Islamic Finance In Melaka – Malaysia

Investment and Financing Opportunities in the Malaysian Financial Sector - Dunia Melayu Dunia Islam Finance House

Azuddin Jud Haji Ismail azuddinjudismail@digitalmelaka.com

Outline • Malaysian economy - Outlook • Asian financial crisis – 10 years since • Financial sector developments • Malaysia as an International Islamic Financial Centre • Investment & financing opportunities in Malaysia
2

Favourable economic conditions with positive outlook…
Stable economic growth….with low inflation and unemployment, stronger domestic based growth

Stable growth at 5.7% for Q2 2007

Diversified and flexible economic structure

Low inflation (2% @ 30 June 2007)

Strong Economic Fundamentals

Strong domestic demand conditions

Low unemployment (3.4% @ Dec 2006) High gross national savings (38.1% of GNP)

Strong reserves (RM59 b @June 2007)

3

Financial system significantly stronger since Asian financial crisis
Holistic approach addressed immediate needs, while putting in place strong foundation for long term stability

Institutional arrangements established to stabilise banking industry

• Danaharta removed NPLs from banking system, with statutory powers to enhance recoveries • Danamodal facilitated recapitalisation of affected banks • CDRC formed to facilitate voluntary debt work-outs for corporates

Prudential framework strengthened

• Prudential limits and provisioning policies tightened • Corporate governance strengthened • Increased focus on risk management • Improved surveillance mechanisms & financial transparency

Structural elements also strengthened

• Merger exercise to consolidate fragmented banking sector • Rationalisation of banking institutions & finance companies into BAFIN • 50 (out of 54) domestic banking institutions consolidated into 10 domestic banking groups 4

10 years on…strong, competitive and diversified banking sector
• • • Key financial indicators strengthened across the board Nine domestic banking groups with strong capitalisation More effective and competitive in meeting economic needs – Wide array of products and services – Large presence of world class foreign banks (30% market share of assets) • Robust risk management practices and infrastructure – Stronger credit culture and governance structure – Centralised Credit Reference Information System (CCRIS) • More diversified financial system with developed bond market • Financing raised through bond market accounts for 24% of total financing by banking sector and PDS (pre-crisis: 9.1%) RWCR Net NPL Ratio (@ June 2007) 3-month classification ROA ROE Average Capital size (RM) 1997/98 10.5% 13.2% -0.3% -4.5% 46,216m August 2007 13.65% 4.1% 1.46% 18.8% 80,228m

5

Comprehensive blueprint for financial sector development in Financial Sector & Capital Market Masterplans
• • • • • Strengthened legal, regulatory and supervisory framework for financial institutions Emphasis on capacity building measures Diversification of financing structure with enhanced role for bond and equity markets Financing new growth areas e.g. SMEs, venture capital, agriculture, microfinance Gradual de-regulation to improve competitiveness and customers’ services

Financial Sector Master Plan Bank Negara Malaysia

Capital Market Master Plan Securities Commission

2001

2003

2004

2005

2006 -2007

2010

Phase 1 Strengthen domestic capacity, and develop strategic and nascent sectors

Phase 2 Intensify competitive pressure in the domestic market and gradually liberalise market access

Phase 3 Assimilate into global market. Introduce new foreign competition. Enhance international positioning in areas of competitive advantage

6

Recent financial sector initiatives reinforce continuing modernisation and resilience of Malaysia’s financial system

Structural enhancements

• Investment banking framework successfully implemented • Emergence of new delivery channels (internet banking, bancassurance, financial advisers) • Establishment of Malaysia Deposit Insurance Corporation (2005) • Establishment of Credit Counselling & Debt Management Agency (2006) • Implementation of more robust capital adequacy framework with Basel II (for banks) and RBC (for insurers) • Move towards principles-based regulation with greater operating flexibility • Alignment with international standards (e.g. FRS 139) • Strengthened AML/CFT regime − affirmed by positive APG Mutual Evaluation Report 2007 which assessed Malaysia to be compliant (C) or largely compliant (LC) with 33 our of 49 FATF recommendations

Regulatory framework

• Consumer education, awareness and protection 7

Malaysian bond market among most developed in the region
The bond market represents a major structural enhancement of the financial system to support economic growth and financial stability.

Malaysia’s position (Size of Bond Market in % GDP)

• In terms of relative size to GDP, Malaysia ranked second after Japan • Total bonds outstanding increased at average annual rate of 12.9% since 1998, underpinned by steady y-o-y increase in bond issuances

250 200 150 100 50 0 CN IN TH HK SG KR MY JP

96.9, RM415.9 b

• Initiatives to develop bond market has improved liquidity, diversified product base, issuers and investors, enhanced price discovery and supporting infrastructure

Source: Asian Bonds online, Dec 2005

8

Global recognition
…has increased attractiveness to foreign investors and issuers

• Leading centre of origination for sukuks – accounting for 67% of total global sukuks outstanding – first country to issue sovereign global sukuk – supportive environment has attracted multilateral organisations to issue ringgit sukuks – tax incentives for private sukuks • Included in major bond indices – Lehman Brothers – JP Morgan – World Government Bond Index (WGBI) in 2007 • Foreign exchange administration policies relaxed further to allow issuance of foreigncurrency denominated conventional bonds or sukuks in Malaysia • As at end 2006, foreign investors’ holdings in bond market was RM35.5 billion from only RM0.8. billion in 2001
9

Liberalisation of the financial sector & financial market
FINANCIAL SECTOR
• Significant foreign participation in financial sector • – accounting for 30% and 70% of market share in terms of assets in banking & insurance sectors respectively flexible expatriate policy

• Foreign shareholding limits have been raised further to foster strategic alliances in new areas of activity – from 30% to 49% in insurance, investment banking and new Islamic banks/takaful operators

• New Islamic banking and takaful licences

FINANCIAL MARKET
• Foreign investors are free to make portfolio investments • No restrictions on repatriation of capital, profits and income • May obtain financing from licensed onshore banks in ringgit or foreign currency • May enter into FX contracts with licensed onshore banks for hedging • Free to convert foreign currency into ringgit and vice versa • Tax incentives on holdings and secondary market transactions: Exemption from withholding tax on interest income from investments in ringgit denominated MGS and corporate bonds No capital gains tax No stamp duty • Free entry and exit of foreign investors – funds

10

Further liberalisation in foreign exchange administration policies carried out in 2007

Reduce cost of doing business

Facilitate risk manage ment

Promote liquidity & diversity
with expanded

Widen investor base

• 15 additional liberalisation measures announced, opportunities & increased flexibility for non-residents

investment

– can utilise proceeds from IPO on Bursa Malaysia abroad – no limit & expanded scope for use of ringgit overdraft facilities by stockbroking companies and custodian banks to avoid settlement failures – no limit on number of residential & commercial property loans – can settle ringgit assets through overseas branches of licensed onshore banks – can transact in ringgit financial products through Labuan offshore banks • WEF 1 Oct 2007 – abolishment of 5 Registration Requirements & 1 Reporting Requirement
11

Investment & financing opportunities in Malaysia’s financial sector

Equity participation

• Foreign shareholding permitted up to:– 30% in banking – 49% in Islamic banking, investment banking, insurance, reinsurance, takaful, retakaful, insurance broking & loss adjusting

Strategic alliances

• Business partnerships to penetrate new markets & distribution channels, develop new products & provide technical support in specialised areas

• International Islamic Bank & International Takaful Operator New licenses • Professional reinsurance (life & general) • Multilateral development banks, multilateral financial institutions and multinational corporations can raise ringgit and foreign currency-denominated bonds in Malaysia • To date, 4 MDBs and 1 quasi sovereign have issued ringgit denominated bonds in Malaysia totaling RM3.76 billion 12

Fund raising

Promoting Melaka as a shared services and outsourcing (SSO) centre
….Multinationals are encouraged to set up SSO hubs in Malaysia • 3rd most attractive outsourcing : AT Kearney 2005 • Top in customer service & back-office processing: Deloitte 2005 • 3rd most attractive for US market after India & China: McKinsey 2005 • Top SSO centre for finance, energy & logistics sectors: Frost & Sullivan 2005

Malaysia’s comparative advantage

Conducive environment with incentive packages

Malaysian Industrial Development Authority (MIDA) •Tax exemption, unrestricted foreign currency borrowing, flexible expatriate requirements •Available to operational HQ, regional development centres and international procurement centres • INVEST Melaka Corp

Multimedia Development Corporation (MDC) • Companies with MSC status eligible for tax exemption; grants; world-class infrastructure and guaranteed services; freedom on equity ownership, sourcing of funds & recruitment of K-workers; intellectual property protection & cyberlaws • K-Economy : Melaka Chief Minister Office 13

Tremendous prospects for Islamic Finance in Malaysia with industry reaching mainstream relevance...
Strengthening International Linkages

Growing Opportunities in Islamic Finance

MIFD
Islamic Finance Gateway

Slide 18

Strong domestic Islamic financial industry – Diversity of players & sophistication of products

Favourable Global & Asia Economic Growth

Platform to tap global business opportunities
• Origination, issuance & trading of Islamic financial instruments including capital market instruments • Fund & wealth management • International currency Islamic financial business • Takaful & ratakaful • Centre for education

Slide 15

Asia’s Potential in Islamic Funds & Investment

14
Slide 16 Slide 17

Malaysia’s Islamic finance…achieving comparative advantage in Islamic finance – Positioning DMDI Finance House
Diversity of players
• • • • • • Domestic IBIs (2 Islamic banks, 9 IS) Foreign IBIs (3 IBs, 5 windows) Takaful operators (9) Retakaful operators (3) ICBUs (15), IIB (1) Fund managers

Focus on international currency business (out-out business)

Conducive operating environment
• Comprehensive infrastructure – vibrant Islamic money and capital markets • Tax neutrality • Liberalised foreign exchange rules • Liberalisation of equity ownership • Dedicated division in High Court for Islamic finance • More convergence in Shariah rulings with centralized Shariah Advisory Council

Strong in domestic business

Islamic money Islamic capital market market Banking Capital Market Takaful Players Players Players
Total solution for talent development (INCEIF, ICLIF, IBFIM, SIDC)

Strong domestic market (as at end-2006)
• Islamic banking assets : 12.2% (RM133 b) • Takaful assets : 6.1% (RM6.9 b) • Islamic PDS : 49.6% of outstanding PDS (RM114.5b)

Solid foundation
(Robust Legal, Shariah, Regulatory infra)

Slide 14 15

Increasing wealth in Asia provides larger source for Islamic finance
US$ bil
5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2000 2001 2002 2003 2004 2005 2006e

International Reserves
50 45 40 35 30 25 20 15 10 5 0

%

Gross National Savings/GDP
40
ME

US$ tril
0.7 1 3.7 7.1 9.3 8.9

HNWI Wealth
0.8 1.2 4.2 7.6 10.2
Africa Middle East Latin America Asia Pacific North America Europe

35 30 25

0.6 0.8 3.4 6.6 8.5 8.6

Developing Asia
Newly industrialized Asian economies World UK

20 15 10 5

9.4

World

Asia (incl Japan)

US

0

2004
Source: IMF World Economic Outlook Sept 2006

2005

2006e

2007f

2003

2004

2005

Source: IMF World Economic Outlook Sept 2006

Source: World Wealth Report 2006

World’s wealth

Positive economic growth, coupled with Asia’s booming economies and increase in petrodollars, increase countries’ reserves with Asia dominates total world reserves Savings rates of Middle East and developing Asia countries are on upward trend, higher than the world’s savings rate High savings will ensure sustained private consumption moving forward amidst moderate global economic growth Driven by real GDP gains and continued market capitalisation, total HNWI’s wealth also expanding and thus, provides potential for Islamic finance

25.0% 21.3% 20.0% 15.0% 19.3%

HNWI Population Growth
14.7% 14.4% 13.5% 13.4% 11.8%

10.0% 6.8% 5.0% 0.0%
a si a Ko n or UA re bi US di In ne Ko ap ra ro Eu pe g a a e E

4.5%

iA ud Sa

do

In

ng

h

So

Ho

Source: World Wealth Report 2006

Si

ut

ng

Slide 14

MIFD Gateway for Islamic finance between regions
Europe share of Gulf wealth eroding

Since 2000, accumulated petrodollars: USD1trillion

US share of Gulf wealth eroding

ME to Europe Intra-regional

Asia’s growing oil demand & trade influence, attracting Gulf wealth

ME to US ME to AsiaPacific

Malaysia is in the right position to become an effective gateway…
Attracting investment flow • Foreign investment flows from GCC in 06/07: USD450bn • Foreign capital injection in Islamic banks of RM1.7b • Baitak Fund by KFH in property sector of USD600m Fund raising • Khazanah Nasional Berhad’s exchangeable sukuk worth USD750 m • IFC issued RM Islamic bond (RM500m) • World Bank issued RM Islamic bond (RM760m)

Predominant direction of investment flow earlier New emerging investment flow

Slide 14 17

Strategising Malaysia’s position to become a Centre for Education Excellence in Islamic finance
SIDC of SC
Focus: Training courses in Islamic Capital Market

HUMAN CAPITAL DEVELOPMENT IN ISLAMIC FINANCE

IBFIM
Level of knowledge: Elementary Focus: Short training courses to meet industry’s needs

INCEIF
Level of knowledge: Intermediate & advanced Focus: International professional certification and postgraduate programs

ICLIF
Focus: Leadership programs

Institutions of higher learning

Other training providers

18 Meeting the education needs of all levels of Islamic finance practitioners

MIFC Gateway for Islamic finance between regions
Conducive environment
Tax incentives • 10 years exemption management fees received by Islamic fund managers managing Islamic funds of foreign & local investors • 5 years tax exemption on profit of newly for Malaysian banks going abroad • Tax exemption on SPV • Tax deduction - expenses in establishing Islamic stock broking firm • Full stamp duty exemption for 10 years • Withholding tax exemption on profit from holding RM & non-RM Islamic securities

Global Integration Offers flexible opportunities
Flexible structure: • IIB, ITO & enjoy 10-year tax exemption • ICBU - to conduct the full range of Islamic banking services in international currencies with nonresidents and residents • Flexibility to Labuan offshore Islamic institutions to open offices anywhere in Malaysia No limit on number of licences to be issued for international currencies business

Flexible regulatory & forex policy
Flexible shareholding structure and relaxed policy on property ownership Enabling platform in the origination, issuance and trading of sukuk Liberalised forex rules- allow issuance of RM & non-RM sukuk • Pre approved rating for issuer: ‘AAA’ for RM-deno and ‘A-’ for nonRM deno instruments

• Expand opportunities to build linkages on Islamic finance - MOUs –JBIC, DFSA, QFRA • Foreign equity participation – relaxed FIC Rules • Strategic alliances in human capital development – INCEIF signed MOUs few strategic partners • Cross border product development e.g. the first IDMA and Commodity Murabahah House • Engagement in adopting international standards and best practices • Progressive R&D activities – joint research19
Slide14

Useful links…

• http://www.bnm.gov.my • http://www.bnm.gov.my/fxadmin • http:// www.sc.com.my • http://www.bursamalaysia.com • http://www.lofsa.gov.my • http://www.pidm.gov.my • http://bondinfo.bnm.gov.my • http://www.akpk.gov.my

- Bank Negara Malaysia - Malaysia’s Foreign Exchange Administration system and rules - Securities Commission Malaysia - Bursa Malaysia - Labuan Financial Services Authority - Malaysia Deposit Insurance Corporation - Bond Infohub (Beta) - Credit Counselling & Debt Management Agency

• http://www.bnm.gov.my/bnmlink/index.htm - Laman Informasi Nasihat dan Khidmat (LINK) • http://www.inceif.org • http://www.iclif.org • • www.e-melaka.gov.my - The International Centre for Education in Islamic Finance (INCEIF) - International Centre for Leadership in Finance - 1 Stop State Govt Portal 20

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