The Investors Conference 2005 - in conjunction with the 30 th Annual Meeting Islamic Development Bank 22 nd June 2005 A Strong and Vibrant Financial Sector for Sustainable Growth the role of Capital Markets Dato Zarinah Anwar Deputy Chief Executive Securities Commission Malaysia
AGENDA 1. Role of the capital market in economic growth 2. Strategies for the development of Malaysia s capital market 3. Islamic capital market Development and challenges 2
The capital market as a key driver of private sector growth 60 50 Funds raised in the capital market 500 450 400 New issues (RM bil) 40 30 350 300 250 200 Nominal GDP (RM bil) 20 150 10 100 50 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 0 Source: BNM New public debt securities issues New equity issues New private debt securities issues Nominal GDP (LHS) 3
And the equity market performance is largely co-related with longterm income trends 1600 1400 1200 1991 New Development Policy introduced, Privatisation Masterplan implemented 1997: East Asian Financial Crisis 1998: Ringgit peg and capital controls imposed. National Economic Recovery Plan introduced 2001: Launch of Capital Market and Financial Sector Masterplans 5000 4000 Index points 1000 800 600 400 200 0 1993: Securities Commission established 2004: Demutualisation. Exchange is listed in 2005 3000 2000 1000 0 US Dollars per capita Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 KLCI index Per capita income (LHS) Source: Thomson Financial Datastream, BNM, SC 4
Relative size of the capital market to the banking sector Size of the equity market, bond market and banking sector (1990-2004) 1200 1000 Debt securities outstanding Equity market capitalisation Banking sector assets 800 RM billion 600 400 200 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 5
The capital market plays a key role in financing diverse needs K-economy Equity funding through venture capital & MESDAQ Market Small-Medium Enterprises Equity funding through Second Board & MESDAQ Market Privatisation & Infrastructure Projects Bonds through issue of Private Debt Securities Equity financing through Bursa Malaysia Islamic Capital Market (ICM) Availability of Syariah-compliant debt & equity securities, warrants & call warrants Availability of Islamic investment products such as unit trusts, Islamic Indices and Crude Palm Oil futures 6
The Islamic capital market component is a significant part of Malaysia s capital market Equity market Private debt securities 826 companies out of the 984 companies (84%) on Bursa are Syariah compliant representing 64% of total market capitalisation (2004) Islamic bonds valued at RM 9.1bn raised during 2004, accounting for 25% of gross issuance of PDS Market capitalisation-2004 Conventional 36% New PDS issued-2004 Islamic 25% Islamic 64% Conventional 75% 7
The capital market also plays an important role in mobilising savings through the investment management industry 100 Growth of unit trust and fund management industry 44 Unit trust NAV (LHS) No of Management Cos (RHS) RM billion 80 60 40 20 38 32 26 No of Management companies 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 20 Source: Securities Commission 8
The Islamic unit trust industry is a relatively young segment with bright growth prospects Unit trust industry Net asset value of Islamic unit trust was RM 6.8 billion as at 2004, representing 8% of total industry NAV Unit trust NAV-2004 Islamic 8% Strong growth in number of funds - 71 funds in 2004 Conventional 92% No. of Funds 350 300 250 200 150 100 Total Funds Number of Islamic Funds Percentage of Islamic Funds 30 25 20 15 10 Percentage (%) 50 5 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 0 9
AGENDA 1. Role of the capital market in economic growth 2. Strategies for the development of Malaysia s capital market 3. Islamic capital market Development and challenges 10
The Capital Market Masterplan (CMP) provides a strategic roadmap for the development of the capital market Vision To be internationally competitive, To provide an efficient conduit for the mobilisation and allocation of funds, and And supported by a facilitative and strong regulatory framework With 152 recommendations covering 11 areas: Equity market Bond market Derivatives market Stockbroking industry Market institutions Investment management Regulatory framework Corporate governance Islamic capital market Technology & e-commerce Training & education 11
Phased approach to implementation 2001 2003 2004 2005 2006 2010 PHASE 1 Strengthen domestic capacity and develop strategic and nascent sectors PHASE 2 Strengthen key sectors and gradually liberalise market access PHASE 3 Enhance market processes and infrastructure and international positioning in areas of comparative and competitive advantage 12
Key thrusts: Broaden sources of financing Developed the corporate bond market Introduced shelf registration scheme to expedite issuance 3,5 and 10-year MGS futures contracts to enhance liquidity and price discovery process in secondary markets Facilitative framework for issuance of asset-backed securities Financed high growth companies though venture capital Enhanced participation of local institutional investors Introduced a facilitative tax framework Accelerated the development of the Islamic capital market Widened the product range Introduced a facilitative regulatory and tax framework Established strategic alliances with other Islamic capital markets Enhanced efficiency of fund raising Reduced processing time for corporate proposals Shift to disclosure based regime 13
Key thrusts: Creating a conducive environment for investors Developed a vibrant investment management industry Greater international portfolio diversification allowed Tax incentives to encourage collective investment schemes Facilitated the development of financial planning Developed the trust and custodial services Strengthened corporate governance framework Enhanced investor protection Enhanced disclosure & transparency Enhanced surveillance and enforcement Extensive education programs for directors Lowered execution cost for investors SCANS, SCORE and SC levy reduced Stamp duty capped 14
Key thrusts: Developing strong and competitive intermediaries Restructured market institutions Consolidation and demutualisation of the exchange Enhanced trading, clearing and settlement infrastructure Fostered constructive competition Deregulation of fixed fee structures Widened scope and range of services Deregulated branching restrictions Liberalisation of foreign participation CLSA, CSFB, JP Morgan, Macquarie & UBS given approval in principle to establish operations in Malaysia. SC to issue up to five new licenses to enable leading global fund managers to establish operations in Malaysia. Allowed 100% ownership of futures brokers and venture capital companies. 15
Key thrusts: Strengthening Malaysia s capital market position Enhancing quality of public listed companies Focus on good governance, sound management, building shareholder value Enhancing quality of capital market intermediation services Benchmarking; building brand and expanding their franchise Professionals and advisors must further enhance their reputation for integrity and reliability. Enhancing quality of market framework Review market structure to ensure appropriate access to capital Emphasis on enhancing market liquidity. Enhancing surveillance and enforcement Strengthen the gate-keeping function, shift to risk-based surveillance and expand the range of actions Build cross-border surveillance and enforcement capabilities. 16
AGENDA 1. Role of the capital market in economic growth 2. Strategies for the development of Malaysia s capital market 3. Islamic capital market Development and challenges 17
The CMP identified the Islamic Capital Market (ICM) as a key component of Malaysia s capital market To establish Malaysia as an international Islamic capital market centre Facilitating expansion of products and services in Islamic capital market More effective mobilisation of Islamic funds Strengthening tax, accounting and regulatory framework for ICM Enhancing international value recognition of ICM 18
Key components of the Islamic financial services sector create a comprehensive enabling environment To effectively play its role as an efficient conduit Contribute to the overall stability of Islamic financial services sector: Islamic banking to mobilise deposits and provide financing Takaful to provide mutual protection/ institutional investor role Islamic capital market to provide long term fund raising and investment Islamic Banking Takaful Islamic capital market 3
The development of a vibrant ICM is reliant on sound fundamentals of the overall capital market Sound economic and market fundamentals are important for instilling greater confidence among investors Funds invest in markets that comply with principles of securities regulation country sovereign rating regulatory framework accounting & tax framework corporate governance practices 20
It requires planning and a sound regulatory infrastructure Capital Market Masterplan Facilitative regulatory framework Shariah Advisory Council have enabled and facilitated the development of Islamic Capital Market Shariah stocks - 84% of total listed shares (April 2005) Mutual funds - 71 funds with NAV of USD 1.8 bil & market share of 7.7% (2004) Bonds 25% of total PDS issued (2004) 21
Diverse products and intermediaries and emphasis on education Tools & Products Availability of Shariah-compliant instruments, investment and indices Intermediaries Availability of Islamic banking and stockbroking, Takaful and asset management services Education General awareness & understanding of Islamic finance concepts 22
Strong support from the government Budget Budget2003 Tax deduction for expenses incurred on issuance of Islamic private debt securities that adopt mudharabah, musyarakah and ijarah principles for 5 years commencing 2003 Budget Budget2004 Deductions given on expenses incurred in the issuance of Islamic securities based on the principle of Istisna for 5 years where property under construction can also be used to back such bonds Budget Budget2005 Tax exemption on interest income derived by non-resident companies from ringgit-denominated Islamic securities and debentures Tax neutrality between Islamic and conventional products by exempting additional tax or duty provided the products are approved by the Syariah Advisory Council 23
Developing internationally-compatible Islamic accounting standards Most Most jurisdictions jurisdictions apply apply IAS/GAAPs IAS/GAAPsfor for their their financial financial institutions institutions In In addition, addition, for for Islamic Islamic financial financial institutions, institutions, the the following following is is applied applied IAS Most jurisdictions apply IAS for Islamic financial institutions National Islamic accounting standards / IAS Malaysia applies national Islamic accounting standards for Islamic financial institutions IAS are used for areas not covered by national Islamic accounting standards AAOIFI stds. / IAS 4 jurisdictions (i.e. Jordan, Sudan, Bahrain and Qatar) apply AAOIFI accounting standards These jurisdictions apply IAS for areas not covered by AAOIFI accounting standards 24
Ensuring international compatibility with global securities regulation IOSCO appointed an ICM Task Force to assess the state of development & regulation of Islamic capital markets globally Memberships: Malaysia, Bahrain, Indonesia, Jordan, Nigeria & Turkey Australia, Italy, South Africa, Thailand, UK & US Key issues and findings of ICM Task Force report : Shariah convergence Shariah compliance and regulation Product innovation & market competitiveness Accounting & tax framework Skills development International cooperation Information database 25
Malaysia has broad experience in promoting international cooperation and cross-border investments in ICM Participation in international efforts such as IFSB and IOSCO ICM Task Force Facilitates cross border issues Issuance of Malaysian global Islamic bonds Promotion / offering of foreign Islamic bonds in Malaysia Fund raising exercise by multilateral banks and MNCs Participation in overseas Islamic private equity investment Knowledge sharing and mutual assistance programmes 26
Thank you 27