Contributed by Securities Commission, Malaysia

Malaysias ICM: A Success Story

Islamic capital market, an integral segment in Malaysias 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 Malaysias capital market. In 2007, Sukuk accounted for 76% or US$37.38 billion of bonds approved by the Securities Commission Malaysia (SC). launched the first US$600 million fiveyear 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 bourses total market capitalization. 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, Asias 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 Malaysias Islamic capital market sector - with emphasis on Islamic fund management.

International Finance Corporation (World Bank) Cagamas MBS Khazanah Nasional (Rafflesia Capital Limited) Nucleus Avenue (Malakoff Corporation) Binariang GSM

RM500 million (US$132 million) RM2.05 billion (US$540 million) US$750 million RM8 billion (US$2.5 billion) RM15.35 billion (US$4.8 billion)

2004 2005 2006 2007 2007

First ringgit Sukuk issuance by supranational agency Worlds first Islamic residential mortgage backed securities Worlds first exchangeable Sukuk First hybrid Sukuk in the world Worlds largest Sukuk issue as at end-2007

Shariah Advisory Council for capital market Established in 1996 at the SC, the Shariah Advisory Council (SAC) provided the single most important impetus

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Malaysia is also committed to work with other centers in creating an Islamic capital market network to provide necessary linkages in optimizing In the unit trust industry, Malaysia, as opportunities across Islamic markets. at June 2008, had 138 Islamic unit In 2007, the SC signed a mutual trusts, from only two in 1993, with a recognition agreement with the Dubai combined net asset value (NAV) of A pioneer in global Sukuk, Malaysia Financial Services Authority for Notable Sukuk issuances in Malaysia cross-border Issuer Amount Year Transaction highlights marketing and Shell MDS RM125 million (US$33 1990 Worlds first ringgit Sukuk issuance by distribution of million) foreign-owned, non-Islamic company Islamic funds Kumpulan Guthrie US$150 million 2001 Worlds first global corporate Sukuk between Malaysia and the UAE. Government of Malaysia US$600 million 2002 Worlds first global sovereign Sukuk

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 Malaysias 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 as templates for off-the-shelf Islamic 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 productspecific guidelines that provide clarity, consistency and enhanced disclosures Islamic Finance

Budget 2008
Liberalized shareholding structure Foreign ownership of fund management companies and REIT management companies is allowed up to 70%; Islamic fund management companies are allowed 100% foreign ownership; With effect from the 1st October 2007, Islamic funds were permitted to invest 100% of assets abroad Approximately US$2 billion in start-up funding will be channeled by EPF to Islamic fund management companies; Income tax exemption on all Islamic fund Income tax exemption for non-resident Islamic finance experts; One stop-center at the SC for all fund management-related queries.

Facilitative cross-border investment policy Greater access to institutional funds More competitive operating environment management activity fees until 2016;

Table 3 for Shariah compliance such as guidelines for Islamic securities, REITs and ETFs. Facilitative regulatory environment with strong investor protection Malaysias comprehensive, facilitative and sophisticated Islamic capital market regulatory framework ensures participants in its capital market enjoy the same degree of clarity, certainty and protection. With an investor protection regime that is among the best in the world, Malaysia also offers investors in Islamic products end-to-end Shariah compliance. Malaysia also has a comprehensive corporate governance framework in place, an international accounting 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 securities laws a major milestone in strengthening supervision and enforcement efforts in the capital market. In addition, it recognizes the SC as a credible regulator with strong enforcement capability. High-quality intermediation services Malaysia has a broad range of intermediaries to meet the needs of investors and issuers in the Islamic capital market. Intermediaries now engage in a broad range of complex financial transactions and operate in various market segments banking, insurance and capital markets and provide specialized over-the-counter hedging and risk management products, and advise on sophisticated transaction structures. 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.

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