This chapter will cover all the key factors behind the success of these two countries as Islamic Capital Markets as well as the infrastructures available.
5.2 Overview of the Malaysian ICM
ICM being an important segment in Malaysia's financial system, keeps on registering strong augmentation with the full complement of products, infrastructure, institutions, intermediaries and investors contributing to the strengthening of the capital market.
Coordinated by Malaysia International Islamic Financial Center (MIFC), which comprises a community network of financial and market regulatory bodies, government ministries and agencies, financial institutions, human capital development institutions and professional services companies that are participating in the field of Islamic finance., in promoting Malaysia's Islamic finance and the capital market.
The ICM has a variety 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. (Source: MIFC: 2)
5.2.1 Regulatory and Supervisory Infrastructure
Malaysia has a robust regulatory infrastructure as a series of measures has been taken. For example, three guidelines have been issued, namely for Islamic fund management, Islamic securities and Islamic REITs . This is in response to investors who are increasingly interested in more sophisticated financial requirements which are another key drivers for product innovation in Islamic finance as now there is 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.
On the other hand, there is the Shariah Advisory Council(SAC) within the Securities Commission(SC) which approves the principles for different products and services while standards are established by the relevant bodies. Additionally, there has been the establishment of the International Shariah Research Academy for Islamic Finance (ISRA), a dedicated research house for Shariah matters in Islamic finance.
Facilitative regulatory environment with strong investor protection Malaysia's 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, Malaysia offers investors end-to-end Shariah compliance.
Malaysia also has an inclusive 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 IOSCO principles.
As an dynamic member of IOSCO, the SC has an widespread and strong network with member regulators globally. It is also a signatory to the IOSCO multilateral memorandum of understanding on information sharing and enforcement of securities laws, a major objective in supervision strengthening and enforcement efforts in the capital market.
5.2.2 ICM Successes and Continuous Product Innovation
Islamic products now account for a significant portion of Malaysia's capital market. Being a pioneer in global sukuk, Malaysia launched the first US$600 million five-year global sovereign sukuk in 2002. In 2007, sukuk accounted for 76% of bonds approved by the SC. As at the 31st March 2008, its offshore market (Labuan International Financial Exchange) had sukuk worth US$4.75 billion. (Source: Islamic Finance News, 2008)
In the domestic equity market, 85% of securities listed on Bursa Malaysia are shariah compliant, representing US$182 billion, or 65%, of the bourse's total market capitalisation. Besides, Bursa Malaysia established two Shariah indices with global index provider FTSE Group. The FTSE-Bursa Malaysia Hijrah Shariah Index and the FTSE-Bursa Malaysia Emas Shariah are used as benchmarks for Shariah compliant investments by asset managers to create new products. As at June 2008, Malaysia had 138 Islamic unit trusts, from only two in 1993, with a combined net asset value (NAV) of 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. (Source: Islamic Finance News, 2008)
In January 2008, Asia's first Islamic Exchange Traded Fund (ETF), MyETF, was launched tracked by the Dow Jones Islamic Market Malaysia Titan 25. Within the wealth management industry several structured investment, targeted at institutions and high net worth individuals, have also been launched. (Source: Islamic Finance News, 2008)
The Malaysian Islamic fund management industry has seen phenomenal growth from just two Islamic unit trust funds in 1993 to 136, 25% of the total 539 funds, with a combined net asset value of US$5.03 billion as at end-March 2008. Several enhancements, like tax exempts and deductions, etc have offered in the government national budget of 2007 and 2008 to further boost this industry. Not forgetting the necessary fund management skills, there have been the creation of the Securities Industry Development Corporation (SIDC) and the International Centre for Education in Islamic Finance (INCEIF). (Source: Islamic Finance News, 2008)
Finally, Malaysia is also dedicated to work with other centres in creating an Islamic capital market network to provide necessary relationships in optimising opportunities across Islamic markets. For example in 2007, the SC signed a mutual recognition agreement with the Dubai Financial Services Authority for cross-border marketing and distribution of Islamic funds between Malaysia and the UAE.
5.3 Outline of the ICM in Bahrain
Bahrain has a long history in the Islamic finance industry. The expansion of the industry was slow during the early years, then rising oil prices after the Gulf war acted as a growth stimulator as demand for Islamic products increased due to excess liquidity. The role of the Central Bank, the country's strategic location and the existence of supporting institutions in Bahrain are the three reasons having facilitated Bahrain's emergence as the Islamic financial centre in the Middle East.
The Central Bank of Bahrain (CBB), formerly known as the Bahrain Monetary Agency (BMA), has played a crucial role in regulating and marketing the industry. CBB also pioneered sukuk issuance for the liquidity management of Islamic banks in 2001 via its salam and ijarah sukuk. In addition, CBB executed a MOU with Tokyo Commodity Exchange (TOCOM) in 2005 to enable financial institutions, brokers and other players in Bahrain to carry out transactions on TOCOM using Shariah compliant instruments. As a consequence of CBB's active management, the total assets of Islamic banks in Bahrain grew from US$1.9 billion in year 2000 to US$12.1 billion by March 2007, representing a growth of over 500%. (Islamic Finance News, 2007)
The existence of supporting organisations has complemented Bahrain's Islamic finance landscape. The AAOIFI was established in the early 1990s to devise accounting and Shariah standards for Islamic financial institutions. CBB was the first Central Bank to make AAOIFI standards mandatory for all players, and other countries later followed. The Liquidity Management Centre (LMC) was developed in 2002 as an intermediary agency to underwrite Islamic financial trading. Its aim was to create an active secondary market for treasury management.
Bahrain also has two bodies mainly with the objective of supporting the growth of the Islamic capital market, i.e. the International Islamic Financial Market (IIFM) founded in 2002 and the Islamic International Rating Agency (IIRA) in 2005. IIFM was re-launched in 2006 with the aim of developing the Islamic primary and secondary market via various projects. IIFM has recently worked with international organisations like the International Capital Market Association (ICMA) and the International Swap and Derivatives Association (ISDA) to explore means to stimulate growth in the Islamic capital market. IIRA, with its rating of Takaful and Islamic financial institutions, in both the credit and Shariah quality rating, aims to facilitate more sukuk issuance that will help the industry to arrive at the critical mass needed to encourage secondary market trading. (Source: Islamic Finance News, 2008)
Bahrain established the first Islamic bond index, the Dow Jones Citigroup Sukuk Index Strategy, a joint effort with the CBB, Dow Jones Indexes and Citigroup Corporate. All these developments confirm to Bahrain's focused effort to develop a wholesome Islamic financial system comprising not only the banking system but also the money market and capital market system.
As at April 2007, CBB had approved over 2,000 funds with almost 40 Shariah compliant funds. The Islamic fund industry in Bahrain has been growing at an annual rate exceeding 20%, representing US$1 billion of assets out of US$9 billion in total fund investment. There have been also geographical diversification in the equity market, Al Amin Bank for example launched a new investment fund, Kotak Indian Islamic Fund (KIIF) targeting investment in the Indian stock market under the principles of Shariah. (Source: Islamic Finance News, 2008)
