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How important is it for Malaysia to become a global centre for Islamic capital markets?
Mahmood: We see the Islamic capital market as a high-growth market segment and as a unique value proposition that Malaysia can offer to global capital market players. There are a broad range of beneficiaries of a well developed Islamic capital market. This ranges from fund managers, intermediaries and investors who wish to issue and invest in sharia-compliant products as well as for non Muslims who have an interest in attractive and ethical-based products. We believe that Malaysia's Islamic capital markets will also open opportunities to global and regional intermediaries to expand their suite of services and products to serve their customer base better.
In addition, the Malaysian market will provide an opportunity for global issuers to tap funds on a competitive basis from an additional subscriber base. Currently, the multilateral banks have been active issuers with the World Bank issuing baiÆ bithaman ajil [deferred payment sale] paper of RM760 million ($240 million) and the International Finance Corporation issuing baiÆ bithaman ajil of RM500 million ($158 million). MalaysiaÆs Islamic capital market clearly offers opportunities and provides an additional source of recycling global wealth into economic development.
How Malaysia has evolved as an Islamic capital market over the recent years?
Malaysia recognised the need to facilitate Islamic equity investment from an early stage and pioneered a system for the identification of local sharia-compliant stocks in the mid-1990s. From then on, the country has played a lead role in the development of the Islamic capital market, especially in the establishment of a robust regulatory framework, innovation and product development. We also have a very strong sharia-compliant framework which is critical to the development of the Islamic financial system.
In tandem with our efforts to develop the private sector bond market after the Asian financial crisis in 1997, we have been successful in promoting the issuance of sukuks (Islamic bonds). As at the end of 2007, RM135.8 billion ($42.9 billion) or 56% of outstanding bonds in Malaysia were sukuks.
How have you approached the development of the Islamic capital market?
We adopted a pragmatic approach and invested substantially into intellectual capital and capacity building to promote an innovative approach to Islamic finance. We also sought to ensure that the Islamic capital market was underpinned by the same regulatory principles that govern the conventional market to ensure high levels of investor protection û which is a core regulatory objective.
What challenges did Malaysia face?
A key challenge was in moving from the early phase adaptation approach to an innovation approach that led to the creation of indigenous sharia products. Increased research and development investments was a key factor in the shift towards innovation and the role of sharia experts and advisory councils was enhanced for them to play a critical role in fostering innovation through their in-depth research and discussions. In this regard, our Shariah Advisory Council for the capital market plays a lead role in facilitating product innovation with the issuance of sharia-specific rules and guidelines.
The introduction of product guidelines (such as for Islamic securities, real estate investment trusts) and best practices (Islamic stock broking) to provide clarity to market players were critical for the development of the market. For example, the breakthrough in Malaysia occurred when the issuance of sukuks was decoupled from the conventional legal concept of debentures through the Islamic Securities Guidelines. This permitted the use of widely accepted structures involving the element of equity participation such as musyarakah (joint venture) and mudharabah (profit sharing). This was a key development that facilitated the development of the global sukuk market.
Regulators keep their eyes open on tightening insurance industry by introducing more detailed risk management requirements, which could bring pressure on smaller players.
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