Islamic Markets Programme (IMP)

Transcription

1 Islamic Markets Programme (IMP) Establishing Appropriate Institutional, Legal and Regulatory Frameworks: The evolution of Islamic finance regulatory framework and Shariah screening reform Kamarudin Hashim Securities Commission Malaysia 11 August 2014

2 Background Malaysia s Islamic finance agenda Positioning Malaysia as a global hub for Islamic finance products and services Islamic banking Takaful Islamic Capital Market (ICM) For ICM, key focus segment in the market include Islamic equities, Sukuk and Islamic fund management Going beyond the provision of an alternative to conventional finance activities for issuers, investors, intermediaries and other market players 2

3 Islamic finance and capital market ICM in M sia has grown to RM1.6 trillion in Q from RM294 billion in 2000 MALAYSIA Banking Takaful Shariah stocks Indices Mutual funds Bonds Stockbroking Islamic fund mgmt PAKISTAN Banking Takaful BANGLADESH Shariah stocks Banking Mutual funds Takaful INDIA THAILAND Mutual funds Banking SRI LANKA Takaful Mutual funds INDONESIA Banking Takaful Shariah stocks Mutual funds Index Bonds SINGAPORE Banking Takaful Mutual funds Bonds PHILIPPINES Banking BRUNEI Banking Takaful Mutual funds Stockbroking SC focuses on: Developing a comprehensive and facilitative framework Working closely with the industry to widen product range Developing linkages with other countries Driving thought leadership and capacity building 3 3

4 Capital markets institutional framework in Malaysia MINISTER OF FINANCE Attorney General s Chambers BANK NEGARA MALAYSIA National Shariah Advisory Council SECURITIES COMMISSION Companies Commission Investment Banks Private Pension Administrator Fund Managers Bursa Malaysia Stockbroking Companies Banking/ Islamic banking and insurance/ takaful sector FIMM Unit Trust Mgt Co Securities Industry Dispute Resolution Centre Listed Companies CRAs BPA Trustees Invt. Advisers Financial planners Unit Trust Distributors PRS Distributors Retail and Institutional Investors e.g. Tabung Haji Investor Education e.g. SIDC, INCEIF 4

5 Philosophy in developing Islamic finance regulatory framework Standards for Islamic finance regulatory framework should not be less than conventional finance The regulatory framework for Islamic banking, Takaful and Islamic Capital Market benchmarked against international standards and best practices Islamic finance products and services can leverage on existing regulatory infrastructure not compromise the universal goals of financial market regulations E.g. IOSCO Report of the ICM Taskforce 2004 and Analysis of IOSCO s Objectives and Principles of Securities Regulation for Islamic Securities 2008 conventional regulatory framework applicable to Islamic capital market products and services Islamic capital market products and services may be introduced and developed within any existing well-structured securities market 5

6 that therefore seeks to achieve similar objective with conventional regulatory framework Although the form for Islamic finance regulation may differ Specific legislation e.g. Islamic Financial Services Act 2013 Non specific legislation e.g. Capital Market and Services Act 2007, but with certain provisions for Islamic capital markets Specific Guidelines e.g. Guidelines on Sukuk, Guidelines on Islamic Fund Management Non specific Guidelines - Guidelines on the offering of Structured Products, but with certain provisions for Islamic structured products Regulatory outcome for Islamic finance remains consistent with the overall objectives and principles of financial market regulation In Malaysia, we have the whole spectrum for the Islamic finance regulation. To suit specific need of the market segment To realize Malaysia s vision as the international centre for Islamic finance 6

7 Practical approach adopted for Islamic finance regulation In Malaysia, a 2-tier approach to Islamic Capital Market is being practised Tier 1 Universal / General Regulatory Requirements Guidelines on the Offering of Asset- Backed Securities Guidelines on the Offering of Structured Products Guidelines on Unit Trust & Wholesales Funds Guidelines on ETF Bonds - Trust deed, mandatory rating, eligible persons, etc Unit Trust - Investment committees, trustees, management company, etc. REITs - At least 75% investment in real property Tier 2 Specific Shariah Requirements Guidelines on Sukuk Guidelines on Islamic REITs Guidelines of Islamic Fund Management Guidelines and Best Practices on Islamic Venture Capital Sukuk - Shariah adviser, compliance with Shariah requirements, application of Shariah rulings Islamic Unit Trust - Shariah adviser to certify that fund complies with Shariah requirement Islamic REITs - Tenants activities and rental income must comply with Shariah requirement 7

8 with Shariah framework viewed as a fundamental component within the overall regulatory framework Two levels for Shariah governance National based: Shariah Advisory Council - Bank Negara Malaysia and SC Market based : Shariah Supervisory Boards of Islamic Financial Institutions Importance of Shariah governance Ensure strict Shariah-compliance Instill market confidence Increasing Shariah dialogue between national and market Shariah experts as a platform to promote thought leadership and development 8

9 Regulatory and tax framework to promote growth of ICM Malaysia s case Sukuk Issuers Tax neutrality for sukuk transactions Stamp duty exemptions Tax deduction on issuance cost for sukuk Company setting up sukuk SPV also given tax deduction Sukuk SPV not required to comply with administrative matters under Income Tax Act Investors Income tax exemptions for all residents on income derived from non-rm investments No capital gains tax No withholding tax on income from RM and non-rm investments Islamic funds Investors No withholding tax Islamic Fund Management Companies 10-year tax exemption on all fees received by fund management companies for managing approved Islamic funds for local and foreign investors up to 2016 MIFC promotion Additional/double tax deduction for promotion of MIFC activities Intermediaries Tax exemptions on fees obtained from arranging, underwriting and distribution of non-rm sukuk from Malaysia Tax exemptions on profits received from the trading of non-rm sukuk from Malaysia Human capital Income tax exemption given to income received by non-resident experts in Islamic Finance 9

10 Regulatory and tax framework to promote growth of ICM Malaysia s case (cont d) Sukuk Deemed approval (1-day) accorded for issues rated AAA by local credit rating agency or for issues rated BBB and above by a foreign credit rating agency Exemption from issuing a trust deed No restriction on use of international law in the offering documentation Opportunity to be listed on Bursa Malaysia - the top sukuk listing destination in the world Foreign currency sukuk listed on Bursa and LFX that meet certain criteria eligible to be included in Bloomberg Malaysian Sukuk Ex-MYR Index Human capital Expedited immigration approval through the Green Lane established for expatriates in Islamic Finance and their family members. Islamic funds Islamic Fund Management Companies Allowed to conduct foreign currency and ringgit fund management for retail and institutional investors Islamic fund management companies are allowed to invest all their Shariah funds abroad Up to 100% foreign equity ownership in the Islamic fund management companies Investors Employees Provident Fund (EPF) has set aside a specific allocation of start-up fund for foreign Islamic fund management companies Bank Negara Malaysia (BNM) has also disbursed funds for Shariah equity investments and set up a developmental Sukuk Investment Fund specifically for Islamic fund management companies 10

11 Regulatory and tax framework to promote growth of ICM Malaysia s case (cont d) Sukuk Expenses for the issuance of AgroSukuk be given a double deduction for a period of four years effective from year of assessment 2013 to Framework on issuance of Socially Responsible Investment (SRI) sukuk being finalised, in response to global trend in issuances of green and social impact bonds to finance sustainable activities. Shariah stock-screening List of Shariah compliant securities by SC s Shariah Advisory Council published twice a year Government Investment Issue (GII) Long-term non-interest-bearing Government securities based on Islamic principles issued by the Government of Malaysia for funding developmental expenditure Benchmark for Sukuk pricing 11

12 Driving the growth of Islamic finance Both the public and private sectors have an important role to play in developing the Islamic Finance market State of development of the financial market Need and sensitivity of the market In the early stages of development, Malaysia took the top down approach 12

13 Government plays a key role to support growth and development Strong and consistent Government support is essential MIFC, Capital Market Masterplan (CMP) and CMP 2, Financial Sector Masterplan and Financial Sector Blueprint 13

14 Shariah stock screening Shariah stock screening refers to a process undertaken by the SC SAC that seeks to ensure securities of public listed companies (PLC) comply with the principles of shariah Each PLC is reviewed once a year based on the audited financial statements for each financial year end and other relevant material The SAC issues a list of shariah-compliant stocks which are published by the SC in May and November of each year Companies seeking to list on the exchange may apply to undertake shariah screening to ascertain its shariah compliance. Pre-IPO screening is voluntary and is subject to a processing fee of RM10, % of SC s IPO fee with a maximum of RM50,

15 Shariah stock screening historical background Pioneered in Malaysia by Bank Islam as they sought to identify permissible counters for investment by reviewing the activities of companies listed on the then KLSE A national level screening methodology was first developed in 1995 by the SC through the work of ICM unit and Islamic Instrument Study Group (IISG) Publication of the list of shariah-compliant securities began in 1997 following the formation of SC s SAC in 1996 Revised screening methodology announced by the SC in 2012 and implemented in November 2013 Publication of methodology and list of shariah-compliant securities allows scale and growth of shariah-compliant equity and investment management segments and expansion on Islamic capital markets international reach outlined in CMP2 List of shariah-compliant securities forms the basis for Bursa s Shariah indices, as well as investable securities for Islamic funds, ETFs, structured products etc. 15

16 Shariah stock screening milestones Pre Shariah screening pioneered by Bank Islam Development of shariah screening criteria to facilitate compliance review process undertaken by SC s ICM unit and Islamic Instrument Study Group (IISG) 1996 Establishment of the Shariah Advisory Council of SC 1997 The SAC announced the official list of shariah compliant securities 1999 Bursa Malaysia launched the Kuala Lumpur Shariah index The SC disclosed the benchmarks applied in the screening of shariah compliant securities Shariah compliant review at pre-initial public offering stage undertaken by the SAC upon application by issuers Bursa Malaysia and FTSE launched 2 Shariah indices - (i) FBM EMAS Shariah Index and (ii) FBM Hijrah Shariah index 2012 The SC announced the revised screening methodology 2013 Revised screening methodology made effective in November 16

17 The SAC provides a national level shariah compliance review Facilitates efforts to promote centralisation and harmonisation of shariah decisions on the status of listed stocks SC s regulatory mandate also allows for the issuance of relevant guidelines on shariah compliance e.g. guidelines on disposal of non-compliant stocks Enhances market confidence as the stocks are endorsed by the shariah body at the national level SC has appointed scholars, academicians and practitioners from diverse backgrounds for membership of the SAC to accommodate broad perspectives on Islamic jurisprudence 17

18 Revised stock screening methodology November 2013 Stock screening involves both quantitative and qualitative assessments: 1. Quantitative assessment I. Contribution from shariah non-compliant activities (computed and compared with group revenue and the group profit before tax) must be below predetermined thresholds II. Financial ratio benchmark - shariah non-compliant cash and debt must be below a predetermined percentage of total assets (i.e. 33%) 2. Qualitative assessment I. Public perception and image of the company is assessed The listed security must pass screening at both stages in order to qualify as shariah-compliant 18

19 Revised vs. previous screening methodology The revised screening methodology introduces financial ratio benchmarks, in addition to the business activity benchmarks of the previous methodology Previous methodology Quantitative assessment Business contribution thresholds: 5% 10% 20% 25% Qualitative assessment Revised methodology Quantitative assessment Business contribution thresholds: 5% 20% Financial ratio benchmark: 33% Qualitative assessment 19

20 Impact of revised screening methodology Revised screening methodology reduced the number of shariah-compliant securities however market capitalisation as a whole was not severely impacted Despite the contraction in numbers, shariah-compliant securities continue to experience robust growth. Number of Shariahcompliant Securities Market Cap of Shariah-complaint Securities (RM bil) % Growth FBM EMAS vs. FBM EMAS Shariah Dec-2012 Dec-2013 Dec-2012 Dec-2013 Shariah-compliant Shariah-compliant Total listed securities Total Market Cap FBM EMAS Shariah FBM EMAS 20

21 Guidance on disposal of shariah non-compliant securities Within six months of effective date Six months after effective date Price = or > investment cost (Breakeven/Net profit) Price < investment cost (Net loss) Price > investment cost (Net profit) Price < investment cost (Net loss) Must liquidate holdings within six months Any dividends received and capital gain from disposal can be kept by investors May hold until price of securities equal or exceeds investment cost Dividends received can be used to expedite disposal Allowed to subscribe to/receive any new issue of securities by the company e.g. rights, special, bonus to expedite disposal Liquidate immediately Profit (dividends received prior to and difference between investment cost and the closing price on the announcement date of the latest list) can be kept Excess profit (dividends received after and difference between disposal price and closing price of announcement date) channeled to baitulmal and/or charitable bodies Allowed to hold until the price of securities equal to investment cost Dividends received can be used to expedite the disposal Allowed to subscribe to/receive any new issue of securities by the company e.g. rights, special, bonus to expedite disposal 21

22 Thank You 22

23 Members of SC s Shariah Advisory Council Y.A.Bhg. Tun Abdul Hamid bin Haji Mohamad Y.Bhg. Tan Sri Sheikh Ghazali bin Haji Abdul Rahman Y.Bhg. Datuk Dr Mohd Daud Bakar Y.Bhg. Dato Dr. Abdul Halim bin Ismail Sahibus Samahah Dr Haji Zulkifly bin Muda Prof Dr Ashraf bin Md Hashim Former Chief Justice Malaysia Shariah Legal Advisor, Attorney General s Chambers Group Chairman, Amanie Advisors Chairman, Shariah Committee of Shariah-Compliant Funds of Amanah Mutual Bhd Terengganu Mufti Chief Executive Officer, ISRA Consultancy Sdn Bhd Prof Dr Engku Rabiah Adawiah Engku Ali Prof Mohamed Ismail bin Mohamed Shariff Prof Madya Dr. Aznan bin Hasan Prof Madya Dr Asmadi Mohamed Naim Dr Shamsiah Mohamad IIUM Institute of Islamic Banking and Finance (IIiBF), International Islamic University Malaysia Adjunct Professor, International Centre for Education in Islamic Finance and Founder of Mohamed Ismail & Co. Ahmad Ibrahim Kulliyyah of Laws, International Islamic University Malaysia Dean, Islamic Business School, Universiti Utara Malaysia Senior Researcher, International Shari ah Research Academy for Islamic Finance (ISRA) 23

24 Quantitative Assessment Business Activity Benchmarks Streamlined business activity benchmarks are as follows: Previous Benchmark 5% 10% 20% 25% Revised Benchmark 5% 20% Activity Conventional banking; Conventional insurance; Gambling; Liquor and liquor-related activities; Pork and pork-related activities; Non-halal food and beverages; Shariah non-compliant entertainment; and other activities deemed non-compliant according to Shariah Interest income from conventional accounts and instruments; Tobacco and tobacco-related activities; and other activities deemed non-compliant according to Shariah Rental received from Shariah non-compliant activities; and other activities deemed non-compliant according to Shariah Hotel and resort operations; Share trading; Stockbroking business; and other activities deemed non-compliant according to Shariah 24

25 Revised Screening Methodology Revised methodology introduced is in line with global practices in Shariah screening of securities. SC Malaysia Dow Jones Islamic Market Indices FTSE Shariah Global Index Series Scope Malaysian Stocks Global Stocks Global Stocks Screener Regulator Index Provider Index Provider Discretion Qualitative stage of screening N/A N/A Denominator Total Assets (TA) Market Cap (MC), Trailing 12- month Average Income Contribution Ratios Financial Ratios Specific non-compliant activity income < 5% or 20% of total revenue and profit before tax depending on activity Total debt/ta < 33% Cash/TA < 33% Specific non-compliant activity income < 5% of total revenue Total debt/mc< 33% Cash+Interest bearing securities/mc < 33% Receivables/MC < 33% Total Assets (TA) Total interest and noncompliant activities income < 5% of total revenue Total debt/ta< 33% Cash+Interest bearing securities/ta < 33% Receivables/TA < 50% 25

26 Quantitative Assessment Financial Ratio Benchmarks Financial ratios introduced are intended to measure riba and riba-based elements within a company s balance sheet: Cash over Total Assets Cash will only include cash and cash equivalents placed in conventional accounts and instruments, whereas cash placed in Islamic accounts and instruments will be excluded from the calculation. Debt over Total Assets Debt will only include interest-bearing debt whereas Islamic debt/financing or sukuk will be excluded from the calculation Both ratios must be lower than 33%. 26