Following the phenomenal success of the inaugural Malaysian Islamic Finance Forum last year, Malaysia successfully hosted the MIF 2007 Issuers and Investors Forum on the 13th and 14th August at Mandarin Oriental, Kuala Lumpur.
MIF 2007 focused on Malaysia’s role as the dominant force in Islamic finance and how it could function to link the Middle East and Asian countries. Tan Sri Dr Zeti Akhtar Aziz, the governor of Bank Negara Malaysia, and Dr Nik Ramlah, senior executive director of the Securities Commission, delivered the keynote addresses. On the first day, the issuers’ day, there were 442 attendees with international participation at 21%. The second day — the investors’ day — witnessed an attendance of 433 including 25% from overseas. Delegates from over 35 countries attended this year’s event.
Dr Zeti during her keynote address focused on the vast growth potential of the global Sukuk market and Malaysia’s experience in strengthening the market for global Sukuk activities. She emphasized that Malaysia not only represents the largest Sukuk market in terms of outstanding size, but also in terms of number of issuance. “As part of our ongoing efforts to position Malaysia as an attractive gateway for the issuance of Sukuk, a number of legal and regulatory requirements are to be further customized to reduce the cost of Sukuk issuance. Profits and dividends received by non-resident investors from the holding of ringgit and non-ringgit Islamic instruments issued in Malaysia are exempted from withholding tax. Special Purpose Vehicles (SPVs) for Islamic financing purposes via the Islamic capital market are not subject to the administrative procedures under the Income Tax Act 1967. In addition, companies that establish these SPVs are given a tax deduction on the issuance cost of the Islamic securities incurred by the SPV. The issuance cost for all Islamic securities approved by the Securities Commission are also eligible for tax deduction. Finally, there is a stamp duty exemption for 10 years on instruments relating to Islamic securities under the Malaysian Islamic Finance Center. These initiatives have positioned Malaysia as a competitive and attractive Sukuk market in the global arena,” she elucidated.
The panelists on the issuers’ day discussed various topics that focused on the effect of the US sub-prime market on Sukuk issuance, the opportunities that Malaysia can offer issuers and factors that issuers need to consider before issuing Sukuk. The sub-prime market credit crisis in the US has indirectly caused the issuer to pay attention to the timing of the issuance. “The sub-prime market does impact the bond market. In the Islamic space there were a few transactions cancelled because the issuer felt the time was not right to go into the market. In my opinion, the current credit crises will bring some bad and good news. The bad news is that the issuer will face more covenants and a thin pricing. Nonetheless, there is a considerable amount of liquidity in the market and the Sukuk issuances will keep continuing,” said Salman Younis, managing director of Kuwait Finance House Malaysia.
Looking at the opportunities that Malaysia has to offer for issuers, Badlisyah, CEO of CIMB Islamic highlighted that, “In Malaysia, we have developed every single infrastructure to come and do business. We have a developed local Islamic capital market and with various incentives from the government, issuers can expect a customized structuring to meet their requirement at an efficient cost.” Salman added that Malaysia has done a lot for Islamic finance that no other country has. “We want to support innovation in this market and take it to the next stage. We would like to bring in issuers and inform them that there are alternative structures in Malaysia that have been successful. Malaysia has the framework, the track record and most importantly, the transparency. This is the right place,” he elaborated.
Mohd Izani Ghani, senior vice president of Khazanah Nasional, a successful issuer of the US$850 million exchangeable Sukuk, shares Khazanah’s experience on the factors that issuers need to consider before going for issuance. “First and foremost we must plan for the issuance i.e. we must decide when is the right time to tap the market. For example, if we are going for a road show for our issuance, July or August is not a suitable time to have it in GCC countries because they’ll not be there. They will be out on a summer vacation. In addition, we as the issuer must know what we want to achieve and select the right advisor for the issuance. The advisor must have structuring capacity and be able to offer the widest opportunities for us. Nonetheless we must be able to dictate to our advisor what they are expected to deliver. This will ensure the smooth running of the issuance process,” he recommended.
Dr Nik Ramlah Mahmood, the senior executive director of the Securities Commission Malaysia, highlighted during her keynote address on the investors’ day that the single most important catalyst for the development of Islamic capital market products and services in Malaysia was the establishment of the Shariah Advisory Council (SAC) at the Securities Commission. “Not only is the SAC able to respond to inquiries and proposals from the industry, often times, the SAC is also able to make pronouncements to encourage innovation from the industry. The guidelines issued by the SC such as those on Islamic unit trusts, Islamic REITs and Islamic securities, always attract considerable interest from across the globe,” Dr Nik observed.
Dr Nik also added that in order to encourage the structuring of new and innovative products, the government has introduced tax incentives for the use of globally accepted Shariah structures. “In relation to this, the government has provided tax incentives on expenses incurred on Sukuk issuance under the Shariah principles of Musharakah, Mudarabah, Istisnah and Ijarah because the issuance of Islamic securities based on these Shariah principles is expected to draw greater interest from foreign investors particularly from the Middle East since these principles are more well-known in the international market,” she elucidated.
Other issues that were
discussed on the investors’ day included the benefit of investing in Malaysia, the investment opportunities prevalent in the market and also the challenges that exist in the Islamic finance industry. Daud Vicary Abdullah, the chief operating officer of Asian Finance Bank, said that the biggest advantage that Malaysia has is a clear articulation of plans by the government. “The Malaysian government has in place the Financial Sector Master Plan that has been carefully planned and executed. This creates and connects the environment in a financial system — namely the banking, Takaful and money market. Malaysia also has a strong legal, tax and regulatory environment.”
According to Daud, sectors that will bring about a lot of opportunities in the Islamic banking industry include traditional ones like real estate and infrastructure and newer ones such as transportation (shipping and aircraft). Keith Driver, CEO of HSBC Amanah Takaful, highlights that Malaysia and Indonesia have the most potential growth. “If we analyze the population structure of these countries, the majority is made up of a young population. However, the younger generation is not attracted to buy insurance. What do we need to sell to them? We need to come up with a product to cater for this segment. Nonetheless, the younger generation will eventually get older and there’s our future prospect client for Takaful. That’s why there is high growth in these markets,” said Driver.
It was also agreed that Indonesia’s market represents the awakened giant. However, efforts to improve the regulatory framework are vital before development can take place. Besides Indonesia, India is also looking into developing its Islamic financial system. According to Taher Badshah, the investment adviser of Kota Mahindra Investment, India holds promising opportunities because it has strong economic growth and a fairly large Muslim population (10%). “There is no Islamic banking available to the Indian population. However, we have a strong equity market. A large number of Shariah compliant corporations are based in India. That’s why we are looking at Shariah compliant investment fund activities. For now, we are issuing funds for investors from outside India. Eventually, we will develop investment products for the local Muslim investors,” he highlights.
The discussion on the second day revolved around the Islamic finance industry as a whole facing a number of challenges. These include the need to modify the expectation of an investor. Currently, investors come into the market with the expectation of making high returns and only taking low risk. This is where consumer education could play a role. The most acute problem in Islamic finance is human capital. We lack qualified and experienced Islamic bankers, investment bankers, marketing teams, fund managers and lawyers. This is where education and training play a vital role to narrow the gap in the workforce. Improvement to the regulatory framework is fundamental to bring the industry forward because sometimes it is the law of the land that acts as the impediment. And last but not least, there is a vital need to work towards Shariah harmonization.
Concluding the two-day event, Abdulkader Thomas, the event chairman, highlighted a point that has put Malaysia at the forefront of the Sukuk market. “MIFC is a promising one-stop center that offers various infrastructure including underwriters, rating agencies, tax and legal consultants, the administrators, the custodial and body of Shariah scholars. Almost any idea that we see practiced in the Sukuk market was tested in Malaysia first. If on the day of its first test-drive in Malaysia a person far away may say it’s not Islamic, that same person today may be underwriting, investing or giving a fatwa on an updated version of the structure in their market. So, there is a really good innovative characteristic in this market. Certain things would not transmit (like Bai al-Inah); however, there is good overall quality of Shariah innovation here. I don’t see Malaysia as Shariah disadvantaged; I see it as Shariah enabled.”