Room for improvement in Islamic capital market

THE market for Islamic products has grown tremendously over the past few years but there is still a lot to be done to make Islamic capital markets more competitive, Aseambankers CEO Agil Natt said. 

“For the Islamic capital markets to remain competitive, attractive and innovative, indigenous Islamic financial products must be introduced to meet the risk reward profiles on investors and issuers, fulfilling the tenets of the syariah while remaining sufficiently cost effective and competitive vis-à-vis conventional products,” he said. 

Agil Natt

Speaking at Finance Asia Conference 2003, Agil said the Islamic capital market would have to perpetually play catch-up if it goes on conforming product development to what is being offered by the conventional markets. 

“There will also be a continuous reliance on the expertise within the conventional market to take the Islamic capital market forward,” he said in his speech entitled, “Developing Vibrant Islamic Debt Markets – Looking to the Future.'' 

Agil, who is also head of investment group at the Maybank group, said a lack of a deep and liquid secondary market for Islamic products was among the challenges faced by the Islamic capital market. 

“In the domestic bond market, 60% of all new issues are held for investment – thus creating a somewhat illiquid market. Perhaps new Islamic issues could be split into various tranches to enable increased participation,” he said. 

Agil said the absence of risk management tools and expertise was a stumbling block to a more robust Islamic structure. 

“The Islamic financial industry does not have an effective methodology to calculate the level of risk accruing from their long-term assets, including both credit and market risks, which involved a specific appreciation of business risk,” he added. 

“Also, the risks of institutional default are becoming more severe given the lack of Islamic hedging instruments and the prohibition on the use of conventional derivative products for this purpose,” he said, adding that one resolution could be that the risk rationale of an issuance could justify the differential pricing in debt trading. 

Agil said the lack of consensus among Islamic jurists and syariah scholars was also a major impediment to the development of the Islamic financial industry. 

“The interpretation of the syariah on the trading of debt for instance has been a stumbling block in attracting Gulf investment in Islamic debt securities; particularly those structured as commodity murabaha-based structures,” he said. 

“In simple terms, while in Malaysia the syariah experts agree to the secondary trading of debt at differential pricing, those in the Gulf do not.” 

Agil said the disparity of interpretation should not cause paralysis and be made an excuse for inaction; rather it should be an opportunity and a challenge. 

“There is a need, therefore, to develop clear and comprehensive strategies that will foster innovation and entrepreneurship and promote broad distribution of opportunities within sizeable Islamic centres,” he said. 

“The fast tracking in implementation of the recommendations of Islamic banking and takaful in the Financial Sector masterplan and the Capital Market masterplan will also facilitate the progress of the industry and minimise barriers to entry.” 

Agil also said that there should be a review of the legal framework to hasten the introduction of new debt capital instruments. 

“It is not that the existing legislation does not facilitate the issuance of Islamic securities; it is just that the industry players/bankers and institutions would need a higher degree of conviction in the law to do more in this business,” he said.  

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