah-conscious investors as well as issuers.
4. Having developed a comprehensive and vibrant Islamic capital market, we have proceeded to build upon this ecosystem so that sustainable and responsible finance and investing can capitalize on existing infrastructure and capabilities, and flourish.
5. The first and a pivotal milestone in Malaysia’s sustainable finance journey is the launch of the SC’s Sustainable and Responsible Investment Sukuk Framework (or SRI Sukuk Framework) in 2014, to create an enabling regulatory environment for the issuance of Islamic capital market instruments to fund green and social projects. Being the pioneering initiative combining Shariah and SRI principles, the SRI Sukuk Framework paved the way for Malaysia’s financial institutions, underpinned by their capabilities and experience in Islamic finance, to broaden their offerings and facilitate the fundraising for eligible projects.
6. To cultivate an innovative and holistic SRI ecosystem, the SC launched the SRI Roadmap for the Malaysian Capital Market in 2019 with 20 strategic recommendations aimed at positioning Malaysia as an SRI centre in the region. This aspiration follows on from the Islamic Fund and Wealth Management Blueprint issued by the SC in 2017, in which one of the strategic thrusts is to establish Malaysia as a regional centre for Shariah-compliant SRI. The recently-launched Capital Market Masterplan 3 further reinforces this goal, and I will expand on this point later.
7. An immediate initiative under the SRI Roadmap then was the revision of the SRI Sukuk Framework to expand the list of eligible SRI projects, giving more clarity to the types of projects that could be funded while encouraging greater diversity and innovation. I am happy to share that there have been 26 issuances of SRI Sukuk to-date by Malaysian corporates to raise financing for sustainable projects. The proceeds have been channelled towards activities such as large-scale solar projects, green buildings, hydropower, education and affordable housing.
8. In addition to the SRI Sukuk Framework to facilitate fund raising activities, the SC has also issued the Guidelines on SRI Funds to enable institutions and individuals to invest into SRI or ESG-compliant securities via unit trust or mutual funds. These various initiatives are part of the SC’s “5-i” strategy in developing the SRI ecosystem – the 5 I’s being Instruments, Investors, Issuers, Internal Governance Culture, and Information Architecture.
9. While the development of the SRI ecosystem for the capital market serves to enable the private sector to participate in and grow this important market segment, sustained and meaningful progress of the sustainability agenda would require the commitment from the top, and in this regard the Government of Malaysia has demonstrated keen leadership in this space. Malaysia’s maiden sovereign sustainability sukuk – which is also the world’s first US dollar sustainability sukuk to be issued by a sovereign - was launched in April this year. The issuance enabled the country to progress towards meeting its commitments under the Paris Agreement and further its efforts in advancing the people’s socio-economic well-being.
10. Prior to that, in August 2020, the Government of Malaysia issued an innovative first-of-its-kind sukuk, in response to the public’s request to participate in and contribute to the rebuilding of the nation amid the repercussions of COVID-19. The Sukuk Prihatin formed part of Malaysia’s National Economic Recovery Plan in addressing the pandemic, to support citizens and businesses, and to strengthen the domestic economy.
Ladies and gentlemen,
11. In September, the SC launched its third Capital Market Masterplan (CMP3), which will serve as a strategic framework for further development of Malaysia’s capital market over the next five years. Two of the key focus areas that the SC has prioritised under the CMP3, pertinent to today’s theme, are transition finance and social finance.
12. Economic development in Malaysia has been spurred by a diverse range of industries, some of which have already started adopting sustainable practices, and many having the potential to do so. In this regard, the sustainability journey for Malaysia has to be fit-for-purpose.
13. In prioritising the sustainability agenda, we believe that the capital market can play an important role in financing industries and businesses in their strategy to transition towards more sustainable practices, by broadening the array of capital market instruments to serve this need.
14. The development of transition finance to support Malaysia’s commitments towards carbon-neutral is thus a focus area that the SC has highlighted in the CMP3. The objective is to facilitate industries and businesses to become less carbon-intensive and to transition into a more resilient, sustainable and low-carbon economy.
15. The CMP3 also recognises that an important enabler in this nascent area is the availability of timely, consistent and accurate disclosures and data that are relevant in assisting stakeholders to better identify risks and opportunities, and therefore make more informed decisions. The SC will evaluate appropriate initiatives that will align with international standards to promote greater acceptability and comparability of disclosure practices, while at the same time mitigating greenwashing risks.
16. Moving beyond the ‘E’ in ESG, the pandemic has highlighted that the financial system has a critical role to play in ensuring inclusive and sustainable recovery. The public and private sectors will need to collaborate to shape the development of social finance and to scale it up in order to achieve the degree of impact that would make a difference to society at large.
17. Islamic social finance has the potential, and is well-placed, to provide the requisite support for post-pandemic poverty alleviation and economic recovery. In the realm of social finance, the SC has introduced frameworks to facilitate the use of capital market instruments to advocate and drive financial inclusion and social impact, such as SRI sukuk and waqf-featured funds.
18. Moving forward, the SC will focus on enhancing its Islamic capital market ecosystem to be more conducive for impact investing, to facilitate the integration of impact assessments with Islamic social finance instruments. This will enable measurable impact investments in the areas of socio-economic development – thereby ensuring investors will be able to gauge whether the capital invested has achieved its desired objectives.
19. Apart from regulations and frameworks, a key enabler in the development of a holistic sustainable finance and investment ecosystem is to ensure that all segments of the financial sector are equipped with the skills and technical expertise needed to facilitate product innovation. In this regard, Capital Markets Malaysia supports the SC’s initiatives to develop capital market intermediaries’ expertise in sustainable finance and investing through its three centres of excellence (COEs). These COEs support capacity development and showcase the track records of three key stakeholder groups: corporations; asset owners and asset managers; and financial sector intermediaries.
Ladies and gentlemen,
20. The sustainability agenda is a journey, and sustainable finance is a critical component towards achieving the desired outcomes including the Sustainable Development Goals and the Paris Agreement commitments. Much has also been said on the recently concluded COP26 in Glasgow, with views coming from different perspectives. What is very clear, however, is that there is still so much more to be done, and these would require extensive collaborations and cooperation among the various stakeholders from developed and developing economies. All options will need to be explored and in this regard, Islamic finance provides a unique value proposition given its close alignment with the principles of sustainability. Malaysia is happy to share our experience thus far on this journey, and we hope to be able to also learn from the experience of others.
With this, I wish you a productive and insightful engagement today.
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