consequences or results obtained from the use of this information.”

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NOVEMBER 2008 VOL 3 NO 4

Quarterly Bulletin of

Malaysian Islamic Capital Market

by the Securities Commission

Contents

1 Resilience of Islamic Finance

SHARIAH

2 Islamic Alternative to Stock Borrowing and

Lending

5 Appointment Of New SAC Member 2008–

2010

REGULATORY

9 Budget 2009: Towards a Vibrant Islamic

Capital Market

CAPITAL MARKET DEVELOPMENT

11 Sukuk

13 Collective Investment Scheme

FEATURES

15 Evolving from Meeting the Needs of Muslim

Savers to Becoming a Global Hub

18 Financial Contagion and Its Impact on

Private Equity

21 News Round-up

STATISTICAL UPDATES

22 Malaysian ICM – Facts and Figures

Background of Sub-prime

The sub-prime meltdown which began in August 2007

has brought down several of the long established and

large financial establishments in the US and Europe.

Major banks and other financial institutions around the

world have reported losses of approximately US$540

billion as of September 2008, and this has continued to

increase. Despite concerted efforts by governments and

central banks worldwide to cut interest rates and inject

massive liquidity into the stock market and the banking

system, the global crisis has yet to show any sign of

abating. Countries are already experiencing recession

while the more resilient economies are revising their

economic growth downwards.

Cause and effect

The sub-prime crisis was mainly due to collateralised

loan obligations (CLO), collateralised debt obligations

(CDO) and mortgaged-backed securities (MBS) which

were bundled and repackaged and combined with

swap and options (swaptions). They then led to

RESILIENCE OF

ISLAMIC FINANCE

page 7

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CLA

(Bursa Malaysia

Securities Clearing

Sdn Bhd

Lending Agent

Lender (Local brokers) Borrower’s Client

Borrowers

(Local brokers)

Shares Shares Shares Shares

Principal relationship Principal relationship Principal relationship

Diagram 1

PART II: ISLAMIC ALTERNATIVE TO STOCK BORROWING

AND LENDING

S H A R I A H

Part I of this article was published in the last bulletin

and it discussed the role of regulated short selling (RSS)

in the Malaysian capital market. It also highlighted

that the Shariah Advisory Council (SAC) of the Securities

Commission (SC) had resolved that RSS on eligible

securities is permissible provided the stock borrowing

and lending (SBL) structured is Shariah compliant.

Part II discusses how an Islamic alternative to replicate

SBL can be structured. Due to the rapid growth and

expansion of Islamic capital market (ICM), there is a need

for a suitable framework for ICM products and services

to meet the needs of both investors and players. The

SBL is part of a requirement and a tool to facilitate a

framework and products such as RSS and exchange

traded funds (ETF). Therefore, there is a need to develop

an alternative SBL which is in line with Shariah principles

to facilitate the market.

Since borrowing and lending securities involves riba

where the lender will charge the borrower interest on

the securities borrowed, what alternative can be

offered using the Islamic framework?

Generally, SBL refers to borrowing securities listed on

Bursa Malaysia. Parties involved in the SBL model are:

1. Lender

2. Lending agent (local brokers)

3. Central lending agency (CLA) (Bursa Malaysia

clearing house)

4. Borrower (local brokers)

5. Borrower’s client

Securities lenders are organisations or bodies

which hold a group of securities portfolio such as

insurance companies, unit trusts, retirement funds and

certain individual investors. The borrowers are

normally broking companies and international

investment banks.

Diagram 1 gives an overall view of the process of

SBL.

SBL usually involves short selling which is selling a

security that a seller does not own at the point of the

transaction. Islam, however, prohibits the selling of an

item which is not currently in one’s possession or in the

future because this involves the element of uncertainty,

or gharar.

Shariah-compliant replicated SBL

To ensure that the ICM products in Malaysia adhere

to Shariah principles, a detailed research was

conducted to develop a suitable alternative for the

conventional SBL. From the research, the SAC has

declared that SBL will be Shariah compliant if it

incorporates the principles of bai` and wa`d. Diagram

2 illustrates the workings of the Shariah-compliant

replicated SBL.

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November 2008 VOL 3 NO 4

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S H A R I A H

Diagram 2 illustrates the following:

1. Supplier sells the stocks to CFA as an outright

sale with a purchase undertaking (wa`d 1) to buy

from CFA whenever CFA sells the stocks.

2. CFA sells the stocks to the user as an outright

sale with a purchase undertaking (wa`d 2) from

the user that whenever CFA asks for them, the

user will sell the stocks to CFA.

3. Supplier’s right and interest to recall the stocks

is embedded in the rules and regulations of

“Shariah-compliant replicated SBL” where CFA

will sell the stocks to the supplier whenever the

supplier asks for them.

4. User’s rights and interest to sell the stocks is

embedded in the rules and regulations of

“Shariah-compliant replicated SBL” where CFA

will buy from the user whenever the user sells

the stocks to CFA.

5. Both rights and interests of the supplier and the

user are covered in the rules and regulations of

“Shariah-compliant replicated SBL” and made

known to all contracting parties upfront. This is

to ensure minimal issues with regard to Shariah

where two purchase undertakings of the same

contracting parties are in place.

Shariah-compliant replicated SBL is applicable to ICM

products such as RSS, Islamic exchange-traded fund

(ETF) and others.

Shariah views on RSS

Short selling involves the selling of shares not owned

by the seller and this falls under the category of bai`

ma`dum. Islam prohibits such transactions since the

delivery of the goods is uncertain and this brings about

the prohibited element of gharar (uncertainty).

However, with RSS, the gharar element is solved.

This is based on the rules and regulations outlined

by Bursa Malaysia which state that any party

performing RSS must satisfy one of the following

prerequisites:

i. Has borrowed the stock; or

ii. Has been given confirmation from an authorised

SBL agent that the short selling stock is

obtainable or ready to be borrowed

Based on the rules mentioned above, the RSS will only

be successfully performed if one of the above

prerequisites is satisfied.

Central facilitating

agent (CFA)

Supplier User

Bai` 1

Wa`d 1 Wa`d 2

Bai` 2

Diagram 2

”...the issue of gharar has been solved in RSS – the inclusion of

SBL principles in RSS eliminates the element of gharar. In

other words, the introduction of SBL can increase the

probability that the shares sold will be delivered. When the

probability of delivery is high, then the element of gharar will

no longer be significant.”

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Situation 1: RSS is performed after Shariahcompliant

replicated SBL

When Shariah-compliant replicated SBL replaces the

conventional SBL, the shares will be traded only after

all the prerequisites in Shariah-compliant replicated

SBL have been satisfied. With Shariah-compliant

replicated SBL, the particular traded stock becomes

owned by the party performing the RSS because the

party has purchased the stock. From the Shariah’s

perspective, the ownership is transferred from the

seller to the buyer as soon as the sale is performed.

If the Shariah-compliant replicated SBL is performed

but the stock has not been delivered to the buyer

who initiated the RSS, it is still permissible for the

buyer to sell the stock which is pending delivery, under

the qabd principle. This is in reference to the fuqaha’s

view in which it is permissible for a party to sell an item

(except food items) that is pending in delivery. What

must be understood is that the aqad of sale and

purchase has been initiated during the Shariahcompliant

replicated SBL process and that, in itself, is

sufficient in terms of ownership transfer.

It is therefore clear that the issue of bai` ma`dum and

gharar is not relevant in RSS, especially in performing

short selling, as the Shariah-compliant replicated SBL

will be engaged prior to that. However, this issue is

relevant when dicussing naked short selling.

In dealing with RSS, the normal sale and purchase

contract is applicable. In the situation above, there is

no need for the salam principle as the seller owns the

stock before the RSS is performed.

The discussion above is relevant where the Shariahcompliant

replicated SBL is performed before the

short selling is initiated.

Situation 2: RSS is performed after

confirmation is given on the Shariahcompliant

replicated SBL

In this situation, the seller can perform the RSS only

after receiving confirmation that the short selling stock

is obtainable or borrowable via SBL or Shariahcompliant

replicated SBL. Here, the seller must complete

the SBL as soon as the short selling is performed.

However, the issue of gharar has been solved in RSS –

the inclusion of SBL principles in RSS eliminates the

element of gharar. In other words, the introduction

of SBL can increase the probability that the shares sold

will be delivered. When the probability of delivery is

high, then the element of gharar will no longer be

significant. Consequently, when an obstacle which

hinders the recognition of a certain activity as Shariah

compliant is solved, then that activity can be classified

as Shariah compliant. This fulfils a fiqh methodology:

Meaning: When an issue that impedes (the

permissibility) is removed, then the activity which

was initially forbidden becomes permissible.

Conclusion

The existence of an alternative means to conventional

SBL is of high importance to Islamic finance, as it will

expand the number of products offered in ICM. This is

made possible with the issue of gharar rendered as

irrelevant. In RSS, the gharar element has been removed

from the equation via the existence of Shariahcompliant

replicated SBL that will act as a guarantee

to the transfer of ownership of the stock.

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APPOINTMENT OF NEW SAC MEMBERS 2008–2010

S H A R I A H

For more than a decade the SC’s SAC has been

contributing to the development of ICM in Malaysia by

advising the SC on Shariah-related matters. The SAC also

serves as a point of reference for all issues relating to

the ICM. Without doubt, its pivotal role in this area has

been fruitful. This can be seen from the breadth and depth

of ICM products and services such as Shariah- compliant

securities, sukuk, Shariah-based unit trusts and Islamic

fund management, Islamic stockbroking and Islamic REITs.

The SAC members comprise individuals who have

sound credentials in the area of Islamic jurisprudence

and who are in a position to present opinions on

issues and matters pertaining to the ICM. In addition,

they have vast experiences in the application of Shariah,

particularly in areas of Islamic economics and finance.

At present, the SAC consists of 10 members. Below are

the three newly appointed members.

1. Professor Dr Hj Abdul Samat Musa

Prof Dr Hj Abdul Samat Musa is currently the Dean, Faculty of Shariah and Law, Islamic

Science University of Malaysia (USIM).

Prof Dr Hj Abdul Samat obtained a BA in Islamic Studies in 1976. He holds an MA in

Comparative Law from University of Malaya (1980) and a PhD in Law from Manchester,

England. He started his career as a tutor in 1976. He was promoted to lecturer in 1979

and was appointed as Professor in 2002. He is a committee member for various

organisations within and outside UKM and USIM. He has written various books, journals

and articles on Islamic constitutions, governance and administration.

At present, he also serves as Chairman, Shariah Committee of RHB Islamic Bank and RHB Groups. In addition, he is

a registered Shariah Adviser for Islamic unit trust with the SC.

2. Associate Professor Dr Isma-Ae Alee

Associate Professor Dr Isma-ae Alee obtained his BA in Islamic Law (Shariah), and BA in

Islamic Calls (Dakwah) and Theology from the Islamic University of Madinah in 1977. He

completed his MA and PhD in Islamic Jurisprudence from the same university in 1981

and 1985 respectively.

At present, Dr Isma-ae Alee is a lecturer at the College of Islamic Studies, Prince of Songkhla

University, Thailand. He is also a member of Advisory Committee of Islamic Bank of

Thailand. This has provided him with an exposure on issues related to Islamic banking

and finance. Furthermore, he participated and presented various papers on Islamic

banking and finance in the seminars and conferences held in Saudi Arabia, Indonesia, Malaysia and Sri Lanka. He

has also written a few books on his area of expertise such as Introduction to Islamic Jurisprudence, Islamic Law of

Transactions and Islamic Law of Inheritance and Will.

Dr Isma-ae Alee also serves as Chairman of Halal Committee and Chairman of Islamic Charity Foundation for

Islamic Education in the South of Thailand.

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S H A R I A H

Shariah Legal Adviser

Shariah Section, Advisory Division

Attorney General’s Chambers

Former Chief Justice of the Federal Court

Malaysia

Very Distinguished Academic Fellow

Ahmad Ibrahim Kulliyyah of Laws

International Islamic University Malaysia

Mufti of Penang

Executive Director

BIMB Securities Sdn Bhd

Dean, Faculty of Shariah & Law

Islamic Science University of Malaysia (USIM)

President/CEO

Amanie Business Solutions Sdn Bhd

Lecturer

Law Faculty

Universiti Kebangsaan Malaysia (UKM)

Director

College of Islamic Studies

Prince of Songkhla University, Pattani Campus, Thailand

Lecturer, Department of Fiqh and Usul

Academy of Islamic Studies

University Malaya

Members of the SAC

1. Tan Sri Sheikh Ghazali Hj Abdul Rahman

(Chairman)

2. Tun Dato’ Seri Abdul Hamid Hj Mohamad

3. Datuk Hj Md Hashim Hj Yahaya

4. Sahibus Samahah Dato' Hassan Hj Ahmad

5. Dato' Dr Abdul Halim Ismail

6. Professor Dr Abdul Samat Musa

7. Dr Mohd Daud Bakar

8. Associate Prof Dr Abdul Halim Muhammad

9. Associate Prof Dr Isma-ae Alee

10. Associate Prof Dr Shamsiah Mohamad

3. Associate Professor Dr Shamsiah Mohamed

Associate Professor Dr Shamsiah Mohamed obtained her BA and MA in Shariah from the

University of Malaya in 1991 and 1995 respectively. She obtained her PhD in Shariah

from the University of Jordan in 1999. She specialises in fiqh muamalat, which deals

with socio-economic issues. She started her career as a tutor at the University Malaya in

1991. Since 1999, she has been lecturing in Department of Fiqh and Usul, Academy of

Islamic Studies, University of Malaya.

From July 2005 to July 2008, Dr Shamsiah was on secondment to the SC, where she

served as Specialist (Shariah) at the Islamic Capital Market Department. Her responsibilities included researching

on ICM-related matters from Shariah perspectives, and presenting the findings to the SAC members. She was also

involved in conducting training programmes for Shariah advisers registered with the SC and scrutinising sukuk

proposals from the industry.

Dr Shamsiah Mohamad has been a member of the Shariah Consultative Committee of Standard Chartered Bank

Malaysia Bhd since 2000.

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cover page

the creation of the sub-prime loans when interest rates

were low which then fuelled an artificial mortgage

growth, leading to a property bubble. In some cases,

the derivatives originated by the investment banks

surprisingly found their way back into the originators’

books. Thus, this time round, the investment banks

themselves became victims of their own doings.

In the early months preceding the crisis, proponents of

Islamic finance were quick to point out that the crisis

would not affect Islamic banks because Islamic finance

transactions are asset-based and shuns gharar –

excessive risk or lack of transparency. Critics on the other

hand say that the reason is simply because Islamic

finance has not achieved the level of sophistication of

the conventional finance and therefore, not exposed

to derivatives.

Impact to the GCC

The Gulf Co-operation Council (GCC) was not spared

the spill-over of the sub-prime crisis. The impact of the

sub-prime crisis on Islamic finance has become more

obvious by the day. The problem however was not from

sub-prime loans, although the GCC sovereign funds have

stakes in several of the troubled banks in the US and

Europe. Instead the causes were a combination of effects

from the decline in world oil prices and property bubble

burst. In anticipation of the local currencies appreciating

against the US dollar, investors in the GCC began

withdrawing funds when instead the dollar appreciated

thus causing further liquidity problems among the

banks. It was reported that one central bank in a GCC

country has intervened to rescue a bank. The banking

authorities in various GCC countries have begun

pumping in cash to ensure the banks can meet liquidity

requirements.

Impact to Malaysia’s Islamic finance industry

• The Malaysian Institute of Economic Research

(MIER) has revised its growth forecast for 2009 to

3.4% from its earlier forecast of 5%. The

government has introduced a multi-pronged

economic stabilisation package aimed at

mitigating a sharp slowdown in domestic demand

given the substantial weak external environment.

The contraction is expected to hurt banks’ income

and Islamic financial institutions will not be spared.

• Bursa Malaysia lost 40% of its value as at

31 October 2008. Shariah-compliant stocks (SCS)

also took a beating. The impact on the Islamic

indices, in most cases, was less severe compared to

the overall index because finance counters, being

the most adversely affected were precluded from

SCS. However, in some cases the off-set effects were

the absence of non-SCS but defensive large market

cap stocks such as tobacco, gaming and brewery

companies.

• The value of sukuk approved until September 2008

was RM24.6 billion, down from RM121.3 billion at

end–2007. In the near future, it is expected that

prospective issuers may reconsider issuing sukuk

as they face higher yields, and the fact that the

economic slowdown would require them to reexamine

their financing requirements.

“It is rather fortunate that

we have not fully liberalised

our banking and financial

infrastructure. Despite

recognising that foreign

participation is necessary to

help accelerate growth and

improve consumer choice,

Malaysia operates on a

gradual and phased approach

to liberalisation based on the

framework set out in the

Capital Market Masterplan.”

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• It is rather fortunate that we have not fully liberalised

our banking and financial infrastructure. Despite

recognising that foreign participation is necessary

to help accelerate growth and improve consumer

choice, Malaysia operates on a gradual and phased

approach to liberalisation based on the framework

set out in the Capital Market Masterplan. At each stage

of phased liberalisation, an assessment is conducted

on the impact and benefits of proposals. By adopting

these measures, Malaysia will meet its agenda of

building a resilient core of domestic financial

institutions and preserve financial stability.

When reality bites

Islamic finance does not operate in a vacuum as it coexists

and interacts with the global financial market

and economies. It will, therefore, be affected, albeit

perhaps to a lesser extent:

• Where Islamic finance is asset-based, it will be susceptible

to a property bubble burst, i.e. when the value of

the security falls and becomes inadequate to cover

the capital, e.g. the mortgage failures in the US.

• For Islamic financial centres which are highly

liberalised and where the foreign/conventional

players are market dominant, capital flights will

have a more serious impact on the market.

• A bank run (triggered by external factors) does not

differentiate between Islamic or conventional finance.

• There are other factors such as currency trades

and contingent liabilities (involving counter-party

risk) which may impinge on an Islamic bank’s

performance.

Challenges for Malaysia

Malaysia’s challenge lies in the following areas:

• Demands from rising inflation which put pressure

on the low interest rate regime when savings

cannot meet the demands;

• Capital flights and repatriations, which have

occurred;

• Since the Asian financial crisis, Malaysian banks too

have been aggressively extending retail credit in

the form of credit cards and refinancing of

mortgages with higher margins. How banks

manage the NPL during the contracting economy

will be of concern; and

• Property overhang is already evident by many

unsold commercial and high-end units with

developers deferring launch of new projects

indefinitely.

Conclusion

Events like the sub-prime crisis provide important

lessons to Islamic finance. The Islamic market is

not independent of the financial markets and is,

therefore, not totally insulated from any financial

crisis – regionally or globally. Thus, the Islamic finance

fraternity cannot afford to be complacent. Moving

forward, Islamic finance has to truly apply the Shariah

spirit not only in form but in substance as well.

Hopefully this will make Islamic finance more resilient

to economic crises.

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R E G U L A T O R Y

The Malaysian ICM offers a comprehensive regulatory

infrastructure, a range of financial intermediaries

and a variety of financial products. A significant

development was the innovation of sophisticated

Shariah-compliant products which have gained

worldwide acceptance and recognition.

Recognising the significance of the ICM, the

government offered a range of incentives in Budget

2009 to entice industry players, both local and abroad

to join the market:

• Tax exemption accorded for a period of three years

for fees and profits earned by institutions

undertaking activities on the arranging,

underwriting, distributing and trading of nonringgit

sukuk issued in Malaysia and distributed

outside Malaysia; and profits received by qualified

institutions from the trading of non-ringgit sukuk

issued in Malaysia.

• Double tax deduction for courses conducted by

BUDGET 2009: TOWARDS A VIBRANT ISLAMIC CAPITAL MARKET

the International Centre for Education in Islamic

Finance (INCEIF).

• Tax exemption on fees received by domestic

intermediaries which have successfully listed

foreign companies and foreign investment

products on Bursa Malaysia. This measure will

enable domestic investors to acquire shares of

foreign companies listed on the local exchange.1a

• Tax rate on dividends received by foreign

institutional investors from Real Estate Investment

Trusts (REITs) was reduced from 20% to 10%.

Recognising that REITs is also an attractive

investment product for individuals, the

government has also allowed a reduction in tax

rate from 15% to 10%.1b

• A five-year tax exemption for venture capital

companies that invest at least 30% of

their funds in start-up, early stage financing or

seed capital are eligible for1c.

1a, b, c These measures are applied to the broad capital market

Special Incentives for Islamic Capital Market

Capital Market Recipient Incentives Reference Legislation

Sectors: Products (if any)

and Services

Sukuk Issuer/ SPV

Issuer/ Originator

• As the special purpose vehicle (SPV) is established

solely to channel funds, the SPV issuing the sukuk is

exempted from income tax;

• The company which establishes the SPV is also given a

deduction on the cost of issuance of the sukuk

incurred by the SPV;

i. Income Tax

(Exemption) (No.14)

Order 2007–3 May 2007

ii. Finance Act 2007 –

Amendment to the

Income Tax Act 1967 –

New Section 60I

i. Income Tax (Deduction

on the Cost of Issuance

of The Islamic Securities)

Rules 2007–26 April 2007

ii. Finance Act 2007 –

Amendment to the

Income Tax Act 1967 –

New Section 60I

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Special Incentives for Islamic Capital Market (con’t)

Capital Market Recipient Incentives Reference Legislation

Sectors: Products (if any)

and Services

Islamic

stockbroking

services

Islamic fund

management

Non-resident

experts in Islamic

finance

Issuer

Investor

Investor

Investor

Issuer

Stockbroking

company

Fund

management

company

Islamic fund

management

company

Non-resident

experts in Islamic

finance

• Extension of deduction on expenses for sukuk issued

under Musharakah, Mudharabah, Ijarah and Istisna`

for another three years until the year of assessment

2010;

• Profit paid or credited to non-resident companies for

ringgit-denominated sukuk (exclude convertible loan

stock) approved by the SC is exempt from income tax;

• Profit paid or credited to any individual, unit trust

and listed closed-end fund in respect of sukuk

(exclude convertible loan stock) approved by the SC is

exempt from income tax;

• Profit paid or credited to any person for non-ringgit

sukuk originating in Malaysia (exclude exchangeable

loan stock) and approved by the SC is exempted from

income tax; and

• To ensure tax neutrality with conventional products,

any additional tax or duty is exempted or given

specific treatment provided that the Islamic capital

market products are approved by the SC’s SAC.

• Establishment expenditure incurred prior to the

commencement of an Islamic stockbroking business is

tax deductible, subject to the company commencing

its business within a period of two years from the

date of approval from the SC. (Effective for

applications received by the SC from 2 September

2006 until 31 December 2009).

2008

• Local and foreign-owned companies managing

Islamic funds of local and foreign investors to be

given income tax exemption on all fees received from

managing the funds. To be effective from year of

assessment 2008 until year of assessment 2016. The

funds must be approved by the SC;

• Islamic fund management companies are allowed to

have 100% foreign ownership;

• Islamic fund management companies are permitted

to invest 100% of assets abroad; and

• A sum of RM7 billion will be channelled by EPF to be

managed by Islamic fund management companies.

2007

• Local and foreign-owned companies managing

approved Islamic funds of foreign investors are

granted income tax exemption on management fees

from the year of assessment 2007 until year of assessment

2016. The funds must be approved by the SC.

• Income tax exemption to be given to income received

by non-resident experts in Islamic finance. The

experts have to be verified by the MIFC Secretariat.

Income Tax (Deduction for

Expenditure on Issuance of

Islamic Securities) Rules 2007

– 11 Jan 2007

Income Tax Act 1967 –

Schedule 6: Section 33A

Income Tax Act 1967 –

Schedule 6: Section 35

Finance Act 2007 –

Amendment to the Income

Tax Act 1967 – Amendment

of Schedule 6: Section 33B

i. Income Tax Act 1967 –

Section 2(8)

ii. Stamp Act – Schedule 1

“General Exemptions”

Income Tax (Deduction on

Expenditure for

Establishment of an Islamic

Stock Broking Business)

Rules 2007 – 15 February

2007

Income Tax (Exemption)

(No.6) Order 2008 – 24 July

2008

–

–

–

Income Tax (Exemption)

(No.15) Order 2007 – 31 May

2007

Income Tax (Exemption)

(No.3) Order 2008 – 17 May

2008

R E G U L A T O R Y

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C A P I T AL M A R K E T D E V E L O P M E N T

In February 2008, the Accounting and Auditing

Organisation for the Islamic Financial Institutions

(AAOIFI) announced that approximately 85% of the Gulf

sukuk are not Shariah compliant. This pronouncement

had an impact on global sukuk issuance especially the

issuance of sukuk musharakah.

The latest AAOIFI’s pronouncement that banned issuers

from “purchase undertaking” to purchase the sukuk

asset back from the sukuk holders at a nominal agreed

value at the end of the tenure of the sukuk or at the

point of default has impacted the global sukuk industry.

The sukuk structures directly affected by AAOIFI’s

pronouncement are sukuk musharakah, sukuk

mudharabah and sukuk istithmar. As a result, issuers

have opted to issue sukuk ijarah which is seen as a viable

alternative in the present situation.

This phenomenon can be clearly seen from the statistics

of global sukuk issuance using musharakah and ijarah

structures at pre and post AAOIFI’s pronouncement.

From March to June 2007, the issuance of sukuk ijarah

recorded less than US$1 billion while sukuk musharakah

recorded more than US$5 billion. This year, for the same

period during post AAOIFI’s pronouncement i.e. from

March to June, the value of sukuk issuance using the

ijarah structures showed an increase to more than US$4

billion while the issuance of sukuk musharakah has

sharply dropped to around US$1 billon.

The effects of the pronouncement has yet to be felt in

Malaysia. However, the global economic downturn

due to the global credit crisis has affected the overall

value of local sukuk issuance.

The following are some selected sukuk issuance from

August to October this year.

PLSA Group of Companies first foray into

the Islamic capital market

In October 2008, Projek Lintasan Shah Alam Sdn Bhd

(PLSA) issued a RM330 million sukuk ijarah and RM415

million sukuk mudharabah. PLSA is a joint venture

between Projek Lintasan Kota Holdings Sdn Bhd

(Prolintas) and Island & Peninsular Sdn Bhd, which are

wholly-owned subsidiaries of Permodalan Nasional Bhd.

PLSA has been awarded a 40-year concession to

undertake the design, construction, management,

operation and maintenance of the 14.7 km Lebuhraya

Kemuning-Shah Alam (LKSA).

Under the mudharabah structure, investors as rabb

al-mal contribute financing capital in the toll road

business and PLSA as mudharib issues sukuk to evidence

the investors’ participation in the venture. PLSA also

invites other investors, i.e. the sukuk ijarah investors to

part finance the project. PLSA will sell the trust asset to

be developed to the investors for a purchase price to

be paid on a staggered basis. Sukuk ijarah investors

subsequently entered into a forward lease agreement

with PLSA (lessee) to lease the trust asset for an agreed

period.

The sukuk ijarah and sukuk mudharabah were assigned

long-term ratings of A1 and A3 respectively by RAM

Ratings Services Bhd.

Sukuk Ijarah for shipping company

The SC has approved a RM370 million Islamic mediumterm

notes (MTN) programme issued by Syarikat Borcos

Shipping Sdn Bhd, a local shipping company specialising

in the provision of marine transportation and support

services for the offshore oil and gas industry. The

issuance comprised RM340 million sukuk ijarah MTN

and RM30 million bai’ bithaman ajil Islamic securities.

Based on the structure, the issuer enters into an istisna`

purchase agreement with the investors where the issuer

agrees to construct and deliver to the investors the

Ijarah assets (vessels) in consideration of a purchase

price. During the construction of the vessels, the

investors enter into a forward lease arrangement with

SUKUK

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the issuer (lessee) where the issuer agrees to make

advance rental payments which will be refunded to

the issuer if the vessels cannot be completed and

delivered.

The Islamic MTN programme has been accorded an

indicative long-term rating of A1 by RAM Ratings

Services Bhd. The proceeds from the issuance will be

utilised by the issuer to finance the construction of the

vessels, refinance existing bridging finance and for

working capital requirements which are Shariah

compliant.

Ringgit sukuk issuance by foreign entity

The SC has approved up to RM1 billion Islamic trust

certificate issuance programme under the principle of

mudharabah by Tadamun Services Bhd (Tadamun), a

special purpose vehicle incorporated in Malaysia under

the Malaysian Companies Act 1965. On 20 August 2008,

Tadamun issued its first tranche of the sukuk valued at

RM300 million.

Under the programme, Tadamun will purchase a pool

of assets from the Islamic Development Bank (IDB) and

hold it in a trust capacity for the benefit of sukuk

holders. The pool may comprise ijarah (leasing),

murabahah and istisna` contracts, originated by IDB.

The proceeds of the trust certificates issued under the

programme will be utilised by the Tadamun to purchase

the sukuk assets from IDB. IDB will, in turn, use the

proceeds from the sale of the sukuk assets for its general

corporate purposes which include but are not limited

to financing projects in Malaysia. Each trust certificate

will represent an undivided beneficial interest in the

portfolio of assets.

CIMB Investment Bank Bhd and Standard Chartered

Bank Malaysia Bhd were the joint lead managers of

the sukuk issuance which was assigned the AAA rating

by Standard & Poor’s.

Selected Sukuk Issuance

July – October 2008

• Projek Lintasan Shah Alam Sdn Bhd – Ijarah and Mudharabah

• Syarikat Borcos Shipping Sdn Bhd – Ijarah and bai’ bithaman ajil

• Tadamun Services Bhd – Ijarah, Istisna` and Murabahah

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The Islamic unit trust segment continued to grow with

the launch of six new funds to reach 149, while the net

asset value (NAV) increased by almost 4% to RM17.5 billion

as at end-September from RM16.9 billion as at end-2007.

The NAV of the overall unit trust industry, however,

decreased 12% to RM149 billion, in line with the decline

of KLCI and the global equity market.

Unit trust fund managers continued to diversify into

foreign markets following the liberalisation of the

threshold for investments abroad. During the first half

of 2008, 27 new unit trust funds were launched for

investment in foreign markets. During the same period,

11 funds had invested RM401 million in foreign assets,

bringing the total number of funds invested in foreign

markets to 160 with investments totalling RM13.3 billion.

The growth of real estate investment trusts (REITs) has

gradually gained momentum. The REIT industry is set

to grow further following the recent measures

announced in August to enhance Bursa Malaysia as a

destination for REIT listings and to promote a vibrant

and competitive REIT industry.

The measures include raising foreign equity in REITs to

70% from 49%, providing greater flexibilities for REIT

managers to manage their portfolios, and allowing REIT

managers to issue units up to 20% of its fund size

without having to seek a mandate from unit holders.

Axis REIT Managers Bhd is now targeting to be classified

as an Islamic REIT and adding the numbers to three Islamic

REIT after Al-Aqar KPJ REIT and Al-Hadharah Bousted REIT.

Below are some Islamic unit trust funds launched from

August to October 2008.

Public Islamic Select Enterprises Fund and

Public Islamic Income Fund

In August 2008, Public Mutual Bhd launched two new

Islamic funds, Public Islamic Select Enterprises Fund

(PISEF) and Public Islamic Income Fund (PIIF). PISEF is

COLLECTIVE INVESTMENT SCHEME

for investors who wish to participate in the long-term

growth potential of Shariah-compliant bell-weather

companies in the domestic market while PIIF caters for

those seeking a steady stream of annual income. PISEF

is actively managed and focuses its investment in the

largest 50 bell-weather companies in terms of market

capitalisation listed on Bursa Malaysia and complied

with Shariah requirements. The fund aims to achieve

capital growth over the long-term. It has an approved

fund size of 1.5 billion units and is targeted for medium

to long-term investors.

At the same time, PIIF seeks to provide annual income

over the medium to long-term period by investing in

sukuk and Islamic money market instruments. The fund,

which has 500 million units of approved fund size, will

invest up to a maximum of 60% of its NAV in sukuk in

the domestic market. The balance of the fund’s NAV

will be invested in Islamic money market instruments.

Sukuk provides a higher level of security for investors

as they are asset-backed securities supported by

underlying cash flows. In the event of a higher interest

rate environment, investing in sukuk allows investors

to capitalise on higher yielding sukuk with good credit

rating.

ING Annual Income Climate Structured

ING Funds Bhd launched its latest innovative product

in 10 September 2008, which featured the first closeended

fund that offers a five per cent annual income

distribution for three years plus potential capital gain

with 100% capital preservation in Australian dollardenominated

underlying assets at maturity in 39

months.

The ING Annual Income Climate Structured (Climate)

appointed Citigroup Global Markets Ltd as the

guarantor of the 5% income and the capital invested.

Its features provide a “safe” solution for investors

following their concern over preserving assets under

the current high inflation and uncertain market

conditions. Climate aimed to capitalise on companies

which focus on alternative, efficient and renewable

C A P I T AL M A R K E T D E V E L O P M E N T

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energy, fuel and transport development and

technology. This includes nuclear power, battery, solar,

biofuel and hybrid vehicles. Climate, which has an

approved fund size of 500 million units, is

benchmarking the Citi Climate Change Opportunities

Index which contains 10 to 30 global stocks selected

through stringent criteria.

HLG Shariah Inflation Select Fund

Hong Leong Group Unit Trust Bhd launched its latest

Islamic fund, HLG Shariah Inflation Select Fund on 25

September 2008. HLG Shariah Inflation Select Fund is

designed for investors who take a defensive approach

due to current inflationary concerns. The fund is an 18-

month closed-ended Shariah-compliant structured fund

which aims to reimburse investors their initial capital

upon fund maturity as well as to gain potential returns

from an environment of rising inflation. Its strategy is

to leverage on potential of inflation hedge sectors such

as consumer staples, agriculture, oil and mining.

The fund, which has 600 million units of approved fund

size has been structured to seek potential returns

benchmarked against the performance reference to

companies that might benefit from an environment of

rising inflation. As such, the fund’s potential returns

are benchmarked against three baskets of reference

stocks in the agriculture, consumer, and oil and mining

sectors.

The fund is for investors who are seeking to preserve

the value of their investment capital, and at the

same time, wish to benefit from the potential upside

from sectors which stand to benefit from rising

inflation.

Am-Namaa’ Asia-Pacific Equity Growth

Am-Namaa’ Asia-Pacific Equity Growth (AM-Namaa’)

will be the first feeder fund to invest in the Asia-Pacific

equities with its investment managed out of Malaysia.

The Fund is from AmMutual, the retail brand under

Funds Management Division (FMD) of AmInvestment

Bank Group and will be exclusively distributed by Al

Rajhi Bank (Malaysia).

Launched on 11 August 2008, Am-Namaa’ is targeted

at investors who seek investment exposure to Asia-

Pacific (ex-Japan), with capital appreciation and

have a medium-to-long term investment goals. The

fund seeks to increase the value of investment in

the longer term by investing in listed equities and

equities-related investments and other Islamic

instruments that conform to the Shariah principles

across Asia-Pacific (ex-Japan).

The Am-Namaa’ has a maximum approved fund size of

200 million units and is offered at RM0.50 per unit. The

minimum initial investment is RM1,000 with subsequent

minimum investments of RM500 each.

Selected Islamic Unit Trust Funds Launched

August – October 2008

• Public Islamic Select Enterprises Fund and Public Islamic Income Fund

• ING Annual Income Climate Structured

• HLG Shariah Inflation Select Fund

• Am-Namaa’ Asia-Pacific Equity Growth

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The Islamic capital market (ICM) continues to entice

interest and enthusiasm from the global financial

community. For many, the stage of awareness and

understanding is over. They have begun to scan the

globe to quickly seize new investment and business

opportunities. Malaysia’s comprehensive Islamic capital

market offers many such opportunities, both to

domestic and global investors alike.

Malaysia’s success in building a comprehensive ICM can

be attributed to the foresight and pioneering efforts

of its policy-makers, finance professionals and Shariah

scholars who saw a need at the time, to create effective

institutions and instruments to mobilise savings to serve

the needs of Malaysia’s Muslim community and to

ensure that these savings could be effectively utilised

to promote economic growth.

From humble beginnings with the establishment of

Tabung Haji or the Pilgrims’ Fund Board in 1969 and

the first Islamic bank in 1983, there has been a natural

progression in development which has led to the

emergence of a distinct and vibrant Islamic financial

market and the availability of a full range of Islamic

banking, takaful and capital market products and

services.

Malaysia’s ICM has now achieved the necessary critical

mass. The leadership and support provided by the

government through the facilitation of policies and

incentives has ensured the effective translation of vision

and aspirations into reality over a relatively short period

of time. Its ICM has also thrived to the extent that it

now accounts for a highly significant portion of the

overall Malaysian capital market.

Islamic equities and sukuk

One of Malaysia’s traditional strengths is its diverse

EVOLVING FROM MEETING THE NEEDS OF MUSLIM SAVERS

TO BECOMING A GLOBAL HUB1

range of listed companies – with probably the best

offering of small and medium-sized companies in

ASEAN and the Middle East. In addition, they operate

in diverse industries, with companies which are assetbased

such as plantations, resources, properties as well as

in a broad range of manufacturing, service industry and

technology-based industry. From this large pool of

companies trading at attractive valuations, many of them

continuously strengthened their corporate governance

practices and increasingly focused on managing their

capital efficiently to generate greater shareholder

value. This has resulted in a steady stream of income

flow from dividends and capital repayments as well as

in terms of capital appreciation over the past decade.

These features, coupled with the fact that 85% of the

listed securities on Bursa Malaysia accounting for 63%

of total market capitalisation, are Shariah compliant,

implies that Malaysia has an attractive Islamic equity

value proposition. This is reaffirmed by the fact that

more and more companies going for IPO are voluntarily

seeking to have their Shariah-compliant status

determined by the SAC. This is a clear recognition of

the premium that Shariah-compliant status confers on

these companies.

Islamic equities best embodies the Islamic principle of

equitable risk-sharing. It is perhaps timely for corporate

leaders and fund managers to review the possibilities

of maximising the potential brand value of Islamic

industries. One possibility may be to shape a valueadded

definition of an Islamic corporation either as

defined by specific aspects of corporate governance,

ethical conduct and particularly through their

contribution to the development and well-being of

society. The creation of valuation premiums through

defining a distinctive Islamic approach in generating

shareholder value and the eventual ability to trade the

shares of these companies across different Islamic stock

markets certainly represents an exciting prospect.

F E A T U R E S

1 This article is based on the keynote address of Dato’ Sri Zarinah Anwar, delivered at the Malaysian Islamic Finance (MIF) Issuers &

Investors Forum 2008, Kuala Lumpur on 12 August 2008.

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Malaysia pioneered the development of the global

sukuk market with the launch of the first sovereign fiveyear

global sukuk in 2002. Since then Malaysia’s sukuk

market has experienced unprecedented growth, and

it has been acknowledged as one of the largest issuers

of sukuk over the years. In 2007, 76% of bonds

approved by the SC were sukuk. Challenging market

conditions this year has naturally had an impact on the

issuance of bonds but nonetheless, the first nine months

saw the approval of 36 sukuk issues totalling RM24.6

billion, accounting for 27.3% of total bonds approved

during the period.

There are several reasons why sukuk issuances from

Malaysia, whether denominated in ringgit or US dollar,

will continue to attract international investors and

issuers. First, Malaysia has a strong base of domestic

investors to anchor the distribution of a major sukuk

issue. Second, sukuk pricing for Malaysian-originated

issues are highly competitive and there is also strong

availability of expertise as well as an established

regulatory framework which meets both Shariah and

legal requirements.

Islamic unit trusts and fund management

The investment management industry is the fastest

growing segment of Malaysia’s capital market with

cumulative growth rates of 24% per annum. This

growth is expected to strengthen even further on the

back of various deregulatory and liberalisation

measures. These include the establishment of a more

facilitative regime for investment product approvals,

the easing of restrictions on investments abroad and

liberalised rules for the establishment of foreign fund

management companies. A range of tax and other

incentives for Islamic fund management companies

establishing operations in Malaysia, have already

generated strong interest from leading fund

management companies and international firms.

Recently, Malaysia announced the first batch of Islamic

fund management licences to Kuwait Finance House,

DBS Bank and CIMB Principal.

The presence of the international Islamic fund

management companies together with the five global

fund management companies already established

under an earlier liberalisation scheme, as well as some

of local major firms will help drive the growth and

vibrancy of the industry in Malaysia.

Malaysia’s expertise in manufacturing Islamic funds

lends itself to providing a strong complement to the

development of the Islamic fund management industry.

The industry is still growing at a considerable pace and

demand for unit trust products continue to be strong.

Shariah-compliant unit trust funds chalked up sales

totalling RM2.96 billion this year, a growth of 84%

compared to last year. The robust growth in this market

segment is really significant when compared to the 11%

growth in net sales for conventional products over the

same period.

The strong growth is a reflection of the increasing

innovation capabilities in the Malaysian industry. There

have been many recent product offerings providing

features of capital protection, with only a portion

invested in structured products like swaps, options and

hedging instruments for a wide range of underlying

assets including currencies and commodities. This

development suggests that irrespective of overall

market conditions, there are opportunities for market

intermediaries to innovate and cater for investors'

appetite for products with sufficient risk mitigation

features. Malaysia has also approved products for

offering in other regional markets; indicating new areas

of growth to increase market share. Therefore, the

F E A T U R E S

“… Malaysia has a strong

base of domestic investors to

anchor the distribution of a

major sukuk issue. ….. sukuk

pricing for Malaysianoriginated

issues are highly

competitive and there is also

strong availability of

expertise as well as an

established regulatory

framework which meets both

Shariah and legal

requirements.”

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challenge is for intermediaries to be innovative in their

Shariah product offerings with more structured

features capturing the entire horizon of investibles in

line with changing appetites of investors. The

exploration of new greenfield markets capitalising on

Malaysia's lead position in product development would

certainly be another area of growth.

Shariah governance and investor protection

To meet the topmost requirement of investors seeking

Shariah-compliant products, Malaysia offers a

consistent, reliable and robust Shariah-compliance

framework. The thinking and opinions of Malaysia’s

Shariah scholars are well researched and relatively well

documented.

Certainty, consistency and clarity of the rulings are

facilitated through the establishment of a single forum,

a national Shariah Advisory Council (SAC) for the Islamic

capital market which was established by the SC since

1996. Membership of this council comprises highly

qualified Malaysian individuals with wide international

exposure and international scholars within the region.

The SAC was established under the Securities

Commission Act 1993, and serves as the sole authority

for the issuance of rulings and guidelines on the Islamic

capital market.

A key aspect of Malaysia’s regulatory approach is to

ensure that investors in Malaysia’s Islamic capital

market receive the same degree of clarity, certainty

and protection as an investor in the conventional

market. Malaysia emphasises a common regulatory

approach based on IOSCO’s objectives and principles

of regulation. The requirements for disclosure,

transparency and governance apply equally to both

Islamic and conventional products, thus ensuring that

an investor in an Islamic product receives the same

legal and regulatory protection and recourse that would

be available to the investor of a conventional product.

Conclusion

The Islamic capital market provides us the most

potential for a sustainable competitive advantage. It is

the most liberalised sector of the Malaysian capital

market; has been a trailblazer in innovation, recording

numerous world firsts in regulatory and product

development since 2002; achieved tremendous growth

and has propelled the country to the global stage.

But there is still so much more that Malaysia can do to

enhance the value proposition of its Islamic capital

market to both domestic and global investors. Energy

and resources need to be continuously invested to

enhance capabilities and competitiveness to attract

more players and to strengthen its distribution

capabilities by addressing bottlenecks and inefficiencies

in the intermediation process, while at the same time,

pursuing linkages with other markets to enable greater

cross border flows. Although Malaysia has the products,

the delivery channels particularly in reaching investors

across its borders are still not fully developed. Similarly,

Malaysia would benefit from the listing of international

Islamic products ranging from equities, sukuk as well

as the increased availability of fund products from other

Islamic centres.

Therefore, even as Malaysia pursues developmental

initiatives to widen access of its markets to regional

and global issuers and investors, it is equally important

for its domestic intermediaries to increase their visibility

abroad and to enhance their focus on regional and

global expansion. In this regard, a number of Malaysian

intermediaries have already taken steps to forge

strategic alliances with intermediaries in other

jurisdictions and are venturing into regional markets,

enabling them to acquire skills and expertise on new

products and overseas investments. Their ability to

partner with other players and leverage off each other’s

strengths in product manufacturing and distribution

will inevitably expedite the growth of Islamic markets

and intermediaries.

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FINANCIAL CONTAGION AND ITS IMPACT ON PRIVATE EQUITY2

The financial crisis in developed countries in the West is

already affecting Asia. While Asian institutions generally

have a relatively low direct exposure to the “high-risk”

structured products, the shockwaves radiating from the

financial distress of global investment banks and other

financial intermediaries have led to increased risk

aversion among lenders and investors.

Inevitably, private equity investors are also exposed to

the effects of the contagion. Regional stock markets

have fallen sharply making it difficult for companies to

finance deals and for buyers and sellers to agree on a

price. Buyers are demanding cheaper bargains to take

into context the current valuations while sellers are

reluctant to sell at a price influenced by the distressed

financial conditions. Financing for transactions comes

at much higher costs while long-term return estimates

need to be trimmed to take into account the more

somber economic environment. Languishing stock

markets do not create an appealing exit mechanism

for the venture capitalist. In Silicon Valley, there is a

dearth of successful public offerings where only six

venture-backed technology and healthcare start-ups

have gone public this year (as opposed to 86 such

companies last year) and only two are trading above

their offering price.3

On the other hand, distressed financial conditions also

mean that there are more “cheap” assets to buy.

Investor like Warren Buffet has made bold investments

at this time, and it appears the upheaval in global

financial markets has created opportunities for the

private equity investor that is long on cash and long

on time. In fact, private equity/venture capital (PE/VC)

funds have been reported to be discreetly buying blocks

of companies that just went public or undertaking

Private Investments in Public Stocks (PIPEs)4 specifically

2 This article is extracted from the keynote address delivered by the SC Managing Director, Dato Dr Nik Ramlah Mahmood at the AVCJ

Private Equity and Venture Forum, Kuala Lumpur on 15 October 2008.

3 International Herald Tribune “Credit crisis spreads a pall over Silicon Valley” October 3, 2008 and NVCA website.

4 PIPE refers to the purchase of stock in a company at a discount to the current market value per share for the purpose of raising

capital. There are two main types of PIPEs – traditional and structured. A traditional PIPE is one in which stock, either common or

preferred, is issued at a set price to raise capital for the issuer. A structured PIPE on the other hand, issues convertible debt (common

or preferred shares). E.g. of a VC undertaking PIPE is Battery Ventures.

capitalising on the consolidation of cash-rich but

fragmented industries.

The current financial environment has transformed

stock markets from being exit mechanisms into hunting

grounds for private equity investors. It is certainly a

reasonably easy task for the PE and VC investors highlyskilled

in nurturing start-ups to shift towards deploying

these skills on growing more matured companies and

franchises and to steer them safely through the current

difficult environment.

Certainly, the emergence of PE and VC investors as

major and active shareholders can bring immense

benefits to most companies in terms of their business

knowledge and in terms of strengthening corporate

governance and organisational capabilities, to unearth

greater efficiencies in management and to leverage on

their wider knowledge base and global relationships.

Their strengths are evident in adding to a company’s

appeal especially in penetrating new markets or in

attracting talent.

Opportunities in Southeast Asia

In the current market environment, it is hard to predict

with any degree of certainty where the best or value

for money opportunities will emerge. But certainly

Southeast Asia with its potential growth prospects and

strong economic resilience will command a premium

over other geographical regions.

The Southeast Asia market is big. With a population of

600 million, Southeast Asia houses nearly 9% of the

global population. While this is less than half of India

and China, nonetheless, it represents a large consumer

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market. Collectively, with a combined GDP of over

US$1.2 trillion (in 2007)5, Southeast Asia is comparable

with India which has a GDP of US$1 trillion.

Southeast Asia also offers diversity in terms of economic

structures, dynamics and competitive advantages. Some

countries have a strong agriculture sector, others are

not only rich in resources but also have a highly

competitive global manufacturing export base and

outsourcing centre. The region’s diversity makes it an

interesting playing field for PE firms which appreciate

the variety for asset diversification, and who believe

that growth opportunities can be found in different

markets within the region, even at a time when all the

economies are likely to be affected by the overall

downturn in the global financial market.

In addition, this is the time where the old adage “small

is beautiful” has greater appeal than “big is best”.

While the deal flow for large transactions may have

dwindled, there are ample opportunities in the small

and mid-market range in Asia. Many companies in

Southeast Asia are family-owned; hence deal sizes may

be smaller than those of China and India and therefore,

easier to finance.

Certainly, regulators in the Southeast Asia region

have taken measures to attract more PE and venture

capitalists to participate in its markets by creating a

more facilitative framework that provides greater

avenue for financing private equity entrepreneurs.

The Singapore Exchange in July 2008, announced

that it will consider allowing private equity and

“blind pool” funds and life-science companies

with no financial track record to list.6 Similarly

in Malaysia, the SC together with Bursa Malaysia

has embarked on transforming the MESDAQ Market

into a sponsor-driven market and to facilitate the

listing of both technology and non-technology

emerging companies.7

There have also been collaborative efforts by the ASEAN

securities regulators operating through the ASEAN

Capital Markets Forum to facilitate cross-border offers

in ASEAN. As a start, the working group on the

harmonisation of distribution rules for IPOs looked at

developing similar offering processes and a single

offering timeline.8 In fact, the ASEAN Finance Ministers

have announced the released of ASEAN + Plus standard

schemes to facilitate cross-boarder offering of securities.

The scheme aims to promote the integration of the

region’s capital market and will facilitate greater

efficiency in cross-border capital raising and provide

cost savings to issuer making multi jurisdiction offerings

within ASEAN. These efforts towards harmonisation will

augur well for the PE players in realising the fruits of

their labour and will be a plus point in attracting PE

investment flows into the region.

With all these positive attributes that Southeast Asia

offers PE and VC investors, it would be interesting to

find out where the investment opportunities are. There

are several industries in Southeast Asia which are as

competitive as their counterparts in China and India in

the areas of auto and automotive-related sectors,

tourism, agribusiness and food processing and business

process outsourcing. Views have also been expressed

that there are strong growth prospects in retailing and

housing given the increase in disposable income and

growing middle class. Additionally, some countries such

as Indonesia, the Philippines and Vietnam are rich in

commodities, mining and natural resources. Given these

opportunities, PEs with established local presence and

networks have the sourcing and execution capabilities

to exploit these opportunities.

Strong recognition in Malaysia for the

important role of the VC industry

The Malaysian venture capital industry has enjoyed

strong growth albeit from a small base. The total

investments by the VC industry grew by 54% from

RM1.1 billion in 2006 to RM1.8 billion in 2007. Malaysia

has long recognised the value that a thriving VC

industry will bring to its capital market – particularly in

terms of promoting new sources of growth and

transforming SMEs into PLCs. Under the Capital Market

Masterplan (CMP), the VC developmental agenda was

to adopt a light touch regulatory approach which generally

5 Source: IMF Global Economic Outlook Database, April 2008. Also cited in the SC Chairman’s speech on 26 June 2008 entitled

“Accelerating ASEAN Integration and Strengthening Capital Markets”.

6 Starbiz Friday 11 July 2008 “SGX may allow private equity and blind pools list”.

7 SC Press Release “Further details on capital market initiatives” – 25 March 2008.

8 SC Chairman’s speech on 26 June 2008 entitled "Accelerating ASEAN Integration and Strengthening Capital markets”.

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aimed at providing substantial support to nurture the

growth of the industry and to strengthen its capacity.

Given the VC’s business philosophy, its contribution to

the economy and recognising the fact that it is very

much an industry that seeks its funding from agencies,

institutional investors and sophisticated high net-worth

investors; Malaysia’s regulatory approach is to exempt

the VC companies and the VC management companies

from licensing requirements and to put in place a

registration requirement with light reporting

requirements for the purpose of compiling data on

industry development as well as to facilitate them to

enjoy tax incentives.

This was complemented by initiatives to create a more

conducive investment environment for the VC. In this

instance, the SC allowed the listing of technology

incubators, allowed funds9 to invest in VC and

continually strengthened MESDAQ as an exit mechanism.

The VC industry is also a fully liberalised industry which

recognises that foreign venture capitalists will bring

benefits to the development of the industry and

expedite the development of the talent pool through

the transfer of their expertise and experience. Indeed,

the agglomeration of foreign talent with the

knowledge of local players will not only strengthen

overall skill sets but also provide opportunities for local

players to form strategic alliances or to network with

foreign partners.

In September 2008, Malaysia witnessed the

participation of Japan Asia Investment Co Ltd (JAIC) as

the first registered foreign venture capital corporation

in Malaysia. JAIC’s entry adds greater depth and breadth

to the pool of players within the industry and increasing

the pool of private equity funding in Malaysia.

Taking cognisance that issues affecting the VC industry

spans across various ministries and government

agencies, one of the recommendations under the CMP

was to establish a one-stop agency to co-ordinate and

spearhead the development and promotion of the

industry. This led to the setting up of Malaysian Venture

Capital Development Council (MVCDC) in January 2005

under the chairmanship of the SC.

In 2007, the MVCDC was requested to lead a project

steering committee tasked to oversee and monitor a

study on venture capital industry with special focus on

funding.10 This is a significant milestone as findings and

recommendations from the study forms part of the

government’s National Innovation Model, or Malaysia’s

roadmap towards an innovation economy.

The government has been consistent in providing

extensive support not only in the form of facilitative

policies but also in terms of funding and tax incentives.

Under the Ninth Malaysian Plan, RM1.6 billion was

allocated to the VC industry to bridge the crucial

financing gap at the early stages of enterprise

development. This represents more than a two-fold

increase from the amount allocated in the previous

plan.11 Tax incentives for the industry were announced

in various budgets12 and most recently, under Budget

2009, the incentives were further boosted with the

announcement that VC companies investing at least

30%13 of their funds in start-up, early stage financing

or seed capital would be eligible for a 5-year tax

exemption.

Conclusion

While Southeast Asia may not be insulated from the

effects of global financial turbulence, opportunities

abound within the region for the PE and VC investors.

Being the regulator, the SC has a responsibility to

nurture the growth of this industry. Therefore, the

support from industry players both domestic and global

are most welcomed in order to create a more conducive

environment that is attractive and profitable.

9 Private funds (RIS and Wholesale) are not restricted to invest while public/retail funds can only invest up to 10% of the NAV in

unlisted securities.

10 The study identified current challenges in the industry and proposed strategic initiatives to enhance the industry’s effectiveness as

well as to improve the dependability of venture capital as a source of financing.

11 8th Malaysian Plan allocated RM690 million.

12 Budget 2000, 2004 and 2007.

13 This is in addition to previous tax incentives–tax exemption for 10 years for investing 70% of investment fund in seed, start up or

early stage or if 50% of investment fund is invested in the form of seed capital.

21

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November 2008 VOL 3 NO 4 ICM

NEWS ROUND-UP

Prudential Fund Management Bhd (PFMB) in Malaysia

and Prudential Asset Management Limited in the

Dubai International Financial Centre signed an MoU to

expand marketing co-operation and distribution of

Islamic funds in Malaysia and the Middle East on

20 August 2008. In Asia, Prudential’s asset management

business is one of the region’s largest. Based in Kuala

Lumpur, PFMB manages six Shariah funds and

Prudential BSN Takaful funds valued at RM629 million.

PFMB also manages offshore Shariah assets worth

RM294 million.

F E A T U R E S

Islamic fund co-operation between Malaysia and the Middle East

The MoU signing ceremony was witnessed by the SC Chairman, Dato’ Sri Zarinah

Anwar and Prudential Corporation Asia, Chief Executive of Fund Management, Arne

Lindman

The Malaysian International Islamic Centre (MIFC)

organised a country road show to Perth and Sydney, Australia

from 20–26 August 2008. Several meetings were held

with Australian regulators and corporations to

strengthen Malaysia’s position as an investment

gateway to the region for the origination, issuance and

trading of Islamic capital market and treasury instruments.

Bursa Malaysia organised a showcase in Taipei, Taiwan

from 27–29 August 2008. The objectives were:

• to promote Malaysia as an Islamic funds/investment

destination;

• to profile Islamic exchange-traded fund (ETF); and

• to evaluate Taiwanese investors’ interest in Islamic

financial markets.

The MIFC conducted its first road show to Kuwait and

Saudi Arabia to meet potential investors and promote

Malaysia as the international hub for Islamic finance from

22–27 October 2008. The delegation which was headed

by the MIFC Ambassador, the Regent of Perak Raja Nazrin

Shah, included representatives from regulatory bodies

and industry participants.

Road show to Taiwan, Australia and Middle

East

The Malaysian Islamic Finance Issuers and Investors

Forum 2008, organised by RedMoney Sdn Bhd was

held from 11–13 August 2008 in Kuala Lumpur. The SC

Chairman delivered a keynote address while Dato Dr

Nik Ramlah, the SC Managing Director moderated one

of the sessions at the forum.

On 15 October 2008, the SC organised the Shariah

Advisers’ Workshop on Derivative Products. As new

Islamic products are continuously introduced all

over the world, the SC realises that it is pertinent

for Shariah advisers to equip themselves with the

concepts and trading activities involved.

More than 70 participants comprising Shariah

advisers registered with the SC and Bank Negara

Malaysia, members of the SC’s SAC and Shariah

officers of Islamic financial institutions attended

the workshop.

Shariah Advisers’ Workshop

Malaysian Islamic Finance: Issuers and

Investors Forum 2008

22

November 2008 VOL 3 NO 4

malaysian

ICM

S T A T I S T I C A L U P D A T E S

MALAYSIAN ICM – FACTS AND FIGURES

Shariah-compliant securities on Bursa Malaysia

Number of Shariah-compliant securities – May 2008+ 843 securities

% to total listed securities 85 %

Latest Market capitalisation – Oct 2008 (RM billion)

Shariah-compliant 416.5

Total market 655.3

% of Shariah-compliant securities to total market 63.6%

Equity market indices 30 Sep 08 31 Oct 08 % change

KL Composite Index (KLCI) 1,018.68 863.61 -15.2%

FBM EMAS Shariah 6,913.91 5,853.46 -15.3%

FBM Hijrah Shariah 7,680.41 6,565.9 -14.5%

+ The SAC of SC releases the updated Shariah-compliant securities list twice a year in May

and November.

* As at September 2008.

+ The sukuk figure includes the approval of seven combination issuances (conventional

bonds and sukuk).

++ Figures from January–September 2008.

Sukuk

Sukuk approved 2007+ Q2-2008++

Number of sukuk 59 36

Size of sukuk (RM billion) 121.30 24.6

Size of total bonds approved (RM billion) 158.80 90.03

% of size of sukuk to total bonds approved 76.4% 27.3%

Sukuk issued 2007 Sep-2008++

Size of sukuk issued (RM billion) 72.9 37.66

% of sukuk issued to total bonds issued 57.2% 44.9%

Sukuk outstanding 2007 Sep-2008

Size of outstanding sukuk (RM billion) 135.8 146

% of outstanding sukuk to total 56% 56%

outstanding bonds

Shariah-based unit trust funds

Number of approved funds 2007 2008*

Shariah-based 134 149

Total industry 521 582

Net asset value (NAV) of approved funds

Shariah-based (RM billion) 16.90 17.54

Total industry (RM billion) 169.40 148.81

% of Shariah-based to total industry 10.0% 11.8%

140

100

110

120

130

80

90

70

60

50

Jun 07

Oct 07

Sep 07

Aug 07

Jul 07

Feb 08

Jan 08

Dec 07

Nov 07

Jul 08

Aug 08

Sep08

Oct 08

Jun 08

May 08

Apr 08

Mar 08

Chart 1

Performance of KLCI vs Shariah Indices

Index points (rebased to 100)

KLCI

FBM EMAS Shariah Index

FBM Hijrah Shariah Index

80

70

60

50

30

40

20

10

0

Balanced fund Sukuk fund Equity fund Others*

Chart 2

Shariah-based unit trust funds by category

No. of funds/NAV

No. of funds

Net asset value (NAV)

RM5.21 billion

RM9.54 billion

RM1.45 billion

RM1.33 billion

21

18

70

40

*Including feeder funds, fixed income funds, money market funds and structured

products.

Chart 3

Size of sukuk approved based on various Shariah

principles in Q3 2008

Mudharabah

2.9%

BBA

7.3%

Murabahah

3.2%

Ijarah

22.5%

Musharakah

64.2%

23

malaysian

November 2008 VOL 3 NO 4 ICM

S T A T I S T I C A L U P D A T E S

Issuer Shariah Size of issue Date of

principle (RM million) approval Rating

1. Cosy Bonanza Sdn Bhd Murabahah 570 03 Jul 08 Not Rated

2. Tadamun Services Bhd Ijarah, Istisna` & 1,000 18 Jul 08 AAA

Murabahah

3. Sepangar Bay Power Corporation Sdn Bhd Ijarah 450 22 Jul 08 AA

4. Syarikat Borcos Shipping Sdn Bhd Ijarah & BBA 370 25 Jul 08 A1

5. Dawama Sdn Bhd Musharakah 140 25 Aug 08 A+, A

6. TSH Sukuk Ijarah Sdn Bhd Ijarah 400 29 Aug 08 AA–,

MARC-1

7. Seafield Capital Bhd Musharakah 1,500 05 Sep 08 AA2

8. Rim City Sdn Bhd BBA 1,000 15 Sep 08 Not Rated

9. Chemical Company Of Malaysia Bhd Musharakah 500 16 Sep 08 AA3, P1

10. Projek Lintasan Shah Alam Sdn Bhd Ijarah, 745 16 Sep 08 A1, A3

Mudharabah

11. Bank Muamalat Malaysia Berhad BBA 200 18 Sep 08 Not Rated

RM-denominated Sukuk approved by the SC in Q3-2008

We appreciate your feedback and comments. If you

would like to know more about the Malaysian Islamic

capital market or require further information from the

Securities Commission, please contact:

Badlishah Bashah

Islamic Capital Market Department

Tel: 03–6204 8000 ext 8373

E-mail: [log in to unmask]

Zainol Ali

Islamic Capital Market Department

Tel: 03–6204 8000 ext 8666

E-mail: [log in to unmask]

Azmaniza Bidin

Islamic Capital Market Department

Tel: 03–6204 8000 ext 8280

E-mail: [log in to unmask]

Securities Commission

3 Persiaran Bukit Kiara Bukit Kiara

50490 Kuala Lumpur Malaysia

Tel: 03–6204 8000 Fax: 603–6201 5082

Website: www.sc.com.my

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