Friday, 3 November 2017

Malaysian report card on Islamic finance is upbeat for 2017

The Malaysian Islamic banking industry has expanded in 2017, according to the country's Economic Report 2017/18. As of end-July 2017, total assets of Islamic banks and development financial institutions (DFIs) offering Islamic banking products recorded an increase of 9.5% to reach RM783 billion (end-July 2016: 9.8%; RM714.8 billion), representing 28.8% of total banking system assets (end-July 2016: 27.3%). Total financing rose 12% to RM578.4 billion, accounting for 34.2% of total loans in the banking system (end-July 2016: 10.4%; RM516.2 billion; 32.6%), reflecting sustained demand for shari'ah-compliant financial solutions, the government said.

The Islamic capital market (ICM) remained a leader globally as it is supported by a strong regulatory and tax framework, a variety of service providers and strong shari'ah governance, said the Malaysia government. This market more than doubled between 2006 and 2016. In fact, Malaysia holds 34% of global Islamic assets under management as of end-July 2017 0 an estimate of funds managed by mutual funds, hedge funds, money management, investment management, wealth management and private bankand has the largest number of funds globally, representing 27% of global funds.

As at end-July 2017, 678 shari'ah-compliant securities were listed on Bursa Malaysia, representing 75.1% of total listed securities. Shari'ah market capitalisation accounts for the majority of the total market capitalisation of RM1.8 trillion (60.7% against 62.4% year on year).

Source: Economic Report, citing the Malaysia International Islamic Financial Centre. The percentage shares held by global sukuk by country in 2016 (left) and as of the end of July 2017 (right).
Source: Malaysia Economic Report 2017/18, citing the Malaysia International Islamic Financial Centre. The percentage shares held by global sukuk by country in 2016 (left) and as of the end of July 2017 (right).

Malaysia has shari'ah-compliant investment platforms such as Bursa Malaysia-i, the world's first end-to-end shari'ah-compliant investing platform when it was launched in September 2016. Under the platform securities deemed shari'ah-compliant must meet the rules set by the Shariah Advisory Council under Securities Commission Malaysia. Trading and post-trading activities must follow shari'ah principles. Funds do not come with an interest-bearing mechanism, and settlement is done through Islamic financial institutions. Muslim investors are also obligated to give zakat from profits derived from shari'ah-compliant trading.

Although transactions worth RM1,587 million have occurred by shari'ah average daily trading value (ADV), only 3.7% (RM58.8 million) of this was traded through Bursa Malaysia-i as at end-July 2017. This performance was attributed to the fact that Islamic participating organisations are focusing domestically and have not yet looked overseas, and that most investors are performance driven rather than investing on the basis of whether the securities are shari'ah-compliant.

To further promote Bursa Malaysia-i, several awareness programmes have been conducted, reaching more than 20,000 retail and institutional investors. These include direct engagements with market participants as well as international events in Bejing, China; Jakarta, Indonesia; London, UK and Shanghai, China. Twitter, Facebook and Instagram have been deployed to attract Millennial investors.

Bursa Suq Al-Sila' (BSAS) facilitates commodity trading for murabahah and tawarruq* transactions. To expand BSAS, Bursa Malaysia has engaged various commodity suppliers to increase the supply base. It has also engaged with financial institutions to enhance participation. Currently, there are 136 participants on this platform, 104 of them local.

As at end-July 2017, BSAS recorded growth of 9.8% in ADV to reach RM18.5 billion with RM1.2 trillion commodities offered and RM2.6 trillion traded. This signifies the growing acceptance of BSAS as a global platform to facilitate murabahah and tawarruq transactions. Leveraging global acceptance of BSAS, ICM will continue its focus on expanding the supply of commodities and enhancing the BSAS infrastructure.

Total sukuk issuances in the domestic market accounted for RM83.9 billion or 50.7% of the total bond issuances worldwide in the first seven months of 2017. In terms of sukuk outstanding, the sukuk market stood at RM719.5 billion accounting for 57.1% of the total bonds outstanding as at end-July 2017.

The total number of new sukuk issuances worldwide in the first seven months of 2017 increased 47% to US$66.8 billion (January-July 2016: 1.1%; US$45.4 billion) due to higher issuances from KSA and Qatar. Malaysia has 26.4% of the market share for new sukuk issuances, worth US$17.7 billion. In the same period a year ago, it had 47.3% of the share,worth US$21.5 billion.

Over the same period, Malaysia's sukuk outstanding share is 50.1% or US$192.2 billion (end-2016: 52.5%; US$182.7 billion). In response to the global needs for green financing, Malaysia issued the world's first green sukuk on 27 July 2017 with a value of RM250 million.

The Islamic fund management industry saw the launch of the 5-Year Islamic Funds and Wealth Management Blueprint in January 2017, in line with the goal to establish Malaysia as a leading international centre for Islamic fund and wealth management. As at end-July 2017, the industry consists of 20 Islamic fund management companies, with 206 Islamic unit trust funds and 86 Islamic wholesale funds (end-July 2016: 20 companies; 198 funds; 97 funds).

Source: Malaysia Economic Report 2017/18, citing Securities Commission Malaysia. According to the Economic Report, 206 shari'ah-compliant unit trusts were launched in 2017, accounting for a net asset value (NAV) of RM70.1 billion.

The total net asset value (NAV) of Islamic unit trust funds grew 27.7% to RM70.1 billion (end-July 2016: 11.4%; RM54.9 billion) while the Islamic wholesale funds declined 4.9% to RM35.6 billion (end-July 2016: 64.1%; RM37.5 billion).

As at end-July 2017, market capitalisation of four listed Islamic real estate investment trusts (i-REITs) was RM17.6 billion, while market capitalisation of four Islamic exchange-traded funds (i-ETFs) stood at RM429.2 million. Islamic assets under management (AUM) accounted for 21.2% or RM160.7 billion of the industry's total AUM at RM756.8 billion.

Source: Malaysia Economic Report 2017/18. Family and general takaful business, January to July 2017. For the same period, there were three family takaful operators, eight composite takaful operators, and five retakaful operators. There was no change in these numbers from 2016 to 2017. 

Takaful expanded further during the first seven months of 2017, with assets increasing by 6.8% to RM28.1 billion (January-July 2016: 9%; RM26.3 billion). Islamic debt securities as well as cash and deposits remained the largest asset component, said the Economic Report, accounting for 54.6% and 15.8% of total assets respectively. The capital position of the takaful industry remained stable with a CAGR of 211.4% in Q217.

Family takaful grew 9.4% or RM1.4 billion in excess of income over outgo during the first seven months of 2017 (January-July 2016: 11.9%, RM1.3 billion). The new family takaful business recorded higher gross contributions of 9.8% valued at RM2.5 billion (January-July 2016: 7.4%; RM2.3 billion). The ordinary life segment improved 9.9% as more consumers became aware of the need for takaful protection. The investment-linked takaful business rose in tandem with a growth of 9.2%. The market penetration rate for family takaful grew slightly, from 14.4% a year before to 14.6%.

The general takaful sector grew 6.8% to RM1.5 billion in gross contributions during the first seven
months of 2017 (January-July 2016: 1.9%; R941.4 billion). Motor and fire classes continued to be the
key segments underwritten by the industry. These segments accounted for 58.4% and 22.2% of total
gross contributions, respectively. Operating profit for the sector was lower at RM89.4
million (January-July 2016: RM186.4 million).

*Murabahah  refers to a sale contract where the buyer is told the price of the asset cost and the profit margin. Tawarruq refers to purchasing an asset with a deferred price. A tawarruq purchase can be made on the basis of murabahah or musawamah (sale contract without disclosing asset cost price and profit margin to the buyer), and then selling it to a third party to obtain cash.