Kuala Lumpur: Recent Islamic finance initiatives unleashed under budget 2015 as an additional boost to the industry which will further improve prospects for its continued growth and evolution both in Malaysia and globally, according to RAM Rating Services Berhad.
“As one of the largest players in the Islamic finance industry, governmental support has always been a significant factor driving the development of the Islamic finance market in Malaysia. Among the measures recently introduced by the government are the new Shariah-compliant investment initiative under the Investment Account Platform (IAP), and the proposed listing and trading of Malaysian Government Securities (MGS) and Government Investment Issues (GII) on the Exchange Traded Bonds and Sukuk (ETBS) platform. The platform is aimed at making the bond market liquid, to potentially attract a greater number of investors. The government has also announced a further extension of the tax incentives for Ijarah- and Wakalah-based sukuk, which it is hoped will boost the volume of sukuk issued based on the 2 structures.”
“With continued encouraging governmental support and the proper execution of these proposed initiatives, Malaysia will, in RAM’s view, continue to have an upper hand in the global Islamic finance market,” Foo Su Yin, CEO of RAM Rating Services Berhad, said.
“The IAP announced at the recently-tabled budget is particularly welcome as it is set to provide opportunities to investors in financing entrepreneurial activities and developing viable SMEs. The IAP will be administered by the government, but facilitated through participating Islamic financial institutions which will act as investment intermediaries matching and channeling funds between private investors and industries or ventures that are in need of funding. Ventures and businesses struggling to obtain financing for their projects may benefit from this platform which provides access to a wider investor base. The IAP, as a new Shariah-compliant investment product, will have an initial start-up fund of RM150 million. Its introduction is in line with current industry developments which lean towards the expansion of the role of Islamic financial institutions as investment intermediaries, applying the concept of risk-sharing – an important aspect of the Islamic finance sphere.”
“This backdrop, together with the income tax exemption on profits earned from investments through IAP, greatly enhances the potential for the entry of a larger number of high-net worth investors into the market. Nevertheless, the risk evaluation of the qualifying investment products may pose a further challenge to Islamic banks in attracting deposits from investors. Conversely, it is hoped that the tax incentives on profits for the next 3 years, effective from 1 September 2015 to 31 August 2018, will encourage investors, who are willing to take on more risk for higher returns, to increasingly diversify their portfolios into equity.”
“On another note, the government’s proposal to have MGS and GII listed and traded on the ETBS platform is viewed as a significant move to further reinforce Malaysia’s position as one of the top 3 countries with the largest sukuk listings. Furthermore, this development will help provide investors with increased access to the debt market and subsequently improve the liquidity of government securities. As at 3Q 2014, the top destinations for sukuk listings were the Nasdaq Dubai which represented 28% of total listed sukuk issuances of $27.4 billion, the Irish Stock Exchange (24%) and Bursa Malaysia (17%). The listing of government securities, it is hoped, will also be a further stimulus to grow the retail sukuk market by attracting a larger pool of investors into the domestic market.
“The government’s decision to extend for another 3 years (until year of assessment 2018) the deduction of expenses incurred in the issuance of sukuk based on Ijarah and Wakalah, is expected to boost issuances structured on these 2 Islamic principles. Currently, the proportion of issuances based on the 2 structures stood at only 11% and 2% of the total number of sukuk issuances in Malaysia, respectively. Thus, the scope for the growth of these types of issuances is significant going ahead.
“Regulatory policy and framework have historically been an important aspect of the popularity of specific sukuk structures. One example would be Murabahah, which is currently Malaysia’s most common sukuk structure, largely owing to the establishment of Bursa Suq al-Sila in August 2009 – a commodity trading platform to facilitate Islamic liquidity management and financing by Islamic banks. As at 3Q 2014, 63% of the total number of sukuk issuances in Malaysia was based on Murabahah, of which 46% was issued by governmental institutions. Given that Murabahah has been successfully established in Malaysia, it is reasonable to provide more alternatives and allow other structures such as Ijarah and Wakalah to gain a firm foothold in the sukuk domain.
“That said, the move to extend the tax incentives for Ijarah- and Wakalah-based sukuk is also in the interest of attracting more money from the Gulf region. Ijarah and Wakalah have been the structures of choice in sukuk issuances in other regions, especially the Middle East. In the past 5 years, 46% of the total number of global sukuk issuances (ex-Malaysia) was based on the Ijarah structure and 8% on the Wakalah structure – ranking them first and third in terms of the most used structures for sukuk issuances. As a side note, the Salam structure ranks second in terms of prevalence and has been mostly issued by the Central Bank of Gambia. While there have been a large number of issuances based on this structure, they have not been significant in value. The Ijarah structure, in particular, has rapidly gained acceptance among Shariah scholars worldwide and has an appeal in multiple jurisdictions, as opposed to the Murabahah structure used in Malaysia which has drawn some criticism from Shariah scholars. This reinforces the belief that the government’s decision to extend the tax incentives for Ijarah-based issuances acts as a continuing move towards the convergence of globally accepted sukuk structures while expanding the sukuk market at the international level, therefore tapping into liquidity from the Gulf.
“Ijarah-based sukuk have largely been used to fund the infrastructure and utilities sector as well as the plantation and agriculture sectors. That said, among the challenges that may be faced by prospective issuers of Ijarah-based sukuk is the requirement of having underlying Shariah-compliant assets to facilitate funding, which may put this type of sukuk out of reach of a segment of the market. This has also led to the success of Murabahah-based sukuk as issuers are able to leverage on the commodity platforms currently available. It is, however, hoped that the tax incentive will spur more Ijarah-based sukuk issuances in Malaysia while encouraging increased foreign participation in the market. Interestingly enough, in the past 5 years, only 6.8% of the total number of Ijarah-based global sukuk was issued internationally, compared to 47% of Wakalah-based sukuk. Wakalah-based sukuk issuances were mostly domiciled in Malaysia (59.5%) over the same period, followed by Saudi Arabia, which saw 19.8% of such issuances. Nevertheless, the number of Wakalah-based issuances in Malaysia still falls short relative to other structures used, despite seeing a gradual increase from year to year. It is believed government support in this regard will stimulate the numbers over time.
“While the initiatives proposed in Budget 2015 are detailed in brief, they are integral to the further development of the Islamic finance market in Malaysia and will help uphold its status in the global Islamic finance landscape.”