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Role of Islamic Capital Market in Economic Growth

Zainal Izlan Zainal AbidinExecutive Director, Islamic Capital Market

Securities Commission Malaysia

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Role of ICM in Economic Growth OIC countries are expected to record higher average GDP growth

compared to the global average over the next five years

Opportunity for Islamic capital market to facilitate mobilisation of wealth and funds to support sustainable economic growth

Sources: KFH Research, Pew Research (2011), World Bank (2013)

Global Sukuk Market

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Total sukuk outstanding globally reached USD286.4 bn as at end 1H2014

Debut sovereign issuances in 2014 by the UK, Hong Kong, South Africa, Luxembourg

Growing diversity in the sukuk market in terms of investors, currencies, sectors, etc.

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Sukuk Issuance by Sector (Global)

Sources: Bloomberg, Zawya, IFIS, KFH Research

Selected issuances in recent years:• PLUS (Malaysia) – Transport• Saudi Electricity – Power• Oooredoo (Qatar) - Telecom

Sukuk: Value Proposition

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Broadens the investor/subscriber base thus providing more competitive pricing for issuers

Enhances inclusiveness thus promoting more equitable wealth distribution/sharing

Contributes to development and growth of Halal as well as SRI businesses and economy

Provides more options for issuers and investors –facilitates diversification and reduces concentration risk

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YearSukuk issued to total

bonds issued (%)Size of sukuk issued

(RM billion)Size of total bonds issued

(RM billion)

2008 27.5 110.1 400.1

2009 32.0 116.4 363.3

2010 32.4 132.8 410.5

2011 35.7 185.0 518.8

2012 51.1 324.6 635.5

2013 54.9 275.8 502.2

Malaysia: Trend in Sukuk Issuance

Yield Comparison Between Sukuk and Bonds in Malaysia

7Source: Bond Pricing Agency Malaysia

3-yr bond yield matrix

MGS

Q2 14

Q1 14

Q4 13

Q3 13

Q3 14

3.553.413.433.43 3.51

4.134.013.963.89 4.09AAA

4.294.164.094.01 4.25AA

5.555.465.375.34 5.50A

3.843.753.683.47 3.83IRS

3-yr sukuk yield matrix

GII

Q2 14

Q1 14

Q4 13

Q3 13

Q3 14

3.593.563.493.37 3.64

4.083.963.913.85 4.04AAA

4.244.114.043.97 4.20AA

5.505.415.325.30 5.45A

3.843.753.68 3.47 3.83IRS

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Shariah-Compliant Equities

Classification of Shariah-compliant equities:

Attracts wider range of investors to own shares in listed companies, directly and indirectly via funds

Provides listed companies incentive to comply with screening criteria and more options for fund raising

Participating in economic growth through investment in Shariah-compliant stocks across various sectors of economy

Dow Jones Islamic Market World Index - Sector Allocation

Total market capitalisation – USD 23.2 tnComponent number - 2,578 stocks(as at end Sept 2014)Source: S&P Dow Jones Indices

Global Islamic Funds

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Total global Islamic AUM reached USD75.1 bn as at June 2014

Total number of Islamic funds increased to 1,069 funds

The growth, albeit gradual, is driven partly by rising wealth and portfolio diversification

Islamic Funds: Value Proposition

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Enables pooling of resources to invest in diverse range of Shariah-compliant securities & instruments

Facilitates effective mobilisation of funds to participate in various sectors & create more wealth in the economy

Provides different fund structures to suit specific needs, requirements and preferences

Creates opportunities for cross border linkages and businesses

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Development of SMEs

Islamic Private Equity and Venture Capital segment can spur development of small and medium scale businesses

SC Malaysia working on regulatory framework for equity crowdfunding

Source: World Bank

Building Blocks for an Effective ICM

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ICM Ecosystem

Legal and Regulatory Framework

Shariah Governance Framework

Tax Framework

Government Support

Diverse Pool of Players

Strong Intermediation

Institutions

Talent Pool

Action Plans for ICM Development

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Implement tax neutrality provisions for sukuk issuance

Adopt screening of equities for Shariah compliance

Intensify stakeholder awareness & education programmes

Enhance capacity building and research &development initiatives

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Thank You