Published in Asia Asset Management August 2008
With both Hong Kong and Singapore snapping away at its heels, Malaysia’s Islamic fund management industry is moving ahead with liberalisation measures and new products aimed at capturing a generous slice of the US$2.9 trillion worth of investible assets currently resident in the Gulf Cooperation Council (GCC) countries.
“As the Islamic gateway to Asia, Malaysia is in a unique position to intermediate capital flows between the GCC and Asia,” declares Datuk Ranjit Ajit Singh, managing director of Malaysia’s industry regulator Securities Commission. “Apart from its geographic location, Malaysia offers a unique proposition in terms of having an established Islamic capital market existing alongside its conventional capital market.”
In a show of innovation, Labuan-based AmanahRaya Investment Bank Ltd together with Middle Eastern-backed Asian Finance Bank (AFB), in June, launched a RM1 billion Safeena Islamic Marine fund, the first Shariah compliant shipping fund in Malaysia and the region. “We have come at the right time. There hasn’t been a shipping fund before in this region,” remarks Faisal Al Showaikh, CEO of AFB.
AmanahRaya Investment Bank is the investment arm of national trustee company Amanah Raya Berhad. AFB is 70% owned by the Qatar Investment Bank, 20% by RUSD Investment Bank Inc of Saudi Arabia and 10% by Global Investment House of Kuwait, and started operations in Malaysia in January 2007 as the third foreign Islamic bank in the country.
The Safeena fund, which may later be listed in US$ on Bursa Malaysia, is similar to a real estate investment trust (REIT) except that its underlying assets are marine vessels rather than properties. It is a ten-year, close-ended private fund with an expected annual yield of up to 10% and is meant for sophisticated and selected investors some of whom are expected to come from the Middle East and Malaysia.
Islamic Green Fund
Both AmanahRaya Investment Bank and AFB have also announced plans to introduce the world’s first Islamic green fund. This RM1 billion fund will invest in environmentally friendly projects such as carbon credit, incinerators, waste recycling and ethanol plants in countries as far flung as Bahrain, Sri Lanka and Malaysia. Investors are expected to come from the GCC states, Europe, the US and Malaysia.
“There is an outcry for innovation in Islamic banking,” Mr Faisal affirms. “We need to think outside the box and come up with something new all the time. We want to promote Malaysia as an international platform.”
Malaysia is already well-known as the worldwide market leader in Islamic bonds or sukuks, with the Malaysian sukuk market accounting for about 60% of the global sukuk outstanding, amounting to about US$100 billion as at end-2007. Malaysia’s volume of sukuk issuance swelled almost 68% year-on-year last year, with RM18.4 billion worth of sukuk proceeds raised from five issues, accounting for 46% of the sukuk market.
Shariah-compliant products now make up a major part of Malaysia’s capital market. Out of the 557 approved unit trust funds in Malaysia at end June, 140 are Islamic-based, contributing RM17.975 billion to total net asset value (NAV) of all unit trust funds of RM159.849 billion. This is up from a mere seven Islamic funds ten years ago. Assets under management (AUM) of Shariah funds in Malaysia have been growing at a compounded annual rate of 29% over the last five years.
In addition, 86% of the stocks listed on Bursa Malaysia are Shariah-compliant, representing 63% of the exchange’s total market capitalisation, which means that a wide range of equities are available for incorporation into Islamic portfolios.
Malaysia was also the first market to release the Guidelines for Islamic REITs in 2005, which was followed by the launch of two Islamic REITS – one with hospitals and the other with plantations as their main assets. This January, Malaysia launched the first shariah-compliant exchange traded fund (ETF) in Asia, MyETF DJIM 25, which tracks the Dow Jones Islamic Market Malaysia Titans 25.
In an effort to further develop Malaysia’s Islamic capital market, the SC last month granted licences to Kuwait Finance House, DBS Asset Management and CIMB-Principal Group for the establishment of three Islamic Fund Management Companies (IFMC) in the country. More such licences are expected to be approved in the future.
SC chairman, Zarinah Anwar, says that it is a priority for Malaysia to create a fully deregulated and liberalised environment for Islamic finance. With the IFMC licences, the SC has liberalised international participation in the Islamic fund management industry by removing restrictions on ownership and investment abroad, for licensees. IFMCs are also granted tax holidays until 2016.
The SC seeks to encourage foreign fund managers to locate in Malaysia and local fund managers to expand their operations to other markets. “Malaysia has a well established Islamic finance architecture that is supported by a comprehensive regulatory framework, a diverse range of financial intermediaries and products, the presence of learned Shariah scholars and a favourable tax regime,” SC’s Datuk Ranjit points out.