1

5th CVM Seminar : Financial and Capital Markets in the Islamic World Opportunities and Challenges

8 December 2008

The Asian Market: Malaysia’s Experience

Nik Ramlah MahmoodSecurities Commission

Malaysia

2

The Development of Malaysia’s Islamic Capital Market –

A Regulatory Perspective

3

The Malaysian capital market forms a significant component

of the overall financial system…

EquityUSD40.6 bn

(66%)

BondsUSD20.9 bn

(34%)

Total value of capital market (1990)

USD61.5 billion

Total value of capital market (nov-2008)USD327 billion

EquityUSD182 bn

(56%)

BondsUSD145 bn

(44%)

4

Islamic capital market value (Nov 2008): USD171 billion

Total value of capital market (Nov-2008): USD327 billion

EquityUSD182 bn

(56%)

BondsUSD145 bn

(44%)

…with Islamic securities forming a substantial portion

Islamic equity

US$117 bn (68%)

Islamic Bonds/sukuk

US$54 bn (32%)

• Malaysia inherited the British system of governance including the conventional financial services industry

• The evolution of Islamic finance began from the setting up of the Pilgrims Fund Board - a savings mechanism under which funds for performing the Hajj were set

aside to cover the costs of performing the annual pilgrimage

• Government and regulatory bodies recognized the need to develop ICM in order to create a financial niche for Malaysia

• The evolution of Islamic finance in Malaysia :

1969 : Establishment of Pilgrim Fund Board

1983 : Islamic Banking Act enacted and the establishment

of first Islamic bank

1984 : Takaful Act enacted and the establishment of first

takaful (Islamic insurance) entity

1993 : Securities Commission Act enacted providing SC with mandate

to develop capital market2007 : Capital Market Services Act

Islamic finance in Malaysia is relatively well diversified…

To cater for domestic demand

To cater for domestic demand

6

…and has evolved to provide viable investment and financing alternatives for local institutions

• An efficient conduit for mobilisation of funds for Malaysian corporates

• long term fund raising and investment; enhances depth & resilience of Malaysian Islamic financial system and overall financial system

• 55% of outstanding corporate bonds are structured using Shariah principles

• 87% of companies on the stock exchange are Shariah compliant

• Malaysian ICM products are accepted by both Islamic and non-Islamic local investors as well as investors across various jurisdictions

• Conventional investors regard ICM products as a new asset class

• Emergence of new demand from the Middle East, South-East Asia, South Asia and North Africa

7

Malaysia is now the leading Islamic capital market in the world…

• Malaysia is regarded as the leading center for Islamic finance− Two thirds of global sukuk originates from Malaysia − Islamic unit trust is the fastest growing segment of the Islamic capital

market − Leading international fund management companies establishing operations

in Malaysia

• Issuance of sukuk is not confined to Islamic institutions− Multilateral institutions such as World Bank and IFC have issued sukuk− Non-Islamic institutions have issued sukuk − Non-Muslim majority countries have shown interest to issue sukuk

• Local and foreign financial institutions are now actively intermediating and structuring ICM products

− Sukuk− Islamic investment products− Islamic exchange traded funds− Islamic REITS

8

Malaysian ICM has been developed through clear vision and well articulated policies

• Strong leadership and proactive role of government

• Close collaboration with private sector

• Progress of implementation closely monitored

Capital Market Masterplan Capital Market Masterplan

Malaysia International Islamic Financial Centre

(MIFC)

Malaysia International Islamic Financial Centre

(MIFC)

Financial Sector MasterplanFinancial Sector Masterplan

9th Malaysia Plan9th Malaysia Plan

9

The Capital Market Masterplan (CMP)

• Equity market• Bond market• Derivatives market• Stockbroking industry• Market institutions• Investment management• Regulatory framework • Corporate governance

• Islamic capital market

• Technology & e-commerce• Training & education

Launched in 2001, the CMP provides a blueprint for long-term strategic

development of the Malaysian capital market with 152 recommendations

covering 11 areas :

To develop Malaysia as an international Islamic financial centre

10

A sound Shariah framework is fundamental for ICM development…

• Main thrust of Islamic capital market is compliance with Shariah principles (Islamic jurisprudence)

• National level Shariah Advisory Council (SAC) established under the Securities Commission Act 1993

− Comprises prominent Shariah scholars, jurists & market practitioners− Advises SC on all Islamic capital market matters− Provides investment guidance− Acts as a reference point for industry− Promotes product harmonisation and standardisation

• SC works closely with industry and the SAC to facilitate new products/concepts

• Publication of Resolutions of the SAC

11

• Islamic capital market products and services must − leverage on existing infrastructure− not compromise the universal goals of securities regulation

• IOSCO’s Objectives and Principles of Securities Regulation applies

…with universal principles of securities regulation applied to Malaysian Islamic capital market

Protection of investors Ensuring markets are fair, efficient & transparent Reduction of systemic risk

• IOSCO Islamic capital market task force 2001 affirmed key issues:

− Conventional regulatory framework applicable to Islamic capital market products and services− Islamic capital market products and services may be introduced and developed within any

existing well-structured securities market− Reaffirmed in 2008

• IFSB efforts in setting international prudential standards

12

A two-tier approach in regulating Islamic products…

Tier I applicable to both conventional and Islamic products

General regulatory requirements

Tier 2 applicable to Islamic productsShariah - specific requirements

Bonds - Trust deed, mandatory rating, eligible persons, etc

Unit Trust - Investment committees, trustees, management company, etc.

REITs - At least 75% investment in real estate

Sukuk - Additional disclosure for Musyarakah Mudharabah structures via info memo, Shariah adviser, utilisation of proceeds

Islamic Unit Trust - Shariah adviser to certify that fund

complies with Shariah requirementsIslamic REITs - Tenants’ activities and rental

income must comply with Shariah requirements

1313

…issuance of Islamic capital market guidelines…

• Guidelines on the Offering of Islamic Securities, 2004

• Guidelines on Islamic REITs, 2005

• Guidelines on Islamic Fund Management, 2007

• Guidelines and Best Practices on Islamic Venture Capital 2008

14

…facilitates the offering of a comprehensive range of products and services

ProductsProductsShariah

compliant stocks

Islamic unit

trusts

Islamic REITs

Sukuk

Islamic ETFs

Islamic structure

d products

Shariah compliant

futures contracts

Islamic banking & takaful

Corporate finance / Advisory

ServicesServicesIslamic fund management

Islamic stockbroking

15

Malaysia has built a reputation as a centre of innovation…

Centre of innovation

• First sovereign 5 year global sukuk of US$600 million in 2002 (Govt. of Malaysia)

• First global sukuk of USD150 million issued by Guthrie Berhad in 2001

• First Islamic residential mortgage backed securities issued by Cagamas Berhad in 2005

• First Islamic Ringgit bond issuance of RM760 million (USD217m) by a multilateral financial institution in 2005 (World Bank)

• First listed Islamic Real Estate Investment Trust in 2006

• First Islamic structured product in 2007

(USD1 = RM3.5)

16

Recent Landmark ICM Issues• Largest sukuk funding programme of RM60 billion (USD17.14 b) by

Cagamas

• Largest corporate sukuk of RM15.4 billion (USD4.4 b) by Binariang GSM

• Largest exchangeable sukuk of USD850 million by Khazanah

• RM3 billion (USD0.86 b) Islamic stapled income securities by Telekom and Hijrah Pertama

• First Asian Islamic ETF launched by i-Valuecap Management in 2008

…with landmark Islamic issues

17

Malaysia – An International Islamic Capital Market Hub

18

Vibrant economyVibrant economy

Competitive cost structure

Competitive cost structure

Efficient business environment

Efficient business environment

Conducive lifestyleConducive lifestyle

Deep, broad-based capital

market

Deep, broad-based capital

market

Islamic finance niche

Islamic finance niche

MalaysiaMalaysia

Malaysia : An international investment hub…

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…slowdown in economic growth due to global environment, with stable and resilient banking system…

Malaysia…positive economic conditions with moderate outlook…

Malaysia’s Credit Rating: A- (S&P), A3 (Moody’s)

Sound Economic

Fundamentals

Sound Economic

Fundamentals

Low inflation of2.0% @ Dec 2007(2008: 5.5 – 6%)

Lowunemployment

(3.5% in Q2 2008)

Diversified andflexible economic

structure

Low external debt (end-June ’08:

34% of GNI)

High grossnational savings

(38.4% of GNI)

High internationalreserves

(USD100 b @November ‘08)

…Malaysia’s real GDP shows moderate growth

Strong domestic demand

conditions …high foreign exchange reserves and low external debt provide one of the strongest external positions globally

Stable growth at 5% – 5.5% in 2008

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...and an attractive business & investment destination

Canada

Israel

South Africa

United Kingdom

Ireland

United States

Malaysia

Hong Kong

Singapore

New Zealand

Most protected

Ranked 4th in investor protection

Cambodia

Israel

Mauritius

South Africa

Hong Kong

United States

Canada

Malaysia

Singapore

New Zealand

Most

Ranked 3rd for regulating directors

Mexico

Bulgaria

Philippines

Chile

Indonesia

Brazil

Thailand

Malaysia

China

India

Most attractive

Ranked 3rd for most attractive outsourcing centre

Source: A T Kearney 2007

Source: World Bank 2008

Source: World Bank 2008

World Economic Forum 2007 Global Competitiveness Index:

• Malaysia ranked 21st in Global Competitiveness Index (World Economic Forum)

• Investment Guarantee Agreements with over 50 countries

• Dynamic legal, regulatory and tax framework

• Regional Centre of Arbitration in Kuala Lumpur

• Affordable cost of living – among cheapest in Asia

• Liberal exchange control regime

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Source: Securities Commission

A large Shariah-compliant equities market…

Shariah-compliant Securities

63.5416.47 (USD119)2008+

63.7705.12007

64.6548.42006

63.3439.82005

62.1448.22004

59.9383.92003

60.3290.52002

65.2303.2 (USD86.6)2001

% of M-capIslamic equities

M-cap of IslamicEquities (RM bln)

Year

Industrial Products

33%

Construction 6%

Trading/Services

20%

Properties 9%

Plantation 4%

Technology 12%

Consumer Products 15%

Others 1%

0.43%6594.186565.90FBM Hijrah Shariah

0.97%5900.375843.46FBM EMAS Shariah

0.29%866.14863.61KL Composite Index (KLCI)

% change30 Nov 200831 Oct 2008Equity market indices

87%% to total listed securities

855 securitiesNumber of Shariah-compliant securities-Nov 2008

Shariah-compliant securities on Bursa Malaysia

* The SAC of SC releases the updated Shariah-compliant securities list twice a year in May and November

Shariah-compliant Securities by market sector

+As at end-Nov 2008

22

0

200

400

600

800

1000

1200

1400

1600

Jun-05Sep-05Dec-05Mar-06Jun-06Sep-06Dec-06Mar-07Jun-07Sep-07Dec-07Mar-08Jun-08Sep-08

…makes Malaysia an attractive Primary Listing Destination

• Market capitalisation as at end-November 2008 stood at RM657 billion (USD188 b)

• Largest number of listed companies in ASEAN (982 as at Sept-08)

• Well-balanced participation ~ with retail, domestic institutional and foreign institutional accounting for roughly a third of trading values each

• Market Diversity - 15 Sectors with 50 economic activities

• Product Diversity – Structured Warrants, REITs, ETFs, Shariah compliant products

• A total of 13 listed REIT – 2 Islamic and 1 conventional converting to an Islamic at the end of the year

• 3 listed ETFs, FTSE Bursa Malaysia Large 30 Index, ABF Malaysia Bond Index Fund & MyETF Dow Jones Islamic Market Malaysia Titans 25 (First Shariah ETF launched in Asia)

• Resilient performer – Among top performing markets in 2007 and performing in line with other Asian exchanges in 2008

No. of Listed Companies : 982

30%

20%13%

10%

11%

6%4% 4% 1% 1%

Industrial products Tading/ServicesConsumer Products PropertyTechnology ConstructionFinance PlantationInfrastructure Project Cos Others

Gives excellent market coverage, peer comparisons, sector premiums

KLCI record high: 1516.22 on 11th Jan 2008

Kuala Lumpur Composite Index

Oct-08

*

23

Attractive value propositions

• Vibrant economy with competitive cost structure, efficient business environment & conducive lifestyle

• Strategic, Islamic connectivity for Middle Eastern funds to capitalize on Malaysian growth opportunities

• Valuation is comparable to regional exchanges and relatively higher valuation on niche sectors

• Non-resident PLCs can repatriate any amount of capital raised during IPO without BNM approval

• Companies can choose to have their Shariah compliant status determined pre-IPO

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11.710.9

9.99.5

7.8

11.4

0.0

4.0

8.0

12.0

Hong Kong

KoreaMalaysia Taiwan Thailand

Singapore

11.710.9

9.99.5

7.8

11.4

0.0

4.0

8.0

12.0

Hong Kong

KoreaMalaysia Taiwan Thailand

Singapore

10.911.4

8.6

7.4

10.9

0.0

4.0

8.0

12.0

KLCI

Oil & Gas Plantation

Industrial ProductsTrading/Services

10.911.4

8.6

7.4

10.9

0.0

4.0

8.0

12.0

KLCI

Oil & Gas Plantation

Industrial ProductsTrading/Services

PE Valuations

Regional PE Valuations (end-Q3 2008)

KLCI Sectoral PE Valuations(end-Q3 2008)

25

Direct listing requirements for foreign companies

N/A• Market capitalisation of at least RM500 mil (USD142.9 m)

• PAT of at least RM30 mil (USD8.6 m) for latest FY

Market Capitalisation/

Profit Test

N/AMust have right to build an infrastructure project – • which contributes to economic growth of Malaysia• concession not < 15 yrs• cost not < RM500 mil (USD142.9 m)

IPC test

• Tech-based companies:

None• Tech incubators:

At least 12 months in operations

• Others:

3 years operating revenue

At least 3-5 full financial yearsOperating history

Requirement Main Board MESDAQ

Paid-up share capital

Min RM60 mil (USD17.14 m) Min RM2 mil (USD0.57 m); or

Min RM20 mil (USD5.7 m) (technology incubators)

Profit Track Record Test

• Uninterrupted profit after tax (PAT) of 3-5 FYs;• Aggregate PAT of at least RM30 mil (USD8.6 m); and• PAT of at least RM8 mil (USD2.3m) for latest FY

N/A

26

Secondary listing requirements for foreign corporations

Flexible requirements for a foreign corporation seeking a secondary listing on Bursa Malaysia:

• The applicant’s home exchange must be a member of the World Federation of Exchanges and must have standards of disclosure rules at least equivalent to those of Bursa Malaysia

• Market capitalisation at least equivalent to RMI billion (USD285.7m) on its home exchange

• After tax profits of at least equivalent to RM60 million (USD17.14 m) based on the audited financial statements for the most recent full financial year

• The applicant must be incorporated in a jurisdiction whose corporation laws and other laws and regulations have standards at least equivalent to those in Malaysia, particularly with respect to-

− Corporate governance

− Shareholders and minority interest protection and

− Regulation of take-overs and mergers

27

The Malaysian Islamic Capital Market – Active global sukuk centre

Malaysia has competitive advantage: Local currency bond market is largest in

ASEAN region, as of end-Nov 2008− total: RM523 bn (USD 145 bn)− sukuk: RM194 bn (USD 54 bn)

New asset class, wide investor base 57% of corporate debt securities are sukuk Corporate sukuk issued in 2007: USD 20 bn

— 1H 2008: > USD 4.3 bn

Despite financial volatility due to continued uncertainties, many large issuances in 2007 and 1H 2008 were made

signifying large demand for sukuk

111

86

73

5650

43

0

20

40

60

80

100

120

Percentage (%)

Korea Malaysia Singapore Thailand China Hong Kong

Bond Market as a % of GDP

USD550 m Khazanah Exchangeable Sukuk 2008 *

Europe26%

US 11%

Asia & Others13%

Middle East50%10x

oversubsc

ribed

28

Corporate Approval

Sukuk - Primary Market Activity in 2008

Jan-Sep 2007

Jan-Sep 2008

Size of sukuk issued 25.92 15.03

Size of conventional bonds issued 17.65 24.64

Total corporate bonds issued 43.57 39.67

% size of sukuk issued to total corporate bonds issued

59% 38%

Jan – Sep 2007 Jan - Sep 2008

No. of issues

Size of issues

(RM‘bil)

No. of issues

Size of issues

(RM‘bil)

Sukuk approvals

43 86.77 36 24.60

Conventional bond approvals

51 31.27 43 65.43

Total 94 118.04 79 90.03

% of Sukuk approved to total corporate bonds approved

46% 74% 46% 27%

Corporate Issuance

Sukuk approved based on various Shariah principles

2007

Murabahah19%

Ijarah11%

Istisna9%

BBA2% Mudharabah

1%

Musyarakah58%

Musyarakah64%

Murabahah3%

Ijarah23%

BBA7%

Mudharabah3%

Jan – Sep 2008• Decrease in amount of Sukuk approved in 2008 is partly due to: - Local and foreign FIs whose assets are conventional based, tapping the bond market; - One off large Cagamas issuance in 2007 amounting to RM60 billion

29

A fast growing Islamic fund management industry – Islamic REITs & ETFs

13579

1113151719

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

No of Listed REITs

13579

1113151719

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

No of Listed REITs

M’sian Govt waived RPGT

and stamp duty.

Tax transparency

introduced. SC issued new Guidelines.

Lower income tax for investors

Malaysia – 1st to issue Guidelines for Islamic REIT (2005)

Malaysia – 1st to have a Shariah-compliant REIT listed on the stock exchange.

Currently, 2 listed Shariah-compliant REIT –

a healthcare REIT; and a plantation REIT (oil palm)

Malaysia – 1st to issue Guidelines for Islamic REIT (2005)

Malaysia – 1st to have a Shariah-compliant REIT listed on the stock exchange.

Currently, 2 listed Shariah-compliant REIT –

a healthcare REIT; and a plantation REIT (oil palm)

ETFs: 1st Islamic ETF in Asia (Jan 2008) RM840 million (USD240 m) MyETF Dow Jones Islamic Market Malaysia Titans 25 Listed on Bursa Malaysia

30Source: Securities Commission

Islamic fund management – Islamic unit trusts

No. of Islamic Funds vs. Total Industry NAV of Islamic Funds vs. Total Industry

71

291

83

340

100

416

134

521

149

582

0

100

200

300

400

500

600

2004 2005 2006 2007 2008

Islamic funds Total funds

6.8

87.4

8.5

98.5

9.2

121.8

16.9

169.4

17.5

148.8

0

30

60

90

120

150

180

2004 2005 2006 2007 2008

Islamic funds Total industry

Number of approved funds 2007 Sep-2008

Islamic 134 149

Total industry 521 582

Net asset value (NAV) of approved funds

Islamic (RM billion) 16.90 17.54

Total industry (RM billion) 169.40 148.81

% of Islamic to total industry 10.0% 11.8%

Islamic unit trust funds

(USD42.5 b)

(USD5 b)

31

Islamic fund management companies

Liberal shareholding structure

Facilitative cross border

investment policy

Greater access to institutional funds

Competitiveoperating

environment

Islamic fund management companies are allowed to have 100% foreign ownership

Islamic fund managers are permitted to manage both institutional & retail funds

Islamic fund management companies are allowed to invest 100% of their assets abroad

RM7 billion (USD2 b) in start up funding will be channeled by EPF to Islamic Fund management companies

Income tax exemption on all Islamic fund management activity fees until 2016

Income tax exemption for non-resident Islamic finance experts

One-stop center at the Securities Commission (SC) for all fund management queries

Islamic fund management companies are allowed to have 100% foreign ownership

Islamic fund managers are permitted to manage both institutional & retail funds

Islamic fund management companies are allowed to invest 100% of their assets abroad

RM7 billion (USD2 b) in start up funding will be channeled by EPF to Islamic Fund management companies

Income tax exemption on all Islamic fund management activity fees until 2016

Income tax exemption for non-resident Islamic finance experts

One-stop center at the Securities Commission (SC) for all fund management queries

32

Islamic fund management companies

• Shariah assets under management (AUM)

− As at 30 June 2008, 10% (RM23 billion) of the total AUM of RM235 billion (USD67.14 b) for the fund management industry were Shariah mandates

− 35 fund mgt companies in Malaysia have Shariah mandates

− The first fully fledged local Islamic fund management company is CIMB Principal Islamic Asset Management

• Growing interest by international companies to use Malaysia for their fund management activities

− Aiiman Capital (owned by DBS Bank) is licensed while;− The following have been approved for establishment

- Global Investment House- Kuwait Investment House- Reliance Capital Asset Management

33

Thank You

Securities Commission

3 Persiaran Bukit Kiara

50490 Kuala Lumpur

Malaysia

www.sc.com.my

34

Top 10 Shariah-compliant companies by market capitalization

10.

9.

8.

7.

6.

5.

4.

3.

2.

1.

10.14PPB Group

31.76MISC

13.41Digi.com

Company name RM billion

Sime Darby 35.15

Tenaga Nasional 25.57

Petronas Gas 19.19

IOI Corporation 19.10

TM International 14.19

Telekom Malaysia 13.90

Plus Expressway 13.45

Islamic equity market: Sizable component of the capital market

•Source: Bursa Malaysia

Top 3 Shariah-compliant companies by sector and market capitalization

Plantation

3.

2.

1.

3.27Batu Kawan

8.91Kuala Lumpur Kepong

19.10IOI Corporation

RM billionCompany name

Construction

3.

2.

1.

2.16IJM Corporation

3.39Gamuda

10.78YTL Corporation

RM billionCompany name

Properties

3.

2.

1.

2.04IOI Property

2.56KLCC Property

2.76SP Setia

RM billionCompany name

Oil & Gas

3.

2.

1.

0.87SapuraCrest

2.64Shell

19.19Petronas Gas

RM billionCompany name

35

Some existing foreign cross listings

Foreign-owned with listings on Bursa

Companies with Foreign-based Operations listed on Bursa

Dual Listing

Bursa and Copenhagen SE

Bursa and Tokyo SE <-----------------Bursa and London SE-------------------->

Key WestGefung

HoldingsSino Hua-An International

Bursa and HKEX

36

Selected notable sukuk issuance

Issuer Facility/ AmountYear of Issue

Bid-to-cover ratio

Transaction Highlights

Shell MDS Sdn. Bhd

RM125 m (USD36m) 1990Private

placement

• World’s 1st RM Islamic corporate bond issued

KL International Airport

RM2.2 b (USD630m) 1996Private

placement Government of Malaysia

USD600 million 2002 2x• World’s 1st global sovereign sukuk• Upsize from USD500 mil to USD600 mil

IFC &World Bank

RM500 m (USD143m)RM760 m (USD217m)

20042005

4.3x1.9x

• 1st RM sukuk by supranational• Largest supranational deal in RM

Khazanah Nasional (Rafflesia Capital Limited)

USD750 million 2006 6x• World’s 1st exchangeable sukuk• Largest exchangeable instrument

issued out of Asia ex-Japan (2006)

Cagamas Berhad

RM60 b (USD17b) prgm, up to 40 years. Issued:

• RM2.745 b IMTNs

• RM1.515 b ICPs

2007/ 2008

•Private placement

• 3.83x (RM750 mil

MTNs)

• Largest, longest term funding program

• 1st combined Islamic and conventional program (CP/MTN)

• 13% non-resident investors for ICPsAEON Credit Services

RM400 m (USD114m) 2007 Bought-deal • 1st Japanese-owned co. issuing sukuk

Tesco StoresRM3.5 b (USD1b) prgm RM400m, RM300m

2007 6x, 4x• 1st sukuk issuance by a British owned

MNC

Binariang GSM (Maxis Comm.)

RM15.35 b (USD4.4b)28 Dec 2007

2x • Largest-ever sukuk issue in the world

Khazanah Nasional

USD550 million 12 Mac 2008

10x• Exchangeable into Parkson Retail

Group, a HK-listed company

Toyota CapitalRM1 b (USD0.3b) prgm. Issued: RM100 m ICPs

May 2008

Private placement

Islamic Dev. BankRM1 b (USD0.3b) prgm: Issued: RM300 million

Aug 2008 1.5x • IDB’s first RM sukuk