The Islamic capital market will sustain its growth momentum over the next decade. Its next phase of growth will be characterized primarily by greater internationalization, which will help address some of the challenges faced by the industry and will provide Malaysia the opportunity to strengthen its position as a hub for Islamic capital market activities. This is the prediction of the Securities Commission of Malaysia, the securities regulator.
"Growth in the number of jurisdictions and industry participants that embrace Islamic finance," explained Nik Ramlah Mahmood, managing director, Securities Commission Malaysia at a recent forum in Kuala Lumpur, "will be a major factor in stimulating more cross-border transactions and activities. So will further development of standards and guidelines by international organizations, such as the Islamic Financial Services Board (IFSB) and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), as well as greater harmonization of Shariah rulings and interpretations, which will provide a more common platform for industry players to operate across jurisdictions."
The outlook for the Islamic capital market remains very promising, stressed Ramlah. "New markets, enhanced integration and liberalization of economies and financial markets are the themes that will help drive further internationalization of the Islamic capital market. These, coupled with coordinated and concerted efforts by all stakeholders including regulators and market players, will put the Islamic capital market in a position of strength," she added.
Indeed, the Islamic capital market industry is "in for exciting times ahead and ready to gear up for the next phase of growth".
Greater internationalization of Islamic capital market will manifest in a number of key areas including product and service development; the provision of legal, Shariah and other advisory and intermediation services; a movement toward Shariah-based products as opposed to Shariah-compliant products; the channeling of savings into investments that create real businesses and jobs; and greater product distribution channels across borders and jurisdictions.
"We are already witnessing increased level of cross-border activities involving Islamic Capital Market products and services in recent years - these include fund managers managing international mandates for investors outside the managers' home countries, diverse international representation of investors in sukuk issuances, and the offering of Shariah-compliant funds out of international centers such as Luxembourg, among others," maintained Ramlah.
Looking ahead, an increasing number and broader range of similar cross-border activities can be expected to feature more prominently in the Islamic capital market landscape. In addition, there will be more concerted efforts towards the Shariah-based, as opposed to Shariah-compliant, approach involving greater innovation of investment products that are structured based on more equitable risk-sharing arrangements and on productive, real economic activities.
The Shariah-based approach, more importantly, is also about the channeling of savings into investments that create businesses and jobs, which in turn will benefit the real economy. Financing in the form of (participatory contracts) of mudharabah or musharakah will facilitate more equitable risk sharing.
Indeed, the growing availability of such investment instruments and vehicles in the future will drive greater internationalization of the Islamic capital market as they will serve to widen the investor base.
Ramlah predicted that in tandem with the projected expansion in product development, product distribution channels will become more extensive, transcending national borders in order to bring the Islamic capital market products to the targeted investor base. In this regard, there will be increased cross-border collaboration among industry players as they leverage on each other's strengths and competitive advantages for mutual benefit.
"As the various countries intensify efforts to develop their respective Islamic capital markets, greater collaboration among these jurisdictions will facilitate cross-border initiatives to strengthen Shariah governance frameworks, which is essential to support the expansion in international product and service offerings. Similarly, we foresee more international collaboration in Shariah research in order to achieve cross-jurisdictional benefits, primarily to facilitate business expansion and secondarily for cost efficiencies," she added.
Malaysia's Islamic finance industry has grown rapidly in the last 10 years, accounting for 22 percent of the total financial assets currently, as compared to 6.9 percent in 2000. According to the Securities Commission, the Islamic capital market has contributed significantly to the growth of the overall Islamic finance industry in Malaysia. As at end-2010, the size of Malaysia's Islamic Capital Market stood at RM1.05 trillion, or 52 percent of the size of the overall Malaysian capital market, as compared to only RM294 billion as at end-2000. It has registered an average annual growth rate of 13.6 percent over the last 10 years.
This is represented by the market capitalization of Shariah-compliant companies listed on Bursa Malaysia which has grown to RM756 billion in 2010 from RM254 billion in 2000, and the value of sukuk outstanding which has increased to RM294 billion in 2010 from RM40 billion in 2000. In addition, the net asset value of Shariah-compliant unit trust funds in Malaysia has grown to RM24 billion from just RM1.7 billion during the 10 years up to end-2010.
Malaysia accounts for almost two-thirds of total sukuk outstanding globally as at end-2010. Malaysia's sovereign global sukuk offering in July this year is the world's first sovereign US-dollar global sukuk structured based on the principle of Wakala (agency). The oversubscription rate of 4.5 times for this $2 billion sukuk issuance, according to the commission, also signifies the wide international acceptance of Malaysia's Islamic capital market products.
Under the Capital Market Masterplan 2 (CMP2), launched earlier this year by Prime Minister Mohd Najib, the size of Malaysia's Islamic capital market is projected to reach almost RM3 trillion by 2020 with an average growth rate of 10.6 per cent per annum over the 10-year period. This growth projection is expected to be achieved primarily through the widening of the Islamic capital market's international base, which would also generate scale efficiencies.
Despite the tremendous strides made over the last decade or so, the challenges facing the Islamic capital market remain significant today. Issuers of Islamic capital market products continue to face challenges in relation to product innovation, development and structuring. In this regard, significant issues include harmonization of Shariah interpretation, distribution channels, documentation, skill sets, and legal, regulatory as well as tax frameworks.
Ramlah urged product issuers and service providers to put their Islamic funds and other products on global or at least regional distribution platforms in order to secure greater demand which in turn would enhance their product innovation and development capability. Facilitation for such distribution platforms, she advised, includes the establishment of regulatory arrangement that will enable accessibility and offering of products across jurisdictions. In this regard, the SC have entered into two Mutual Recognition Agreements (MRAs), with the Dubai Financial Services Authority and the Hong Kong Securities and Futures Commission, to facilitate the cross offering of Islamic collective investment schemes.
There is also a need to address the elements of uncertainty and disparity in the legal, regulatory and tax frameworks for Islamic capital market transactions, particularly in cross-border situations. In this respect, Malaysia has established relevant frameworks that put Islamic financial products effectively on the same playing field as their conventional counterparts. However, for Islamic capital market to progress further internationally, more jurisdictions would need to move in a similar direction.
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