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Malaysia remains world’s top center for Islamic capital market activities

Published on 22nd Feb, Edition 08- 2016

 

Islamic banking and finance has become a flourishing business with assets estimated at value of over US$180.0 billion. It is spreading from UK, USA and Switzerland to the Middle East and Asia. Both Muslims and non-Muslims are using extensively the facilities being provided by Islamic banking and finance.

Malaysia and Pakistan are well known for its Islamic banking and finance system. Both being the Muslim countries, the Islamic financial system runs similar with the conventional financial system. All praise must be given to the various regulatory authorities for their sincere efforts of turning the determination of having an Islamic financial system running alongside the conventional system into a fact.

In the past the Islamic capital markets role was less. The Islamic banking and finance system, began in the early 1980s. It played a strategic role in the development of the Islamic financial system owing to their funding capacity for the Islamic economic activities. The substantial developments in the Islamic Capital Market and its contributions towards the development of the Islamic financial system were observed from the mid-1990s onward.

Malaysia provided the requisite infrastructures and facilities for a more continuous usage of the Islamic Capital Market by both the corporate sector as well as the individual. The infrastructures and incentives incorporate the establishment of the Islamic money market, tax-exemption incentives and the introduction of the Shariah approved list of securities for example halal securities for investment purposes.

The Malaysian financial system constitutes the banking system, the non-bank financial institutions and the financial markets. It is within the financial markets that both the conventional and Islamic capital markets are situated. The Islamic Capital Market has the financial assets that are Shariah-compliant.
The growth of the Islamic Capital Market can be seen at from two clear-cut features. The Islamic Equity Capital Market and the Islamic Debt Capital Market. Halal for any equity securities, the Muslims have no option to invest their hard earned monies therefore participation in the growth of the Islamic Capital Market in general and the Islamic equity capital market in specific were limited.

The various regulatory authorities have responded by providing the required infrastructures and procedure to safeguard that the Muslims have an allowable option avenue for their investments, which will finally contribute to the development of the Islamic financial system in Muslim countries as a whole.
During the early days, Bank Islam Malaysia Berhad, the first Islamic bank in Malaysia, had taken the initiative to review and identify companies listed on the Kuala Lumpur Stock Exchange considered permissible for Muslims to invest in. This provided the more-needed advancement for Muslims to participate in the stock market. This in Malaysia was further encouraged by the introduction of the Shariah Approved Securities list in June 1997 by the Securities Commissions Shariah Advisory Council.
Beyond the equity securities, the Securities Commissions Shariah Advisory Council had also approved other conventional market instruments such as call warrants and Transferable Subscription Rights for investments by Muslims.

In order to satisfy the likelihood to engage in the stock market, various Islamic stock-broking services began to emerge with the first being BIMB Securities Sdn Bhd, which was established in 1994.
There are also other conventional stockbrokers that had grasped the opportunity to operate Islamic windows side-by-side with their conventional stock-broking services since then.

At present the Islamic equity capital market has grown to a degree where Muslim investors could allow experts to govern their funds through the various Islamic Unit Trust Funds and Asset Management Companies.

For yardstick the performance of the Islamic equity capital market, various indices were generated. There are two major Islamic indices used by the various market participants specifically, the RHB Islamic Index introduced in 1996 and the KLSE Shariah Index introduced in 1999.

 

The availability of the Shariah Approved List, the stock-broking services as well as the indices makes it possible more participants, either individuals or corporate, to be tangled in the Islamic Equity Capital Market.

The Islamic Debt Capital Market can be ascertained to the early 1990s when major corporations such as Shell MDS Sdn Bhd, Sarawak Shell Berhad and Petronas Dagangan Berhad raised phenomenal amount of funds from the Islamic Debt Capital Market.

The said funding exercises were mainly carried out through the issuance of Islamic debt securities similar to conventional bonds usually structured under the Shariah.

The Malaysian government also issued Islamic debt instruments in the form of Government Investment Issue to provide liquidity as well as to cater to the management of assets in the Islamic banking and finance system.

In a latest development the Malaysian government, through Khazanah Nasional Berhad, had also issued Islamic debt instruments in the form of the Khazanah Benchmark Bonds. These Benchmark Bonds were structured under the Shariah principle of Al-Murabahah.

It was only in the last few years that we have observed a huge increase in the number of corporate companies accessing the Islamic Debt Capital Market for funds.

Islamic Capital Market is over a trillion ringgit industry in Malaysia. It has grown at an average rate of 13.6 percent per annum over the decade period between 2000 and 2010, the size of Malaysia’s Islamic capital market, or ICM, stood at RM1.05 trillion as at the end of 2010, compared to just RM294 billion as at end-2000. During this period, the market capitalization of Shariah-compliant companies and the value of Sukuk outstanding in Malaysia increased at average rates of 11.5 percent and 22.2 percent per annum respectively.

A similar trend was also observed at the universal level, with Islamic finance as a whole registering an average growth rate of almost 15 percent per annum.

Malaysia’s ICM is projected to increase to RM2.9 trillion in 2020. In comparison, the whole capital market is projected to more than double from RM2.0 trillion in 2010 to RM4.5 trillion by 2020. Malaysia remains at the forefront of the sukuk market, accounting for 67 percent.

The overwhelming response to the US$2 billion issue from both international and domestic investors, underlines the healthy expansion of cross-border Islamic finance transactions.

Malaysia continues to enjoy a leadership role as an international center for Islamic capital market activities. Malaysia has successfully developed various capabilities and capacities in virtually all segments and aspects of the Islamic capital market.

One of the growth drivers of the Islamic Capital Market is the greater awareness of and demand for Shariah-compliant investment and savings products and services. The comprehensiveness of Malaysia’s Islamic capital market is reflected by the presence of other capabilities and services such as Shariah research, institutions of higher learning offering Islamic finance programmes, and Shariah advisory and consultancy.

In addition the Shariah Advisory Councils of the Securities Commission and Bank Negara Malaysia have been delegated to make rulings on any Shariah matter relating to Islamic finance referred to them by the courts.

With further development of the Islamic Capital Market in Malaysia, the government of Malaysia will widen and attached further depth to the overall capital market.

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