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Disclaimer The Securities Commission of Malaysia does not represent nor warrant the completeness, accuracy, timeliness or adequacy of this material and it should not be relied on as such. The Securities Commission of Malaysia does not accept nor assumes any responsibility or liability whatsoever for any data, views, errors or omissions that may be contained in this material nor for any consequences or results obtained from the use of this information. Contents1 Seizing Global OpportunitiesSHARIAH SECTION2 Sources and ResearchMethodologies (Manhaj)REGULATORY SECTION4 Issuance of ForeignCurrency-denominatedSukuk in MalaysiaPRODUCT DEVELOPMENT5 Shariah Tradeable Indexfor Global Investors7 Sukuk8 Shariah-based Unit Trust FundsFEATURES9 Strategies Going Forward11 Cross-sectoral Regulatory Approachto Supervising15 News RoundupSTATISTICAL UPDATES18 Malaysian ICM Facts and FiguresThe Malaysian Islamic capital market (ICM) has entereda new phase of development. Policy makers, regulatorsand intermediaries have shifted their focus, beyondmeeting domestic demand, to leveraging on strengthsdeveloped over time and seizing the opportunitiespresented in the global market place. Simply put, thenew phase we are embarking on is about going global.Policies, strategies and business models which haveworked well in the initial phase of meeting domesticdemand must now be assayed and refined, reconfiguredor replaced accordingly. First, it is important forinitiatives to move from being policy-driven to market-driven, by articulating the vision of taking ICM global,establishing the necessary building blocks, removingimpediments, and providing incentives.Second, market participants intending to go global mustabide by the norms and rules of the global marketplace which require products, services and practices tobe benchmarked internationally. They must have theability to not only respond swiftly to changing marketdemands, but also anticipate and lead in makingchanges. These efforts, if pursued more aggressively, willput Malaysia in the driving seat of global Islamic financeand broaden the opportunities for both intermediariesand investors.JUNE 2007 VOL 2 NO 2SEIZING GLOBALOPPORTUNITIESQuarterly Bulletin ofMalaysian Islamic Capital Marketby the Securities Commission2JUNE 2007 VOL 2 NO 2 ICMmalaysianSOURCES AND RESEARCH METHODOLOGIES (MANHAJ)ICM products have become one of the vital componentsin the overall financial landscape locally andinternationally. Before being introduced into themarket, ICM products undergo thorough researchstudies to ensure their permissibility from theShariah perspective. For this purpose, the SC ShariahAdvisory Council (SAC) has adopted two significantapproaches: Study the validity of conventional instruments fromthe Shariah point of view, focusing on the structure,mechanism and use of the instruments to ensuretheir compliance with Shariah principles. Formulate and develop new financial instrumentsbased on Shariah principles.Research plays an important role in ensuring thecontinuous development of the ICM. When conductingresearch, the SAC uses both primary and secondarysources. The primary sources are the Quran and theSunnah. This is based on the fact that Islam urgesits followers to refer to these sources in solvingproblems in their daily lives, as commanded by Allahs.w.t.In Surah al Nisa verse 59, Allah s.w.t. said:Meaning: O you who believe! Obey Allah andobey the Messenger, and those charged withauthority among you. If you differ in anythingamong yourselves, refer it to Allah (Quran)and His Messenger (Sunnah).Also in Surah al-Hasyr verse 7, Allah s.w.t. said:Meaning: So take what the Rasulullah s.a.w.(the Messenger) assigns to you, and denyyourselves that which he withholds from you.Apart from the two primary sources, the SAC alsouses secondary and other sources which have alreadybeen applied in Islamic jurisprudence, including: Ijmak consensus of Islamic scholars and jurists. Qiyas analogical reasoning from a knowninjunction (nas) to a new injunction. According tothis method, the ruling of the Quran and Sunnahmay be extended to a new problem providedthat the precedent (asl) and the new problem(far) share the same operative or effective cause(`illah). Maslahah making a judgement based on theprinciple of general benefits on matters that haveno clear nas from the Quran or the Sunnah. Istihsan disregarding a hukm (law) that is backedby dalil (evidence) and applying another hukmthat is more convincing and stronger than theformer, based on Syara` dalil permitting the act inquestion. Istishab maintenance of the previous hukm, aslong as there is no other dalil that can change thatparticular hukm. Sadd zari`ah approach used to curtail anythingcausing a Muslim to do the forbidden. It isconsidered an early preventive measure toprevent a Muslim from doing what is forbiddenby Allah s.w.t. `Urf norms of the majority of a society whetherapplied in speech or deed. Maqasid shari`ah desired objectives of the Shariahwhen determining a hukm aimed at protectinghuman maslahah. Siyasah Syar`iyyah area in Islamic jurisprudenceS H A R I A H S E C T I O N3JUNE 2007 VOL 2 NO 2 ICMmalaysianS H A R I A H S E C T I O Nwhich explains rulings related to policies andapproaches taken in organising the nationaladministrative structure (and its people) inaccordance with the spirit of the Shariah. Tawil an effort to explain or interpret Syara`principles through a dalil without being restrictedby its literal meaning. Istiqra a thorough scrutiny of a matter before aconclusive hukm is made on the matter. Talfiq introducing an approach which has neverbeen used or discussed by past mujtahid.This is based on a hadith (prophetic tradition) whenthe Prophet s.a.w. appointed Muaz as qadhi (judge) inYaman. He asked Muaz about certain importantprinciples. He asked: Muaz, what references do youuse when you make a decision? Muaz replied that hewould refer to the Quran. The Prophet s.a.w. thenasked: What if the matter in question is not foundin the Quran? To which Muaz replied that he wouldrefer to any decision that had been made by theProphet s.a.w. The Prophet s.a.w. asked again:What if the matter had never been decided by me?Muaz then replied that he would apply ijtihad(reasoning of qualified scholars) using his own thinkingand wisdom to come to a decision. The way Muazhandled the questions on making judgment receivedthe blessings of the Prophet s.a.w. He then said:Praise be to Allah s.w.t. for giving guidance to theProphet s.a.w. and his representative (Muaz).Thus, all matters relating to secondary sources areincluded in ijtihad, as stated in the hadith.Based on the above research methodologies, the SAChas determined important resolutions to facilitate thedevelopment of Malaysian ICM, both in the equityand sukuk market. Among others, the utilisation ofproceeds raised from the issuance of sukuk can beused for various purposes, including financing,provided the instruments used and financing objectivesare Shariah compliant. The proceeds can also be usedfor the general business operations of conventionalfinancial institutions, as long as the proceeds are notdirectly used for any activities and instruments whichare prohibited by the Shariah.Another resolution concerns compensation andrebate. Investors in sukuk are allowed to imposecompensation (ta`widh) on late and default paymentby issuers. Ta`widh can be imposed after it is foundthat mumathil (deliberate delay in payment) is presenton the part of the issuer to settle payment of theprincipal or profit.In addition, upon request by the issuers of sukuk foran early settlement, a rebate (ibra) is allowed to begiven to investors. The ibra clause for an earlysettlement can be inserted in the primary legaldocument of a sukuk transaction. The resolution isprovided on the basis of urf (custom), maslahah (publicinterest) principles and avoidance of gharar(uncertainty). The ibra clause in the primary legaldocument is considered as a syart (condition) thatcomplies with muqtadha `aqd (purpose of contract).However, the SAC has advised that the ibra clause beseparated from the pricing section in the primarydocument. The ibra clause can be inserted in thepayment and settlement section.In summary, every SAC resolution is subjected tocomprehensive analysis using all of the mentionedsources the holy Quran, Sunnah, ijma`, ijtihad, etc.This method of analysis provides a high level ofconfidence to the industry and stakeholders, on theShariah status of the ICM products being introduced inthe market.4JUNE 2007 VOL 2 NO 2 ICMmalaysianR E G U L A T O R Y S E C T I O NOn 27 March 2007, the SC and Bank Negara Malaysia(BNM) released a Joint Information Note on thefacilitative regulatory framework for the issuance offoreign currency-denominated sukuk and bonds inMalaysia.The Joint Information Note outlines the procedures forthe issuance of foreign currency-denominated sukukand bonds by qualified issuers. Qualified issuers includethe Malaysian government, foreign governments,multilateral development banks (MDBs), multilateralfinancial institutions (MFIs), agencies or nationalcorporations of the Malaysian government or foreigngovernments, foreign multinational corporations(MNCs) and resident corporations.Specific flexibilities are accorded under the SCsPractice Note 1A to expedite the issuance of foreigncurrency-denominated sukuk (Practice Note 1A onIssuance of Foreign Currency-denominated IslamicSecurities or Sukuk in Malaysia) and bonds (PracticeNote 1A on Issuance of Foreign Currency-denominatedBonds Malaysia).Under this facilitative approval process, a submissionto the SC by an issuer with a credit rating of at leastsingle A- is deemed approved upon filing of theprescribed documents with the SC, at least two workingdays prior to the issuance of the sukuk or bonds. Inaddition, international credit ratings are acceptable.International legal documentation governed by thelaws of England or the US is also allowed. Under theISSUANCE OF FOREIGN CURRENCY-DENOMINATED SUKUK INMALAYSIAfacilitative regulatory framework, both resident andnon-resident issuers are free to use the proceedsfrom the issuance onshore and offshore. The issuersare also free to hedge to the full amount of theunderlying commitment.Non-resident investors are free to invest in foreigncurrency-denominated sukuk and bonds onshoreand there are no restrictions on the repatriation ofcapital, profits and income earned from Malaysia,including any coupon or profit earned from theirinvestments. Investments by resident investors will bein accordance to the prevailing foreign exchangeadministration policy on investment in foreign currencyassets. Resident investors are exempted from paymentof income tax on the profits received from foreigncurrency-denominated sukuk issued in Malaysia.Similarly, profits or income on non-residentsinvestments in foreign currency-denominated sukukissued in Malaysia are also fully exempted fromwithholding tax.The foreign currency-denominated sukuk and bondsshall be issued on a scripless basis through the FullyAutomated System for Issuing/Tendering (FAST) anddeposited with the Real Time Electronic Transfer ofFunds and Securities (RENTAS) System with BNM as thecentral depository agency and authorised depositoryinstitutions as the sub-depositories.Further information on the Joint Information Note canbe obtained from www.sc.com.my.5JUNE 2007 VOL 2 NO 2 ICMmalaysianP R O D U C T D E V E L O P M E N TFollowing the successful launch of the FTSE-BursaMalaysia (FBM) EMAS Shariah Index in January 2007,Bursa Malaysia has further expanded its index serieswith a new Shariah tradeable index the FBM HijrahShariah Index. The launch of the countrys firstShariah tradeable index marked another significantmilestone in the development of key initiatives toenhance the attractiveness of the Malaysian ICM todomestic and global investors. Designed using FTSEsglobal indexing standards, the FBM Hijrah ShariahIndex is an internationally accepted benchmark whichwill increase the Malaysian ICMs competitiveness.Similar to the previous Shariah index, the FBM HijrahShariah Index (Figure 1) was subjected to the sameinternational indexing features, such as free floatand liquidity, and ultimately the rigorous Shariahscreening process performed by the SC Shariah AdvisoryCouncil (SAC) and Yasaar Research Ltd a global leadingShariah consultancy that offers Shariah-complianceservices to institutional clients. Constituents in theFBM Hijrah Shariah Index must comply with stringentfinancial criteria and with principles set out by theSAC and Yasaar Research Ltd to ensure they are notSHARIAH TRADEABLE INDEX FOR GLOBAL INVESTORSinvolved in non-halal core activities, such as alcohol,tobacco and gaming.This collaborative screening process and a fixed numberof 30 constituents makes the FBM Hijrah ShariahIndex a highly investable, liquid and transparentindex for international investors (Table 1 on page 6).The new index will create further opportunities forinvestors seeking Shariah-compliant investments topage 6Figure 1FBM Hijrah Shariah Index designInvestable universeFBM EMASIndexFilterYasaarResearch LtdInvestable indexFBM HijrahShariah IndexFilterSAC list of Shariah-compliant securitiesNote: FBM Hijrah Shariah Index is a tradeable index with a total number of constituents fixed at 30 All stocks are free float weighted to accurately represent the stocks available for investment All stocks are liquidity screened to ensure stock availability and ease of trading Constituents must pass Yasaar Research Ltd and SAC screening for Shariah compliance.6JUNE 2007 VOL 2 NO 2 ICMmalaysianP R O D U C T D E V E L O P M E N Tpage 5Updated List of Shariah-compliant Securities by the SACThe SC released an updated list of Shariah-compliant securities approved by its SAC. The updated list ofShariah-compliant securities listed on Bursa Malaysia took effect from 25 May 2007. The full list is availableat www.sc.com.my.Seventeen newly classified Shariah-compliant securities by the SAC have been added to the list, whichcurrently totals 875 securities. Eleven securities, which were in the October 2006 list, have been excluded.Based on the current list, 86% of the listed securities on Bursa Malaysia are classified as Shariah compliant.In classifying the listed securities, the SAC has received input and support from the SC and has appliedstandard criteria in focusing on the activities of the companies listed on Bursa Malaysia. The approach andcriteria in classifying the securities as well as the SACs advice and guidance on the disposal of Shariah non-compliant securities are stated in the list.A booklet on the list is issued free of charge by the SC. The next updated list will be available in November2007.benchmark their investments, and for asset managersto create new products serving the investmentcommunity. It will create opportunities for capitalmarket intermediaries to work with Bursa Malaysia topackage a broad range of attractive products to enhancethe choice of investments in the Malaysian capitalmarket, such as Islamic exchange-traded funds (ETFs)and structured products.Table 1FBM Hijrah Shariah Index informationIndex universe FBM EMAS IndexInvestability screens Size, free float, liquidity, Yasaar Research Ltd and SACIndex calculation Calculated in real time every 15 seconds and end of dayCalculation states Firm, closed, held, indicativeEnd of day distribution 19:01 local time, 11:01 GMT & 12:01 BSTCurrency Ringgit Malaysia, euro, US dollar, yen, sterlingBase value / base date 6,000 / 31 March 2006Index constituent review End of June and DecemberLaunch date 21 May 20077JUNE 2007 VOL 2 NO 2 ICMmalaysianP R O D U C T D E V E L O P M E N TSUKUKBiggest sukuk funding programmeThe SC has approved a RM60 billion fundingprogramme issued by Cagamas Bhd, Malaysias nationalmortgage firm, which will be the biggest issue.Cagamas, which uses funds raised from the debtmarket to buy housing loans from banks, has thehighest credit rating from the countrys two ratingagencies and the issue will cover Cagamas fundingneeds for four decades. The programme consists ofcommercial papers and medium-term notes, and hasmaturities between three and five years. However, theprogramme will also be a mixed issuance of both sukukand conventional tranches.The sukuk will use multiple Shariah principles, such asmurabahah, ijarah, mudharabah, musyarakah andistisna`. CIMB Islamic Shariah Committee, HSBC BankMalaysia Bhd Shariah Committee and MaybankShariah Committee will be joint Shariah advisers forthe sukuk issuance.Sukuk istisna` for toll highway projectIn the first quarter of 2007, the SC approved a RM1.4billion junior and senior sukuk istisna` issuance byLebuhraya Kajang-Seremban Sdn Bhd (Lekas), anassociate company of IJM Corporation Bhd, to fundthe construction of a 44.3km toll highway which willconnect Kajang, Semenyih and Seremban.In the sukuk istisna` structure, Lekas is the specialpurpose vehicle set up to undertake concession of theKajang-Seremban Highway which comes with theright to collect toll for 32.5 years. The constructioncost is estimated at RM900 million, to be part-financedby the RM785 million proceeds from the senior sukukistisna` sale. The other portion of RM633 million, arisingfrom the junior sukuk istisna` issue, will be used to repayolder debts incurred by the highway project.The sukuk istisna` have maturities ranging from sevento 15 years and were accorded AA3 and A1 ratingsrespectively by Rating Agency Malaysia Bhd.AmInvestment Bank Bhd is the lead arranger for thefinancing facilities while Bank Muamalat Malaysia Bhdis the co-arranger of the programme.Sukuk ijarah for plantation companyIn May 2007, Kuala Lumpur Kepong Bhd (KL Kepong)issued a five-year sukuk ijarah Islamic commercial papers(ICP)/Islamic medium-term notes (IMTN) to raiseRM500 million. The sukuk ijarah programme allowsKL Kepong to issue ICP and/or IMTN of different tenorsto meet its short- to medium-term funding requirements,with the flexibility to issue ICPs in tenors of below12 months and IMTNs in tenors of one year to fiveyears. Of this total amount, RM210 million from theproceeds will be used to refinance its existing bankborrowings while the rest to finance future Shariah-compliant investments and working capitalrequirements, such as buying more plantation land andexpanding its oleochemicals business.Aseambankers Malaysia Bhd and CIMB Investment BankBhd are joint lead arrangers, lead managers and bookrunners for the sukuk ijarah programme.8JUNE 2007 VOL 2 NO 2 ICMmalaysianP R O D U C T D E V E L O P M E N TAnother prerequisite for going global is the abilityof intermediaries and institutions to, not only swiftlyrespond to changing market demands, but alsoto anticipate and lead changes. By way of example,the origination and distribution of Islamic financialproducts is a key focus area of the MIFC. Productsand services under the MIFC can be in any currencyand offered to both residents and non-residents.These flexibilities, coupled with Malaysiasacknowledged leadership in the global sukukmarket, must be swiftly capitalised by industry toextend its reach to foreign issuers and investors.These efforts, if pursued more aggressively, will nodoubt put Malaysia in the driving seat of globalIslamic finance and broaden the opportunities forboth intermediaries and investors. It is importantfor the Malaysian ICM to capitalise on its strengths,experiences and track record to propel itself intothe next phase of development. The opportunitiesare tremendous and there is potential reward forall.New capital protected Shariah-compliantfundA new capital protected fund known as ING BarakaCapital Protected Fund was launched on 9 May 2007by ING Funds Bhd. With an approved fund size of 200million units, it offers investors capital protection andaccess to global Shariah-compliant equities, and anexpected average annualised return of between 10%and 12% over its three-year life.The fund is targeted at investors with a low to moderaterisk appetite who want to diversify investments locallyand offshore. Like other capital protected funds, at theend of the funds maturity period of three years, theING Baraka Capital Protected Fund will return unitholders initial capital plus returns from the offshoreinvestments, if applicable.The funds investment portfolio will be selected fromthe Dow Jones Islamic Market World Index. The allocationof the portfolio will be as follows: at least 85% inringgit-denominated Islamic negotiable instruments(INIs), 10% in the Societe Generale Asset Managements(SGAM) Alternative Investments Baraka Options withthe remaining 5% in Islamic fixed-income instruments.SHARIAH-BASED UNIT TRUST FUNDSThe fund will be managed in-house by ING FundsMalaysia and SGAM in France. To ensure compliancewith the Shariah, Yasaar Research Ltd will act as theglobal Shariah consultant, while the Islamic Bankingand Finance Institute of Malaysia (IBFIM) will be thelocal Shariah adviser for the INIs.Islamic cash management fundPublic Bank Bhd, through its subsidiary Public MutualBhd, launched its new Shariah-based unit trust fundknown as PB Islamic Cash Management Fund (PBICMF).PBICMF is an Islamic money market fund which providesliquidity and current income while maintainingcapital stability by investing in instruments that complywith Shariah requirements. The fund has IBFIM as theShariah adviser.The fund, with an approved fund size of 1 billion,offers an option to investors with low tolerance torisk to invest on a short-term basis before investingin or switching back to equity, balanced or bondfunds. It is suitable for those interested in short-terminvestments with conservative risk-rewardtemperament.page 109JUNE 2007 VOL 2 NO 2 ICMmalaysianF E A T U R E SSTRATEGIES GOING FORWARD1No single sector within the Malaysian capital markethas, within a short span of time, received as muchattention, commitment, resources and facilitation fromthe government and the regulators, as the ICM. Andthese have been received with unanimous andresounding reciprocity from the market.It is therefore not surprising that the Malaysian ICMhas emerged as a significant area of growth. Today, ithas a full complement of products, infrastructure,institutions, intermediaries and investors, contributingto the development and deepening of the entire capitalmarket. ICM products and services are now an integralcomponent of the Malaysian capital market, offeringviable and competitive forms of financing andinvestment alternatives to their conventionalcounterparts.The growth of the sukuk market, for instance, has beenparticularly impressive. Last year, over 55% of all bondsapproved by the SC were sukuk with a total value ofRM42 billion. In fact, it has been independentlyrecognised that Malaysia originates over 60% of theworlds sukuk issues. Increasingly, these involveinnovative structures using internationally acceptedprinciples, such as musyarakah, mudharabah and ijarah.In the equity market, 86% of all securities listed onBursa Malaysia are classified as Shariah compliant. Thisamounts to about RM684.3 billion or 64.8% of thetotal market capitalisation of Bursa Malaysia. Lastyear also saw the listing of an Islamic real estateinvestment trust (REIT) on Bursa Malaysia a worldsfirst. On the demand side, growth in the Shariah-basedunit trust industry has been remarkable over the lastfew years. There are now more than 102 Shariah-basedunit trust funds with a total net asset value (NAV)amounting to RM9.5 billion, representing 7.1% of thetotal NAV of the unit trust industry.In terms of developmental efforts, the products andservices offered cater to the needs and risk-rewardprofiles of all investors and issuers. The strategy ofmainstreaming the ICM has worked very well becauseit thrives best within an overall strong, deep andefficient capital market.Indeed, the Malaysian capital market has experiencedconsiderable growth. The capital market is now 2.4times nominal GDP. Adding the equity and bondmarkets together, the size of the Malaysian capitalmarket as at end-2006 was RM1.3 trillion, expandingby 17% or by RM190.1 billion, year-on-year.The Malaysian ICM has entered into its next phaseof development. The strategy of taking ICM global isnot something thought of just yesterday. In fact, theCapital Market Masterplan (CMP), which was launchedin 2001, provides a strategic blueprint for developingan internationally competitive ICM for Malaysia that iswell positioned to meet the increasing challenges ofinternational competition and financial globalisation.The CMP identified the establishment of Malaysia asan international ICM as one of its six strategic objectives.In the third and final phase of implementing the CMP,a significant number of recommendations on the ICMwere completed.The introduction of Islamic securities guidelines,which effectively addressed legal and regulatoryimpediments to the development of the sukukmarket, and the guidelines on Islamic real estateinvestment trusts (REITs), as well as the promotionof the use of musyarakah, mudharabah andijarah structures are efforts consistent with therecommendations of the CMP. The fact that themarket has responded positively to these efforts byquickly introducing new products, whether in theform of global sukuk or other innovative sukuk1 This article is based on the SC Chairman's keynote address delivered at Invest Malaysia 2007 on 21 March 2007.10JUNE 2007 VOL 2 NO 2 ICMmalaysianF E A T U R E Sstructures and Islamic REITs, is testimony to the factthat the recommendations of the CMP, thoughambitious, are achievable.Going forward, it is the intention of the final phaseof the CMP to remove remaining inefficienciesand rigidities to enhance the efficiency of the capitalmarket intermediation process. The vision of takingthe ICM global is reaffirmed by the government inthe Ninth Malaysia Plan (9MP) which has extendedthe ICM agenda beyond the CMP. Of course, theMalaysia International Islamic Financial Centre (MIFC)agenda, launched last year, signifies the confluenceof the vision and strategies, and all policy andregulatory initiatives with respect to taking the entireIslamic financial services forward.There is vast potential in the global ICM, with depositsin Islamic banks estimated to be in excess of US$560billion, and growing at between 10% and 20%annually. There are presently more than 350 Islamicequity funds with assets exceeding US$300 billionoperating in major financial centres around the world.The availability of such a large amount of Islamicfunds internationally is a clear indication of thepotential of the ICM.But going global is not just about setting sights on thetremendous opportunities that are available in themarket place. To effectively tap the global market, thegovernment, regulators and most critically, theintermediaries must be ready, able and willing, to dothings differently. Policies, strategies and businessmodels which have worked well in the initial phase ofmeeting domestic demand need to be assayed, refined,reconfigured or replaced accordingly.There is therefore a lot that needs to be donedifferently. First, it is important to move from policy-driven to market-driven initiatives. Up till now, thegovernment and the regulators have been at theforefront of efforts to develop the ICM articulatingthe vision, establishing the necessary building blocks,removing the impediments and providing theincentives. In fact, the government and government-linked companies (GLCs) have, as issuers, alsobeen pushing the frontiers of innovation in thesukuk market. These efforts were critical to thesuccess of Malaysian ICM and undoubtedly will continueto be pursued.However in taking the ICM to its next phase, therole of the private sector becomes more critical.There is expectation for higher levels of investmentinto product origination and distribution capabilities,and into building intellectual capacity to accelerategrowth momentum and to maximise the capture ofopportunities. Indeed, the widespread availabilityof high-quality intermediation services is critical tothe next phase of growth. The government andregulator will continue to play their roles as catalystand facilitator. Product innovation, ensuring globalcompatibility and acceptance, branding and promotionmust, however, be pursued by the private sector.Second, going global means abiding by the normsand rules of the global market place. It is recognisedthat while the global market offers infiniteopportunities, it also demands that products, servicesand practices be benchmarked internationally.The presence of foreign intermediaries in Malaysia,the pursuit of international alliances, the openingof offices abroad and the structuring and offeringof products for the international market by localintermediaries will ensure that Malaysianintermediaries can extend their reach and influenceto regional and international markets. Strategicalliances with leading global players and directparticipation in key foreign markets must bepursued....in taking the ICM to its nextphase, the role of the privatesector becomes more critical.page 811JUNE 2007 VOL 2 NO 2 ICMmalaysianF E A T U R E SCROSS-SECTORAL REGULATORY APPROACH TO SUPERVISING2Today, more than ever before, regulators are faced withthe challenge of having to understand and respondto complexities brought about by rapid changes inglobal financial markets. The increasing integrationof various segments of the market, the trend towardscommoditisation of transactions and the blurring ofboundaries between once-separate institutions,products and market sectors are challenging thetraditional parameters of regulatory and supervisoryroles and functions.The activities of banks, insurance companies and mutualfunds have traditionally been considered as distinctfrom each other. To protect the soundness of each sectorand its role in enhancing the soundness of the financialsystem, inter-sector activities were prohibited. Hence,each service is also traditionally regulated andsupervised by a distinct and specialised authority.However, the regulators ability to ensure seamlessregulation is increasingly being challenged by the growingfunctional integration of financial intermediaries.This trend has been the result of a number of factors: Cross-sectoral mergers and acquisitions betweenbanks and securities firms, and between banks andinsurance companies. Market participants are increasingly branching outand diversifying to offer a broader range of productsand services, in order to compete and grow. New products with hybrid characteristics areentering the market place; mostly bankingproducts which have investment-like profile, e.gmudharabah deposits offered by Islamic banks,capital protected structured products, investment-linked insurance products (ILIPs), etc.As a result, the scope and nature of financial activitiesare increasingly developing well beyond those oftraditional regulatory structures and jurisdictions. Thesedevelopments have resulted in the blurring of historicaldistinctions between institutional arrangements andfinancial activities.Hence, as investors are responsible for their owninvestment choices, there is a need for them tounderstand and fully appreciate the nature and riskprofiles of investment-type products. Likewise, thefinancial institutions also need to acknowledge theunique risks emanating from the products they offer.Islamic banks, for example, must recognise their fiduciaryduty towards their investment account holders, and putin place quality risk management systems.Regulators must react and respond swiftly to changes.Additionally, the increasing internationalisation offinancial operations has also accentuated theinternational dimension to regulation. Regulators atthe national level, no longer concern themselvesonly with issues within national boundaries, but areforced to deal with international issues affecting theirconstituents. As a result, regulators are increasinglymoving away from prescriptive rules to a market-basedapproach, in order to react swiftly and respondadequately to changes in the market place. A market-...the scope and nature offinancial activities areincreasingly developing wellbeyond those of traditionalregulatory structures andjurisdictions...2 This article is extracted from the SC Chairman's keynote presentation at the IFSB Summit in Dubai, UAE on 15 May 2007.12JUNE 2007 VOL 2 NO 2 ICMmalaysianFrom the capital marketperspective, it is absolutely vitalthat cross-sectoral regulatoryapproaches comply withuniversally accepted principles ofsecurities regulation...F E A T U R E Sbased approach allows greater flexibility but itassumes a level of sophistication among investors andstrong governance and compliance culture amongmarket players.Shift in regulatory perspectivesRegulators in a number of markets have attempted toeffect changes to better address these challenges. Butfirst, they need to be aware that functional regulation3of financial institutions is crucial for optimising andstreamlining existing regulatory resources to ensureseamless regulation. This is particularly so in a dual ormultiple regulator environment where increasingly, across-sectoral approach to regulation and supervisionneeds to be pursued.The idea of functional regulation emphasises theprinciple of regulatory parity. The need for a functionalperspective is reinforced by the increasing scope forhybrid and complex transactions; the trend for theunbundling of financial products and services into theirconstituent economic, risk and value components; andthe blurring of boundaries between once-separateinstitutions, products and market sectors. The notion isthat if a market participant is engaged in a particularactivity, the participant should be regulated in the samemanner as other market participants who engage insubstantially equivalent activities. This level playingfield promotes confidence and consistency in the overallregulation of the market place.From the capital market perspective, it is absolutely vitalthat cross-sectoral regulatory approaches comply withuniversally accepted principles of securities regulation,i.e. they must provide the same level of protection forinvestors, be adopted within markets that are fair,efficient and transparent, and must not be susceptibleto systemic risks. The success of regulators in this caseis seen in terms of the extent to which they can buildinvestor confidence in the integrity and fairness ofcapital market transactions, and the extent to whichthey are able to develop the markets in the directionof better transparency, greater competition and hencegreater efficiency. Further, for Islamic products, themarket must inspire investor confidence in the Shariah-compliant process, and that the Islamic products aretrue to label and perceived to be fair.The role of the regulator is not restricted just toregulatory oversight but also includes initiatingdevelopmental activities, especially in the area ofIslamic finance. They include facilitating thedevelopment and introduction of new productsthrough new regulatory framework and guidelines,and investor education.Likewise, regulation should not be so rigid andcomprehensive that it raises compliance costsunbearably and stifles innovation and creativity.Regulators should not lose sight of the trade-off between stability and efficiency. The idea is not toadd unduly to the regulatory burden while maintaininghigh standards of investor protection and marketintegrity.3 Functional regulation is the regulatory approach based on the specific purview of the regulatory agency, such as Bank NegaraMalaysia (BNM) over the banking system and its intermediaries and insurance industry, and the SC over the regulation of thesecurities and futures markets and non-bank intermediaries in the capital market.13JUNE 2007 VOL 2 NO 2 ICMmalaysianF E A T U R E SThe Malaysian experienceThe regulatory approach in Malaysia is predominantlyinstitutional-based with Bank Negara Malaysia (BNM)regulating the banking system and insurance sector,and the SC presiding over the regulation of thesecurities and futures markets and non-bank capitalmarket intermediaries. Further, the Islamic bankswere accorded exempt dealer status to undertakecapital market activities. As a consequence, therewere regulatory gaps in the provision of investorprotection for products issued by Islamic banks.While they take on investment characteristics, thestructure of the product and disclosure requirementsdiffer.Under securities laws, disclosure is governed bysection 32 of the Securities Commission Act 1993where there is statutory obligation for adequate,accurate and timely disclosures. In this case, false andmisleading disclosures are subject to criminal sanction.As financial modernisation increases within thedomestic market and a wide variety of institutionsengage in substantially similar activities, there isgradual progress towards functional regulation withcross-sectoral offering of investment-linked productsby financial conglomerates and Islamic financialinstitutions.Regulating Islamic banksThe year 2007 sees the introduction of the CapitalMarket and Services Act (CMSA) which reflects manyof the cross-sectoral regulatory philosophies. Islamicbanks no longer need a licence from the SC toundertake capital market activities. They only need tobe licensed by BNM and will be accorded registeredperson status under the CMSA.There are two very significant developments here.First, the CMSA recognises the important role thatIslamic banks play in developing the ICM and enablesthem to broaden the scope of their activities and tocarry out additional ICM activities, such as fundmanagement, initial public offering (IPO) submissionsand private placements, without further need forlicensing by the SC. The elimination of dual licensingwill significantly reduce friction costs and promotebusiness flexibility and efficacy.Secondly, the CMSA enables the achievement ofregulatory parity for all participants carrying out capitalmarket activities. This is done by recognising Islamicbanks as registered persons which then extends theprovisions relating to investor protection under theCMSA to Islamic banks. As mentioned earlier, thestructure and disclosure requirements for collectiveinvestment scheme (CIS) products under securities lawstake on a different dimension from those existing forIslamic banks.Regulating investment banksThe SC and BNM introduced the framework for theestablishment of investment banks (IBs) in 2005. Thishas led to the rationalisation and integration ofbusinesses of merchant banks, discount houses andstockbroking companies within a single banking groupinto one entity. This is a relatively new developmentwith IB licences issued late last year. As IBs undertakeboth capital market and banking activities, they arelicensed both by the SC and BNM.BNM is responsible for the prudential regulation ofIBs to preserve their stability and soundness. The...there needs to be a strongregulatory frameworkwhich promotes principles ofsecurities regulation forinvestment-type products.14JUNE 2007 VOL 2 NO 2 ICMmalaysianF E A T U R E Sthrust of the SCs regulations is to promote marketintegrity and investor protection. BNM and the SCare finalising an MoU to facilitate co-ordination andcollaboration between the two regulatory agencies.Both agencies have powers to prescribe and enforceregulations, supervise and conduct inspections on IBsto meet their objectives.Regulating Islamic products withprofit-sharing characteristicsAs many of the Islamic products are distributed to retailclients, it is pertinent to deal with their regulation.Islamic banks and Takaful companies offer a form ofmudharabah investment based on profit-sharingcharacteristics. How should such products be regulated?How does the status of such products compare withother capital market products? This is likely to becomea major issue confronting regulators in the years ahead,given the rapid growth of these products. At the coreof a strong Islamic financial system in any jurisdiction,there needs to be a strong regulatory frameworkwhich promotes principles of securities regulation forinvestment-type products.In Malaysia, the mudharabah deposits and Takafulproducts are regulated by BNM. These investmentsare eligible to have a share of the profits earned.Given that the returns are not pre-determined, thecapital provider may have to bear any loss. Thisplaces a higher degree of fiduciary risk on the Islamicfinancial institutions in ensuring that investmentdeposits funds are managed in the most effective andefficient manner.Hence, apart from fiduciary responsibility, investorprotection and transparency issues need to be aligned.The crucial challenge is to adapt existing regulationsso that clients of Islamic banking and Takaful productsenjoy similar, although not necessarily the same,protection as clients of capital markets.ConclusionGoing forward, there is a need for the regulatoryframework to be flexible and effective in adapting tothe fast-changing market environment. To have thecapacity to accommodate change and the evolutionof market structures, regulation must not lag behindor act as an impediment to market development andinnovation. The challenge ahead lies in the ability ofregulators to balance flexible regulatory structureswith uncompromisingly robust provisions, withregard to the fundamental principles and objectiveson which they are based: the protection of investors;ensuring that markets are fair, efficient and transparent;and reducing systemic risks.Furthermore, the regulatory framework must alsorecognise the increasing integration of the varioussegments of the financial market, resulting in a networkof economic, commercial and legal relationships.Proper functional regulation has thus become moreimportant due to the increasing trend towards thecommoditisation of transactions; unbundling offinancial products and services into their constituenteconomic, risk and value components; and the blurringof boundaries between once-separate institutions,products and market sectors.15JUNE 2007 VOL 2 NO 2 ICMmalaysianF E A T U R E SNEWS ROUNDUPIFSB/IOSCO seminar on ICM regulatory issuesThe SC Chairman delivered a welcome speech atthe Seminar on Regulatory Issues in Islamic CapitalMarket, held at the SC on 19 April 2007. The seminarwas jointly organised by the Islamic FinancialServices Board (IFSB) and International Organizationof Securities Commissions (IOSCO). Its main objectiveOn 27 March 2007, a mutual recognition agreement wassigned between the SC and the Dubai Financial ServicesAuthority (DFSA). The signing ceremony between theSC Chairman, Dato' Zarinah Anwar and DFSA ChiefExecutive, David Knott was witnessed by the SecondFinance Minister of Malaysia, Tan Sri Nor MohamedYakcop. This agreement follows an earlier announcementmade on 15 August 2006 on the commencement of ajoint initiative on regulatory alignment to facilitateIslamic finance transactions between the DubaiInternational Financial Centre (DIFC) and Malaysia.The agreement was the first between two Islamicmarkets, and marks a significant milestone, providinga gateway for Malaysian capital market players toventure into the Middle East market. This reciprocalliberalisation between the two Islamic financial centreswill enable cross-border marketing and distribution ofIslamic funds with minimal regulatory intervention.Under the agreement, Islamic funds approved by theSC may be marketed and distributed in the DIFC, to befacilitated by the entry of Malaysia on to the DFSAsMutual recognition with Dubai Financial Services AuthorityRecognised Jurisdiction Notice. At the same time, Islamicfunds registered or notified with the DFSA will haveaccess to Malaysian investors. Malaysian capital marketintermediaries will benefit from the gateway todistribute their Islamic products to a fast growingmarket while Malaysian investors will have access to arange of Islamic products from the DIFC. Both regulatorswill work closely in the areas of supervision andenforcement of securities laws to ensure adequateinvestor protection.was to discuss several relevant issues in regulating theICM. The SC Senior Executive Director of Strategic &Development Dr Nik Ramlah also chaired a session,entitled Country Presentations on Regulation ofIslamic Capital Market which gave an insight on theregulation of the Malaysian ICM.16JUNE 2007 VOL 2 NO 2 ICMmalaysianThe third forum for Shariah advisers in Malaysia,held on 911 May 2007 in Seremban, was organisedby the Department of Islamic Development ofMalaysia (JAKIM). Shariah scholars deliberated onOn 20 March 2007, the SC organised an ICM talk presented by Rushdi Siddiqui, Global Director of DowJones Islamic Market on Islamic Stock Exchange.Rushdi exposed the audience to various issuesICM talk on Islamic Stock ExchangeForum for Shariah advisers in Malaysiapertaining to Islamic indices. More than 100 participantsfrom various agencies, namely regulatory bodies,banks and fund management companies attended theevent.F E A T U R E SIFSB summit in DubaiHosted by the Central Bank of the United Arab Emirates,the 4th Islamic Financial Services Board (IFSB) Summitwas held on 1516 May 2007 in Dubai. The summit,entitled The Need for a Cross-sectoral Approach to theSupervision of Islamic Financial Services, discussedchallenges and efforts towards the standardisation andconvergence of the global Islamic financial services industry.The SC Chairman delivered a presentation, entitledThe Relevance of a Cross-sectoral Approach to theSupervision of Islamic Financial Services: RecentExperience and Prospects. The summit concluded thatadopting a more dynamic and flexible approach to thesupervision of Islamic financial institutions is essentialin moving the industry forward. A cross-sectoralapproach to the supervision of Islamic financial servicesis seen as an alternative, as the industry moves towardsgreater convergence. This is also exemplified by thecross-border operations of an increasing number ofinstitutions offering Islamic financial services.The Global Islamic Financial Forum 2007 (GIFF 2007),organised by Bank Negara Malaysia (BNM), washeld from 2629 March 2007 at the Kuala LumpurConvention Centre. The SC Chairman chaired apanel discussion, entitled Islamic Capital Market:The Next Phase of Development at the FinancialRegulators Forum in Islamic Finance while theSC General Counsel Wong Sau Ngan presented apaper, entitled Creating Effective and EfficientGlobal Islamic Financial Forum 2007Regulatory Framework for Islamic Capital Market.Under the Malaysia International Islamic FinancialCentre (MIFC) banner, the SC, together with BNM,LOFSA and Bursa Malaysia set up an exhibition boothshowcasing the availability of Islamic banking, guidanceand investment services in Malaysia. The exhibition alsoprovided visitors with a platform for learning,networking and discovering business opportunities.selected Shariah issues relating to Islamic finance.Two speakers from the SC presented on the subject ofevaluating the Shariah status of listed securities.17JUNE 2007 VOL 2 NO 2 ICMmalaysianF E A T U R E SThe SC participated in the Malaysia InternationalHalal Showcase (MIHAS) 2007 held from 913 May 2007at the Kuala Lumpur Convention Centre. It wasorganised by the Malaysia External Trade DevelopmentCorporation (MATRADE) and the Islamic DakwahFoundation Malaysia (YADIM), in association withthe Ministry of Entrepreneur and Co-operativeDevelopment (MECD).Invest Malaysia 2007Invest Malaysia 2007 was organised by Bursa Malaysiafrom 2123 March 2007 in Kuala Lumpur. It is aninvestment conference for institutional investorsto highlight the latest capital market developmentsand key investment prospects. The SC Chairmandelivered the keynote speech, entitled The MalaysianIslamic Capital Market Roadmap and Strategies GoingForward. In her speech, Dato Zarinah Anwarhighlighted the latest ICM developments in Malaysiaand the issues and challenges for the next phase ofdevelopment.Malaysia International Halal Showcase 2007The ICM was identified by the organisers as one of thekey components of the exhibition. The SC booth wasset up to showcase ICM development in Malaysia andthe milestones achieved. In addition, the SC distributedpromotional materials on Malaysian ICM coveringmarket infrastructure, products and services to createa greater awareness of the development and regulationof the ICM.Islamic Markets Programme: 16 July 2007, Securities Commission, KualaLumpurThis Islamic Markets Programme (IMP) is designed to cater to a wide audience of both experiencedpractitioners and newcomers in the world of Islamic finance. It is directed towards individuals involved inany aspect of Islamic finance and will be most useful in preparing professionals dealing with Islamic productsand institutions.It offers a step-by-step progressive learning platform for participants to better understand the principlesand practice modes of modern Islamic finance; realise its business potential; and explore its implications forindustry growth, capital market attractiveness and its contribution to the overall economy.Presentations will be reinforced by case studies and experiences from practitioners, subject matter expertsand capital market regulators.This programme begins on Sunday 1 July 2007 with a full day city tour. Training sessions will start onMonday 2 July 2007. For more details and registration, log on to www.sc.com.my.18JUNE 2007 VOL 2 NO 2 ICMmalaysianMALAYSIAN ICM FACTS AND FIGURESS T A T I S T I C A L U P D A T E S1 The SC SAC releases the updated Shariah-compliant securities list twice a year inMay and November.2 Launched on 21 May 2007.Equity market indices 30 April 07 31 May 07 % changeKuala Lumpur Composite Index 1,322.25 1,346.89 1.9%Kuala Lumpur Shariah Index 194.99 198.53 1.8%FBM EMAS Shariah Index 9,102.89 9,317.56 2.4%FBM Hijrah Shariah Index2 9,326.30 9,415.94 1.0%1 As at end-March 2007.Number of approved fundsShariah-based 102Total industry 429Net asset value (NAV) of approved funds (RM billion)Shariah-based 9.6Total industry 134.2% of Shariah-based to total industry 7.2%1401301351051101151201259510090 Jan 07 Mar 07 Feb 07 Apr 07May 07Chart 1Performance of KLCI vs Shariah IndicesIndex points (rebased to 100)KLCI KLSI FBM EMAS Shariah Index6050304049201520100Balanced funds Sukuk funds Equity funds Others*Chart 2Shariah-based unit trust funds by categoryNo. of funds/NAVNo. of fundsNet asset value (NAV)RM1.2 billionRM1.8 billionRM5.9 billionRM0.6 billion* Including feeder funds, fixed income funds, money market funds and structured products.18Table 2Shariah-compliant securitiesNumber and percentageNumber of Shariah-compliant securities May 20071 875% of Shariah-compliant securities to total listed 86%securitiesMarket capitalisation (end-May 2007) (RM billion)Shariah-compliant securities 685.14Total market capitalisation 1,060.92% of Shariah-compliant securities to total market 64.58% capitalisationTable 3Shariah-based unit trust funds119JUNE 2007 VOL 2 NO 2 ICMmalaysianIssuer Shariah Size of issues Date of Initialprinciple (RM million) approval rating1. Malaysian International Tuna Port Sdn Bhd BBA 240 17 Jan 07 A+2. Tomei Consolidated Bhd Murabahah 100 19 Jan 07 MARC-1A3. Pins Capital Sdn Bhd Ijarah 150 22 Jan 07 P1AA24. Pins Capital Sdn Bhd Murabahah 10 22 Jan 07 Not rated5. Straight As Portfolio Sdn Bhd Murabahah 200 15 Feb 07 MARC-16. Lebuhraya Kajang-Seremban Sdn Bhd Istisna` 820 15 Feb 07 AA37. Lebuhraya Kajang-Seremban Sdn Bhd Istisna` 633 15 Feb 07 A18. Arapesona Development Sdn Bhd Murabahah 200 26 Feb 07 AAA9. Arapesona Development Sdn Bhd Murabahah 70 26 Feb 07 MARC-110. United Growth Bhd Musyarakah 800 14 Mar 07 AA211. Kuala Lumpur Kepong Bhd Ijarah 500 26 Mar 07 P1AA212. Capable Aspect Sdn Bhd Murabahah 40 26 Mar 07 A+MARC-2Total RM3,763S T A T I S T I C A L U P D A T E STable 5Sukuk approved by the SC in Q1 2007Table 4SukukSize of outstanding and percentageSize of outstanding sukuk1 RM112.2 billion(excluding government sukuk)% of outstanding sukuk to total outstanding bonds 49.0%Sukuk approved by the SC in Q1 2007Number of sukuk 12Size of sukuk RM3.76 billionSize of total bonds approved RM13.22 billion% of size of sukuk to total bonds approved 28.46%1 As at end-April 2007.Chart 3Sukuk approved based on various Shariah principlesBai` bithaman ajil (BBA) 6.38%Musyarakah21%Murabahah16.48%Ijarah17.27%Istisna`38.61%Q1 2007We appreciate your feedback and comments. If youwould like to know more about the Malaysian Islamiccapital market or require further information from theSecurities Commission, please contact:Mr Nik Ruslin Nik JaafarIslamic Capital Market DepartmentTel: 036204 8000 ext 8589E-mail: ruslin@seccom.com.myDr Md Nurdin NgadimonIslamic Capital Market DepartmentTel: 036204 8000 ext 8105E-mail: nurdin@seccom.com.myMr Syed Azhan Syed Mohd BakhorIslamic Capital Market DepartmentTel: 036204 8000 ext 8376E-mail: azhan@seccom.com.mySecurities Commission3 Persiaran Bukit Kiara Bukit Kiara50490 Kuala Lumpur MalaysiaTel: 036204 8000 Fax: 6036201 5082Website: www.sc.com.myPrinted by:Good News Resources Sdn Bhd6-1-8 Meadow Park Jalan 1/130 Off Jalan Klang Lama58200 Kuala Lumpur Malaysia

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