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Islamic Finance In Melaka – Malaysia

Investment and Financing Opportunities in the Malaysian


Financial Sector - Dunia Melayu Dunia Islam Finance House

Azuddin Jud Haji Ismail


azuddinjudismail@digitalmelaka.com
Outline

• Malaysian economy - Outlook

• Asian financial crisis – 10 years since

• Financial sector developments

• Malaysia as an International Islamic


Financial Centre

• Investment & financing opportunities in


Malaysia
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Favourable economic conditions with positive outlook…
Stable economic growth….with low inflation and unemployment, stronger domestic based growth

Stable
Diversified and flexible
growth at 5.7%
economic structure
for Q2 2007

Low inflation
(2% @ 30 June 2007)
Strong Economic Strong domestic
Fundamentals demand conditions

Low unemployment
(3.4% @ Dec 2006)
High gross national
savings
(38.1% of GNP)
Strong reserves
(RM59 b @June 2007)

3
Financial system significantly stronger since Asian financial crisis
Holistic approach addressed immediate needs, while putting in place strong foundation for long
term stability

Institutional arrangements • Danaharta removed NPLs from banking system, with statutory
established to stabilise powers to enhance recoveries
banking industry • Danamodal facilitated recapitalisation of affected banks
• CDRC formed to facilitate voluntary debt work-outs for corporates

• Prudential limits and provisioning policies tightened


Prudential framework
strengthened • Corporate governance strengthened
• Increased focus on risk management
• Improved surveillance mechanisms & financial transparency

• Merger exercise to consolidate fragmented banking sector


Structural elements
also strengthened • Rationalisation of banking institutions & finance companies into
BAFIN
• 50 (out of 54) domestic banking institutions consolidated into 10
domestic banking groups
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10 years on…strong, competitive and diversified banking sector

• Key financial indicators strengthened across


the board
• Nine domestic banking groups with strong
capitalisation
• More effective and competitive in meeting August
1997/98
economic needs 2007

– Wide array of products and services RWCR 10.5% 13.65%


– Large presence of world class foreign
banks (30% market share of assets) Net NPL Ratio (@ June 2007)
13.2% 4.1%
3-month classification
• Robust risk management practices and
infrastructure
ROA -0.3% 1.46%
– Stronger credit culture and governance
structure
ROE -4.5% 18.8%
– Centralised Credit Reference Information
System (CCRIS)
Average Capital size (RM) 46,216m 80,228m
• More diversified financial system with
developed bond market
• Financing raised through bond market
accounts for 24% of total financing by
banking sector and PDS (pre-crisis: 9.1%)
5
Comprehensive blueprint for financial sector development in Financial
Sector & Capital Market Masterplans

• Strengthened legal, regulatory and supervisory framework for financial institutions


• Emphasis on capacity building measures
• Diversification of financing structure with enhanced role for bond and equity markets
• Financing new growth areas e.g. SMEs, venture capital, agriculture, microfinance
• Gradual de-regulation to improve competitiveness and customers’ services

Financial Sector Capital Market


Master Plan Master Plan

Bank Negara Malaysia Securities Commission

2001 2003 2004 2005 2006 -2007 2010

Phase 1 Phase 2 Phase 3


Strengthen domestic capacity, and Intensify competitive pressure Assimilate into global market.
develop strategic and nascent in the domestic market and Introduce new foreign competition.
sectors gradually liberalise market access Enhance international positioning in
areas of competitive advantage

6
Recent financial sector initiatives reinforce continuing modernisation and
resilience of Malaysia’s financial system

• Investment banking framework successfully implemented


Structural
enhancements • Emergence of new delivery channels (internet banking,
bancassurance, financial advisers)
• Establishment of Malaysia Deposit Insurance Corporation (2005)
• Establishment of Credit Counselling & Debt Management Agency
(2006)

• Implementation of more robust capital adequacy framework with


Regulatory Basel II (for banks) and RBC (for insurers)
framework
• Move towards principles-based regulation with greater operating
flexibility
• Alignment with international standards (e.g. FRS 139)
• Strengthened AML/CFT regime
− affirmed by positive APG Mutual Evaluation Report 2007
which assessed Malaysia to be compliant (C) or largely
compliant (LC) with 33 our of 49 FATF recommendations
• Consumer education, awareness and protection

7
Malaysian bond market among most developed in the region
The bond market represents a major structural enhancement of the financial system to support
economic growth and financial stability.

Malaysia’s position
(Size of Bond Market in % GDP) • In terms of relative size to GDP,
Malaysia ranked second after Japan

250 • Total bonds outstanding increased at


average annual rate of 12.9% since
1998, underpinned by steady y-o-y
200
increase in bond issuances
150 96.9, RM415.9 b • Initiatives to develop bond market has
improved liquidity, diversified product
100 base, issuers and investors, enhanced
price discovery and supporting
50 infrastructure

0
CN IN TH HK SG KR MY JP

Source: Asian Bonds online, Dec 2005

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Global recognition
…has increased attractiveness to foreign investors and issuers

• Leading centre of origination for sukuks


– accounting for 67% of total global sukuks outstanding
– first country to issue sovereign global sukuk
– supportive environment has attracted multilateral organisations to issue ringgit
sukuks
– tax incentives for private sukuks
• Included in major bond indices
– Lehman Brothers
– JP Morgan
– World Government Bond Index (WGBI) in 2007
• Foreign exchange administration policies relaxed further to allow issuance of foreign-
currency denominated conventional bonds or sukuks in Malaysia
• As at end 2006, foreign investors’ holdings in bond market was RM35.5 billion from
only RM0.8. billion in 2001

9
Liberalisation of the financial sector & financial market

FINANCIAL SECTOR
• Significant foreign participation in financial sector
• accounting for 30% and 70% of market share in terms of assets in banking & insurance sectors
respectively
– flexible expatriate policy
• Foreign shareholding limits have been raised further to foster strategic alliances in new areas of activity
– from 30% to 49% in insurance, investment banking and new Islamic banks/takaful operators
• New Islamic banking and takaful licences

FINANCIAL MARKET
• Foreign investors are free to make portfolio investments
• No restrictions on repatriation of capital, profits and income
• May obtain financing from licensed onshore banks in ringgit or foreign currency
• May enter into FX contracts with licensed onshore banks for hedging
• Free to convert foreign currency into ringgit and vice versa
• Tax incentives on holdings and secondary market transactions:
 Exemption from withholding tax on interest income from investments in ringgit denominated
MGS and corporate bonds
 No capital gains tax
 No stamp duty
• Free entry and exit of foreign investors – funds
10
Further liberalisation in foreign exchange administration policies carried
out in 2007

Reduce Facilitate Promote Widen


cost of risk liquidity investor
doing manage & base
business ment diversity

• 15 additional liberalisation measures announced, with expanded investment


opportunities & increased flexibility for non-residents
– can utilise proceeds from IPO on Bursa Malaysia abroad
– no limit & expanded scope for use of ringgit overdraft facilities by stockbroking
companies and custodian banks to avoid settlement failures
– no limit on number of residential & commercial property loans
– can settle ringgit assets through overseas branches of licensed onshore banks
– can transact in ringgit financial products through Labuan offshore banks
• WEF 1 Oct 2007 – abolishment of 5 Registration Requirements & 1 Reporting
Requirement
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Investment & financing opportunities in Malaysia’s financial sector

• Foreign shareholding permitted up to:-


Equity participation
– 30% in banking
– 49% in Islamic banking, investment banking, insurance,
reinsurance, takaful, retakaful, insurance broking & loss
adjusting
• Business partnerships to penetrate new markets &
Strategic alliances
distribution channels, develop new products & provide
technical support in specialised areas

• International Islamic Bank & International Takaful Operator


New licenses
• Professional reinsurance (life & general)

• Multilateral development banks, multilateral financial institutions


Fund raising and multinational corporations can raise ringgit and foreign
currency-denominated bonds in Malaysia
• To date, 4 MDBs and 1 quasi sovereign have issued ringgit
denominated bonds in Malaysia totaling RM3.76 billion
12
Promoting Melaka as a shared services and outsourcing (SSO) centre
….Multinationals are encouraged to set up SSO hubs in Malaysia

Malaysia’s • 3rd most attractive outsourcing : AT Kearney 2005


comparative • Top in customer service & back-office processing: Deloitte 2005
advantage • 3rd most attractive for US market after India & China: McKinsey
2005
• Top SSO centre for finance, energy & logistics sectors: Frost &
Sullivan 2005

Conducive environment with incentive packages

Malaysian Industrial Development Multimedia Development Corporation (MDC)


Authority (MIDA)
•Tax exemption, unrestricted foreign • Companies with MSC status eligible for tax
currency borrowing, flexible exemption; grants; world-class infrastructure
expatriate requirements and guaranteed services; freedom on equity
•Available to operational HQ, regional ownership, sourcing of funds & recruitment of
development centres and K-workers; intellectual property protection &
international procurement centres cyberlaws
• INVEST Melaka Corp • K-Economy : Melaka Chief Minister Office
13
Tremendous prospects for Islamic Finance in Malaysia with
industry reaching mainstream relevance...
Strengthening International
Linkages

Growing
Opportunities
in Islamic Finance MIFD Slide 18

Islamic Finance
Gateway
Strong domestic
Islamic Favourable Global &
financial industry – Asia Economic Platform to tap global
Diversity of players Growth business opportunities
& sophistication • Origination, issuance &
of products trading of Islamic
financial instruments
including capital market
Asia’s Potential instruments
in Islamic Funds & • Fund & wealth
management
Slide 15 Investment
• International currency
Islamic financial business
• Takaful & ratakaful
• Centre for education
14
Slide 16
Slide 17
Malaysia’s Islamic finance…achieving comparative advantage in
Islamic finance – Positioning DMDI Finance House

Diversity of players
• Domestic IBIs (2 Islamic banks, 9 IS)
• Foreign IBIs (3 IBs, 5 windows) Focus on international currency business
• Takaful operators (9) (out-out business)
• Retakaful operators (3)
• ICBUs (15), IIB (1)
• Fund managers

Conducive operating environment Strong in domestic business


• Comprehensive infrastructure – vibrant Islamic Islamic money Islamic capital
money and capital markets market market
• Tax neutrality
• Liberalised foreign exchange rules Banking Capital Market Takaful
• Liberalisation of equity ownership Players Players Players
• Dedicated division in High Court for Islamic finance
• More convergence in Shariah rulings with centralized Total solution for talent development
Shariah Advisory Council (INCEIF, ICLIF, IBFIM, SIDC)

Strong domestic market (as at end-2006) Solid foundation


• Islamic banking assets : 12.2% (RM133 b) (Robust Legal, Shariah, Regulatory infra)
• Takaful assets : 6.1% (RM6.9 b)
• Islamic PDS : 49.6% of outstanding PDS (RM114.5b)

Slide 14 15
Increasing wealth in Asia provides larger source for Islamic finance
International Reserves % Gross National Savings/GDP US$ tril HNWI Wealth
US$ bil 40
5,000 50
4,500 45 35
0.8
ME 0.7
4,000
40 0.6 1.2
3,500 30 1 4.2 Africa
35 Developing Asia 0.8 3.7
3,000
25 3.4 Middle East
2,500 30 7.6
7.1 Latin America
2,000 25 Newly industrialized 20 6.6
1,500 Asian economies Asia Pacific
20 15
1,000 World 9.3 10.2 North America
15 8.5
500 Europe
10
0 10 UK
2000 2001 2002 2003 2004 2005 2006e
5 5 8.6 8.9 9.4
World Asia (incl Japan) 0 US 0
2004 2005 2006e 2007f
2003 2004 2005
Source: IMF World Economic Outlook Sept 2006 Source: IMF World Economic Outlook Sept 2006 Source: World Wealth Report 2006

World’s wealth
25.0%
 Positive economic growth, coupled with Asia’s booming 21.3%
19.3%
economies and increase in petrodollars, increase countries’ 20.0% HNWI Population Growth
reserves with Asia dominates total world reserves 14.7% 14.4%
15.0% 13.5% 13.4%
 Savings rates of Middle East and developing Asia countries 11.8%

are on upward trend, higher than the world’s savings rate 10.0%
6.8%
4.5%
 High savings will ensure sustained private consumption 5.0%
moving forward amidst moderate global economic
growth 0.0%

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 Driven by real GDP gains and continued market re

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capitalisation, total HNWI’s wealth also expanding and thus,
So

Sa
provides potential for Islamic finance Source: World Wealth Report 2006
Slide 14
MIFD
Since 2000, accumulated
Gateway for Islamic
finance between
petrodollars: USD1trillion
regions
Europe share
of Gulf
wealth
US share of eroding
Gulf wealth
eroding Asia’s growing oil demand
ME to Europe & trade influence, attracting
Gulf wealth
Intra-regional

ME to US
ME to Asia-
Pacific

Malaysia is in the right position to


Predominant direction of
become an effective gateway… investment flow earlier

Attracting investment flow Fund raising New emerging


investment flow
• Foreign investment flows from • Khazanah Nasional Berhad’s
GCC in 06/07: USD450bn exchangeable sukuk worth
USD750 m
• Foreign capital injection in
Islamic banks of RM1.7b • IFC issued RM Islamic bond
(RM500m)
• Baitak Fund by KFH in property
sector of USD600m • World Bank issued RM Islamic
bond (RM760m)
Slide 14 17
Strategising Malaysia’s position to become a Centre for Education
Excellence in Islamic finance

SIDC of
INCEIF
HUMAN CAPITAL DEVELOPMENT IN ISLAMIC FINANCE

IBFIM ICLIF SC
Level of knowledge: Level of knowledge: Focus: Focus:
Elementary Intermediate & Leadership Training
advanced programs courses in
Focus: Islamic
Short training courses Focus: Capital
to meet industry’s International Market
needs professional
certification and post-
graduate programs

Institutions Other
of higher training
learning providers

18
Meeting the education needs of all levels of Islamic finance practitioners
MIFC
Gateway for Islamic
finance between
regions

Conducive environment Global Integration

Offers flexible Flexible regulatory • Expand opportunities to


Tax incentives opportunities & forex policy build linkages on Islamic
• 10 years exemption -
finance - MOUs –JBIC,
management fees received
DFSA, QFRA
by Islamic fund managers Flexible structure:  Flexible shareholding
managing Islamic funds of • IIB, ITO & enjoy 10-year structure and relaxed • Foreign equity
foreign & local investors tax exemption policy on property participation – relaxed FIC
ownership Rules
• 5 years tax exemption on • ICBU - to conduct the full
profit of newly for Malaysian range of Islamic banking • Strategic alliances in
 Enabling platform in
banks going abroad services in international human capital
the origination,
currencies with non- development – INCEIF
• Tax exemption on SPV issuance and trading
residents and residents signed MOUs few
of sukuk strategic partners
• Tax deduction - expenses in
establishing Islamic stock • Flexibility to Labuan  Liberalised forex • Cross border product
broking firm offshore Islamic rules- allow issuance development e.g. the first
institutions to open
of RM & non-RM IDMA and Commodity
• Full stamp duty exemption offices anywhere in
sukuk Murabahah House
for 10 years Malaysia
• Pre approved
No limit on number of • Engagement in adopting
• Withholding tax exemption rating for issuer:
licences to be issued for international standards
on profit from holding RM & ‘AAA’ for RM-deno
international currencies and best practices
non-RM Islamic securities and ‘A-’ for non-
business • Progressive R&D activities
RM deno
instruments – joint research19
Slide14
Useful links…

• http://www.bnm.gov.my - Bank Negara Malaysia


• http://www.bnm.gov.my/fxadmin - Malaysia’s Foreign Exchange
Administration system and rules
• http:// www.sc.com.my - Securities Commission Malaysia
• http://www.bursamalaysia.com - Bursa Malaysia
• http://www.lofsa.gov.my - Labuan Financial Services Authority
• http://www.pidm.gov.my - Malaysia Deposit Insurance Corporation
• http://bondinfo.bnm.gov.my - Bond Infohub (Beta)
• http://www.akpk.gov.my - Credit Counselling & Debt Management
Agency
• http://www.bnm.gov.my/bnmlink/index.htm - Laman Informasi Nasihat dan Khidmat
(LINK)
• http://www.inceif.org - The International Centre for Education in
Islamic Finance (INCEIF)
• http://www.iclif.org - International Centre for Leadership in
• Finance
• www.e-melaka.gov.my - 1 Stop State Govt Portal

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