Challenges and prospects of Islamic capital market in Malaysia


Since its inception over 30 years ago, Islamic finance has become more vibrant with a diverse set of industry players. Malaysia has maintained its position as the global leader in Islamic finance and the sector has matured.

As of end-2018, Malaysia continued to be the main driver for the sukuk (Islamic bond) market with 51% of the US$396 bil of total global outstanding sukuk while continuing to lead in Islamic wealth management with 36.5% of the global share as of end-2017. In the short-term, we do not see any strong catalyst in the Islamic capital market apart from the revival of the East Coast Rail Link (ECRL) and LRT 3 projects. In February 2019, Bursa Malaysia’s Construction Index in particular, grew 6.74 points or 3.68% to 189.93 due to positive sentiments following news of the project’s revival. As of 31 July 2019, the Construction Index stood at 219.30.

Against this backdrop, we believe Bursa Malaysia-i (BM-i) can become a tool for Islamic Participating Organisations (POs) and POs with Islamic windows to continuously engage with equity investors. Currently, there are 15 Islamic and Islamic window POs serving as the ambassadors of BM-i. As of July 2019, total Shariah trades on Bursa Malaysia stood at RM1.302 tril out of a total trade of RM2.031 tril. This is a very huge market that cannot be ignored.

Though we have made much progress in developing the BM-i platform but in all honesty, a question arose as to where has the initiative taken us to? How are the investors especially the institutional investors responding to this new platform? The growth for BM-i can be accelerated if we could obtain strong support from institutional investors. The organic growth contributed by retail investors will then serve as supplementary contribution to this BM-i initiative. Hence, the BM-i platform would be more meaningful. Having big numbers in Shariah trade volume and value vis-à-vis the non-Shariah trade would make this BM-i platform to be more visible. Only with this bold move, we can showcase the real depth of our Islamic equity market.

Moving on to the prospect of our sukuk market, we welcome the setting up of the Debt Management Office by the government to resolve its debt problems. In the short-term, we may see a slowdown in business activities as the government is not in favour of any expansionary fiscal policy until the country’s finances improve. The 25-basis-point (bps) reduction in the Overnight Policy Rate (OPR) by the Monetary Policy Committee (MPC) of Bank Negara Malaysia to 3.00% in May 2019, serves as a short-term market stimulus for cheaper borrowing cost to borrower in particular, corporates. We view the move as pre-emptive and timely given the current global economic uncertainty that ranges from the escalation in the US-China trade tensions to the slowdown in global trade and a weak economy in major markets such as China and Europe. We believe this would complement the government’s efforts to boost the economy mainly by reviving most mega infrastructure projects which will indirectly contribute to a brighter outlook for the sukuk market in the near future. The cost consolidation and fiscal transparency carried out by the government have translated into stronger GDP. The 2Q19 GDP growth accelerated to 4.9% year on year, from 4.5% in the previous quarter. The 4.9% GDP growth is above market consensus of 4.7% as compiled by Bloomberg.

Regional perspective

The Securities Commission (SC) is reported to be cautiously optimistic of higher sukuk issuance this year. Malaysia’s sukuk issuance increased to RM199.9 bil last year from RM168.68 bil in 2017. According to Moody’s in its report titled: Cross-Sector -Sukuk Market Outlook – H1 2018 Update, green sukuk issuance is set to accelerate in Malaysia and Indonesia as governments in both countries seek to promote sustainable policy agendas by attracting private capital into low-carbon and climate-resilient infrastructure projects. Malaysia issued the world’s first green sukuk in July 2017, while Indonesia unveiled the first sovereign green sukuk in the year after. We understand that Indonesia’s 2015-2019 National Medium-Term Development Plan prioritises Shariah financing as one of its agenda. Hence, the continuation of Joko Widodo (Jokowi) as Indonesia’s president will strengthen the development of the country’s Islamic finance sector.

Global leadership

The Islamic finance industry in Malaysia is characterised by having comprehensive market components ranging from Islamic banking, takaful, Islamic money market and Islamic capital market. According to RAM Ratings, Malaysia was the top sukuk issuer with US$13.9 bil ringgit equivalent or 35.1% of the US$39.5 bil ringgit equivalent, sukuk issued in the first quarter ended March 31, 2019. Malaysia has demonstrated an enabling environment to spur Islamic capital markets given a supportive regulatory framework with the introduction of Sustainable and Responsible Investment (SRI) Sukuk Framework in 2014 and the issuance of revised Guidelines on Unlisted Capital Market Products by the SC under the Lodge and Launch Framework in 2017. The introduction of SRI Sukuk Framework is part of the SC’s developmental agenda to facilitate the creation of a conducive eco-system for SRI investors and issuers and to be in line with the rising trend of green bonds and social impact bonds that have been introduced globally to facilitate and promote sustainable and responsible investing. Combined with Malaysia’s leading position in the global sukuk market, this framework will further enhance the country’s value proposition as a centre of Islamic finance and sustainable investment. However, global investors’ appetite for the local ringgit sukuk market will very much be dependent on the yield attractiveness and the resilience of the ringgit. A concerted effort by the regulators and market players is important to improve the depth and breadth of our debt capital market.

Multi-currency Sukuk

We have been trying to attract regional/global corporate players to raise funds in Malaysia via the establishment of a multi-currency sukuk programme which facilitates issuance in ringgit or foreign currency. On this note to-date, it has not progressed as envisioned. Multiple questions arose here for our reality check: Whether the multi-currency sukuk programme is suitable for foreign issuers and taking into account the foreign exchange exposure and hedging / swap facilities? Is our market ready for such product? How successful has been the International Currency Business Units (ICBU) undertaken by our industry players in building Islamic banking business in international currencies; needless to say, the extremely shallow secondary market for non-ringgit issues. Have we identified the mismatch? These are the salient points to ponder upon before we continue aggressively promoting Malaysia as the global hub for Islamic capital market. To promote this initiative positively, investors may consider expanding their mandate in regards to foreign currency portfolios, so as to participate meaningfully in any non-ringgit issues; taking cognisant of their natural ringgit portfolio. Only if we can achieve this, we can truly promote Malaysia as the global Islamic marketplace.

Future growth

Moving forward, the question remains whether Islamic finance industry would continue seeing the financing assets and sukuk dominating the assets class as they stand now. Food for thought; where do we see the future growth of Islamic capital market? These are the critical points to ponder for the industry to elevate itself to the next level.
With the large pool of qualified scholars and having the best infrastructure anyone can ask for, such as International Shari’ah Research Academy for Islamic Finance (ISRA) and International Centre for Education in Islamic Finance (INCEIF) and, most importantly, the necessary regulatory framework, it is time for Malaysia to drive the market impactfully with more compelling products such as deeper Islamic Exchange Traded Fund (ETF), Islamic wealth management, Islamic equity offerings and deeper secondary non-ringgit market activities.
At the end of the day, it is my honest and humble opinion that the market should not be contented with what has already been achieved as we should endeavour to strive to complete the journey full circle, making the difference where it matters most.

Original article was published on 31 August 2019 by Focus Malaysia.

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