Review of act can help grow Islamic capital market


This is the third and final part of a series on CIMB's venture into Islamic banking. The first two appeared on March 10 and April 14. Come June 2, Bank Negara governor Tan Sri Zeti Akhtar Aziz will launch CIMB's product offerings for Islamic banking. 

IT may be an uphill task to introduce newer Islamic fixed-income or debt capital market instruments if a review were not made to the existing legal framework to fully support their issuance, experts said. 

The existing legal framework and the unwavering support of the government have facilitated the development of the Islamic financial market till now but the ad hoc changes to the laws to facilitate issues were no longer sufficient to grow the market, they said. 

Mustapha Hamat

Commerce International Merchant Bankers Bhd (CIMB) head of CIMB Islamic unit, Badlisyah Abdul Ghani, pointed that there were discrepancies in the definition of “de- benture” under the Securities Commission Act 1993, which did not cover Islamic securities. 

Debenture is defined under the act as “?debenture, stocks, notes and any other evidence of indebtedness of a corporation for borrowed monies.”  

None of the Islamic securities, including Bai Bithaman Ajil (BBA) bonds, falls under this definition since all Islamic transactions do not involve indebtedness for borrowed monies.  

“Ijarah-based products can be popular here and some market players are working towards coming up with Musyarakah and Mudarabah-based papers, but domestically we have not resolved some tax and company law issues because the laws when drafted did not include the Islamic factor,'' he said. “It is not that the existing legislation does not facilitate the issuance of Islamic securities; it is just that industry players like us would need a higher degree of certainty in the law to do more in this business.''  

Mustapha Hamat, chairman of market and product development committee of the Bahrain-based International Islamic Financial Market, concurred but felt that the industry should also be more proactive and could help by coming up with proposals on the possible areas of review. 

A review or even an introduction of a new set of legislation would not only mean better governed issuances but also potentially a gamut of new products, such as Ijarah (leasing), Salam (advance payment sale), Aarbun (down payment), Murabaha (cost plus), instruments related to Istithmar (investment), being introduced here.  

For a long time now the Al Bai Bithaman Ajil (ABBA) (buy and sale of assets) has dominated the local scene although the US$600mil Sukuk Al-Ijarah issued last year has set new standards for the local issuers.  

According to experts, the Islamic capital market needs more depth and breadth, yet market players, investors, arrangers and issuers alike do not want to take the risk of going beyond ABBA due to the uncertainty in the laws.  

“Therefore, without a legislative review, the introduction and promotion of new products in the Islamic capital markets would be stunted and this would only delay Malaysia's vision of becoming a global Islamic capital market centre as envisioned under the Capital Market Masterplan,'' said a market player. 

Despite that, the International Financial Services Board is looking at Malaysia as an example to formulate the global framework for Islamic banking and finance. 

“Malaysia’s Islamic finance framework is already more advanced than most markets but it could be much better,” Badlisyah said adding that on the international front, the issue of legal framework was secondary to that of the creation of the primary and secondary Islamic capital markets.  

The primary concern is liquidity. Mustapha admitted that liquidity was lacking and there were not many syariah-based instruments floating in the global market. Whoever has got it keeps it, for he knows replacements for new issuances are slow to come by.  

“Fund managers need to keep a balanced portfolio of their yields since Islamic banking products offer a fixed rate – there is certainty in returns. What we are saying is that there should be more issues to spur growth in liquidity,'' said Mustapha, who is also the chief executive officer of the Islamic Banking and Finance Institute Malaysia.  

There is ample capacity to absorb any issue in the global market, and if the issuer was worried about a particular market, Mustapha said there were other markets such as Hong Kong, the Middle East, London and even New York to tap into. Each issue could also be split into tranches if the need arises.  

But the aim, according to Mustapha, should not be about to be the leader in creating new products but in following market demands. 

“You must look at the cultures of the individual markets. What products they want and not just be concerned to be leader in creating products,'' he said, adding that apart from enhancing liquidity and meeting market demands, there was a need for better transparency in terms of returns on investment. 

“We need a well-managed market system which is transparent and has well-disciplined players. That entails an education process so that market participants would feel comfortable buying Islamic products. Only then can the market take off. This process may take one to two years.''  

Despite all that, Badlisyah said the SC had set up a unit to look at reviewing the act. 

CIMB itself is moving towards introducing new products such as the Mudharabah asset backed securities, Sukuk Istithmar and Ijarah commercial papers in its quest to better penetrate the Islamic capital markets. 

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