Contributed by Securities Commission, Malaysia

Malaysia’s ICM:
A Success Story
Islamic capital market, an integral
segment in Malaysia’s financial
system, continues to register robust
growth — with the full complement
of products, infrastructure,
institutions, intermediaries and
investors contributing to the depth
and breadth of the capital market.
It has an extensive range of products
and mechanisms, including Shariah
screening systems for equities, Sukuk,
unit trust, exchange-traded funds
(ETFs), real estate investment trusts
(REITs) and structured products and
derivatives.
Islamic capital market successes
Islamic products now account for a
significant portion of Malaysia’s capital
market. In 2007, Sukuk accounted
for 76% or US$37.38 billion of bonds
approved by the Securities Commission
launched the first US$600 million five-
year global sovereign Sukuk in 2002.
Being the largest issuer, representing
60% of global outstanding Sukuk,
Malaysia aims to retain its leading
position by broadening Sukuk variety
from plain vanilla to exotics.
Notable Sukuk issuances in Malaysia
There are more than 350 Islamic equity
funds operating in major financial
centers globally, managing more than
US$500 billion worth of assets. This
indicates huge potential to further
develop the Islamic capital market.
In the domestic equity market, 85%
of securities listed on Bursa Malaysia
are Shariah compliant, representing
US$182 billion, or 65%, of the bourse’s
total market capitalization.
In the unit trust industry, Malaysia, as
US$5.6 billion —representing more
than 35% of the global Islamic unit trust
industry NAV. The country also has two
listed Islamic REITs with hospitals and
plantations as their main assets.
In January 2008, Asia’s first Islamic
Exchange Traded Fund (ETF), MyETF,
was launched tracked by the Dow Jones
Islamic Market Malaysia Titan 25.
Within the wealth management industry,
various structured investment, targeted
at institutions and high net worth
individuals, have also been launched.
The 2008 Budget also included
incentives to boost Malaysia’s Islamic
capital market sector - with emphasis
on Islamic fund management.
Malaysia is also committed to work
with other centers in creating an Islamic
capital market network to provide
necessary linkages in optimizing

Malaysian Islamic Capital Market

Malaysia (SC). at June 2008, had 138 Islamic unit opportunities across Islamic markets.
trusts, from only two in 1993, with a In 2007, the SC signed a mutual
A pioneer in global Sukuk, Malaysia combined net asset value (NAV) of recognition agreement with the Dubai
Financial Services
Notable Sukuk issuances in Malaysia Authority for
cross-border
Issuer Amount Year Transaction highlights marketing and
Shell MDS RM125 million (US$33 1990 World’s first ringgit Sukuk issuance by distribution of
million) foreign-owned, non-Islamic company Islamic funds
Kumpulan Guthrie US$150 million 2001 World’s first global corporate Sukuk between Malaysia
Government of Malaysia US$600 million 2002 World’s first global sovereign Sukuk and the UAE.
International Finance RM500 million (US$132 2004 First ringgit Sukuk issuance by
Corporation (World Bank) million) supranational agency Shariah Advisory
Council for
Cagamas MBS RM2.05 billion (US$540 2005 World’s first Islamic residential
million) mortgage backed securities capital market
Established
Khazanah Nasional US$750 million 2006 World’s first exchangeable Sukuk
(Rafflesia Capital Limited)
in 1996 at the
SC, the Shariah
Nucleus Avenue (Malakoff RM8 billion (US$2.5 2007 First hybrid Sukuk in the world
Advisory Council
Corporation) billion)
(SAC) provided
Binariang GSM RM15.35 billion (US$4.8 2007 World’s largest Sukuk the single most
billion) issue as at end-2007
important impetus

August/September 2008 . Islamic Finance Asia 49

 for the success of other initiatives. As
the highest point of reference for all
Shariah-related matters in the capital
market, many other building blocks
were put in place. The extensive powers
of the SC, in the issue and offering of
securities in the market, paved the way
for issuance of legally binding guidelines
and requirements in the Islamic capital
market — enabling the SC, for instance,
to impose specific requirements for
Islamic unit trust funds and Sukuk.
Other measures taken include the
adoption and pursuit of a screening
process to determine Shariah compliant
securities; the issuance of numerous
guidelines to impose additional
requirements on products that are
identified as Shariah compliant; and
the introduction of education and
awareness programs through the
publication of SAC resolutions and
programs organized by the Securities
Industry Development Centre.
Continuous product innovation
Malaysia’s Islamic capital market growth
is also due to its wide range of products,
which saw Islamic institutions evolve
into originators of Islamic products
and services – a notable achievement
from the earlier days when they would
merely adapt conventional structures
Malaysian Islamic Capital Market
Budget 2008
Liberalized • Foreign ownership of fund management companies and REIT
shareholding structure management companies is allowed up to 70%;
• Islamic fund management companies are allowed 100% foreign
ownership;
Facilitative cross-border With effect from the 1st October 2007, Islamic funds were permitted
investment policy to invest 100% of assets abroad
Greater access to • Approximately US$2 billion in start-up funding will be channeled by
institutional funds EPF to Islamic fund management companies;
More competitive • Income tax exemption on all Islamic fund
operating environment • Income tax exemption for non-resident Islamic finance experts;
management activity • One stop-center at the SC for all fund management-related queries.
fees until 2016;
Table 3
for Shariah compliance such as securities laws — a major milestone
guidelines for Islamic securities, REITs in strengthening supervision and
and ETFs. enforcement efforts in the capital
market. In addition, it recognizes the
Facilitative regulatory environment with SC as a credible regulator with strong
strong investor protection enforcement capability. High-quality
Malaysia’s comprehensive, facilitative intermediation services Malaysia has
and sophisticated Islamic capital market a broad range of intermediaries to meet
regulatory framework ensures participants the needs of investors and issuers in the
in its capital market enjoy the same degree Islamic capital market.
of clarity, certainty and protection. With an
investor protection regime that is among Intermediaries now engage in a broad
the best in the world, Malaysia also offers range of complex financial transactions
investors in Islamic products end-to-end and operate in various market segments
Shariah compliance. — banking, insurance and capital markets
and provide specialized over-the-counter
Malaysia also has a comprehensive hedging and risk management products,
corporate governance framework in and advise on sophisticated transaction

as templates for “off-the-shelf” Islamic place, an international accounting structures.

products. Today, a diversified array of
products ranging from Shariah compliant
equities, Sukuk, unit trust funds, Islamic
ETFs and REITs to structured products
and derivatives are available in Malaysia.
Clients’ increasingly sophisticated
financial requirements are also another
key driver for product innovation in
Islamic finance. There is now greater
awareness on the benefits of diversifying
their balance sheet risk. Islamic finance
investors are also more adventurous
by investing in hedge funds and more
complex capital market products.
The SC has facilitated the introduction
of these products in the Malaysian
market through numerous product-
specific guidelines that provide clarity,
consistency and enhanced disclosures
framework based on the International
Accounting Standards Board, and its
securities and settlement systems and
regulations conform to International
Organization of Securities Commissions
(IOSCO) principles.
According to the World Bank 2006
report, Malaysia scored top marks
for disclosure and transparency of
accounting standards. Additionally, the
World Bank, in its “Doing Business
Report 2007 and 2008”, ranked
Malaysia fourth in terms of investor
protection. An active member of
IOSCO, the SC has an extensive and
strong network with fellow regulators
globally. It is also a signatory to the
IOSCO multilateral memorandum
of understanding on information
sharing and enforcement of
Their expertise has been recognized by
the global financial community in the
Islamic capital market and has received
numerous awards and recognition for
their innovativeness in structuring Sukuk.
A number of Malaysian intermediaries
have strengthened their position by
forging strategic alliances with foreign
jurisdictions and venturing into regional
markets, enabling them to acquire skills
and expertise on new products and
overseas investments.
Similarly, the presence of several Islamic
financial institutions from the GCC
countries in Malaysia has significantly
altered the Islamic capital market
intermediation landscape here. More
efforts are taken to attract more to set up
operations in Malaysia.

50 Islamic Finance Asia . August/September 2008