&

SEMINAR ON ISLAMIC FINANCE

THE DEVELOPMENT OF ISLAMIC DEBT CAPITAL MARKETS IN MALAYSIA
EN SUFFIAN ARIFFIN SENIOR MANAGER, DEBT CAPITAL MARKETS CORPORATE INVESTMENT BANKING BANK ISLAM MALAYSIA BERHAD

17 March 2010 / 1 Rabiulakhir 1431H

STRICTLY PRIVATE & CONFIDENTIAL STRICTLY PRIVATE & CONFIDENTIAL

Contents

1. Overview of Malaysian Islamic Debt Capital Markets. 2. Malaysian Islamic Securities Experience: Evolution & Development. 3. Malaysia as Hub for Islamic Securities Issuance. 4. Moving Forward.

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OVERVIEW OF MALAYSIAN ISLAMIC DEBT CAPITAL MARKETS

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Overview of Malaysian Islamic Debt Capital Markets

Malaysian Islamic Financial Market

Islamic Financial Market

Islamic Banking & Takaful

Islamic Banking: Islamic Interbank Money Market Islamic Financing Islamic Deposits Islamic Investment Takaful: Takaful products Takaful linked investments

Islamic Capital Markets

Derivatives
Islamic Profit Rate Swap Islamic Foreign Exchange Swap Islamic Cross Currency Swap

Equity
Islamic Unit Trust Islamic REITs Islamic Stockbroking Islamic Indexes Shariah Compliant Securities

Debt
Islamic Securities Islamic Medium Term Notes Islamic Commercial Papers Exchangeable Sukuk
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Overview of Malaysian Islamic Debt Capital Markets

The Market Participants

REGULATORY AUTHORITIES BNM/ SC/ Bursa Malaysia/ Labuan FSA

INVESTORS
Islamic/ Conventional Domestic/ International Institutional

Islamic Securities

ISSUERS
Businesses Government/ Government Agencies

Islamic Debt Capital Markets

Surplus Funds

INTERMEDIARIES Financial Institutions/ Rating Agencies/ Reporting Accountants/ Legal Counsels/ Trustees/ Shariah Advisers
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Overview of Malaysian Islamic Debt Capital Markets

Regulatory Framework
SC
Established under the Securities Commission Act 1993. To supervise & monitor activities of capital markets activities under the CMSA. To protect the investors rights. To promote and develop securities & futures markets. To spearhead development of the Malaysian Islamic capital markets.

Labuan FSA
Formed in 1996 as regulator in Labuan IBFC. To market & promote Labuan as the premier international businesses and financial centre in Asia Pacific.

REGULATORS Bursa Malaysia

An exchange holding company that regulates and operates the trading activities on Bursa Malaysia. To promote Islamic capital markets products via Bursa Malaysia for onshore market & LFX for offshore market.

BNM
Established in 1959 under the Central Bank of Malaysia Act 1958 (Revised 1994). To regulate and monitor monetary, financial & payment systems. To promote and develop Islamic finance via MIFC, INCEIF & ISRA. To act as Depository & Paying Agency for bonds issued in Malaysia.

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Overview of Malaysian Islamic Debt Capital Markets

Governing Laws
Key Acts/ Guidelines
Islamic Banking Act 1983 (IBA). Capital Markets and Services Act 2007 (CMSA). Labuan Islamic Financial Services and Securities Act 2010. Guidelines on the Offering of Islamic Securities (IS Guidelines). Guidelines on the Offering of AssetBacked Securities. Shariah compliances according to IBA & IS Guidelines. Rules on The Scripless Securities under RENTAS System. Rules on Fully Automated System for Issuing/ Tendering (FAST).

Supplemental Laws
Applicable tax and stamp duty legislation. Land laws. Lease laws for Ijarah transaction.

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MALAYSIAN ISLAMIC SECURITIES EXPERIENCE: EVOLUTION & DEVELOPMENT

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Malaysian Islamic Securities Experience: Evolution & Development

Evolution of Islamic Securities

The Islamic Securities structures have evolved from simple BBAs to more complex structures as more legislations are introduced & also an increased in the understanding of Islamic finance among the industry players.
SKS Power Sdn Bhd (Sukuk Kumpulan Guthrie Berhad (Ijarah K.L. International Shell MDS Sdn Bhd (BaIDS) Airport Berhad (BBA Notes) Syndicated/ Sukuk) Istisna)

PLUS SPV Sdn Bhd (Sukuk Musharakah)

1990

1996

2001

2003

2008
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Malaysian Islamic Securities Experience: Evolution & Development

New Capitals for 2009

12,104.0 million

Capital Markets

109,233.0* million

Equity

Debt

* Total issue amount approved by the SC.

RM11,969.7 million

Islamic Capital Markets

RM43,624.0* million

Islamic Equity Islamic Debt

* Total issue amount approved by the SC.

Source: Securities Commission

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Malaysian Islamic Securities Experience: Evolution & Development

Growth of Malaysian Debt Capital Markets

20-Year Growth - Islamic Debt Securities vs Conventional Debt Securities
Millions MYR 0.06

MYR 0.05

MYR 0.04

MYR 0.03

Islamic Debt Securities Conventional Debt Securities

MYR 0.02

MYR 0.01

MYR -

Source: Bank Negara Malaysia

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Malaysian Islamic Securities Experience: Evolution & Development

Approved Islamic Securities in 2009 (by Quarters)

Period

Issue Size (RM Million)

25,000.00

Approved Islamic Securities in 2009 (by Quarters)

Q1 Q2 Q3 Q4 Total

10,855
RM 'Million

20,000.00

3,600 4,500 20,000 38,955

15,000.00

10,000.00

5,000.00

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Source: Securities Commission

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Malaysian Islamic Securities Experience: Evolution & Development

Shariah Contracts Applied in Islamic Securities

Islamic Securities Approved by SC in 2008

Musharakah Istisna' Mudharabah Ijarah Murabahah Bai Bithaman Ajil

Islamic Securities Approved by SC in 2009

Musharakah Ijarah

9%
7% 11% 40% 9% 7%

91%
26%

Source: Securities Commission

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MALAYSIA AS A HUB FOR ISLAMIC SECURITIES ISSUANCE

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Malaysia as a Hub for Islamic Securities Issuance

Malaysias Competitive Advantages

Comprehensive Regulatory & Supervisory Frameworks

Wider Investors Base

KEY ADVANTAGES

Liberal Foreign Exchange Rules

Expertise & Talents

Tax Incentives

Continuous Products Development

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Malaysia as a Hub for Islamic Securities Issuance

Key Benefits of Islamic Securities: Issuers Perspective

TAX INCENTIVES
Stamp duty exemption on SCs approved Sukuk. Tax deductible of issuance cost. Tax neutrality. Tax exemption on SPV incorporation.

VALUE PROPOSITION
Wide investors base. Attractive pricing due to strong demand. Strong structuring expertise. Enhance Issuers profiles.

REGULATORY PROCESS
Facilitative issuance process. Automatic approval for AAA-rated for RM Sukuk issue domestically & Arated Sukuk for foreign currency Sukuk. Any amendment to terms of approved Sukuk need only to inform SC. Exchangeable Sukuk exempted from rating.

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Malaysia as a Hub for Islamic Securities Issuance

Promotion of Islamic Securities via MIFC

To create a vibrant, innovative and competitive international Islamic financial services industry in Malaysia focusing on the following niche activities:(1) origination, distribution & trading of Islamic capital markets and treasury instruments; (2) Islamic fund & wealth management services; (3) International currency Islamic financial services; and (4) Takaful & retakaful.

Issuer

Incentives for Islamic Securities

Tax exemption on income received by SPV. Companies that establish SPV are allowed a tax deduction on the issuing costs incurred by the SPV. Tax deduction on expenses incurred for Islamic Securities approved by the Securities Commission until year of assessment 2015. Stamp duty exemption on instruments used to issue Sukuk in any currency.

Investors

Tax exemption and withholding tax exemption on profits received by non-resident. Tax exemption on profits received by resident and non-resident investors in respect of foreign currency Islamic securities approved by the Securities Commission and originating from Malaysia. Stamp duty exemption on investing and trading of sukuk.

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Malaysia as a Hub for Islamic Securities Issuance

The Results
List of Foreign CurrencyCurrencyDenominated issuances in Malaysia
Issuer Rafflesia Capital Malayan Banking Cherating Capital Paka Capital Ltd Petronas Sukuk Issuer Tadamun Services Berhad Woori Bank Industrial Bank of Korea State Bank of India The Export-Import Bank of Korea Date of Issue August 2008 June 2008 April 2008 March 2008 March 2008 Issue Size * (RM million) 1,000.0 1,000.0 3,000.0 1,350.0 3,000.0 Rating AAA (S&P) N/A N/A N/A N/A Date of Issue October 2006 April 2007 July 2007 March 2008 August 2009 Issue Size (USD million) 750.0 300.0 850.0 550.0 1,500.0 Rating N/A A3 (Moody) N/A N/A A1 (Moody)

List of Islamic Securities Issued in Malaysia by Multinational Development Banks/Financial Institutions/Foreign Governments/Foreign MNCs

* Total issue amount approved by the SC.

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MOVING FORWARD

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Moving Forward

Issues to be Addressed
The following considerations need to be addressed for Islamic Debt Capital Markets to continue being one of the major components of funding: Greater clarity in transaction structures, improved documentations, increased standardizations and lower overall complexities. Consensus among Islamic scholars around the world. Better issuers and investors education about Islamic Securities and Shariah compliance. A liquid secondary market. The structures for the Sukuk need to be more competitive in order to motivate future Sukuk issuances. Continuous support from the Government and regulators to further promote and develop the Islamic debt capital markets.

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Moving Forward

Future Outlooks
Increased demand from the Middle Eastern and Asian Muslims to invest in products that are in compliance with their religious beliefs. The recent global economic recovery is expected to stimulate infrastructure projects which require huge amounts of financings and the Islamic Securities can be the preferred financing instrument to raise these funding requirements. More efforts have been implemented towards having a global Shariah compliance for local Islamic products. More interests are shown by other countries such as United Kingdom, Hong Kong, France and other European countries in Islamic finance is expected to further boost the industrys growth.

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Thank You & Wassalam

The information contained in this presentation may be meaningful only with the oral presentation and are of the personal view of the presenter and does not necessarily represent an official opinion of Bank Islam Malaysia Berhad. For further information, please contact: Suffian Ariffin Senior Manager, Debt Capital Markets Corporate Investment Banking Bank Islam Malaysia Berhad Email: suffian@bankislam.com.my
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