Malaysia's capital markets drive Islamic finance

In recent years Malaysia has strengthened its well-earned reputation as one of the world’s leading Islamic capital markets. By the end of 2015 the country commanded more than 54% of total outstanding global sukuk (sharia-compliant bonds) and more Islamic funds than any other fund domicile. As measured by overall assets under management (AUM), the nation’s Islamic fund management industry was the second largest in the world, according to data from Securities Commission Malaysia (SCM), the capital market sector regulator. Similarly, at end-2015 almost 74% – 667 in total – of the 903 securities listed on the Bursa Malaysia (BM) were classified as sharia-compliant. In the same period, Islamic securities constituted more than 64% of the BM’s total capitalisation, up 7.3% from the end of 2014. Similar rates of growth were evident across most other aspects of Malaysia’s Islamic capital market in 2015. These developments are in line with longer-term trends in the country. Indeed, between 2005 and the end of 2015 the country’s Islamic capital market expanded at a compound annual rate of 11.7% to reach RM1.69trn ($418.3bn), which represented 60% of the capital market at large.

Though the sharia-compliant capital market has performed well in recent years, it is not immune to the numerous macroeconomic challenges currently faced by Malaysia. It was a volatile year for the country in 2015, with declining global energy prices and slowing demand in China putting pressure on government revenues; the ringgit falling to lows against the US dollar not seen since the end of the Asian financial crisis in the late 1990s; and growing political tensions related to a number of investigations over debts accrued at the state-run investment 1Malaysia Development. Tightening liquidity in the banking sector, including at sharia-compliant lending institutions, also contributed to conditions in the country’s capital markets in 2015. “The Islamic market has seen slowing growth since 2014, in particular,” Pong Teng Siew, head of research at Inter-Pacific Securities, a Kuala Lumpur-based stockbroking company, told OBG. “This can be linked to the fact that many Islamic countries in the Middle East – which are home to many large funds – have seen slowing revenue. Islamic finance is tied more directly to oil than conventional finance.”

Future Growth

Despite these issues, both the government and local players alike remain cautiously optimistic about the future of Islamic capital markets in Malaysia. The SCM, for its part, plans to launch a major new development initiative – namely, the Islamic fund and wealth management blueprint – before the end of 2016. The strategy aims to build on the nation’s sharia-compliant fund and wealth management success and expertise in an effort to ensure continued expansion, and develop a steady stream of new opportunities, thereby solidifying Malaysia’s reputation as a global leader in this area. “With Islamic finance rapidly gaining traction in Muslim-majority nations and international financial centres, it’s crucial to continue to identify new growth areas to consolidate Malaysia’s leadership in an increasingly competitive market,” Ranjit Ajit Singh, executive chairman of the SCM, told local media in March 2016. “We have identified Islamic wealth management as a new growth area which, apart from leveraging on Malaysia’s existing infrastructure and capabilities in Islamic finance, is also a logical expansion of our well-developed Islamic fund management industry.”

Development

In 1990 the industry saw its first corporate sukuk issued by Shell MDS. This was followed in 1993 by the launch of the country’s first sharia-compliant equity unit-trust fund, by Arab-Malaysia Unit Trust, and in 1994 by the establishment of the first full-fledged Islamic stockbroking company, BIMB Securities. The SCM approved the listing of Islamic securities on BM in 1996, which was widely heralded as a key event in making sharia-compliant capital markets mainstream in Malaysia. After the Asian financial crisis, the state focused its efforts on developing sustainable financial institutions and sectors. Sharia-compliant finance, which eschews riba (usury), maisir (gambling) and gharar (uncertainty), was a logical area of focus at this time. In 1999 the Kuala Lumpur Sharia Index was established on the BM.

In 2001 the SCM launched the Capital Market Masterplan (CMP) 1, a decade-long development strategy that put the growth of Islamic products and services at the centre of the sector. Consequently, as a result of public sector-led development efforts and steadily rising private-sector interest in the segment, from 2000 through to 2010 the size of Malaysia’s Islamic capital market more than tripled, posting average annual growth of 13.6% for the decade.

Up To Date

This rapid expansion continued through to 2013, before slowing slightly in 2014-15. As of the end of 2015, the market capitalisation of sharia-compliant securities listed on BM had reached RM1.09trn ($269.8bn), up around 7.3% from RM1.01trn ($250bn) at the end of 2014, according to data from the exchange. This latter figure is down slightly on end-2013 Islamic market capitalisation of RM1.04trn ($257.4bn). However, to put these numbers into a longer-term perspective, in 2010 sharia-compliant equities listed on BM had a total market capitalisation of just RM802bn ($198.5bn).

Meanwhile, in terms of sukuk, issuance declined substantially in 2015, to RM117.7bn ($29.1bn), down from RM262.8bn ($65.1bn) the previous year, according to SCM data. While the percentage of new sukuk issues to total new debt issuance also dropped from 53% in 2014 to 44% in 2015, it is worth noting that total bond issuance in Malaysia also fell of considerably over the course of 2015, which was widely regarded as a reflection of the weakening macroeconomic situation in the region more than any inherent limitation to the sharia-compliant market as such. Meanwhile, Islamic AUM showed strong growth across all metrics in 2015. By the end of the year the value of all sharia-compliant AUM was RM132.38bn ($32.8bn), up nearly 20% from RM110.6bn ($27.4bn) at the end of the previous year, according to data compiled by the SCM. In a similar vein, Islamic assets grew by more than two percentage points as a share of total AUM over the course of 2015.

In addition to sukuk and equities, which are standard across most Islamic capital markets in South-east Asia and the Gulf – the two key global sharia-compliant financial centres – Malaysia is home to a wide range of more exotic Islamic products, including exchange-traded funds (ETFs), real estate investment trusts (REITs) and a number of specialised funds. These products, many of which were first developed and launched in Malaysia, have set the country apart as a centre for Islamic financial innovation, a reputation it has maintained for decades. Many of these products have attracted increased interest recently, as investors have looked for new ways to diversify their holdings. By the end of 2015, Malaysia was home to four sharia-compliant ETFs worth RM360m ($89.1m), up from just two worth RM310m ($76.7m) at the end of 2014. Similarly, as of end-2015, four Islamic REITs were on offer in the country, with a market capitalisation of RM16.1bn ($4bn), as compared to three worth RM15.06bn ($3.7bn) at end-2014.

Further shoring up Malaysia’s status as the world’s most indispensable Islamic capital market is the fact that the nation is home to both the Islamic Financial Services Board (IFSB), an international regulatory organisation that issues standards for Islamic banking, finance, insurance and capital markets, and Bursa Suq Al Sila (BSAS), an Islamic commodity-trading platform. Since it was established in 2003, the IFSB has become one of the most referenced sharia-standards bodies in global Islamic financial sectors around the world. The BSAS was established by BM in 2009 and bills itself as “the world’s first sharia-compliant commodity trading platform”. Currently the BSAS handles five products, namely crude palm oil, refined, bleached and deodorised palm olein, plastic resin, hardwood timber and softwood timber. As of end-January 2015 the market had 95 registered participants, up from just 33 at the end of 2010.

Planning Ahead

As SCM data notes, by the end of 2015 Malaysia oversaw some 31% of the $58bn in Islamic AUM globally, making it an international leader in this rapidly growing area. Ensuring that Malaysia’s Islamic capital market continues to remain at the forefront of the global industry for the foreseeable future is at the heart of both the SCM’s new Islamic fund and wealth management blueprint and the commission’s 10-year CMP 2. The latter strategy, which was launched in 2011 at the conclusion of the first master plan, runs from 2011 to 2020.

Drawing on the objectives laid out in the earlier strategy, in this second plan the SCM aims to “further build scale in the sharia-compliant equity and investment management segments, as well as expand the Islamic capital market’s international reach.”