Private credit might be less attractive than it was last year as investors rush into the market, but there are sweet spots to be found.
How much of the stocks listed in Malaysia and bonds issued in the market are sharia-compliant?
Mahmood: At the end of 2007, there were 853 sharia-compliant equities, making up 86% of the total listed equities on Bursa Malaysia. The market capitalisation of sharia-compliant equities stood at RM705.1 billion ($222.6 billion) or 63.7% of total market capitalisation.
The growth of the Malaysian sukuk (Islamic bond) market over the last five years has been particularly impressive, registering an average growth of 33%. Forty-five per cent of all bonds issued in 2007 were sukuks û with a total value of RM55.5 billion ($17.5 billion) û compared with only 17% or RM17.8 billion ($5.6 billion) of total sukuk bonds issued five years ago.
How does this compare to five years ago?
We are seeing many innovative structures being brought to the market since Shell issued the first sukuk in Malaysia in 1990. Since then, we have launched the worldÆs first sovereign five-year global sukuk worth $600 million in 2002, the first ringgit sukuk by a foreign issuer (the World Bank) in 2005 for RM760 million ($240 million) and the worldÆs first exchangeable sukuk by Khazanah Malaysia in 2006.
The size of approved sukuk has also increased substantially. In 2007, we saw landmark issuances of the largest sukuk such as the funding programme of RM60 billion ($19 billion) by Cagamas Berhad; the sukuk programme of RM19 billion ($6 billion) by Binariang GSM Berhad; the largest exchangeable sukuk of $850 million by Khazanah Nasional Berhad; and the RM3 billion ($947 million) TM Islamic Stapled Income Securities by Telekom Malaysia and Hijrah Pertama Berhad.
What are your growth projections?
Broadly, the fact that a large proportion of the Malaysian capital market is sharia-compliant means that it is popular with investors and issuers. We would expect the growth trends to generally be shaped by overall demand and market conditions and expect the growth of sharia-compliant products to outpace that of conventional products as this provides opportunities to tap a wider investor base.
How huge is MalaysiaÆs Islamic fund industry?
MalaysiaÆs Islamic unit trust industry has a net asset value of US$5.1 billion and growing at an average rate of 40% per annum. As of end-2007, there were 134 Islamic unit trust funds in Malaysia. The size of the Islamic unit trust industry is still relatively small compared to the overall domestic industry; nonetheless it is the worldÆs largest Islamic unit trust industry. The rising affluence of Muslim investors and expansion of Islamic capital market products will underpin the strong growth prospects in the future.
The government is keen to promote the growth of the Islamic fund management industry and several incentives were offered to attract global players to establish Islamic fund management operations in Malaysia. Apart from tax incentives and the liberalisation of investment policies, MalaysiaÆs Employees Provident Fund will outsource RM7 billion ($2.2 billion) of its funds for management by Islamic fund management companies.
Are foreign investors able to freely access Islamic securities, bonds and unit trusts in Malaysia or are there restrictions at the moment?
There are no restrictions for foreign investors to access Islamic securities, bonds and unit trusts in Malaysia. Non-residents are free to invest in Malaysia in any of these products. There are also no restrictions on the repatriation of capital, profits and income earned from Malaysia.
We currently have five foreign stock broking companies operating in Malaysia. To make it even easier for foreign investors to participate in our market, we allow 100% foreign Islamic fund management companies to operate in Malaysia without restrictions and they can undertake the full spectrum of fund management activities. These firms enjoy a range of tax incentives including tax exemption on income earned. In the sukuk (Islamic bond) market, we have seen significant issues by non-residents such as World Bank and International Finance Corporation.
Additional liberalisation measures were announced in Budget 2008. These include increasing the permissible foreign ownership in fund management companies and real estate investment trusts (Reits) to 70% and three new stock broking licences offered to leading stock broking companies able to source and intermediate businesses and order flows from the Middle East
The Securities Commission has also signed a mutual recognition agreement with the Dubai Financial Services Authority, the first between two Islamic financial centres. The agreement allows the cross-border distribution and marketing of Islamic funds in the two centres, and marks a significant milestone in providing the gateway for investors from the Middle East to venture into the Malaysian market and vice versa.
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